New Stimulus Deal: Amendments to the Bankruptcy Code
President Trump signed the Consolidated Appropriations Act, 2021 yesterday, December 27, 2020. Although not widely reported, the legislation makes several amendments to the Bankruptcy Code based upon the severe financial hardships created by the COVID-19 pandemic.
The amendments relate to Section 365(d)(3) (the deferral of rent by small business debtors), Section 365(d)(4) (the period of time to assume, assume and assign, or reject a nonresidential real property lease), and Section 547 (preferential transfers). All of the amendments will sunset on December 27, 2022.
Preferential Transfer Protection
Perhaps most significantly, landlords which entered into lease amendments with tenants on or after March 13, 2020, to defer the payment of rent as a result of the pandemic are protected from claims of preferential transfers. Normally, payments made by a debtor within 90 days of a bankruptcy filing and outside the ordinary course of business are potentially “preferential” and subject to a “clawback” by the debtor. The amendments to Section 547 create a temporary exemption from preference liability to facilitate and encourage rent deferral and vendor repayment agreements. Prior to the amendment, the deferred rent payments could be subject to preference liability as payments that would otherwise be past due. By insulating these payments from preference exposure, landlords (and vendors) are encouraged to reach deferred payment arrangements with struggling businesses without fear that in a later bankruptcy case the deferred payments would have to be disgorged back to the debtor. Put another way, the amendment helps avoid invocation of the age-old adage that no good deed goes unpunished.
Rent Deferrals for Small Business Debtors
The amendment to Section 365(d)(3) provides a small business debtor under the Small Business Reorganization Act provisions of the Bankruptcy Code (i.e., commercial debtors having non-contingent, liquidated debts under $7.5 million) the opportunity to defer rent coming due in the first 120 days of the bankruptcy case. However, causation and materiality elements must be satisfied—the debtor must demonstrate that it is experiencing, or has experienced, material financial hardship due, directly or indirectly, to the COVID-19 pandemic.
More Time to Assume or Reject Leases
The amendment to Section 365(d)(4) allows additional time for a Chapter 11 debtor to assume, assume and assign, or reject its nonresidential real property leases. Prior to the amendment, a debtor had an initial 120-day period, plus one additional 90-day extension to assume or reject, for a maximum of 210 days. Additional extensions beyond the 210th day of the case require the landlord’s prior written consent. The amendment increases the initial period from 120 days to 210 days, but maintains the single 90-day extension provision and the landlord written consent requirement. As a result, a debtor is given more breathing room to make critical reorganization decisions relating to its real estate, but must nonetheless timely perform all of its obligations under the lease during that time. To the extent the debtor does not perform, landlords retain the ability to either compel the debtor’s performance in bankruptcy court or seek relief from the automatic stay to exercise state law remedies.
Read our comprehensive alert about the new stimulus legislation here.
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