Legislative Update: The Consolidated Appropriations Act of 2021 Amends the Bankruptcy Code
The Business Advisor
On December 27, 2020, in response to the economic distress caused by the COVID-19 pandemic and to supplement the CARES Act enacted in March 2020, the Consolidated Appropriations Act of 2021 (the “Act”) was enacted. In addition to providing $900 billion in pandemic relief, the Act benefits both debtors and creditors by temporarily amending certain sections of the Bankruptcy Code.*
First, the Act amends Bankruptcy Code section 365(d)(3) by addressing deferral of rent by small business debtors. Debtors are required to timely pay rent post-petition under a nonresidential real property lease until the lease is assumed or rejected. Prior to the amendment, a bankruptcy court was able to grant a motion to defer the debtor’s lease obligations for the first 60 days after filing, if the debtor showed “good cause” for the deferral. However, this 60-day deferral is rarely used and, when used, it is strictly enforced by bankruptcy courts. Now, a small business debtor that qualifies under the Small Business Reorganization Act (SBRA) can defer upcoming rent payments for the first 120 days of the bankruptcy case. To qualify under the SBRA, companies can have up to $7.5 million in secured and unsecured non-contingent and liquidated debt. To be entitled to the 120-day deferral period, the debtor must also be able to demonstrate material financial hardship due specifically to the COVID-19 pandemic.
Next, the Act amends Bankruptcy Code section 365(d)(4), which concerns the period of time to assume, assume and assign, or reject non-residential real property leases. Originally, a debtor had a maximum of 210 days (120 days initially, plus a potential 90-day extension) to assume or reject nonresidential real property leases. The debtor could have an additional extension beyond the 210 days only if the landlord consented in writing. With the amendment, the initial 120-day period is extended to 210 days, with the potential 90-day extension remaining the same. However, if the debtor does not perform its obligations under the lease during this extended deadline period, the landlord may still compel the debtor to perform by a bankruptcy court order or may seek relief from the automatic stay and pursue state law remedies.
Third, the Act amends Bankruptcy Code section 547, which concerns preferential transfers. Section 547 of the Bankruptcy Code allows a trustee or debtor-in-possession the ability to avoid and recover transfers occurring in the 90 days prior to the filing of a bankruptcy petition, provided the transfers meet certain criteria (unless one of the statutory defenses applies). To encourage rent deferral and vendor repayment agreements in the midst of this pandemic, the amendments to section 547 create a temporary exemption from preferential liability. But for the amendment, a payment of deferred rent might have been considered outside of the ordinary course of business because it is irregular and outside of the scope of the lease. But under the new statute, deferred rent and vendor payments pursuant to lease amendments, entered into on or after March 13, 2020 as a result of the pandemic, cannot be recovered as preferential transfers. Landlords and vendors can reach out to struggling businesses and negotiate deferred payment plans without the possibility of the deferred payments going back to the debtors.
With respect to post-petition financing, the Act amends Bankruptcy Code section 364 to resolve prior inconsistent bankruptcy court decisions regarding the eligibility of debtors to obtain Paycheck Protection Program (PPP) loans. The Small Business Administration (SBA), which administers the PPP, has denied debtor requests for PPP loans, leading to legal challenges across the country. The Act amends Section 364 of the Bankruptcy Code to allow certain debtors, including small business debtors, to obtain PPP loans as administrative expenses if they are otherwise eligible, upon notice and a hearing. This amendment will take effect, however, only if the SBA makes a determination that debtors are generally eligible for PPP loans. There is no deadline for the SBA to make any such determination, leaving the actual ability of debtors to obtain PPP loans in question.
With respect to utility providers, the Act amends Bankruptcy Code section 366 to prohibit a utility from discontinuing utility services to an individual debtor so long as the individual debtor pays the utility company for services rendered in the 21-day post filing period and continues to make all other post-petition utility payments, even if the individual debtor did not otherwise provide the utility company with adequate assurance of payment (typically in the form of a deposit).
The Act also amends section 507(d) of the Bankruptcy Code so that a party that pays the United States government a customs duty on behalf of an importer is subrogated to the government’s priority status under Section 507(b)(8)(F) for customs duties. Previously, the party paying the customs duty was subrogated to the government’s rights, except for the priority status. This provision benefits customs brokers and forwarders who pay the government for customs duties on behalf of their importer clients.
In addition to expanding a debtor’s ability to obtain PPP loans and amending section 541 of the Bankruptcy Code to provide that pandemic relief payments are not property of the debtor’s bankruptcy estate, the Act amends Bankruptcy Code section 525 to ensure debtors can benefit from various pandemic-related legal protections. Section 525 generally offers debtors protection from discriminatory treatment. As amended by the Act, Section 525 prohibits a debtor from being denied relief on the basis of currently being or having been a debtor, under the CARES Act’s (i) foreclosure moratorium; (ii) provision providing for forbearance of residential mortgage loan payments for multifamily properties with federally backed loans; and (iii) temporary moratorium on eviction filings.
Finally, the Act amends Bankruptcy Code section 1328 to give bankruptcy courts the discretion to grant a discharge to an individual chapter 13 debtor despite mortgage payment defaults occurring on or after March 13, 2020 (but not more than three monthly payments under a residential mortgage) because of a material COVID-19 related financial hardship. Additionally, the bankruptcy court can grant a discharge to a debtor whose confirmed plan provides for curing defaults on a residential mortgage with a qualifying loan modification or forbearance agreement with the lender having been approved by the bankruptcy court.
In conclusion, the Act makes multiple amendments to the Bankruptcy Code that will impact both debtors and creditors alike. Certain constituents in bankruptcy cases, such as borrowers, lenders, landlords, tenants, trade vendors, utility companies, and customs brokers, should pay careful attention to these important amendments and continue to monitor legislative developments since it is likely that additional amendments may make their way into law.
*With the exception of changes to Bankruptcy Code sections 366, 501, 502, 507, 525, 541, and 1328, which sunset on December 27, 2021, the remaining amendments sunset on December 27, 2022.