Earlier today Rockaway Bedding filed for bankruptcy protection in the United States Bankruptcy Court located in Newark, New Jersey.  Rockaway bedding has numerous retail locations throughout the tri-state area and is seeking to reorganize its affairs.  The company will undoubtedly see the affects of the recent changes to the bankruptcy code and although seemingly subtle at first glance, the amendments to the bankruptcy law have shifted the balance of power in favor of landlords.

Under the prior law, a debtor was required to make a decision on whether to assume or reject a commercial lease within 60 days of filing for bankruptcy protection. The bankruptcy court retained discretion to extend the time period indefinitely, often times until the end of the bankruptcy case (which could take several years). Under the new law, the initial 60 day time period has been extended to 120 days. However, the court may only grant one extension for an additional 90 days. After this initial seven month time period, the time to assume or reject a commercial lease can only be extended with the written consent of the landlord.Although seemingly subtle at first glance, the amendments to the bankruptcy law have shifted the balance of power in favor of landlords.

This change will present new challenges to bankrupt tenants, especially retail chains such as Rockaway Bedding. First, debtors will have to spend more time during the pre-bankruptcy planning process evaluating their operations in order to be in a position to know which locations shut down. Equally challenging will be determining when to file for bankruptcy protection. For example, many retailers make bankruptcy decisions based upon the results of the Christmas season. Under the old law, a debtor could file after a poor Christmas season and be confident that it would be able to continue to operate through the next Christmas season before deciding which leases to assume or reject. Between the two seasons, the debtor could implement cost-saving programs and have time to evaluate the operating results over a 12 to 18 month time period. The new law changes this time frame.

The second major change is the new limitation on the “exclusivity period” in a Chapter 11 bankruptcy case. Under the old law, only the debtor was permitted to file a disclosure statement (the first step in confirming a plan) during the first 120 days of the case. The debtor was required to obtain plan acceptance within 180 days of the bankruptcy petition. However, like the time period to assume or reject a lease, the court retained discretion to extent the exclusivity period without limitation. Under the new law, Congress set a deadline for extension of exclusivity periods of 18 months for filing the disclosure statement, and 20 months to solicit acceptance of the plan.

The new deadlines for exclusivity will once again put pressure on the debtor to do a better job in its pre-bankruptcy planning and have its “ducks in order” earlier in the case. Also, as the debtor gets closer to the end of the exclusivity period, creditors will gain additional negotiating leverage since when exclusivity expires, any creditor (including the unsecured creditors committee) can file its own plan of reorganization or liquidation.

Since debtors will have less time to decide whether to assume or reject commercial leases, Congress sought to balance the law by limiting the otherwise severe impact of prematurely assuming a lease. Under the old law, rejection damages from a lease that was assumed and subsequently rejected, were treated as an administrative claim and required to be paid in full before unsecured claims received anything. Under the new law, the rejection damages arising from a lease that was assumed and subsequently rejected will be capped at a much lower amount.

In order to remedy certain abusive practices, Congress also added additional grounds for the conversion of a Chapter 11 case to a Chapter 7 liquidation. Now, it will be easier for creditors to seek to end a case and have the assets liquidated.