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Published: Wednesday, 4/27/2005

In new bankruptcy law, changes for corporations

To keep top executives from leaving during a difficult period when customary stock options aren't feasible, Toledo's Owens Corning followed the lead of other firms in Chapter 11 bankruptcy.

It has offered special retention bonuses of up to double the employee's annual base salary.

But in a little-noted provision of the nation's new bankruptcy law, such bonuses will be severely restricted.

The bill, which was signed by President Bush last week and takes effect in six months, mainly affects consumer bankruptcies. But a number of provisions affect businesses in bankruptcy reorganization. They include:

● Companies must show that a top executive has a job offer at the same salary before paying special "retention bonuses." The law doesn't apply to all executives but only the top rung who are considered "insiders."

●Companies will get 18 months to submit an exclusive plan of reorganization, or its proposal for re-paying debts and exiting Chapter 11. After that, creditors will get an opportunity to file competing plans. Now, bankruptcy judges routinely offer extension after extension of the four-month deadline.

●Companies will get seven months to decide to stay or leave rented stores, factories, and other facilities. The current law allows two months for a debtor to "assume or reject leases," but court-granted extensions are routine.

●To discourage efforts to recoup small payments to creditors made in the 90 days before bankruptcy, so-called "preferential claims" for $10,000 and under must be filed in the court nearest to the creditor and not where the bankruptcy case is being heard.

●Small businesses - those with less than $2 million in debts - must file periodic reports on profitability.

●Creditors with claims involving shipments of goods or products within three weeks of the bankruptcy will have higher status than other routine claims.

"Like the rest of the changes in the bankruptcy code, the changes that relate to business are intended to strengthen the hand of creditors and will make it more difficult for companies to operate in Chapter 11," said Louis Solimine, a bankruptcy lawyer in Cincinnati.

Many provisions, like the limit on deciding whether to assume or reject a lease, reduce "flexibility" for the debtor, he explained.

"If you are creditor, generally there are more things throughout the bill that are helpful than in the current law," said Sam Gerdano, executive director of the American Bankruptcy Institute.

The restrictions on retention bonuses, included as a last-minute amendment by Sen. Edward Kennedy (D., Mass.), are likely to prompt court challenges because of contradictory wording, he said.

The bill will affect only future bankruptcies, so OC executives won't have to worry about their bonuses, he added.

Despite problems, the new provisions on retention bonuses won't end the payments because firms still will be free to offer them to hundreds of employees considered crucial to the firm's operations but who are not top corporate officers, Mr. Gerdano said.

OC, for example, offered the bonuses to 270 such employees.

The reform measure, formally known as the Bankruptcy Abuse Prevention and Consumer Protection Act, was passed by Congress this month after years of lobbying by credit card issuers and the financial services industry.

- GARY T. PAKULSKI



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