New Bankruptcy Relief Provisions for Small Business Debtors and Creditors Impacted by COVID-19 Pandemic Under the Consolidated Appropriations Act of 2021

Wednesday, February 24, 2021

On December 27, 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was enacted into law.[1] The CAA, a massive 5,593 pages in length, was Congress’ response, in part, to the continuing economic fallout caused by the Covid-19 pandemic.  In addition to appropriating $900 billion in additional relief to individuals and businesses and supplementing the CARES Act, the CAA included provisions for additional bankruptcy relief to both debtors and creditors through modifications to various sections of the Bankruptcy Code.  Key bankruptcy-related provisions, as discussed below, are found under Title III – “Continuing the Paycheck Protection Program and Other Small Business Relief” and Title X of Division FF - “Bankruptcy Relief” of the CAA.

1. Despite language in the CAA suggesting otherwise, PPP Loans still not available to debtors in bankruptcy.

When the CARES Act became law in March of 2020, a debtor in bankruptcy was automatically ineligible to receive a Paycheck Protection Program (“PPP”) loan under guidelines established and administered by the Small Business Administration. This triggered a considerable amount of litigation where debtors challenged the governing SBA regulations on grounds that they were unlawfully discriminatory against debtors in bankruptcy and therefore violated section 525(a) of the Bankruptcy Code or were arbitrary and capricious and exceeded SBA authority.  Court rulings have not been consistent.[2] 

In a purported attempt to resolve previously inconsistent bankruptcy court decisions regarding the eligibility of debtors to obtain PPP loans, section 320 of Title III of the CAA specifically sought to amend Section 364 of the Bankruptcy Code that would allow certain debtors, including small business debtors under subchapter V of Chapter 11[3], to obtain PPP loans in bankruptcy.  All good except for one critical catch.  Congress conditioned the effectiveness of this amendment on SBA approval, thereby reaffirming the SBA’s jurisdiction over PPP eligibility guidelines.  Despite protections and priority of payment this amendment would afford PPP loans to debtors in bankruptcy, the SBA, in its Interim Final Rules in response to the CAA published on January 14, 2021, refused to yield its position that debtors in bankruptcy are ineligible for PPP loans.[4] 

2. Lease on Non-Residential Real Estate

The Bankruptcy Code gives preferred treatment to landlords of non-residential real estate leases (i.e., a commercial lease) in these particular respects.  First, under § 365(d)(3) of the Bankruptcy Code, a chapter 11 debtor who is a tenant under the commercial lease is required to pay rent and perform all of its other lease obligations arising from and after the date of commencement of the bankruptcy case.  The time to perform, however, can be extended by the bankruptcy court, for cause, up to 60 days from the commencement date.  Second, under § 365(d)(4) of the Bankruptcy Code, a debtor has up to 120 days from the commencement date to assume or reject the commercial lease. If the debtor fails to assume the lease within the 120-day deadline, the lease will be deemed rejected.  However, the court may extend the 120-day deadline by an additional 90 days (210 days in total) for cause.

The CAA provides some relief to the chapter 11 debtor/tenant. It amends § 365(d)(3) to allow a subchapter V small business debtor the opportunity to request an additional 60-day extension (120 days in total) to pay rent if the debtor has experienced and is continuing to experience a material financial hardship, directly or indirectly, as a result of the COVID-19 pandemic. As for the landlord, the amendment provides that any claim the landlord may have arising from such extension (primarily, unpaid rent) shall be treated as an administrative priority expense for purposes of confirming a subchapter V small business plan. This amendment sunsets two years after the December 27, 2020 enactment of the CAA, but it will continue to apply to any subchapter V small business chapter 11 case commenced before the sunset date.

The CAA also amended § 365(d)(4) by increasing the period of time for a debtor to assume or reject a commercial lease from 120 days to 210 days.  Leaving intact § 365(d)(4)(B)(i) that allows a court to grant a further extension up to an additional 90 days for cause, a debtor under an unexpired lease of nonresidential real property could have up to 300 days to decide whether to assume or reject the lease. This amendment also sunsets 2 years after enactment, but the provisions will continue to apply to any subchapter V small business chapter 11 bankruptcy case commenced before the sunset date.

