ALERT APRIL 25, 2005

919 Third Avenue, New York, NY 10022 n Tel: (212) 756-2000 n Fax: (212) 593-5955 n www.srz.com n e-mail: wwwmail@srz.com ALERT APRIL 25, 2005 2005 BANKRUPTCY CODE AMENDMENTS: QUICK SUMMARY OF BUSINESS REORGANIZATION CHANGES President Bush signed into law the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 (the "Act") on April 20, 2005. We summarize below only the changes relevant to lenders and other creditors in business reorganizations. With certain exceptions, the Act applies to cases commenced on or after October 17, 2005. 1 Creditor Reclamation of Goods [ 503(b)(9), 546(c)] Single Asset Real Estate Cases [ 101, 362] Administrative Priority for Reclamation Claims. Seller of goods in the ordinary course of business will have administrative expense claim (not mere general unsecured claim) for "value" of goods received by the debtor within 20 days before the commencement of case, when seller has not reclaimed the goods. Reclamation Procedure. Seller of goods in the ordinary course of business may, subject to the prior rights of a secured creditor, reclaim goods received by insolvent debtor within 45 days before the bankruptcy; need only make written demand 45 days after debtor's receipt of goods, or 20 days after case filing if the 45-day period has expired. If seller fails to make timely demand, it may still become an administrative claimant. Expanded Definition. Eliminates cap of $4 million on secured claims, expanding the scope of these special provisions to larger properties. Mandatory Payments to Secured Creditors. Secured creditors are entitled to commence foreclosure on the later of the 91 st day after the case is commenced or 30 days after the court determines that case is a "single asset real estate case" unless the debtor either (i) makes monthly payments in an amount equal to interest at the then applicable non-default contract rate of interest on value of the collateral, or (ii) files a confirmable plan. Monthly payments can be made from rents or other proceeds generated by the property (source may be secured creditor's cash collateral). Abusive Real Estate Filings. Lenders are entitled to commence foreclosure if bankruptcy case was commenced as part of a "scheme to delay, hinder and defraud creditors" and involves either (i) a transfer of property ownership without the consent of the lender or the court, or (ii) multiple bankruptcy filings affecting the same property. Court order effective for 2 years and applies in subsequent cases, if order filed in real estate records. 1 We do not deal with the consumer, small business, municipalities, family farmers, cross-border bankruptcy, and tax amendments. The treatment of financial contracts is summarized in "SRZ Alert: New Amendments to Code Favor Financial Contract Participants," April 15, 2005. 1

