A new trend is brewing in bankruptcy courts: debtors are increasingly able to use the courts’ general equitable powers for assistance in weathering the current economic storm. These pandemic-related equitable arguments may significantly impact the marketplace—positively or negatively depending on your position—specifically as it relates to lease performance and also in general.
In light of the ongoing economic impacts of the COVID-19 pandemic, and although Chapter 11 of the U.S. Bankruptcy Code pertains to many industries, there are certain real estate related provisions of which owners and tenants should remain particularly aware in planning strategies to cope with the fallout from the current health crisis.
To raise awareness in that regard, the following is a general summary of some of the more critical provisions of the Code.
Single Asset Real Estate Entity
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, Public Law No. 116-136 (the “CARES Act” or the “Act”), the stimulus package designed to mitigate the widespread economic impacts of the coronavirus (“COVID-19”). The Act includes important temporary modifications [1] to Subchapter V of the Bankruptcy Code (the “Code”), applicable to small -business debtor reorganizations.
Temporary Increase in Debt Limit
On March 31, 2020, the Rhode Island Superior Court announced the creation of its COVID-19 Receivership Program. The Program establishes a unique non-liquidating receivership calendar intended to assist Rhode Island businesses that are unable to pay their debts as they become due as a result of the coronavirus pandemic. The Program is designed to give struggling businesses time to obtain emergency funding under the CARES Act or other source, to resume paying its ongoing obligations under Court supervision, and repay its prepetition debt.
Landlords are often among the very first to feel the impacts of their tenant’s financial woes. In today’s unpredictable economic environment, many businesses are forced to shut their stores temporarily while the risks of COVID-19 continue to play out. Within the last few days many large and small retailers have unilaterally announced publicly that they would not be paying upcoming rent. In these unprecedented times, landlords must be aware of the risks they face in light of what is certain to be a previously unheard of level of tenant defaults.
Debtors in bankruptcy, including hospitals and skilled nursing facilities, left out under the CARES Act PPP
Small businesses have traditionally had difficulties reorganizing under Chapter 11 of the Bankruptcy Code. The legal fees necessary to prepare a plan and disclosure statement and navigate the confirmation process were often prohibitively expensive. Further, the reporting requirements and United States Trustee fees mandated by Chapter 11 added significant expenses to the already struggling debtor’s cash flow.
Small businesses have traditionally had difficulties reorganizing under Chapter 11 of the Bankruptcy Code. The legal fees necessary to prepare a plan and disclosure statement and navigate the confirmation process were often prohibitively expensive. Further, the reporting requirements and United States Trustee fees mandated by Chapter 11 added significant expenses to the already struggling debtor’s cash flow.
On February 19, 2020, the Small Business Reorganization Act went into effect. The purpose of the new law is to offer an alternative, more streamlined path in chapter 11 reorganizations for small business debtors (including sole proprietorships). When the new law was passed, the only small business debtors eligible to file were those having less than $2,725,625 in debt, at least 50% of which arose from business activities. The Coronavirus Stimulus Bill changed that by increasing the limit to $7.5 million.
When Financial Stress Turns to Distress–Restructuring Tools to Avoid Disaster
Parts 1 and 2: Chapter 11 Checklist and What Else Is in the Toolbox