In our latest installment of our series “Bankruptcy On Ice”, we tackle temporary suspension of bankruptcy proceedings in response to the closure of “non-essential businesses” and other critical protective measures being imposed to fight the spread of COVID-19. Last week, key decisions in the Pier 1 and Modell’s Sporting Goods bankruptcy cases extended temporary freezes and limited suspensions of proceedings as most states slowly begin to reopen.

Before we get to that, it is important to note that despite the entry of suspension orders freezing certain proceedings in a number of retail and restaurant bankruptcy cases, bankruptcy courts remain open for business across the country. They have not shut down, deadlines have not been extended ad infinitum, and interested parties must stay alert that all critical deadlines are met. And even in these bankruptcy cases now on ice, the courts have emphasized that their doors remain open to parties seeking relief due to exigent circumstances.
Continue Reading Bankruptcy On Ice III – The Freeze Extends Temporary Suspensions of Chapter 11 Cases

The Paycheck Protection Program (PPP) is one of two business loan programs created under the Coronavirus Aid, Relief and Economic Security (CARES) Act to assist companies by extending potentially forgivable credit to small business employers. The PPP is designed to help cover employee-related expenses and help employers avoid layoffs. The prospect of forgivable debt, coupled with relatively favorable terms, have put PPP loans in high demand and many businesses, including some which had already sought chapter 11 bankruptcy protection, have sought PPP loans.

The CARES Act contains no bar to the granting of PPP loans to bankrupt companies. That said, section 7(a)(6) of the Small Business Act requires qualifying small business loans to be “of such sound value or so secured as reasonably to ensure repayment.” As a result, the U.S. Small Business Administration (SBA) took the initial position that a PPP loan must meet the same requirements, and a loan cannot meet this standard if the borrower is a debtor in a bankruptcy case. 
Continue Reading Are Debtors Eligible to Receive PPP Loans? Bankrupt Companies and the SBA Wage War Over Critical CARES Act Program Eligibility

This article was originally published on Law360

The COVID-19 pandemic has caused, and continues to cause, massive humanitarian and economic upheaval with no clear end in sight. Borrowers are already scrambling to increase liquidity from their banks. Some will continue to operate openly, honestly, and in the best interests of the company and its stakeholders. Others will not.

Notwithstanding that lenders and governments are attempting to mitigate the crisis’s effects,[1] loan defaults are anticipated to be increasing, and accordingly, so will loan enforcement lawsuits.

In lawsuits stemming from the COVID-19 crisis, where the default was caused by more than just a lack of money—fraud, mismanagement, neglect, waste, misconduct—litigants, and the courts, may increasingly turn to equity receivers to help protect collateral and manage struggling businesses.
Continue Reading Illinois Courts May Increasingly Embrace Equity Receiverships

Last week, in our first of what we expect to be many articles in the series “Bankruptcy On Ice”, we wrote about the unprecedented suspensions of proceedings enacted in several major chapter 11 bankruptcies in response to the temporary store closures and critical protective measures being imposed to fight the spread of COVID-19.

Decisions by the bankruptcy courts presiding over the Modell’s Sporting Goods, Pier 1 Imports, and Craftworks cases have demonstrated how far bankruptcy courts are willing to extend their equitable powers to put bankruptcy matters on ice while debtors are unable to conduct liquidation sales or otherwise advance their cases. Notably, until stores are allowed to reopen, some bankruptcy courts have allowed debtors to defer payment of post-petition rent under unexpired leases despite clear provisions in the Bankruptcy Code prohibiting such payment holidays.
Continue Reading Bankruptcy on Ice II – an Early Spring Thaw for Bankruptcy Courts?

Unprecedented times call for unprecedented solutions. This has never been more true than now as our world struggles through impactful changes to our lives, both at work and at play, as a direct result of the COVID-19 pandemic. As social distancing, stay-at-home orders, and sheltering-in-place have forced the closing of shopping centers and retail stores, bars and restaurants, movie theaters, and other venues, “business as usual” has largely, but hopefully only temporarily, ground to a halt.

While these shutdowns have not resulted in a wave of new chapter 11 filings (yet), as many lenders and their borrowers patiently take advantage of the relief that the CARES Act and similar legislation has implemented, these unforeseen closures have had predictable yet damaging effects on the ability of pending pre-COVID-19 retail and restaurant debtors already in bankruptcy to reorganize, sell, or liquidate through the chapter 11 process. Store closures have naturally prevented debtors from conducting liquidation sales, and market uncertainty and volatility has complicated, and even paralyzed, preformed restructuring plans.
Continue Reading Bankruptcy on Ice – Retail Debtors Taking Steps to Freeze Chapter 11 Bankruptcy Proceedings Based on COVID-19 Issues

Buried in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which is expected to be passed by Congress and signed by the President today, are revisions to the Bankruptcy Code that are relevant to creditors dealing with distressed debtors. Most notably, the bill will impact the recently-enacted Small Business Reorganization Act of 2019 (the “SBRA”) by increasing the potential pool of qualified debtors.

