New Bankruptcy Code Amendments Help Small Businesses

Small companies impacted by the pandemic recently received some positive news re: filing file chapter 11. The changes relate to the Paycheck Protection Program, preferential transfers, rent deferrals, and additional time to assume or reject a lease.

Potentially clearing up an issue with the PPP. When the CARES act was first passed, the application for the Paycheck Protection Program included a question asking whether the company was a debtor in a chapter 11 bankruptcy case. If the applicant answered “yes,” it was disqualified from participating. This led to litigation in a number of bankruptcy cases. Most Courts ruled in favor of the SBA, finding the SBA was within it authority in making the distinction. The amendment changes Section 364 of the Bankruptcy Code that business debtors may be eligible for PPP funding if they obtain bankruptcy court authorization. However, the statute also says the PPP loans will be available only if the SBA Administrator sends a letter to the United States Trustee agreeing to PPP loans in bankruptcy. Once that happens, there will still be a number of hoops the company must jump through. 

Changes to the preference law. A preference, or “preferential transfer,” is a payment made by a company to a creditor within three months before a bankruptcy is filed where the debtor “prefers” one creditor over another. Here is an example. Apex Corp. manufactures dress shoes. Apex purchases shoelaces from Zeno, Inc. Terms are net 30. Over the last year, as business for dress shoes has lagged, Apex had a $100,000 receivable to Zeno. Because of their relationship, just before Apex filed, it paid Zeno $50,000. This money was paid to Zeno instead of other creditors. In other words, Apex “preferred” Zeno. Even though the money was owed, under the Bankruptcy Code, the trustee can “claw back” the $50,000, as similar types of creditors are supposed to be treated the same.

As a way to encourage rent deferral repayment agreements, there is now a temporary exemption to preference liability. Landlords that agree to defer rent payments from their tenants and enter into lease amendments with tenants on or after March 13, 2020 are now protected from those payments being deemed as preferences. The point of this is to encourage landlords to strike deals with their tenants that might be struggling and considering filing for chapter 11. This also applies to vendors.

Rent deferrals. The Bankruptcy Code provides that, even if a company files for chapter 11, it still has to pay its rent, starting on day one. The new amendment gives a company that files for chapter 11 a 120 day deferral of paying its rent. However, in order to take advantage of this, the debtor has to show that it is experiencing, or has experienced, material financial hardship due, directly or indirectly, to the pandemic. 

Time to assume or reject leases. The Bankruptcy Code provides that a tenant has to decide within the first 120 days of the case whether it is going to keep (assume) or get rid of (reject) its lease of non-residential real property. The debtor can get a one-time 90 day extension, giving it to 210 days to decide whether to assume or reject. The amendment increases the original 120 days to 210, but also keeps the one-time 90 day extension. Even though this extends the initial time frame from 120 to 210 days, it does not extend the rent deferral time. The debtor has to start making rent payments after the 120th day.

There’s pretty much nothing in The Bankruptcy Code that is super clear or easy so if you have questions, it’s best to bring in a good guy litigator like Dean Sperling to resolve YOUR matter with YOUR best interests in mind! 

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