COVID-19 Update II: The CAA Expands Protections for Debtors and Creditors in Bankruptcy

On December 27, 2020, President Donald J. Trump signed the Consolidated Appropriations Act of 2021 (“CAA”) into law. The CAA was enacted in part to expand the economic stimulus relief provided by the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”) signed into law six months earlier. Like the CARES Act, the CAA temporarily modifies the Bankruptcy Code to provide greater protections for debtors and certain creditors in bankruptcy.

For example, the CAA amends bankruptcy law to protect landlords and suppliers who agreed to defer or postpone rent and payments during the Covid-19 pandemic. In bankruptcy, a debtor or trustee may “claw back” a payment made outside the ordinary course of business by the insolvent debtor to a creditor within the 90 days prior to the bankruptcy. The goal is to avoid that creditor’s more favorable treatment over comparable but unpaid creditors. To encourage landlords and suppliers to continue to lend assistance to debtors in financial distress, however, the CAA protects non-ordinary course payments made to them within 90 days prepetition so long as (1) the payment arrangement between the landlord or supplier and debtor was entered into on or after March 13, 2020, and (2) the payments are not more than the debtor would have owed to the landlord or supplier had it not entered into the payment arrangement. 

The CAA also materially amends bankruptcy law relating to the treatment of unexpired leases of nonresidential real property. Chapter 11 debtors generally have 120 days from the date the bankruptcy case is filed, also known as the petition date, to assume or reject such leases. Debtors may seek an additional 90 days to assume or reject upon a showing of good cause. Under the CAA, chapter 11 debtors now have a total of 210 days from the petition date in which to assume or reject unexpired leases of nonresidential real property, and may seek an extension of up to 300 days upon a showing of good cause.

As previously discussed in our first creditors’ rights Covid-19 update, the CARES Act expanded the eligibility of small businesses to elect to proceed under Subchapter V of the Small Business Reorganization Act of 2019 (“SBRA”) by raising the debt limit for eligibility from $2,725,625 to $7,500,000 for a period of one year, or through March 27, 2021, when the debt limit will revert to the lower amount. The SBRA provides eligible debtors with a substantially streamlined path to reorganization compared to chapter 11. The CAA does not alter the March 27 expiration date, so we may see a flurry of SBRA filings in the next two months.

The more recent CAA amendments to the Code expire on December 27, 2022, and will apply in all cases filed before that date. The attorneys in Hopkins & Carley’s Financial Institutions and Creditors Rights group stand ready to help our creditor clients navigate the ever-shifting landscape of bankruptcy law as we proceed through the uncertainty caused by the pandemic.

Please contact our experienced team of creditors’ rights attorneys to help with these and other bankruptcy issues.

Ross Adler
Andrew Ditlevsen
Erika Gasaway
Sepi Ghiasvand
Marie Gribble
Monique Jewett-Brewster
Steve Kottmeier
Breck Milde
Liam O'Connor
Chuck Reed
Jay Ross

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