What Distressed Businesses and Their Counsel Should Know About the Consolidated Appropriations Act 2021 and Its Effect on the Bankruptcy Code

What is the Consolidated Appropriations Act?

Congress passed the Consolidated Appropriations Act, 2021 on December 21, 2020, and President Trump signed the massive act into law six days later, when it became effective. The act includes several changes to title 11 of the United States Code, which is usually called the “Bankruptcy Code,” and most changes sunset on either the first or second anniversary of the effective date of the act. Here are the changes you need to know, in the order they are presented in the act.

Property That Is Not Property of the Bankruptcy Estate

Section 541(a) defines—very broadly—what property is included in the debtor’s estate. Much of the Bankruptcy Code provides for the administration of property of the estate. Section 541(b) defines what is not property of the estate.

The Consolidated Appropriations Act adds new subsection 541(b)(11), which excludes from the estate “recovery rebates made under section 6428 of the Internal Revenue Code of 1986.” That IRC section was created by The Coronavirus Aid, Relief and Economic Security Act, S. 3548 (the “CARES Act,” signed by President Trump on March 27, 2020) to empower the IRS to send federal coronavirus relief payments to taxpayers. Under the Consolidated Appropriations Act, such payments are not recoverable by creditors or by a chapter 7 trustee in a debtor’s bankruptcy case. This amendment has a one-year sunset.

Chapter 13 Plan Default Relief

Chapter 13 of the Bankruptcy Code provides for debt reorganization by natural persons with a regular income, often to distribute partial payment to unsecured creditors under a plan while preserving the debtor’s possession of their residence as they make regular payments to the mortgage lender.

The act amends section 1328 of the Bankruptcy Code to help chapter 13 debtors keep their discharge of unsecured debts even though the debtor missed three or fewer monthly payments on a residential mortgage loan “due directly or indirectly, to the [COVID-19 pandemic]”. The debtor must still pay the missed payments. This amendment has a one-year sunset.

Discriminatory Treatment of Recipients of CARES Act Relief

Section 525 of the Bankruptcy Code forbids many kinds of discrimination by governmental entities or private employers against natural persons or entities on the grounds that any of them (or any associate of the them) has been a debtor in a bankruptcy case.

The Consolidated Appropriations Act adds new subsection 525(d) to provide that such debtors are similarly protected from discrimination based on receipt of CARES Act assistance in the forms of mortgage debt forbearance, mortgage debt payment assistance, mortgage loan forbearance, or eviction relief. This amendment has a one-year sunset.

Claims Process for Certain Loan Servicers Forced to Forbear by the CARES Act

Sections 501 and 502 of the Bankruptcy Code provide for the filing of proofs of claims or interests, and for allowance of the same.

The CARES Act mandates that certain mortgage loan servicers forbear from exercising their rights on federally backed mortgage loans, including multi-family mortgage loans. The Consolidated Appropriations Act amends sections 501 and 502 of the Bankruptcy Code with respect to how such creditors may file such claims, including by establishing that such a forbearance claim shall be timely filed if filed before the 120th day after the expiration of the forced forbearance (trustees and loan servicers take note!).

The act also amends section 1329 of the Bankruptcy Code to account in chapter 13 plans for the CARES Act forbearance proofs of claim discussed immediately above. These amendments have one-year sunsets.

Modified Treatment of Unexpired Leases of Nonresidential Real Property in Subchapter V Chapter 11 Cases

Section 365 of the Bankruptcy Code covers rejection, assumption, and assignment of executory contracts and unexpired leases, as well as the rights and remedies of the parties to such agreements. Section 365(d)(3) requires a debtor’s estate to continue during a bankruptcy case to perform its obligations under an unexpired lease of nonresidential real property.

The act amends section 365(d)(3) to provide that a court presiding over a subchapter V small business chapter 11 bankruptcy case may grant an additional 60-day delay (on top of the 60-day delay already afforded by that statute) in paying the rent where the debtor has experienced and is continuing to experience a material financial hardship “due, directly or indirectly, to [the COVID-19 pandemic].”

The amendment provides that any claim arising from such extension shall be treated as an administrative priority expense in any confirmed subchapter V small business plan.

The act also amends—for subchapter V cases—section 365(d)(4)’s provision that an unexpired lease of nonresidential real property is deemed rejected unless it is assumed by the debtor within 120 days following the commencement of the bankruptcy case. The amendment lengthens the 120-day period to 210 days for subchapter V cases. Left unchanged is the court’s authority in all cases to extend the period by 90 days. Thus, under the amendment, a subchapter V debtor may possibly put off the deemed rejection date to 300 days after the commencement of the case and retain all that time to decide whether to assume or reject the unexpired nonresidential lease.

These amendments have a two-year sunset but will nevertheless apply to any subchapter V small business chapter 11 bankruptcy case commenced before the sunset falls.

Landlord and Supplier Relief From Claw-Backs of Otherwise Avoidable and Recoverable Preferential Transfers

A beleaguered landlord or goods supplier receives some late payments. Then the payor enters a bankruptcy case, and the estate sues the landlord or supplier for the avoidance and return of such deferred payments as preferential transfers. Such pain afflicts many landlords of and suppliers to eventually bankruptcy persons. The Consolidated Appropriations Act exempts some such transfers from avoidance. A bone has been thrown to creditors.

