Summary Document

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Summary Document

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

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• On April 20, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. The Act modifies sections of the U.S. Bankruptcy Code and contains provisions that affect consumer bankruptcies and corporate reorganizations. Generally, the amendments became effective for bankruptcy cases commenced on or after October 17, 2005.

• The Act has several provisions that give increased protection to employee benefits when an employer files for bankruptcy. Plus, the Act imposes limits on the debtor’s ability to pay retention bonuses, severance pay and other payments to officers and directors.

1. Retention

The Act provides that post-petition retention payments for the purpose of inducing an insider to remain with the debtor’s business may not be made unless the payment or obligation is:

1. “essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation”; and

2. “the services provided by the person are essential to the survival of the business.”

Even if these requirements are satisfied, the Act imposes a cap on the retention amount that cannot be 10 times the mean of similar payments made to nonmangement employees “for any purpose during the calendar year” in which the payment is made or the obligation is incurred or, if there were no such payments or obligations to nonmanagement employees, the post-petition payment or obligation cannot exceed 25% of any similar payment or obligation made to the insider in the prior year.

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2. Severance

The Act provides that severance payments to an insider cannot be allowed or paid unless the court finds that the payment is part of a program generally applicable to all full-time employees and the amounts of the payment is not greater than 10 times the mean severance pay to non-management employees during that same calendar year.

3. Other Payments

The Act prohibits allowance or payment of “other transfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of officers, managers or consultants hired after the date of the filing of the petition.

4. Fraudulent Transfer Look-back Period

The Act extends from one to two years the look-back period during which fraudulent transfers and obligations incurred by either the debtor or partnership debtor may be avoided. This amendment became effective one year after passage of the Act.

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4. Fraudulent Transfers to Insiders

The Act permits the avoidance as a fraudulent transfer or obligation, any transfer or obligation made to or for the benefit of an insider of the debtor “under an employment contract if:

1. The transfer or obligation was not in the ordinary course of business” and

2. The debtor did not receive reasonably equivalent value for in exchange for the transfer or obligation.

“Ordinary course of business” is not defined in the Bankruptcy code but has been interpreted to include the ordinary business practices of the debtor as demonstrated by pre-bankruptcy conduct and ordinary practices of competitors or the industry.

This amendment was effective immediately, but did not apply to any pending cases.