The Consolidated Appropriations Act of 2021 (the CAA), which President Trump signed into law on December 27, 2020, amends several provisions of the Bankruptcy Code.  While a number of the amendments are applicable only to small businesses (e.g., businesses eligible to file under the new small-business subchapter of the Bankruptcy Code and/or businesses eligible to receive PPP loans), several others have more general application, as discussed below.

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Amendments of More General Application

  • Extension of time to assume or reject unexpiredleases of non-residential real property
    • The CAA amends Section 365(d)(4)(A) of the Bankruptcy Code to extend the initial deadline by which a debtor must assume or reject an unexpired lease of non-residential real property from 120 days to 210 days.
    • This extension, which is applicable to all debtors and not just small business debtors, is likely to impact the retail and energy industries in particular; bankrupt debtors will now have additional time to consider what property leases they may want to assume and keep in place, and landlords and/or other counterparties can now be forced to wait longer to find out if their leases will be assumed.
    • Under the CAA, this extension from 120 to 210 days is set to expire on December 27, 2022.
  • Exceptions from avoidance for certain COVID-period rental/supplier arrearage payments
    • The CAA amends Section 547 of the Bankruptcy Code to protect transfers that might otherwise be avoidable as preferences if such transfers were made to pay certain covered rental and/or supplier arrearages. To qualify for such protections: (1) the debtor and counterparty must have entered into a lease or executory contract pre-filing; (2) the debtor and counterparty must have amended that lease or contract after March 13, 2020; and (3) that amendment must have deferred or postponed payments otherwise due under the lease or contract (fees, penalties or interest imposed by the post-March 13, 2020 amendments are not protected).
    • These additional protections will be potential helpful to entities that negotiated forbearance agreements during the 2020 COVID disruptions that allowed them to defer rent or supplier payments, including to ensure they could stay afloat during government-ordered lockdowns.
    • Under the CAA, these additional protections are only available for any case commenced before December 27, 2022.
  • Custom broker subrogation to US government custom duties priority rights
    • In response to efforts to industry groups like the National Customs Brokers and Forwarders Association of America (NCBFAA), the CAA amends Section 507(d) of the Bankruptcy Code to clarify that custom brokers who pay custom duties on behalf of their client companies are subrogated to the priority rights of the US government to the extent of the custom duties paid prior to their client companies filing for bankruptcy.
    • Previously, while the US government itself was entitled to priority payment ahead of other unsecured creditors for custom duties owed to it by bankrupt debtors, custom brokers who had prepaid such custom duties on the debtor's behalf pre-bankruptcy were not. This amendment clarifies that such priority status is now afforded to brokers that are subrogated to the US government's right to the extent the broker has paid the custom duties on the debtor's behalf.
    • Under the CAA, this status is only available until December 27, 2021.

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Amendments Applicable to Small Business Debtors or Individual Filers

  • PPP loans for debtors in bankruptcy
    • The CAA amends section 364 of the Bankruptcy Code to make certain debtors in bankruptcy – i.e., Subchapter V small business debtors, Chapter 12 family farmer debtors, and chapter 13 self-employed debtors – eligible to receive loans under the Paycheck Protection Program (PPP) created by the March 27, 2020 Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
    • One key exception, though, which may essentially swallow this new rule, is that such loans will only be available to debtors if the Small Business Administration (SBA), which is responsible for administering the PPP loan program, sends a letter to the Director of the Executive Office for United States Trustee acquiescing to PPP loans in bankruptcy.
      • There is no indication that the SBA intends to do so. Indeed the SBA has opposed debtors' eligibility for PPP loans since the program's inception, an approach that was recently approved as within the SBA's discretion by the Fifth and Eleventh Circuit Courts of Appeal.  See; In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d 838, 840 (5th Cir. 2020); In re Gateway Radiology Consultants, P.A., No. 20-13462, 2020 WL 7579338, at *6 (11th Cir. Dec. 22, 2020).
    • Under the CAA, even this limited eligibility for bankrupt debtors to receive PPP loans will expire on December 27, 2022.
  • Chapter 13 discharge available even if certain mortgage payments have not been made
    • The CAA amends Section 1328 of the Bankruptcy Code to give courts discretion to grant a discharge to a Chapter 13 debtor even if the debtor has not made all payments under a Chapter 13 plan if either (1) the debtor defaults on no more than three monthly residential mortgage payments on or after March 13, 2020, due to financial hardship caused by the COVID-19 pandemic; or (2) the Chapter 13 plan provides that the debtor can cure any defaults under a residential mortgage and the debtor has entered into a qualifying modification or forbearance plan with its lender.
      • In such a scenario, the debtor would not receive a discharge of its outstanding mortgage debt. But it would be eligible to receive a discharge of its remaining debt, notwithstanding that it failed to pay all mortgage payments due under a confirmed plan.
    • Under the CAA, this additional discretionary power of the court is only applicable until December 27, 2021.
  • No Discrimination Because of Bankruptcy Filing
    • The CAA amends Section 525 of the Bankruptcy Code to ensure that no individual can be denied relief under provisions of the CARES Act (§§9056-58), which freeze foreclosures and ensure the right to request forbearance, allows for forbearance of mortgage payments owed on multifamily properties, and imposes a temporary stall on eviction filings solely because that individual is or was a debtor in a bankruptcy case.
    • Under the CAA, these additional protections are only available until December 27, 2021.
  • CARES Forbearance Claims; Modification of Chapter 13 Plan
    • Under the CARES Act, mortgagors under federally-backed residential and multifamily mortgages are entitled to request forbearance for up to 12 months, but are required to pay such deferred mortgage payment in one lump sum at the end of the forbearance period. This lump sum payment requirement led to confusion as to how such amounts should be addressed in a Chapter 13 bankruptcy case and plan (e.g., when did mortgage lenders/servicers need to file a proof of claim if a mortgagor filed for bankruptcy during the forbearance period; how should deferred payment plans be addressed in an already confirmed Chapter 13 plans, etc.)
    • The CAA clarified these issues by providing that (1) qualified mortgage servicers could file proofs of claims relating to deferred mortgage payments regardless of whether the bar date in a Chapter 13 case had already passed; and (2) chapter 13 debtors could modify their already-confirmed plans to address a deferred payment plan (or, if the debtors failed to move for a modification, the bankruptcy court, U.S. Trustee's office, Chapter 13 trustee or any other party in interest could).
    • Under the CAA, these additional protections are only available until December 27, 2021.
  • Additional 60 days for small business debtors to pay rent
    • The CAA amends Section 365(d)(3) of the Bankruptcy Code to allow a bankruptcy court to extend a Subchapter V small business debtor's time to perform under an unexpired lease of non-residential real property for an additional 60 days (beyond the 60 days which the bankruptcy court is already permitted to offer all debtors) if the small business debtor "is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic."
      • Under other provisions of Subchapter V, the debtor may also be able to spread out delayed rental payments over a period of several years following confirmation.
    • Under the CAA, these additional powers are only available for any case commenced before December 27, 2022.
  • Utility protections for individual debtors
    • The CAA amends Section 366 of the Bankruptcy Code to prohibit a utility company from discontinuing services to an individual debtor, even if the debtor fails to provide adequate assurance of future utility payments, so long as the debtor (1) makes a payment to the utility for services provided during the 20-day period following the bankruptcy filing and (2) continues to make timely utility payments during the case.
    • Under the CAA, these additional protections are only available until December 27, 2021.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.