The act amends section 547 of the Bankruptcy Code, which governs the avoidance of preferential transfers, to add new subsection (j), which insulates from avoidance any “covered payment of rental arrearages” and any “covered payment of supplier arrearages” (each as defined therein) made by a debtor:

• After March 13, 2020;
• To landlords (of nonresidential real property) or suppliers of goods and services under executory contracts; but
• Only to the extent such deferred payments do not include any fees, penalties, or interest greater in amount than the debtor would owe as a timely-paying lessor or purchaser.

 

Under the act, the supplier cannot say “Whew!” unless it has been paid under an executory contract—within the meaning of that term in section 365 of the Bankruptcy Code. Payments made to a supplier lacking an executory contract with the debtor are expressly not “covered payment of supplier arrearages.”

This amendment has a two-year sunset, but it will nevertheless apply to any bankruptcy case (not just subchapter V bankruptcy cases) commenced before the sunset falls.

Some Relief from Termination of Utility Services for Debtors Who are Natural Persons

Section 366 of the Bankruptcy Code regulates the alteration, refusal to provide, or discontinuation of utility services to a bankruptcy estate. The act amends section 366 to bar a utility from taking such steps against a debtor who is a natural person and (even if the debtor pays no security deposit) who both:

• Pays the utility for any debt owed for services provided during the 20-day period beginning on the date the case commenced; and
• Thereafter makes timely payments for services provided during the case.

 

This amendment has a one-year sunset.

An Effective Priority For Customs Brokers and Freight Forwarders Who Pay Customs Duties on Behalf of Importer Clients

Section 507 of the Bankruptcy Code sets forth what expenses of and claims against bankruptcy estates have priority and in what order. Section 507(d) identifies which entities subrogated to the rights of a holder of a claim entitled to priority under section 507 are nevertheless not subrogated to the holder’s priority right. Customs brokers and forwarders often pay U.S. government-imposed customs duties on behalf of their clients who import merchandise. The act amends Section 507(d) of the Bankruptcy Code so that such a party that pays a customs duty on behalf of an importer is subrogated to the government’s priority status established by section 507(a)(8)(F) for customs duties. This amendment has a one-year sunset.

The Temporary Debt Limit Increase for Subchapter V Debtors Has Not Been Extended

While the Act provides many statutory boosts for smaller chapter 11 debtors, it does not extend the March 27, 2021 sunset of the raised debt limit for subchapter V cases.

The Small Business Reorganization Act of 2019 created subchapter V of chapter 11 the Bankruptcy Code (11 U.S.C. §§ 1181-1195, also known as “subchapter V”) and became effective on February 19, 2020. the intent was to mitigate challenges faced by small business debtors in chapter 11 cases. An otherwise eligible debtor with debts not exceeding $2,725,625 could thus avail itself of subchapter V.

The CARES Act raised the subchapter V debt limit to $7,500,000. However, that rise has a sunset date of March 27, 2021. It is odd that the massive Consolidated Appropriations Act left that aspect of pandemic-related relief un-extended, even as it provided that its executory contract and unexpired lease-related provisions (described above) will have a two-year sunset and will apply to any subchapter V case commenced before that sunset occurs.

The Skinny – Key Takeaways

The Consolidated Appropriations Act, 2021 became immediately effective upon being signed into law on December 27, 2020.

The act:

• For one year, excludes federal coronavirus relief payments from “property of the estate” under section 541 of the Bankruptcy Code.
• For one year, provides that chapter 13 debtors keep their discharge of unsecured debts even though the debtor missed three or fewer monthly payments on a residential mortgage loan, where the defaults are caused by COVID-related financial hardship.
• For one year, extends section 525 of the Bankruptcy Code to forbid discrimination against debtors and their associates based on receipt of CARES Act assistance in the forms of mortgage debt forbearance, mortgage debt payment assistance, mortgage loan forbearance, or eviction relief.
• For one year, amends the Bankruptcy Code to clarify how and when loan servicers may file proofs of claims for forced forbearances. It establishes a filing deadline 120 days after expiration of the forbearances.
• For two years and throughout any subchapter V case that commences within two years, permits courts presiding over a subchapter V case to grant an additional 60-day delay (on top of the 60-day delay already afforded by that statute) in paying the rent where the debtor has experienced and is experiencing COVID-related financial hardship.
• For two years and throughout any subchapter V case that commences within two years, deems rejected an unexpired lease of nonresidential real property unless it is assumed by the debtor within 210 days (up from prior 120 days) following the commencement of the case (while retaining the court’s authority in all cases to extend the period by 90 more days).
• For two years and throughout any bankruptcy case commenced within those two years, insulates from avoidance as a preferential transfer any “covered payment of rental arrearages” and any “covered payment of supplier arrearages” made by a debtor after March 13, 2020. However, qualifying payments to suppliers must be made under an executory contract.
• For one year, bars any utility from altering, refusing to provide, or discontinuing utility services to the bankruptcy estate of a natural person who both pays the utility for any debt owed for services provided during the 20-day period beginning on the date the case commenced, and who thereafter makes timely payments for services provided.
• For one year, permits customs brokers and forwarders who pay customs duties on behalf of importers to be subrogated to the government’s priority status under section 507(a)(8)(F) of the Bankruptcy Code.
• Provides many statutory boosts for smaller chapter 11 debtors, but does not extend the March 27, 2021 sunset of the raised debt limit for subchapter V cases.

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[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Restructuring, Insolvency & Troubled Companies and Help, My Business is In Trouble!]

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