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Spending Bill’s Bankruptcy Provisions Target Some Covid-19 Woes

Dec. 21, 2020, 10:57 PM

Bankruptcy judges would be able to approve Paycheck Protection Plan loans on an expedited basis under the government spending bill currently under consideration in Congress.

The Consolidated Appropriations Act (H.R. 133) revealed Monday would add a section allowing Chapter 11 debtors or trustees to seek final approval of a PPP loan, with a hearing only seven days from filing the request. It’s one of a handful of provisions aimed at helping bankrupt debtors during the Covid-19 pandemic.

But the change won’t be effective unless and until the administrator of the Small Business Administration advises the director of the Executive Office of the U.S. Trustee—the Justice Department’s bankruptcy watchdog—that it will accept applications from bankrupt borrowers.

The SBA’s policy thus far has been to exclude bankrupt businesses from applying for the loans.

This policy has been the subject of significant litigation in bankruptcy courts across the country, with differing results. The U.S. Court of Appeals for the Fifth Circuit is the only federal appeals court to have ruled on the issue, finding that the SBA can’t be required to accept applications from bankrupt borrowers. The Second and Eleventh circuits are currently considering the question.

Businesses say PPP loans’ favorable terms—including their eventual forgiveness—make them more like a grant, and the bankruptcy code prohibits denying grants solely because of a bankruptcy filing.

“Now that Congress’ intent to authorize bankrupt companies for CARES Act borrowing is explicit,” the SBA could start accepting bankrupt borrowers’ applications, said Jared Ellias, a law professor at the University of California, Hastings.

Leases, Rent

The bill also would make two significant changes to a debtor’s options for handling non-residential leases and rent.

Bankrupt companies currently have 210 days to decide whether to keep or reject their leases before being subject to penalties for not paying rent, a time frame retailers in particular are having trouble meeting because of pandemic-spurred shutdowns, Ellias said.

H.R. 133 would temporarily extend that time by 90 days, requiring the decision to be made 300 days after filing for bankruptcy.

Companies filing under Subchapter V of Chapter 11, a new proceeding tailored to small businesses, could also get an additional 60 days to cure their rent defaults, for up to 120 days, if the court finds that the Covid-19 pandemic is the cause of delayed payments.

The additional time could let businesses “wait and see what happens with the vaccination campaigns” before deciding whether to reject their leases, Ellias said.

Another provision would allow suppliers and landlords to accept payments in the 90 days before a bankruptcy filing without being subject to clawbacks, if they had agreed to payment extensions because of the pandemic.

Bankruptcy law currently allows a debtor-in-possession or trustee to claw back payments made to creditors in the 90 days prior to a bankruptcy filing, called “preferences,” in order to prevent debtors from preferring some creditors over others. The bill provision would provide an incentive to cut businesses a break in light of the pandemic.

On the consumer side, the bill would allow individuals in Chapter 13 to fall behind on their mortgage payments by up to three months—if because of Covid-19—without endangering their ability to discharge debts remaining after the payment plan period ends.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com

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