The economic havoc unleashed by the COVID-19 crisis in most sectors of the economy will affect businesses and their employees, servicers, customers, and others for the foreseeable future. Among those that are directly and critically affected are banks and other lenders, commercial landlords and tenants, restaurants, and the travel and hospitality industries. All of these areas will see an increase in bankruptcy filings and other insolvency proceedings in the near term. Here is a short guide for some of the issues that will arise in the coming months.

Landlords

Seyfarth Synopsis: As OEMs confront the impact of the COVID-19 pandemic on an already changing automotive industry, one significant issue will be the inevitable financial challenges that many dealers will face. Financially distressed or, worse, bankrupt dealers, create serious issues for manufacturers and affiliated lenders, including negative publicity, dissatisfied customers, limited or shuttered operations, out-of-trust sales, and litigation.

The question is no longer whether the volatility created by the COVID-19 pandemic will deepen the difficulties businesses and other institutions face in the coming months, but by how much and in what ways. In the past few weeks, we have offered client mailings and webinars on COVID-19-related topics, and we will work to keep you informed of important developments as these issues evolve. Included below are updates to our recent commentary, with answers to questions we have been receiving.

Corporate

Impact of COVID-19 on M&A

While the impact of the coronavirus disease (COVID-19) is as of yet uncertain, one thing is clear: the global outbreak of COVID-19 has caused − and will likely continue to cause − a precipitous decrease in demand and supply as a result of quarantine orders, business closures, and social distancing, all aimed at flattening the curve of the pandemic. As a result, a dramatic and pronounced economic downturn is predicted as the pandemic’s impact touches virtually all businesses, regardless of geography or industry.

In the energy industry, it’s common for oil and gas well operators to “net” unpaid joint interest billings (JIBs) against working interest revenue payments in the ordinary course of business. However, the moment a petition is filed by a debtor under any chapter of the United States Bankruptcy Code, the automatic stay goes into effect which affects the right to “net,” depending upon whether the netting constitutes a setoff or recoupment.

What: This evening, March 19, Senate Majority Leader Mitch McConnell introduced a bill called the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The proposed bill is intended to provide relief to various sectors of the U.S. economy. Of particular interest is the Coronavirus Economic Stabilization Act of 2020, set forth in Division C, Title I of the proposed bill, which provides assistance to severely distressed sectors of the U.S. economy, including (but not limited to) airline carriers.

Who Does This Impact:

COVID-19 has quickly and vastly impacted our world and created a lot of uncertainty. Most courts in the country are operating on atypical and limited schedules while conducting many hearings on a telephonic basis. The same is true of the bankruptcy courts in Alabama. However, the prophylactic measures currently in place do not limit financially troubled borrowers’ ability to file for bankruptcy protection. While the full extent of COVID-19’s impact remains unclear, we can safely assume that many, if not most, businesses will be negatively impacted.

On March 18, 2020, the U.S. District Court for the Southern District of Ohio (the “District Court”), acting as appellate court for the U.S. Bankruptcy Court for the Southern District of Ohio (the “Bankruptcy Court”), affirmed the Bankruptcy Court’s decision that certain alleged liability of the Debtor, Edward Dudley, Sr., stemming from his role as treasurer for certain charter schools, was dischargeable and not exempt from bankruptcy discharge under 11 U.S.C. § 523(a)(8)(A)(ii).  That is the provision which excludes student loans and similar obligations from discharge.

“In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin

With businesses focused on the impact of the novel coronavirus (COVID-19) pandemic on current and future liquidity, balance sheet and cash flow concerns, and an expected decline in the level and profitability of business activity in these difficult and uncertain times, in many cases attention has turned to the issue of the duties and responsibilities of directors to creditors when a corporation is financially troubled and is either approaching insolvency (the so-called “zone of insolvency”) or becomes insolvent.