3. Preference Amendments

Under § 547 of the Bankruptcy Code, a payment by the debtor to a creditor made within 90 days of a bankruptcy filing on account of a pre-existing or antecedent debt can be recovered by the debtor as a preferential transfer, subject to certain defenses. In recognition that the pandemic has caused landlords or suppliers of goods or services to engage in out-of-court workouts with distressed debtors to recover past due arrearages under forbearance, deferral or extension agreements, the CAA provides preference protection to landlords and suppliers for payments made by the debtor pursuant to these types of agreements within the 90-day period before bankruptcy.

The CAA amended § 547 to exempt as a preference a payment by the debtor to the landlord for "covered rental arrearages” or to the supplier for “covered supplier arrearages” subject to the following: (i) in the case of a landlord, the payment was made in connection an agreement or arrangement with the debtor to defer or postpone the payment of rent or other periodic charges under a non-residential lease; (ii) in the case of a supplier, the payment was made in connection with an executory agreement or arrangement to defer or postpone the payment of amounts due under an executory contract for goods or services; and (iii) in both cases, (a) the agreement was made or entered into on or after March 13, 2020  (b) the amount deferred or postponed did not exceed the amount that was due under the agreement prior to March 13, 2020, and (c) did not include fees, penalties, or interest in an amount that would be greater than what would be charged if the debtor had paid all amounts due under the lease or contract timely and in full before March 13, 2020. This amendment sunsets 2 years after enactment, but the provisions will continue to apply to any bankruptcy case commenced before the sunset date.

While the CAA made several amendments to the Bankruptcy Code benefitting consumer and chapter 13 debtors, the focus of this client alert was on the several amendments benefiting or purporting to benefit small business debtors as well as their creditors impacted by the Covid-19 pandemic.  That said, the ultimate refusal of the SBA to make PPP loans eligible to debtors in chapter 11 bankruptcy is disappointing and seemingly at odds with the underlying intent of Congress to allow such loans to chapter 11 debtors as reflected in section 320 of Title III of the CAA. Also, notably missing from the CAA was any proposed extension of the one-year sunset provision in the CARES Act regarding the increase in the maximum qualifying debt threshold for subchapter V small business debtors from $2,725,625 to $7,500,000.  As of today, this CARES Act amendment is set to expire on March 27, 2021 unless Congress acts before then.  However, a review of the House’s draft bill on the next go-around of Covid-19 relief, entitled the American Rescue Plan Act of 2021, contains no provision for extending this higher qualifying debt threshold amendment.[5]  If this amendment is allowed to expire on March 27, 2021, distressed small business debtors with secured and unsecured debts aggregating up to the higher $7,500,000 threshold, who are otherwise not eligible for a PPP loan and will need bankruptcy relief, should be ready to file before the March 27th deadline.

As always, Butzel Long will continue to monitor the situation and will report on any significant changes or developments on this front.

For further information, feel free to contact Tom Radom (the author) or Max Newman. 

Thomas Radom
248.258.1413
radom@butzel.com

Max Newman
248.258.2907
newman@butzel.com

[1] The full text of the Act, in condensed form, can be found at https://www.congress.gov/116/bills/hr133/BILLS-116hr133enr.pdf.

[2] See e.g. In re Springfield Hospital, Inc., 618 B.R. 70, 80-93 (Bankr. D. Vt. June 22, 2020) (ruling for debtor) (appeal pending to 2nd Cir.); In re Roman Catholic Church of Archdiocese of Santa Fe, 615 BR 644 (Bankr. D. NM) (ruling for debtor); In re Gateway Radiology Consultants, P.C., 983 F.3d 1239 (11th Cir. Dec. 22, 2020) (reversing bankruptcy court’s ruling for debtor); In re Hildago County Emergency Service Foundation, 962 F.3d 838 (5th Cir June 22.2020) (holding that SBA did not exceed its authority in issuing a rule making bankruptcy debtors ineligible for PPP loans).

[3] Subchapter V of Chapter 11 was created by the Small Business Reorganization Act of 2019, which Butzel Long covered in previous client alerts. See, Revisions to Chapter 11 Create New Opportunities for Small Business Reorganization, dated February 7, 2020; Cares Act Provides Greater Relief for Financially Distressed Small Businesses under the Small Business Reorganization Act, dated March 30, 2020. 

[4] See, https://home.treasury.gov/system/files/136/PPP--IFR--Loan-Forgiveness-Requirements-Loan-Review-Procedures-Amended-Economic-Aid-Act-1192021.pdf.

[5] See, https://assets.documentcloud.org/documents/20489001/house-democratic-covid-relief-bill.pdf

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