New Bankruptcy Relief Options Introduced by 2021 Federal Appropriations Act 

A new Consolidated Appropriations Act was signed into law at the end of December 2020. Among its thousands of pages, it includes several new bankruptcy provisions for businesses in what is referred to as the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. Additional bankruptcy relief provisions are located in a miscellaneous section of the Act. To better prepare you for navigating the Consolidated Appropriations Act, consider the following  summary of the relief provisions that will impact businesses that have experienced financial challenges. 

PPP Loans are Now Available

Under regulations that were adopted by the Small Business Act in response to the CARES Act, businesses navigating bankruptcy were disqualified from receiving PPP loans. The Small Business Act regulations resulted in various legislative challenges on the grounds that these rules were unlawfully discriminatory. 

The new law states that only debtors who are proceeding under Subchapter V of Chapter 11 which is the Small Business Reorganization Act of 2019 as well as those who are navigating Chapter 12 and Chapter 13 are permitted to apply to bankruptcy court for a PPP loan. This provision, however, does not resolve pending litigation concerning the extension of PPP loans to Chapter 11 debtors who are not proceeding under Subchapter V. 

Under this new provision, a qualifying debtor can apply for as well as obtain authority to receive a PPP loan that, if not forgiven, is treated as a “superpriority” administrative expenses in a Chapter 11 proceeding. This means that the expense will be prioritized before all other administrative costs associated with a case. If a debtor applies for a PPP loan in such a manner, the bankruptcy court must then hear this matter within a period of seven days after the filing and service of the application. Additionally, a reorganization plan might anticipate a PPP loan that, if not forgiven, is then paid under the terms on which it was made.

What This Means for Small Business Owners: If you are pursuing bankruptcy under Subchapter V of Chapter 11, Chapter 12, or Chapter 13, you can now apply to bankruptcy court for a PPP loan. 

Commercial Real Estate Leases

Section 365(d)(3) of the Bankruptcy Code requires Chapter 11 debtors to continue paying rent and to comply with all other obligations under a commercial real estate release after a bankruptcy filing date. The rule also vests authority in bankruptcy courts to extend the time of performance under the lease to 60 days. 

This section has been revised to allow the bankruptcy court to extend the time for performance under these leases for a Subchapter V debtor an additional 60 days. For this extension, however, the debtor must be experiencing or must have experienced a material financial hardship either directly or indirectly as a result of the COVID-19 pandemic. 

The time that a Chapter 11 debtor has to either assume or reject a commercial real estate lease has also been changed. Following the passage of the Bankruptcy Abuse Prevention and Consumer Protection  Act of 2005, a Chapter 11 debtor is limited to a period of 120 days or 210 days, providing the court gives permission to decide whether to either assume or reject a nonresidential real property lease. Under the Consolidated Appropriations Act, the period of time that a debtor has to decide whether to assume or reject a commercial release estate lease has been increased to 210 days and can be extended an additional 90 days with the bankruptcy court’s permission. 

What This Means for Small Business Owners: If you are pursuing bankruptcy under Chapter 11, you have 210 days to either assume or reject a commercial real estate lease and can request an additional 90 extension from the bankruptcy court.

Preference Amendments

The Consolidated Appropriations Act recognizes that many landlords and suppliers have entered into either deferral or forbearance agreements as a result of the pandemic and provides preference protection for payments made under the terms of these agreements. Often, a payment to a creditor made within 90 days of a bankruptcy filing on account of a pre-existing debt can be clawed back to the bankruptcy estate as a preferential transfer. 

For both commercial tenants and landlords, any covered payment of rental arrears is protected from avoidance as a preference assuming that:

• The payment is made in accordance with either an arrangement or agreement to defer or postpone the payment of rent or other charges under the lease
• The agreement was either made or entered into on or before March 13, 2020, and
• The amount deferred or postponed does not exceed the rent and other charges that were owed under the lease before March 13, 2020, includes fees, interest, or penalties in an amount that is greater than what would be owed under the lease or any fees or penalties, or interest that is greater than what would be charged if a debtor had paid all amounts due under a lease timely and in full before March 13, 2020 

For the supplies of goods and services, the protection that is provided states that any covered payment of supplier arrears will receive protection from avoidance as a preference assuming that:

• The payment is made pursuant to an agreement or arrangement to defer or postpone the payment of amounts due under a contract for goods or service
• The agreement or arrangement is made either on or before March 13, 2020
• The amount deferred or postponed does not exceed the amount that was due under the contract before March 13, 2020, includes fees, interest, or penalties in an amount that is greater than what is owed under the contract, or interest that is greater than would be charged if the debtor had paid all amounts due under the contract before March 13, 2020 

What This Means for Small Business Owners: Any covered payment of rental areas is now protected from avoidance as a preference assuming that several critical requirements are first met.

Speak With an Experienced Bankruptcy Attorney

The potential for a Subchapter V debtor to obtain a PPP loan while in bankruptcy is a powerful new form of debt relief. Additional types of rent relief will also likely prove advantageous. If you need help navigating these or any other aspect of bankruptcy law, you should not hesitate with a knowledgeable lawyer. Contact Attorney Melanie Tavare today to schedule a free case evaluation.