Consolidated Appropriations Act, 2021: Bankruptcy Code Amendments in the Wake of the Pandemic

Consolidated Appropriations Act, 2021: Bankruptcy Code Amendments in the Wake of the Pandemic

On December 27, 2020, Consolidated Appropriations Act of 2021 (“Act”) was enacted to fight the economic distress caused by the global pandemic. By way of the Act, several amendments were made to the provisions of the Bankruptcy Code, especially the ones affecting the landlords and small business owners. To start with, an amendment was made to Section 365 (d) (3) of the Bankruptcy Code[1]. The amendment was brought to allow small business debtors who were experiencing financial hardship due to the pandemic, and have been provided sixty-days in addition to the already given sixty-days grace period to make payments towards unexpired leases of non-residential real property following the bankruptcy filing date. Such deferred payment would be treated as administrative expense entitled to the highest priority under the Bankruptcy Code’s distribution scheme. The amendment has been made in response to the extended rent deferral allowed to the tenants facing financial difference in the hands of the pandemic. The second amendment has been made to Section 365 (d) (4)[2] of the Code, which allows an extension deadline for trustees or debtors in possession to assume or reject non-residential real property leases for additional ninety-days, to given a total of two-hundred-twenty days from the initiation of the bankruptcy proceedings. As the Code allows initial period to be extended by ninety-days “for cause”, a debtor, therefore, has a total of three-hundred days to assume or reject leases. The United States Bankruptcy Court for the Southern District of Texas[3] ruled that the amendment was retroactive and thereby allowed two-hundred-ten days after the case was filed. The amendments would expire on December 27, 2022, and would be applicable on all cases filed under subchapter V before the stated date. The landlords seeking unpaid rents from the tenants should consider that filing bankruptcy petition against the tenant could lead to months-long delay in rent payment and also assumption of the lease. The third amendment has been made to Section 547[4] in order to prohibit debtors-in-possession and trustees from avoiding payments made by a debtor during the preference period for “covered rental arrearages” and “covered supplier arrearages”. In order to avail the exemption, certain conditions are to be met. Firstly, the debtor and the other party must have executed the lease or executor contract before the bankruptcy filing. Secondly, the contact must have been amended after March 13, 2020. Lastly, the amendment should allow deferred or postponed payments otherwise due under the lease contract. However, the exemption made vide the amendment would not be applicable to payments made on account of interest, fees or penalties imposed by any post March 13, 2020 amendment.

The fourth amendment brought to the Code vide CAA has been amendment to Section 364[5], with the aim to provide Paycheck Protection Program (“PPP”) loans to certain debtors and trustees. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), created the PPP which was to be administered by Small Business Administration (“SBA”). However, this created controversy about the availability of PPP loan to companies in bankruptcy as the SBA denied PPP loans to debtors. The Eleventh Circuit[6] settled the controversy by holding that debtors could not obtain PPP loans. As per amendment brought by CAA, the loan will be available only if the SBA Administrator sends a letter to the Director of the Executive Officer for United States Trustee acquiescing to PPP loans in bankruptcy. The PPP loans would only be available in case filed after the date the SBA sends the referenced letter to the Office of the United States Trustee, and to a debtor in possession or a trustee who is authorized to operate the business of the debtor under Section 1183, 1184, 1203, 1204 or 1304. CAA further brought an amendment to Section 541[7] of the Code, so as to exempt stimulus payments from the property of the estate. As a result, the debtors would not be able to utilize the pandemic relief payments in order to satisfy obligations owed to creditors.

The sixth amendment has been brought to Section 1328[8] to give discretion to the Bankruptcy Court to discharge a Chapter 13 debtor despite of mortgage payment defaults occurring on or after March 13, 2020 on the grounds of a material COVID-19 induced financial difficulty. The amendment also allows discharge of a debtor whose confirmed plan provides for curing defaults on a residential mortgage. CAA brought the seventh amendment to allow qualified servicers to file a proof of claim for the deferred payments, even if the bar date has passed. It also allows the authorized debtors to modify a confirmed Chapter 13 plan to address the deferred payment.

Further, vide CAA, Section 525[9] of the Code was also amended to provide that no person would be denied relief under the CARES Act provision solely because the person is or was a debtor in a bankruptcy proceeding. The Amendment prohibits denying a debtor relief on the basis of currently being or having been a debtor under the CARES Act’s foreclosure moratorium, or provision providing for forbearance of residential mortgage loan payments for multifamily properties with federally backed loans, or temporary moratorium on eviction filings. The ninth amendment modified Section 366 of the Code to prohibit a utility from discontinuing utility services to an individual debtor as long as the individual debtors pay for the services rendered by the utility company in the 21-day post-filing period and continues to make all other post-petition utility payments. Lastly, the tenth amendment was brought to Section 507 (d)[10] of the Code to allow a party which pays a custom duty to the United States government on behalf of an importer, is subrogated to the government’s priority status under Section 507 (b) (8) (F) for custom duties. The state amendments would expire on December 27, 2021 after which the amended provisions would revert to their prior provisions for cases filed after the stated dates.

[1] 11 U.S. Code § 365 (d) (3)

[2] 11 U.S. Code § 365 (d) (4)

[3] In re Bouchard Transportation Co., Inc., et al., 20-34682

[4] 11 U.S. Code § 547

[5] 11 U.S. Code § 364

[6] USF Federal Credit Union, et al. v. Gateway Radiology Consultants, P.A., 20-13462 (11th Cir., 2020)

[7] 11 U.S. Code § 541

[8] 11 U.S. Code § 1328

[9] 11 U.S. Code § 525

[10] 11 U.S. Code § 507 (d)