COVID-19: Amendments to the Bankruptcy Code in the Consolidated Appropriation Act and COVID-19 Bankruptcy Relief Extension Act | K&L Gates LLP
On March 27, 2021, President Biden enacted the law COVID-19 Bankruptcy Extension Law (the law on extension). The extension law temporarily extends certain COVID-19 bankruptcy relief provisions adopted as part of the Coronavirus Aid, Relief and Economic Security Act (the CARES law), which were further amended and / or extended within the framework of the Consolidated Appropriation Act (the CAA). Some of the changes included in the CAA and the Extension Act are highlighted below:
Debtor Protection Program Loans and Paycheque
Under the CARES Act, Congress established the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA), through which businesses can obtain loans that would be canceled if borrowers used the funds to certain permitted purposes. The SBA enacted a rule declaring bankrupt debtors ineligible for PPP loans. Debtors across the country have challenged this rule. The CAA is attempting to address this issue by expressly allowing certain bankrupt debtors to obtain PPP loans only if the SBA administrator sends a letter to the director of the executive office of the US trustees approving the rule change. If the SBA administrator issues such a letter, PPP funds will be available (a) in cases filed after the letter delivery date and (b) to subchapter V small business debtors, debtors of Chapter 12 family farmers and fishermen, and Chapter 13 debtors employed. To date, the SBA administrator has yet to deliver the letter. This provision expires under the CAA on December 27, 2022.
Discrimination under section 525
Section 525 of the Bankruptcy Code generally protects bankrupt debtors from certain types of discrimination based solely on the fact that the debtor has sought bankruptcy relief. CAA amends section 525 to clarify that a bankrupt debtor also cannot be deprived of the benefit of certain provisions of the CARES Act due to their status as a bankrupt debtor, including (a) the foreclosure moratorium and the right to seek forbearance, (b) forbearance from mortgage payments for multi-family properties, and (c) temporary moratorium on eviction deposits. This amendment to section 525 will expire on December 27, 2021.
Unexpired non-residential real estate leases
Section 365 (d) (3) of the Bankruptcy Code requires a debtor to continue to enforce unexpired non-residential real estate leases on a timely basis, until such leases are resumed or rejected. The CAA allows debtors in subchapter V small business cases to request a 60-day performance period (up to 120 days in total) under its unexpired non-residential real estate leases, if the debtor has known and continues to experience difficulties as a result of the COVID-19 pandemic. In addition, and without having to demonstrate significant financial hardship, the CAA also allows an additional 90-day extension of the 120-day period for the debtor to assume or reject unexpired non-residential real estate leases. With this additional extension, all debtors can have up to 300 days to decide whether to accept or reject these leases. These two provisions will expire on December 27, 2022, but they will remain applicable to any business started before that date.
Section 547 allows a debtor or trustee to avoid certain payments due to pre-bankruptcy obligations while the debtor is insolvent. CAA amends section 547 to prohibit the cancellation of payments made during the preference period after March 13, 2020, for “covered rent arrears” and “covered supplier arrears” that had been carried over under an abstention or a similar agreement. For payments to qualify for the avoidance exemption, they must not include any fees, penalties or interest in excess of amounts that would have accrued without any deferral.
The CAA is also amending section 507 (d) of the Bankruptcy Code to allow claims arising from customs duties paid to the federal government on behalf of an importer. The provision is designed to assist brokers and freight forwarders who pay the government tariffs on behalf of customers and expires on December 27, 2021.
Finally, the CAA amends Articles 501 and 502 of the Bankruptcy Code to create a process by which creditors can file proof of claim for amounts that have accrued due to the implementation and remedy provided by the CARES Act. This provision aims to compensate creditors for any damage suffered as a result of the implementation of the CARES law and ends on December 27, 2021.
Limitations of subchapter V
The bill extends until March 27, 2022, increasing debt limits under the Small Business Reorganization Act, 2019, allowing more debtors to use the streamlined subchapter V bankruptcy procedures. The CARES Act had previously increased these debt limits from US $ 2.7 million to US $ 7.5 million, but this increase was originally scheduled to expire on March 27, 2021.