Bankruptcy Relief for Small Businesses Under the 2021 Consolidated Appropriations Act

Robert G. Sanker and Stephanie M. Scott

The Consolidated Appropriations Act, 2021 (“CAA”) was signed into law on December 27, 2020 (H.R. 133) in response to the ongoing COVID-19 pandemic.  Buried among the CAA’s nearly 6000 pages, the CAA contains provisions that amend certain provisions of the United States Bankruptcy Code (“Bankruptcy Code”) that have an impact upon Chapter 11 bankruptcies. Some of these amendments include allowing debtors to apply for and obtain PPP loans; extending the amount of time for debtors to pay rent and assume/reject a commercial lease; and protecting certain deferred payments to landlords and suppliers from being clawed back to the bankruptcy estate.

PPP Loans

Importantly, the CAA clarified previous uncertainty regarding whether small businesses going through bankruptcy may qualify for loans under the Paycheck Protection Program (“PPP).”  The PPP was signed into law on March 27, 2020 as part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and is administered by the Small Business Administration (“SBA”).  Under the PPP, eligible businesses may apply for and obtain loans to cover enumerated business expenses, such as payroll, rent, and utilities.  PPP loans are forgiven if certain conditions are met – primarily, if the loan proceeds are used for these allowable expenses. 

Although the CARES Act was silent on the issue, the SBA promulgated rules interpreting the CARES Act as denying PPP loans to bankrupt small businesses, even if they would have otherwise qualified.  This flooded the court system with lawsuits challenging the regulations on the grounds that they were arbitrary and capricious, exceeded the SBA’s rulemaking authority, and/or were unlawfully discriminatory against debtors under 11 U.S.C. § 525(a).[1]  See PPPs for DIPs.

The CAA makes clear that debtors proceeding under Subchapter V of Chapter 11[2] (“Subchapter V”)[3] may apply to the bankruptcy court for a PPP loan.  Under this provision, which amends § 364 of the Bankruptcy Code, a qualifying debtor may apply for and obtain authority to receive a PPP loan.  If the loan is not forgiven, it will be treated as a “superpriority” administrative expense in the Chapter 11 proceeding. 

This amendment sunsets 1 year after enactment.

Additional Time for Debtors to pay Rent or Assume/Reject Commercial Leases

Under § 365(d)(3) of the Bankruptcy Code, a Chapter 11 debtor must continue to perform its obligations under an unexpired commercial lease, including paying rent.  See Could Bankruptcy Amendments Be on the Horizon as Pressure Mounts on Retailers?  However, under the CAA, Subchapter V debtors may now ask the bankruptcy court for an additional 60-days to pay rent (on top of the original 60-day request provided for in the Bankruptcy Code), but only if “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly,” to the COVID-19 pandemic.  The CAA has also amended the standard amount of time that a Chapter 11 debtor can assume or reject a commercial real estate lease (without requiring court approval) from 120 days to 210 days. 

These amendments sunset 2 years after enactment, but will continue to apply to any Subchapter V bankruptcy case filed before the sunset date.

Certain Payments Not Clawed Back

Generally, under § 547 of the Bankruptcy Code, payments made by the debtor to a creditor within 90 days of a debtor filing bankruptcy are classified as a preferential transfer, and can be recovered (or “clawed back”) to the bankruptcy estate.  However, recognizing that many landlords and suppliers have entered into certain forbearance or deferral agreements due to the COVID-19 pandemic, the CAA protects deferred payments made by a debtor after March 13, 2020 from being recovered from landlords and suppliers.  Notably, these deferred payments are only protected to the extent they do not include fees, penalties, or interest in an amount greater than what the debtor would have otherwise owed.

This amendment sunsets 2 years after enactment, but will continue to apply to any bankruptcy case filed before the sunset date.

These are just a few of the Bankruptcy Code amendments found in the CAA.  The CAA also made several amendments to provisions of the Bankruptcy Code that impact individual consumer cases in an attempt to address the economic distress caused by the ongoing COVID-19 pandemic.  We welcome the opportunity to discuss these changes to the Code, or any other questions that you might have regarding bankruptcy or reorganization issues during these unprecedented times.

The Workouts & Restructuring Group at KMK Law is here to provide you with advice and guidance in connection with these and other issues. Please contact a KMK attorney for assistance, including those listed below.

Robert G. Sanker

Stephanie M. Scott

Jason V. Stitt

Joseph E. Lehnert

[1] § 525 of the Bankruptcy Code, which protects debtors against discriminatory treatment on the basis of bankruptcy filing, was expanded by the CAA to ensure debtors have access to relief under the CARES Act.

[2] Referred to as the Small Business Reorganization Act of 2019 (“SBRA”).

[3] Notably, the debt limitations to qualify for SBRA were already expanded by the CARES Act to $7.5 million.  

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