Preferences [ 547] Fraudulent Transfers [ 548] Utility Service: "Adequate Assurance" [ 366] Commercial Real Estate Leases [ 365; 503(b)] Ordinary Course of Business Defense. Creditor defendants relying on this defense need only show that payment was consistent with (i) payment history between debtor and creditor or (ii) industry standards; Act eliminates requirement of proving both facts. Extends Time of Security Interest Perfection for Preference Transfer Date. The Act extends the time when a security interest "transfer" is deemed to occur for preference purposes until (i) the date security interest is granted, if the interest is perfected within 30 days of the grant, or (ii) the date of perfection, if perfection occurs more than 30 days after the grant. (The perfection grace period had been 10 days.) Purchase Money Security Interest Defense: Longer Grace Period. A purchase money security interest is not voidable as a preference if perfected within 30 days after debtor receives possession of goods. (Perfection grace period had been 20 days.) Clarifies Elimination of Indirect Preference Liability for Lenders When Insiders Preferred. Act supplements 1994 Code amendments to overrule case law (Deprizio (7 th Cir. 1989)) that had permitted trustee to avoid payments to lenders outside the 90-day preference period when an insider/guarantor had benefited. Effective as of April 20, 2005. New 2-Year Reachback Period. The Act extends the current 1-year reachback period to 2 years. Effective for cases commenced on or after April 20, 2006. Avoidance of Excessive Insider Compensation. The Act enables a trustee to avoid an insider transfer pursuant to an employment contract if it was made outside the ordinary course of business and the debtor received less than reasonably equivalent value; no proof of insolvency required. Effective for cases commenced on or after April 20, 2005. Liquidity Impact. To avoid discontinuance of utility service, a debtor must provide cash deposit, letter of credit, certificate of deposit, surety bond, prepayment or other form of security acceptable to debtor and utility. Administrative expense priority is no longer sufficient. Form of "adequate assurance" must be "satisfactory" to utility; debtor can seek judicial redress if utility is not satisfied. Limits Debtor Lessee's Time to Assume/Reject. The Act extends the initial 60-day period to assume or reject commercial leases to 120 days, but permits only a single 90-day extension for cause. Further extensions require lessor consent. No Need to Cure Non-Monetary Defaults. The Act excuses a debtor lessee from curing non-monetary defaults that are impossible to cure. But if the debtor tenant's non-monetary default is based on a failure to operate under the lease (e.g., breach of "going dark" provision), then (i) the default must be cured by performance at the time of assumption, and (ii) the debtor must compensate the lessor for any pecuniary losses resulting from the default. Cap on Damages for Post-Assumption Rejection. If a debtor assumes and later rejects a commercial real estate lease, the Act caps a lessor's administrative expense claim at an amount "equal to all monetary obligations, excluding those arising from or relating to a failure to operate or a penalty provision, for the period of 2 years following the later of the rejection date or actual turnover of the premises, without reduction or offset for any reason, except for sums actually received or to be received" from a non-debtor. Any balance shall be treated as an unsecured claim subject to the damages cap under 502(b)(6) (i.e., unsecured claims capped at the

rent for the greater of (i) 1 year and (ii) 15%, not to exceed 3 years, of the remaining term of the lease). Conversion/ Dismissal of Reorganization Case [ 1112] Reorganization Plan Exclusivity [ 1121] Appointment of Trustee [ 1104] Retention Bonuses and Severance Pay [ 503] Avoids Judicial Delay. Court must hear dismissal or conversion motions within 30 days of motion, and must decide motion within 15 days unless "compelling circumstances" prevent the court from doing so. Limits Judicial Discretion. Dismissal or conversion mandatory if cause shown unless the court finds "unusual circumstances" and conversion/dismissal not in the "best interests of creditors or the estate." Expanded Grounds for Conversion/Dismissal. New non-exhaustive list of grounds showing "cause": (i) substantial or continuing losses and absence of reasonable likelihood of rehabilitation; (ii) gross mismanagement; (iii) unauthorized and prejudicial use of cash collateral; (iv) non-compliance with a court order; (v) failure to maintain insurance; (vi) failure to satisfy timely filing or reporting obligations; (vii) failure to attend statutory creditors' meeting; (viii) failure to attend meetings or furnish information to the U.S. Trustee; (ix) failure to pay taxes timely; and (x) failure to file a plan and disclosure statement timely. Debtor Can Contest Conversion/Dismissal. If movant establishes cause, debtor must prove: (i) reasonable likelihood of plan confirmation within the exclusivity period or within a reasonable period of time thereafter; and (ii) its acts or omissions supporting "cause" for conversion or dismissal (a) are reasonably justified; and (b) can be cured within a reasonable time. Trustee or Examiner. If case not converted or dismissed due to special circumstances, court must appoint a trustee or an examiner. Limits Extensions. The Act limits plan filing exclusivity extensions to no more than 18 months, supposedly to accelerate the timetable for implementing plans, and to avoid supposed judicial delay. Obligation of U.S. Trustee. U.S. Trustee must move for the appointment of a trustee if there are "reasonable grounds to suspect" that debtor's management participated in fraud, dishonesty or criminal conduct in the management of the debtor or in debtor's public reporting. Court must appoint a trustee on showing of "cause." Effective for cases commenced on or after April 20, 2005. New Criteria for Retention Bonuses. Not permitted unless: (i) the payment is "essential to retention" because the insider has a "bona fide job offer from another business at the same or greater rate of compensation"; (ii) the insider's services are "essential to the survival of the business;" and (iii) either (a) the amount of the payment does not exceed 10 times the amount of the mean of similar payments made to non-management employees for any purpose during the same calendar year, or (b) if there have been no payments to non-management employees, the payment does not exceed 25% of the amount of any similar payment to the insider in the preceding calendar year. New Criteria for Insider Severance Bonuses. Not permitted unless: (i) the severance program is available to all full-time employees; or (ii) the insider severance payment is not greater than 10 times the mean amount paid to non-management employees during the same year. Limits on Extraordinary Compensation. No extraordinary course of business payments to parties, including officers, managers or consultants hired after case is commenced, to the extent payments are unjustified by facts.

