Sunday, November 4, 2007

The Business Bankruptcy Blog Reviews BAPCPA and I Talk Up Preferences

Bankruptcy remains an important if somewhat diminished force for American businesses. I missed The Terrible Twos? A Look At BAPCPA's Impact On Business Bankruptcy Cases At Its Second Anniversary until yesterday. The articles reviews the last two years under the new Bankruptcy Code.

"Tomorrow, October 17, 2007, marks the second anniversary of the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known as BAPCPA. BAPCPA was enacted primarily to make sweeping changes to the consumer provisions of the Bankruptcy Code. However, BAPCPA also made significant revisions in the business bankruptcy arena. When it was passed, bankruptcy lawyers, creditors, and potential debtors had many questions about how these changes would play out as new cases made their way through the system. Two years out, we now have answers to some of those questions."
Preferences interest me. They should interest more businesspeople. What are preferences? A preference refers to money paid by a debtor to a creditor within a certain time period prior to the bankruptcy and which the bankruptcy trustee can get the creditor to give back to the bankruptcy estate. A bit less precisely: the business gives up money for which it gave money or services or goods for the debtor's money. Sort of like adding insult to injury.

Here is the Business Bankruptcy Blog's take on the new law:

Preferences. Before it took effect, one of BAPCPA's most talked about changes was a revision to the "ordinary course of business" defense to preference claims. BAPCPA dropped the requirement that a preference defendant establish that a transfer was both (i) made in the ordinary course of business or financial affairs between the debtor and the defendant and (ii) made according to ordinary business terms.

  • BAPCPA's main change was to replace the "and" with an "or", meaning that a preference defendant now has to establish only one of the two prongs (instead of both) to prevail on the defense. When it was enacted, many bankruptcy lawyers believed this change would favor preference defendants.
  • In something of a surprise, however, the first case interpreting the revised statute applied a brand new standard to the "ordinary business terms" provision. Unlike the prior analysis of that prong, the new standard examined the question from the perspective of both the creditor (as had been done pre-BAPCPA) and the debtor (the new BAPCPA twist). As a result, in that decision the preference defendant lost. For more on the decision, in the In re National Gas Distributors, LLC case, check out this post on David Rosendorf's BAPCPA Blog.
  • There have been surprisingly few cases interpreting this section, so it remains to be seen whether other courts will follow the National Gas Distributors interpretation.
I retain my belief that bankruptcy preferences are one area where businesses could prevent loss by working with their lawyers but consistently fail to protect themselves. Working with counsel, the business should have no problem setting up procedures for dealing with debtor clients. My experience tells me that preference actions only succeed if the creditor prepared the ground long before the debtor filed bankruptcy.

As I wrote above, bankruptcy remains an important consideration for businesses. I suggest reading the whole article.