December 28, 2020Client Alert

Updates to Bankruptcy Provisions Provided by New COVID-19 Relief Package

The week of Christmas, Congressional leaders released the text of the new $900 billion COVID-19 relief package. After a week of push-back, President Trump signed the bill on Sunday evening. In addition to the $600 per adult stimulus payment, additional PPP funding, rental assistance, and school/college aid, the bill also provides additional updates on certain bankruptcy provisions. Those changes, which are spelled out in Division FF of the bill “Title X-Bankruptcy Relief,” include the following:

  • With court approval, Subchapter V small business debtors experiencing material financial hardships due to the pandemic may have additional time to pay rent owed on nonresidential real estate. Typically, debtors are provided a 60-day window after the petition date during which rent can be withheld as the debtor decides whether to assume or reject a lease. The time period is proposed to be extended to 120 days with court approval.
  • Additionally, debtors-in-possession or trustees now have 210 days from the petition date to assume or reject unexpired nonresidential leases. The Code previously required such decisions to be made within 120 of the bankruptcy filing.
  • Payments made by a debtor to a landlord within the 90-day pre-petition preference period (which were for rent due before March 13, 2020), are exempt from preference actions. This provision exempts payments to landlords from preference actions provided that the parties amended their pre-existing lease agreement after March 13, 2020 and such agreement deferred or delayed the anticipated rental payments under the lease.
  • Utility companies cannot terminate service for individual debtors who cannot provide adequate assurance of future performance under section 366 of the Code, so long as the individual debtor becomes current, and remains current, within 20 days of filing the petition.
  • The bill also resolves an ongoing issue regarding whether small business debtors are eligible to obtain PPP funds. Now debtors are specifically authorized to obtain PPP funds on an expedited schedule; however, a third-party SBA Administrator has discretion to approve or deny such loan request by the debtor. So, although small business debtors are not statutorily barred from PPP money, they may still be at the whim of the SBA.
  • The bill also voids terms in any existing loan documents that would have prohibited the debtor from obtaining such funds. The prior version of the CARES Act was silent on PPP funding, resulting in conflicting bankruptcy court decisions on this issue around the country.

The modifications sunset in one year for normal cases, and sunset in two years for provisions tied to PPP loans, Subchapter V cases, and rental changes. Importantly, the bill does not appear to extend the March 27, 2021 sunset of the expanded $7.5M debt limit to qualify as a small business debtor under Subchapter V.

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