The SBRA, which just went into effect in mid-February, adds to the Bankruptcy Code a subchapter V, which allows small business owners certain advantages to reorganize their debt. The current debt limit for eligibility for cases under the new subchapter V is $2,725,625. The CARES Act will increase the eligibility threshold to $7.5 million in total debt, but only for one year, at which time it will revert back to the present limit.
Continue Reading How The CARES Act Will Impact Small Business Bankruptcies

The business, economic and financial fallout from the COVID-19 pandemic cannot be understated. While our families, friends, and clients are adjusting to these difficult, uncertain and stressful times – protecting our families, friends and communities from the spread of the virus, working from home, avoiding public spaces, and social distancing – businesses large and small are suffering from shutdowns, closures, breaks in supply chains, and the loss of business and revenue.

At a time when distressed situations will undoubtedly increase, it is logical, and reassuring, that Bankruptcy Courts will remain open for business in order to provide relief for troubled companies. The procedures may differ as many Bankruptcy Courts have implemented changes in order to address concerns raised by the potential spread of the virus. In this vital way, the Courts will continue to function uninterrupted.
Continue Reading Bankruptcy Courts Remain “Open For Business”

Over the years, much has been written about the Bankruptcy Code’s treatment of small businesses, and the American Bankruptcy Institute Commission’s testimony to Congress this summer made clear that the existing law fell short of providing necessary relief for small businesses. For example, of the 18,000 small business bankruptcy cases filed between 2008 and 2015, less than 27% of those cases resulted in confirmed plans of reorganization. And these numbers excluded countless small businesses that, for a variety of reasons, did not or could not seek bankruptcy relief. See Robert J. Keach, ABI Testifies on Family Farmers and Small Business Reorganizations, XXXVIII ABI Journal 8, 8-9, August 2019, available at https://www.abi.org/abi-journal/abi-testifies-on-family-farmers-and-small-business-reorganizations (subscription required). 
Continue Reading New Bankruptcy Laws Offer Hope for Small Businesses, Family Farmers and Service Members

Over the past several years, much has been written about how numerous bankruptcy courts have interpreted and enforced bankruptcy and insolvency-related provisions in intercreditor agreements, subordination agreements and other “agreements among lenders” when they may affect a debtor and its estate. Although the Bankruptcy Code itself provides little guidance, the emerging trend has been for bankruptcy courts to strictly enforce intercreditor agreements according to their clear and unambiguous terms, rather than allow for broader interpretations based upon the parties’ intent or other policy considerations.

Intercreditor agreements are commonplace in loan transactions that involve multiple lenders, and set forth the relative rights, priorities and obligations of senior lenders verses junior or subordinated lenders—including priority of payment—and as to their common borrower and its assets. Section 510(a) of the Bankruptcy Code provides that a subordination agreement is enforceable in a bankruptcy case to the same extent it would be under applicable nonbankruptcy law. But bankruptcy courts have not always enforced these agreements consistently; some courts have enforced them as written, while others have invalidated certain provisions. 
Continue Reading Importance of Careful Drafting of Intercreditor Agreements Highlighted by Recent Federal Appeals Court Ruling

Starting now, all creditors must exercise more caution when trying to collect against discharged bankruptcy debtors, because a creditor’s good faith belief that the discharge injunction did not apply is no longer a viable defense. On Monday, June 3, 2019, the U.S. Supreme Court clarified the standard for awarding sanctions against a creditor for violation of the discharge injunction, unanimously holding that a court may hold a creditor in civil contempt for violating a discharge order if there is “no fair ground of doubt” that the discharge order barred the creditor’s conduct.  Taggart v. Lorenzen, 587 U.S. __ (2019).

Bradley Taggart (“Taggart”) owned an interest in an Oregon company called Sherwood Park Business Center (“Sherwood”). In 2007, Sherwood and some of the other owners filed a lawsuit against Taggart in state court, claiming that Taggart had breached Sherwood’s operating agreement. On the eve of the state court trial, Taggart filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. At the conclusion of his bankruptcy case, Taggart received an order granting him a discharge under Section 727 of the Bankruptcy Code “from all debts that arose before the date of the order for relief” (subject to certain exceptions that are not relevant here). Section 524 of the Bankruptcy Code explains that a discharge order “operates as an injunction” that bars creditors from collecting any debt that has been discharged. In Taggart’s case, any damages that would have resulted from the state court litigation were subject to the discharge. 
Continue Reading Creditor Beware: Supreme Court Rejects “Good Faith” Defense to Violations of Bankruptcy Discharge Orders