Clearly, the Bankruptcy Code has some rough edges in need of repair. It has not been amended since 2005, and it has not been overhauled since 1978. Legislative change does not seem imminent. In 2014, the ABI commission submitted its long-awaited report to Congress on proposed revisions. So far, all is quiet on making change.

Duane Morris senior associate Kate Heitzenrater noted the following recommendations from the 370-page report:

• A single standard to determine adequate protection under Section 361. Courts currently use different standards to measure the value of a secured creditor’s collateral.
• Narrowing the use of Section 506(c). This allows the debtor to surcharge a secured creditor’s collateral; the trustee can recover from the collateral the necessary expenses of preserving or disposing of that collateral. 506(c) should not be used to cover the administrative costs of operating an estate. Trustees should not be allowed to waive their Section 506(c) claims, which can benefit the entire estate
• Restricting the use of debtor-in-possession (DIP) financing credit roll-ups, used by debtors to avoid a priming fight or costly evaluation litigation. DIP roll-ups should be approved only where the post-petition facility is provided by lenders who are not related to the pre-petition lenders. If the lenders are related, the postpetition facility must repay the pre-petition facility in cash. Otherwise, it is essentially a refinancing of the pre-petition debt on better terms to the secured lender.
• Courts are split on the releases and exculpation provisions used in reorganization plans. Exculpation provisions provide limited immunity for debtors and their professionals during a chapter 11 case. That immunity should apply to the conduct of the estate representatives in a case of simple negligence, but not necessarily gross negligence or willful conduct. Consensual releases, which bar creditors from pursuing claims against other entities, should be adequately disclosed in the debtor’s plan and disclosure statement. Specific factors should be used to determine whether a third-party nonconsensual release is appropriate.

Like economic factors and other things beyond our control, bankruptcy professionals should not wait for policy changes to clarify tough problems. “Unless our legislatures come up with some wonderful solutions ahead, I think we’re going to have to deal with these issues with the tools that we’ve got,” Heitzenrater noted.