New COVID-19 Bill Provides Additional Bankruptcy Relief

On Sunday, December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, which provides $900 billion in a second wave of economic stimulus relief for industries and individuals faced with challenges from the COVID-19 coronavirus. This legislation supplements the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)[1] and further amends several provisions of title 11 of the United States Code (the “Bankruptcy Code”) by providing financially distressed small businesses and individuals with greater access to bankruptcy relief.[2] Chapter 11 debtors may even have a way to receive CARES Act funding if the Small Business Act Administrator determines these debtors are eligible.[3]

Importantly, the Consolidated Appropriations Act includes two key amendments for commercial landlords: (1) reduced preference exposure and (2) increased rent deferral under executory contracts.

Reduced Preference Exposure

Section 547 of the Bankruptcy Code provides that a bankruptcy trustee or debtor-in-possession may recover certain payments made in the 90 days prior to a bankruptcy filing.[4] Typically, a debtor’s payment of previously deferred rent to a landlord within 90 days before the bankruptcy filing, while the debtor is insolvent, would potentially be subject to avoidance and recovery by the trustee as a preference. However, the Consolidated Appropriations Act temporarily amends this section for two years to limit a trustee’s ability to “claw back” a deferred rent payment made by a debtor as a preference. As a result, this amendment gives both commercial landlords and tenants the flexibility to negotiate rent deferrals and longer repayment periods without fear of losing revenue or litigating preference-related issues.

Under the amendment, for a landlord and debtor to qualify for protection, (1) there must be an amendment to an existing nonresidential lease for the deferral of rent, (2) the amendment must have been made on or after March 13, 2020, and (3) the amount of deferred rent must “not exceed the amount of rental and other periodic charges agreed to” under the existing lease.[5] However, this exception does not include any fees, penalties, or interest in an amount greater than those that the debtor would owe if the debtor had made every payment due under the nonresidential lease on time and in full before March 13, 2020.

Increased Rent Deferral

Section 365(d)(3) of the Bankruptcy Code provides that a commercial debtor tenant must timely perform all of its lease obligations pending the debtor’s decision to assume or reject the lease.[6] This provision allows debtors to request a 60-day rent deferral after the bankruptcy filing date before requiring them to begin paying postpetition rent (i.e., rent after the bankruptcy case commences). Typically, this extension is granted by the court for cause. However, the Consolidated Appropriations Act temporarily amends this section for two years to allow debtors who are experiencing coronavirus-related financial hardship to defer their rent to the earlier of 120 days or the debtor’s assumption or rejection of the lease.[7] As a result, debtors have more flexibility in paying their rent at the landlord’s expense of providing an involuntary extension of credit. However, the amendment provides a silver lining for landlords as any claims arising from the extension will be treated as an administrative expense (which receives priority payment).

Other Amendments

Other notable amendments to the Bankruptcy Code in the Consolidated Appropriations Act that assist individual debtors and small business debtors include the following:

1. An amendment allowing a court to discharge a chapter 13 debtor if the debtor defaulted on a mortgage for up to three months as a result of coronavirus-related financial hardship;[8]

2. An amendment preventing the court from denying relief to an individual under the CARES Act because he or she is or has already been a debtor;[9]

3. An amendment creating a new supplemental claim called a “CARES forbearance claim” for mortgage lenders for the amount of a federally backed mortgage loan previously granted forbearance under the CARES Act (a debtor can modify a confirmed plan to include this claim);[10] and

4. An amendment preventing a utility company from stopping service to an individual debtor if the debtor is current on his or her debt during the first 20 days of the bankruptcy case.[11]

We will continue to monitor bankruptcy and other relief provisions and will provide further updates with new developments.

[1] Morrison & Foerster previously wrote an article on the CARES Act, which can be found at: https://www.mofo.com/resources/insights/200330-bankruptcy-relief-cares-act.html.

[2] The amendments to the Bankruptcy Code are set forth in sections 320 and 1001 of the Consolidated Appropriations Act.  The Consolidated Appropriations Act also contains certain technical corrections to the Bankruptcy Code not discussed in this alert memorandum.

[3] See Consolidated Appropriations Act § 320.

[4] 11 U.S.C. § 547.

[5] See Consolidated Appropriations Act § 1001(g).

[6] 11 U.S.C. § 365(d)(3).

[7] See Consolidated Appropriations Act § 1001(f).

[8] See Consolidated Appropriations Act § 1001(b).

[9] See Consolidated Appropriations Act § 1001(c).

[10] See Consolidated Appropriations Act § 1001(d)(e).

[11] See Consolidated Appropriations Act § 1001(h).