Small businesses experiencing short-term and long-term distress from the effects of the current pandemic can avail themselves of various immediate remedies that are available under Chapter 11. However, the Small Business Reorganization Act (the SBRA) provides enhancements solely for eligible small businesses that are faster and less expensive than traditional Chapter 11.

On March 25, 2020, the United States Senate – and on March 27, 2020, the United States House of Representatives – passed the “Coronavirus Aid, Relief and Economic Security Act” (“CARES Act”) to provide relief to small businesses and consumers harmed by the COVID-19 pandemic. The CARES Act is expansive in its scope, but there are important provisions lenders should know about that are related to bankruptcy.

In the past several years, the United States has seen a tidal wave of retail sector chapter 11 cases. The end result for most of those cases has been going out of business and liquidation sales. On March 11, 2020, Modell’s Sporting Goods commenced its chapter 11 cases seeking to follow a similar path taken by other retailers by closing all 153 sporting goods stores in a controlled liquidation. Unfortunately for Modell’s, the COVID-19 crisis hit the United States just as Modell’s commenced its liquidation.

Buried in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which is expected to be passed by Congress and signed by the President today, are revisions to the Bankruptcy Code that are relevant to creditors dealing with distressed debtors. Most notably, the bill will impact the recently-enacted Small Business Reorganization Act of 2019 (the “SBRA”) by increasing the potential pool of qualified debtors.

As the COVID-19 financial turmoil escalates, many businesses are asking themselves, “but for the virus, I had a profitable and successful business. What can I do to survive a short term liquidity crisis?” Businesses may be able to utilize a litany of remedies in Chapter 11 to assist in weathering the current, but hopefully, short lived recession.

During challenging economic times, Bankruptcy Courts serve an essential governmental and financial function. The COVID-19 outbreak has forced closures of businesses and governmental entities throughout the country, resulting in a cascade of financial distress across virtually every economic sector. The nation’s courts have not been immune from disruptions. Nearly all State Courts and Federal District Courts in major metropolitan areas have suspended non-emergency civil proceedings.

As the U.S. energy industry comes to grips with the most dire economic crisis in its history, wrought by an invisible virus and global oil price war, and with many exploration and production (E&P) producers substantially adjusting their capital and maintenance budgets, all parties must carefully assess their partners’ financial positions. The bankruptcy filing of a joint venture partner (whether operator or nonoperator) can lead to substantial problems for the other joint venture partner(s) and potentially hamstring operations on the co-owned lands.

Please note: The below information may require updating, including additional clarification, as the COVID-19 pandemic continues to develop. Please monitor our main COVID-19 Task Force page and/or your email for updates.

Section 1113 – Bankruptcy

As the nation hunkers down to combat the novel coronavirus (COVID-19), bankruptcy courts throughout the country have moved quickly to implement procedures to preserve access to the courts while limiting in-person interaction during the crisis. Each court’s specific COVID-19 procedures are different, but they largely prohibit in-person hearings, recognize the need for flexibility and adjournments for non-emergent matters whenever possible, and encourage the creative use of technology to allow as many matters to go forward as scheduled, including evidentiary hearings.

The COVID-19 pandemic has caused unprecedented economic disruption, creating sudden financial distress across industries. Companies are now facing impacts ranging from a dramatic decline in revenue of uncertain duration, to potential setbacks to M&A transactions, to delayed or canceled financing rounds.

With even some previously well-performing companies potentially entering the so-called zone of insolvency, it’s important to review the fiduciary duties owed by directors and officers and how discharging those duties may change in the face of financial distress.