On December 21, 2020, Congress passed the Consolidated Appropriations Act of 2021 (the Act), which was just signed by President Donald Trump. The Act makes certain amendments to the United States Bankruptcy Code (the Bankruptcy Code) relating to small business bankruptcies commenced under Subchapter V of Chapter 11, as well as to individual bankruptcies under Chapters 7, 11, 12, and 13 of the Bankruptcy Code. This article highlights those changes to the Bankruptcy Code that small businesses should consider utilizing in weighing the benefits and potential costs of filing for bankruptcy.
The Act amends Section 364 of the Bankruptcy Code to provide that bankruptcy courts may authorize small business debtors to obtain a loan under the Paycheck Protection Program (PPP). The PPP was signed into law on March 27, 2020 as part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (the CARES Act), and is administered by the Small Business Administration (SBA). Under the PPP, eligible businesses may obtain guaranteed loans to cover certain expenses, including payroll costs, mortgage interest, rent, and utilities. Loans issued through the PPP may be forgiven if certain conditions are satisfied, namely that the proceeds of the loans are used to cover allowable expenses. While the CARES Act was silent about excluding companies in bankruptcy from receiving PPP loans, the SBA had promulgated rules which denied bankrupt small businesses access to PPP loans, assuming they otherwise qualify for a PPP loan. Under the Act, bankrupt small businesses and those contemplating bankruptcy are now assured of access to PPP loans. Thus, the Act reverses certain court decisions that upheld the SBA’s determination that debtors in bankruptcy were not entitled to seek loans under the CARES Act. The Act also amends Section 525 of the Bankruptcy Code, which provides debtors with protection against discriminatory treatment, by making clear that CARES Act loans can be obtained by small business debtors.
The Act also modifies certain Bankruptcy Code provisions relating to unexpired leases of non-residential real property leases. Specifically, Section 365(d)(3) of the Bankruptcy Code has been amended to provide small business debtors experiencing, or having previously experienced, a material financial hardship due to the COVID-19 pandemic, with an additional 60-day period (up to 120 days total) to perform all post-petition obligations arising under the terms of an unexpired non-residential real property lease. This amendment provides a small business debtor with effectively a four-month rent holiday, but not a waiver of its obligation to ultimately pay this post-petition rent to the landlord. In addition, Section 365(d)(4) of the Bankruptcy Code now allows small business debtors an additional 90 days (up to 300 days total) to assume or reject unexpired non-residential real property leases.
Section 366 of the Bankruptcy Code has also been amended to prevent the termination of utility services during bankruptcy by waiving the requirement that small business debtors furnish a security deposit or other assurance of payment. While certainly beneficial, the Act’s amendments to Sections 365(d) and 366 will not excuse a small business debtor from its obligation to become and remain current under its lease, or of its duty to make post-petition utility payments, but they simply provide the debtor more time to make payment and thereby conserve short-term cash liquidity.
Mindful of concessions made by landlords and suppliers to help companies stay afloat during this pandemic, Congress also included provisions in the Act that amend Bankruptcy Code Section 547 to protect certain deferred or postponed rent and supplier payments made by small business debtors from being targeted by a bankruptcy trustee or a Chapter 11 debtor-in-possession as alleged preferential transfers. Such payments are protected from being avoided or “clawed back” so long as the payment arrangement between the landlord or supplier and the small business debtor was entered into on or after March 13, 2020, and only to the extent such payments do not include any fees, penalties, or interest in an amount greater than the fees, penalties, or interest the small business debtor would have owed the landlord or supplier had it not entered into the payment arrangement.
In conclusion, the Act provides many benefits to small businesses contemplating bankruptcy under Subchapter V of Chapter 11, and ensures that landlords and suppliers are not unfairly punished for working with their tenants or vendors during this unprecedented pandemic.