New Changes to Business Bankruptcy Law Enacted – But No Extension of the Increased Debt Threshold to Take Advantage of the Small Business Bankruptcy Law Implemented as Part of The CARES Act
On December 27, 2020, the Consolidated Appropriations Act (the “CAA”) was signed into law by then President Trump. Although the primary purpose of the CAA was to provide funding for the federal government for 2021, the CAA also included some less publicized amendments to the United States Bankruptcy Code. Below is a summary of the amendments affecting business bankruptcies.
Noticeably absent from the new legislation was an anticipated extension of the $7,500,000 debt threshold that had been implemented as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) in order to make it easier for businesses to qualify for the relatively new, and very debtor-friendly, small business bankruptcy provisions contained in recently enacted Subchapter 5 of Chapter 11 of the Bankruptcy Code. Accordingly, effective March 27, 2021, the debt limit for eligibility to commence a case under Subchapter 5 will fall back from $7,500,000 to $2,725,625. Businesses that are contemplating a potential bankruptcy filing would be wise to consider seriously a bankruptcy filing before March 27, 2021, when the CARES Act relief is scheduled to expire because the relief available to a Subchapter 5 small business debtor is far superior to the relief available to a traditional Chapter 11 debtor.
1. PPP Loans Potentially Made Available to Small Business Debtors.
United States Bankruptcy Courts have been divided on whether to permit Chapter 11 debtors to apply for Paycheck Protection Program loans (“PPP Loans”) administered by the Small Business Administration (“SBA”) pursuant to the CARES Act and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. The SBA has taken the position that debtors are ineligible for such loans but some bankruptcy courts have permitted debtors to apply for such loans over the objection of the SBA. The new legislation creates new section 364(g) of the Bankruptcy Code, which authorizes such loans. However, there are a number of important restrictions. First, only business debtors who file a small business bankruptcy case under Subchapter 5 of Chapter 11 are eligible. Thus, a debtor that does not qualify for Subchapter 5 would not qualify for a PPP loan. Further, and more importantly, this amendment shall only go into effect on the date that the Administrator of the SBA sends a written determination to the Director of the Executive Office for United States Trustees that a Subchapter 5 debtor is eligible for a PPP loan. Given that the SBA has consistently taken the position that Chapter 11 debtors are not eligible for a PPP loan, it is unlikely that the Administrator of the SBA will send such a determination letter any time soon. Finally, even if the Administrator of the SBA were to send such a letter, the amendment will only apply with respect to cases commenced prior to December 27, 2022. Accordingly, an eligible business would be wise to apply for a PPP loan before commencing a Chapter 11 case.
2. Small Business Debtors Granted Extra Time to Begin Paying Rent Under Non-Residential Real Property Lease.
Under section 365(d)(3) of the Bankruptcy Code, all debtors are required to begin paying rent on non-residential real property leases within 60 days of a bankruptcy filing. However, the CAA amended section 365(d)(3) of the Bankruptcy Code to authorize bankruptcy courts to grant small business debtors with Subchapter 5 cases an additional 60 days to begin paying rent where the small business debtor has experienced and is continuing to experience a material COVID-19 related financial hardship. Further, any rent accruing during the extended period (up to 120 days) may be repaid over time pursuant to the small business debtor’s Subchapter 5 plan. As is the case with the other amendments described herein, this amendment will only apply with respect to Subchapter 5 cases commenced prior to December 27, 2022.
3. All Debtors Granted Extra Time to Assume Non-Residential Real Property Leases.
Under section 365(d)(4) of the Bankruptcy Code, all debtors are required to assume a non-residential real property lease within 120 days of the bankruptcy filing or the lease will be deemed rejected (subject to the ability of a bankruptcy court to grant a 90-day extension of this deadline upon a showing of cause). However, the CAA amended section 365(d)(4) of the Bankruptcy Code to grant debtors an additional 90 days to assume such a lease. Therefore, all debtors will have a minimum of 210 days to assume a non-residential real property lease with the potential to obtain an extension to 300 days. As with the other amendments, this amendment will only apply with respect to cases commenced prior to December 27, 2022.
4. Landlords and Suppliers Are Granted Preference Protection for Payments Made Under Deferred Payment Arrangements.
Under section 547 of the Bankruptcy Code, payments received by a creditor during the 90-day period prior to a bankruptcy filing (and during the 1-year period prior to a bankruptcy filing if the creditor is an insider) are subject to potential avoidance as a preference. However, the CAA amends section 547 of the Bankruptcy Code to protect landlords and suppliers of goods or services from a preference action when the payments were made pursuant to a deferred payment agreement or arrangement entered into on or after March 13, 2020. This amendment will not protect payments to the extent the total amount paid exceeds the amount due under the original payment arrangement or to the extent such payment is on account of additional fees, penalties, or interest imposed under the amended lease or contract. Further, as with the other amendments, this amendment will only apply with respect to bankruptcy cases commenced prior to December 27, 2022. This amendment was an obvious attempt to encourage landlords and suppliers to work with debtors without fear that any payment relief could result in increased preference risk. It is recommended that landlords and goods/services providers have any deferred payment agreements they wish to enter into first reviewed by experienced counsel so as to maximize the likelihood that payments received under such agreements will be protected to the maximum extent possible.
5. Creditors that Pay Customs Duties on Behalf of a Debtor Importer Are Entitled to Priority Payment.
Under section 507(a) of the Bankruptcy Code, certain types of claims are entitled to priority payment under the Bankruptcy Code. Further, although an entity that pays such a claim on behalf of a debtor may be entitled to be subrogated to the rights of the holder of such a priority claim under applicable law, section 507(d) of the Bankruptcy Code provides that such an entity would not be entitled to priority payment for certain types of claims listed in section 507(b) of the Bankruptcy Code, including a claim for payment of customs duties arising out of the importation of merchandise that would otherwise be entitled to priority payment pursuant to section 507(b)(8)(F) of the Bankruptcy Code. However, the CAA amends section 507(d) of the Bankruptcy Code to exclude section 507(b)(8)(F) of the Bankruptcy Code from its reach, meaning that a subrogation claim based on a payment of customs duties on behalf of a debtor importer will now be entitled to priority payment. As with the other amendments, this amendment will only apply with respect to bankruptcy cases commenced prior to December 27, 2022. This amendment is an obvious attempt to encourage creditors to pay the government for customs duties that may be owed by distressed debtors.
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