In the midst of the COVID-19 pandemic, many commercial landlords may be wondering whether they’ll receive their next rent payment as tenants struggle to make ends meet. Landlords and tenants alike should be prepared for a bankruptcy filing by the lease counterparty. This memorandum primarily focuses on the rights and remedies of landlords facing a tenant’s bankruptcy filing. We are continuing to monitor proposed state and federal government moratoriums on the filing of eviction actions, and will provide further guidance should any be imposed.

Setoff is a right that allows a creditor to offset a prepetition debt owed to a debtor with its prepetition claim against the debtor.  See In re Luongo, 259 F.3d 323, 334 (5th Cir.

With the havoc being wreaked by the COVID-19 virus on businesses and supply chains, shuttering many businesses and decimating certain industries, business owners and management are seeking guidance to help mitigate their risk of financial distress. Following is a checklist with specific action items for decisionmakers to review, recognizing that every situation is unique and there is no universal solution that will fit every business scenario in our current unprecedented economic environment.

Countries across the world are actively taking measures to stem the spread of COVID-19 by encouraging and, in some cases, forcing social distancing. One of the most common measures employed so far is the closing of non-essential stores, bars and restaurants for several weeks, if not longer. Several large retailers, such as JCPenney, Ross Stores, Kirkland’s Inc., Marshalls and TJ Maxx, have announced store closings for two weeks in efforts to help stop the spread of COVID-19.

COVID-19 is having a negative impact on almost the entire business environment. Early financial planning is critical for management to deal with the economic downturn. For some, bankruptcy may be an option that businesses should consider.

Take these steps now!

Now is a critical time for businesses to engage internal and external advisors to assist with the following:

Setoff is a right that allows a creditor to offset a prepetition debt owed to a debtor with its prepetition claim against the debtor. See In re Luongo, 259 F.3d 323, 334 (5th Cir. 2001). This remedy is aimed at preventing the inequitable and inefficient result that occurs when a creditor is forced to pay a 100% of its prepetition debt owed to a debtor, without resolving its prepetition claim. In such circumstances, the creditor is often forced to later prosecute its unresolved claim against the debtor and is commonly only awarded a fraction of the value of its claim.

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