Overview of Corporate Bankruptcy: How Subchapter V, the CARES Act, and the Consolidated Appropriations Act Expanded the Remedies for Businesses and Business Owners in Bankruptcy | Bradley Arant Boult Cummings LLP

In February 2020, just before the COVID-19 outbreak, the Small Business Reorganization Act 2019 (Subchapter V) came into force.[1] Subchapter V amends Chapter 11 of the Bankruptcy Code to allow certain individuals and businesses with debts of less than $ 2,725,625 to file a simplified chapter 11 case in order to make small business bankruptcies more fast and cheaper.[2]

Subchapter V includes some unique provisions of Chapter 11, such as: (i) the appointment of a permanent trustee; (ii) only allow a debtor to propose a reorganization plan, which must be filed within 90 days of the date of the request; (iii) except by order of the court, no committee of unsecured creditors; (iv) the elimination of the rule requiring that a new value be given in order for the debtor’s shareholders to retain their stake without paying the creditors in full; and (v) authorize the modification of certain residential mortgage loans if the underlying loan was not used to purchase the residence and was primarily used in connection with the business.[3]

Very soon after, in response to the COVID-19 epidemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was promulgated on March 27, 2020, which notably changed the definition of “debtor” for the Subchapter V aims to increase the debt limit from $ 2,725,625 to $ 7.5 million.[4]

In the wake of these new laws, creative individual debtors have filed a Subchapter V application to restructure personal guarantees for expired commercial debts. In addition to the debt limit of $ 7.5 million, to qualify as a debtor under Subchapter V, at least 50% of the debt must arise from the business or commercial activities of the debtor.[5] Within these parameters, bankruptcy courts recently found that people whose debts account for at least 50% of commercial debts, such as individual guarantees, qualify to be small business debtors under subchapter V. .[6]

For example, the Louisiana Eastern District Bankruptcy Court ruled that individual debtors’ guarantees on business loans constituted commercial debt so that the debtors could be small business debtors under subchapter V. .[7] The court found that, since the majority of debtors ‘debts arose from the operation of the debtors’ currently operating businesses, as well as their now defunct businesses, and were for an amount below statutory debt limits. of subchapter V, debtors qualified under subchapter V.[8]

As a result of the CARES Act, businesses received additional relief from COVID-19 with the enactment of the Consolidated Appropriations Act, 2021 (CAA) on December 27, 2020, which includes multiple Bankruptcy Code amendments designed to help businesses.[9]

Before the enactment of the CAA, the Small Business Administration (SBA), which administers the Paycheck Protection Program (PPP), opposed PPP loans for debtors and enacted rules prohibiting small businesses from failing. to access PPP loans.[10] In response, CAA now expressly allows Chapter 11 Subchapter V debtors (as well as Chapter 12 and 13 debtors) to apply for a PPP loan.[11]. However, frustrating for large companies, debtors in traditional Chapter 11 cases were not included and, therefore, would likely continue to be denied PPP loans in bankruptcy.[12]

Another benefit for subchapter V debtors is the CAA’s amendment to Section 365 (d) of the Bankruptcy Code, which allows the court to extend the debtor’s execution period under a unexpired lease of a non-residential property up to 120 days from the date of the petition if: the debtor is living or has experienced difficulties due to COVID-19.[13]

The CAA also amends section 365 (d) (4) (A) of the Bankruptcy Code – to all debtors and not just subchapter V – to extend a debtor-tenant’s time to take over or reject a non-residential real estate lease for an additional 90 days up to a total of 210 days after the date of the petition .[14] Section 365 (d) (4) (B) (i) of the Bankruptcy Code already allows the court to extend the time limit for assuming or rejecting a lease, for cause, by an additional 90 days. Therefore, a debtor could have up to 300 days to decide whether to assume or reject an unexpired commercial lease without the consent of the landlord.

In addition, the CAA aims to encourage owners and sellers to offer flexible payment terms to debtors by amending the preference provisions of Section 547 to provide that any “payment covered by rental arrears” or “supplier arrears” cutlery ”cannot be avoided as preferences.[15] To benefit from the exemption, the debtor and the counterparty must have entered into a lease or a contract before the date of the request, the lease or the contract must have been modified on March 13, 2020 or after this date, and this modification must have deferred or postponed. payments due under the lease or contract.[16]

Subchapter V, the CARES Act and the CAA provide multiple new possibilities for certain businesses and individuals to restructure their debts in a Chapter 11 matter. The CARES Act will currently expire on March 26, 2021, but new bipartite legislation has been introduced. was recently introduced to extend the CARES Act Subchapter V debt limitation increase until March 27, 2022.[17] The CAA provisions discussed in this article are all expected to expire on December 27, 2022.[18]


Remarks

[1] See Pub. L. n ° 116-54 (2019). [2] See 11 USC § 101 (51D). [3] See 11 USC §§ 1181–1195. [4] See Pub. L. No. 116-136 (2020). [5] See 11 USC § 1182 (1) (A). [6] See for example In re Wright, 2020 WL 2193240, at * 3 (Bankr. DSC April 27, 2020) (individual debtor with 56% of the debt from defunct companies classified as small business debtor in subchapter V). [7] See In re Blanchard, 2020 WL 4032411, at * 3 (Bankr. ED La. July 16, 2020). [8] Username. at 2 hours. [9] See Pub. L. No. 116-260 (2020). [10] See 85 Fed. Reg. 23,450, 23,451 (April 28, 2020). [11] See Pub. L. No. 116-260 (2020). [12] Username. [13] Username. [14] Username. [15] Identifier. [16] See Pub. L. No. 116-136 (2020). [17] See Grassley and Durbin Introduce Biparty Legislation to Extend the Relief Provisions of the CARES Act (senate.gov). [18] See Pub. L. No. 116-260 (2020).

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