Covid 19 – Bankruptcy Related Changes In The Cares Act Amendment: Eligibility Of Commercial Landlords And Lenders; And Cares Act Funding While In Bankruptcy

The December 27, 2020 CARES Act Amendment (“CAA”) to the original COVID-19 CARES Act relief package includes several temporary amendments to the Bankruptcy Code designed to provide additional relief to bankruptcy debtors and additional protections for commercial landlords and suppliers adversely impacted by the COVID-19 pandemic. Key provisions include:

Bankruptcy Debtor Eligibility for CARES Act Funding

Corporate debtors that have filed for bankruptcy protection may now be eligible for CARES Act funding. However, this amendment will not become effective unless and until the SBA Administrator submits a written determination to the Office of the U.S. Trustee that corporate debtors in bankruptcy are generally eligible for CARES Act funding. Assuming the SBA Administrator permits the issuance of Paycheck Protection Program loans to corporate debtors in bankruptcy, these loans can be issued only upon bankruptcy court approval. The deadline to apply for Paycheck Protection Program funding is March 31, 2021.

The CAA also prohibits discriminatory treatment against individual debtors (including sole proprietors and/or independent contractors) seeking CARES Act funding based on past or present bankruptcy filings. The relevant CARES Act programs available to individual debtors are: (a) the foreclosure moratorium and right to request forbearance; (b) the forbearance of mortgage payments for multifamily properties; and (c) the temporary moratorium on eviction filings. The CAA also created a supplemental creditor Proof of Claim for mortgage lenders that had previously granted a forbearance claim of a federally backed mortgage or a multi-family mortgage loan to a debtor under the CARES Act. These supplemental claims must be filed with the bankruptcy court no later than 120 days after the end of the forbearance period and include details of the forbearance agreement or loan modification. This amendment expires on December 27, 2021.

Commercial Lease Assumption/Rejection Periods Have Been Extended

As explained in DarrowEverett LLP’s prior alert on the New And Expanded Court Protections Available To Businesses In Response To Covid-19 Pandemic, a new section in the Bankruptcy Code known as Subchapter V was added just before the COVID-19 pandemic hit the U.S. to provide additional relief for “small business debtors”. The CARES Act increased the debt limit for small businesses to qualify for Subchapter V to $7,500,000 in secured and unsecured debt. Under the CAA, Subchapter V debtors may now be able to defer rent payments for up to 120 days (increased from 60 days). However, the deferred rent still accrues as an administrative expense.

In addition, the deadline for debtors to assume or reject a commercial real estate lease has been extended from 120 days to 210 days. This amendment expires December 27, 2022.

Preference Protections for Commercial Landlords and Suppliers

Generally speaking, the bankruptcy code’s preference avoidance provisions allow a trustee or a debtor to force creditors to return certain payments made by a debtor to a creditor within 90 days before the debtor’s bankruptcy filing. However, the CAA excludes rental arrearage payments or covered supplier arrearage payments from preference liability if: (i) the debtor and landlord/supplier entered the lease or contract before the filing; (ii) they amended the lease or contract after March 13, 2020; and (iii) the lease amendment deferred or postponed payments otherwise due under the lease or contract. These provisions are designed to encourage landlords and vendors to reach deferred payment arrangements with struggling businesses without fear that the deferred payments would have to be paid back to the lessee/customer in a subsequent bankruptcy case. This amendment also expires December 27, 2022.

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This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.