365(d)(4) A Good (or Bad) Provision?

By Anthony Schnelling

A great deal of noise and consternation has surrounded the passage of the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Act"). Much, if not most, of that reaction deals with the concern of bankruptcy professionals that the rights of a fresh start for consumers have been adversely affected in favor of more creditor friendly provisions benefiting banks and credit card issuers. While the Act hardly returns us to the days of debtors' prison and the Dickensian world of Oliver Twist, it does appear, at first blush, to make it more difficult for consumers to shed unwanted excess debt and make a fresh start.

However, buried in the Act are other provisions which directly affect the functioning of the Chapter 11 reorganizations that are the province of corporate insolvency. Changes in the exclusivity rules affecting plans of reorganization; changes in the rules affecting the retention of investment banking professionals; changes in the rules affecting reclamation claims, adequate assurance for utilities, defenses to preference actions; and, changes in the rules affecting non-residential real property leases come immediately to mind. In most cases these changes appear also to favor creditors over debtors. However, careful thought about how some of these changes will play out in practice may lead bankruptcy professionals to conclude over time that at least some of these provisions are not as onerous to debtors as they seem and may in fact be more balanced that they first appear.

As an example, conventional wisdom suggests that the change in the rules affecting Section 365(d)(4) of the Bankruptcy Code is necessarily bad for debtors. After all the current rule allows a debtor, for cause shown and after notice and a hearing, to extend the time for assuming or rejecting a non-residential lease to confirmation of a plan of reorganization from the initial deadline of 60 days after entry of an order commencing a Chapter proceeding. The new rules provide that a nonresidential lease is deemed rejected on the earlier to occur of (i) failure of the debtor to assume that lease within 120 days of the commencement of the case (subject to a one time extension of 90 days for cause, unless landlord and tenant can agree between themselves to further extensions) or (ii) confirmation of a plan of reorganization. While the Act clearly gives landlords more certainty on the timing of what will happen to their property and takes away the debtors' ability to make use of endless extensions under Section 365(d)(4) to delay the process of determining what it wishes to do with its real property, it is far from clear that, from a practical business perspective, this change is all bad for the debtor and all good for the landlord.

While it is often useful to keep one's options open and consider at length the possibilities of how real property may best fit into a reorganization strategy, there is also a lot to be said for mandating decisive action. Apparently careful consideration about the disposition and use of assets is too often a cover for indecision on the part of management, who frequently led the company into insolvency by being indecisive in the first place. In cases (involving retailers, distributors, restaurants, etc.) where real estate is a critical component in the debtor's economic mix, the ability enshrined in the practical application of the Bankruptcy Code's section 365 (d)(4) to stall making a decision on the disposition of that real estate can actually be detrimental to any ultimate possibility of reorganization. During the time the decision is being delayed because it can be delayed, critical cash flow is spent supporting assets which are ultimately found to be superfluous, payroll is maintained at unnecessarily inflated levels and unneeded infrastructure is maintained at a high economic and conceptual cost. Cause for extensions is often easy for professionals to support because it is easier for everyone in a case except the landlord - to agree to defer a decision which will impact jobs and communities. The new Act provisions will force professionals to evaluate the critical real estate component of a debtor's assets early in cases and force management to deal decisively with this key economic element of their case much earlier and with much less loss of valuable resources than heretofore. The argument usually made for delay is that, with more time to evaluate the debtors' real property assets and their potential future usefulness to the debtor, a better decision will be made relative to the assets disposition. In fact where real estate is critical to a debtor's survival its disposition should be the first element under review, after cash flow, in any restructuring or liquidation analysis. The new Act mandates a change in analytic priorities and from a practical business standpoint that is a good thing.

From the landlord's perspective while earlier certainty is a good thing, it is far from clear that there will not be many circumstances where a landlord may well look back with longing on the days when a tenant was forced to pay rent in the post-petition period for the privilege of delaying its decision on whether to assume or reject its leases. Much will depend on where in the real estate cycle the economy is at the time a debtor files for protection. In good real estate markets, the Act more than likely will benefit the landlord. In bad real estate markets landlords may well remember the Code provisions with more fondness.