Bankruptcy and Restructuring Blog

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On June 7, 2006, Senator Arlen Specter, the chairman of the Senate Judiciary Committee, and co-sponsor Senator Patrick Leahy, convened a Senate Judiciary Committee hearing to consider proposed amendments to the Fairness in Asbestos Injury Resolution Act of 2006 (or the FAIR Act of 2006, S. 3274), the controversial asbestos reform legislation originally introduced on May 26, 2006. In November of 2005, the bill had fallen one vote shy of the 60 votes needed to waive objections that the FAIR Act would violate Senate budget rules. Notwithstanding the proposed amendments, the bill continues to face significant opposition from numerous parties, including small and medium-sized companies that have used insurance to pay asbestos judgments and assert that they would face financial hardship if forced to make annual contributions to the fund based on their past liability. The general consensus of a number of experts is that the bill will not pass Congress this year, and instead, a medical criteria bill may be the focus of Congress next year.

When a company files for bankruptcy protection, its vendors risk not getting paid for outstanding invoices, and getting sued by the estate for return of payments received shortly before the petition date. Vendors may also have concerns about continuing to do business with the debtor. In order to address some of these issues, a vendor may be able to persuade the debtor to seek a court order providing that it is "critical" to the debtor's ongoing operations. Such a "critical vendor order" protects the vendor by allowing the debtor to pay most or even all of its outstanding invoices, as well as providing some assurance of payment for ongoing sales. What these orders very often do not provide is protection from so-called "preference" claims for recovery of amounts paid to the vendor during the 90 days prior to bankruptcy.

Traditionally, serving on a committee has ensured that committee members' interests were represented and provided members with access to confidential information that would otherwise be inaccessible. Several new provisions under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?which will increase flexibility in the composition of committees and significantly expand the duties that a committee and its members owe to non-committee members?raise the issue of whether it will even be necessary to serve on a committee after October 17, 2005. But creditors may not want to shun committee membership quite yet.

As has been widely reported in the financial press, the April 2005 amendment of the Bankruptcy Code represents the most sweeping changes to the Code in several decades. And while considerable media coverage has described what the new laws mean for consumers, the ramifications of those changes for healthcare bankruptcies has gone largely unaddressed by the mainstream press. We believe that for the healthcare industry, the most significant ramifications of the 2005 bankruptcy law changes are likely to include the following:

The Telecommunications Act of 1996 (the "1996 Act") was designed to facilitate local telephone competition by eliminating state-imposed barriers to competition, and by forcing the incumbent local exchange carriers (generally the incumbent former Bell operating companies such as Verizon, SBC and Qwest) to cooperate and lease their network elements to competitive companies. Thus, the new entrants - the competitive local exchange carriers (the "CLECs") - were allowed to build their own competing networks and to interconnect that infrastructure with the existing telephone networks of the incumbents.

If your customer files its bankruptcy petition after October 17, 2005, you may be entitled to the benefit of some new or changed rules resulting from revisions recently made to the United States Bankruptcy Code. In fact, some of the provisions are significantly more friendly to creditors, so you may find yourself in a much better position than you would have been under the prior version of the Bankruptcy Code.