Creditors' Committee [ 1102, 503(b)] Jurisdiction [28 U.S.C. 1334] Appeals [28 U.S.C. 158(d)] Miscellaneous Access to Information. Creditors' Committees must share information with their constituency and solicit comments. Membership. Court, on request of a party and after notice and hearing, can order the US Trustee to change committee membership if necessary to ensure "adequate representation" of creditors or shareholders. Professional Fees. Committee members cannot seek payment from debtor's estate to pay for fees and expenses of their own counsel (as opposed to Committee's counsel) (overrules 3d Cir. precedent). Exclusive Jurisdiction for Suits Against Professionals. Court has exclusive jurisdiction over claims requiring construction of Code 327 (professional retention) or professional disclosure rules. Effective for cases commenced on or after April 20, 2005. Possible Bypass of Appeal to District Court Direct Appeal to Circuit Court. Appeals may be taken of final orders directly to circuit court if bankruptcy court and district court or all parties to appeal certify that (i) the appeal involves (a) question of law as to which there is no controlling precedent or which requires resolution of conflicting decisions; (b) a matter of public importance; or (ii) an immediate appeal will "materially advance" progress of the underlying bankruptcy case. But the circuit court must agree to take direct appeal. Actions Excluded from Automatic Stay ( 362). Automatic stay will not apply to (i) certain actions (other than to enforce a money judgment) by the SEC and other regulatory agencies and (ii) taxing authorities seeking to create or perfect tax liens for post-bankruptcy taxes and certain set-offs. Venue for Small Debt Collection Suits (28 U.S.C. 1409). Suits by debtor to collect debts (i.e., account receivable) of $10,000 or less must be brought in the district of the defendant's residence. Investment Banker Retention ( 101(14)). Definition of "disinterested" amended to allow retention of pre-bankruptcy investment bankers who were underwriters. Cross-Border Cases ( 304). The Act includes a new chapter 15 (to replace 304) dealing exclusively with cross-border bankruptcy cases. Professional Compensation ( 328). Professionals may be retained on a fixed or percentage fee basis (in addition to an hourly or contingent fee bases). Priority Wage Claims ( 507). Cap on priority wage claims is increased from $4,925 to $10,000, and time of accrual is extended from 90 days to 180 days before the bankruptcy filing. Small Preference Claims ( 547). Preferences under $5,000 are not avoidable. Warehouseman's Liens ( 546). Trustee cannot avoid liens for storage, transportation or other costs incidental to the handling of goods. The exclusion is applied in accordance with U.C.C. 7-209.

If you have any questions about the Act, contact the partners in our Business Reorganization Group: Michael L. Cook (212) 756-2150 michael.cook@srz.com Lawrence V. Gelber (212) 756-2460 lawrence.gelber@srz.com David M. Hillman (212) 756-2174 david.hillman@srz.com James M. Peck (212) 756-2207 james.peck@srz.com Jeffrey S. Sabin (212) 756-2290 jeffrey.sabin@srz.com This information has been prepared by Schulte Roth & Zabel LLP ("SRZ") for general informational purposes only. It does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness or timeliness. Transmission or receipt of this information does not create an attorney-client relationship with SRZ. Electronic mail or other communications with SRZ cannot be guaranteed to be confidential and will not (without SRZ agreement) create an attorney-client relationship with SRZ. Parties seeking advice should consult with legal counsel familiar with their particular circumstances.