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2020 was a bad year… okay, it was a really, really bad year. CMBS borrowers, in particular, found themselves in default and often-times upside down on their CMBS loans. While 2021 has started to show signs of life, even showing a gentle decline in special servicing and delinquency rates, a closer look reveals that certain sectors remain in distress.

As forbearance periods expire, state moratoriums on commercial evictions and foreclosures end, and businesses exhaust federal PPP and other stimulus aid, more foreclosures and other loan enforcement solutions are inevitable. (The status of moratoriums on commercial foreclosures/eviction are as follows: Illinois—expired; Michigan—expired; Texas—expired; New York—expired May 1, 2021; California—county-specific; Ohio—expired; and Indiana—expired.) While the world remains hopeful for a more “normal” 2021, the impacts on CMBS borrowers will likely continue in a state of flux for some time.Continue Reading Workouts Never Go Out of Style: What To Expect in the CMBS Market During the Second Half of 2021, and Beyond

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On December 27, 2020, the Consolidated Appropriation Act of 2021 (the “CAA“) was enacted to provide additional coronavirus stimulus relief for businesses challenged by the ongoing Covid-19 Pandemic. In doing so, the CAA includes several targeted, but temporary, changes to the Bankruptcy Code (the “Code”) which will have implications for lenders, landlords, vendors and other creditors. Absent further legislation, these changes will sunset on December 27, 2022, but will continue thereafter to affect cases filed prior to that date.

  1. PPP Loans Still Aren’t For Everyone: CAA Attempts to Clarify Debtors’ Eligibility

The CARES Act, passed at the outset of the Covid-19 pandemic, did not make clear whether bankrupt debtors were eligible for the Paycheck Protection Program (“PPP“) loans it provided. The Small Business Administration (“SBA”), the agency charged with implementing the PPP loan program, previously promulgated regulations disqualifying all bankrupt debtors from the program, and it sought to enforce that regulation in the Bankruptcy Courts. Litigation ensued over debtor eligibility for PPP loans, but no clear consensus emerged.
Continue Reading Bankruptcy’s New Normal – The Consolidated Appropriations Act Distances from the Bankruptcy Code to Provide Further Covid Relief

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On May 15, 2020, the House passed the Health and Economic Recovery Omnibus Emergency Solutions Act, or “HEROES Act”, which is a 1,815-page bill that affords $3 trillion in relief to consumers and businesses impacted by COVID-19. The bill includes a number of provisions, including another round of $1,200 payments to most Americans, hazard pay for frontline workers, and funding for local and state governments. The bill also includes proposed amendments to the Fair Credit Reporting Act (“FCRA”). Unfortunately, these well-intentioned amendments to FCRA do not appear to have been thought through well and, practically speaking, would have dire consequences if implemented.

First, the bill prohibits both consumer reporting agencies (“CRAs”) or data furnishers from reporting of any adverse information that occurred during a “major disaster” declared by the President. With respect to CRAs, the bill states:
Continue Reading HEROES Act Includes Potentially Disastrous FCRA Amendments

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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

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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

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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

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As all lenders know by now, the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) guaranteed Paycheck Protection Program (“PPP”) loans are the key piece of economic relief for small businesses during the COVID-19 crisis. Yet, in the rush to get those loans flowing into the economy, the Small Business Administration (“SBA”) issued an interim regulation that raises substantial unanswered questions about participating lenders’ compliance policies. Business Loan Program Temporary Changes; Paycheck Protection Program (proposed Apr. 2, 2010) (to be codified at 13 C.F.R. pt. 120). Those questions are starkly different yet similarly important for banks and other traditional lending institutions accustomed to operating under the Bank Secrecy Act (“BSA”) and those nonbank lenders who have never been under the BSA’s purview.

Banks and other traditional lending institutions already have AML (Anti-Money Laundering) and KYC (Know Your Customer) policies in place. For them, the SBA’s interim regulation seems, at first glance, like nothing earthshattering; it simply requires these lenders “to follow their existing BSA protocols.” In this crisis, though, nothing is as it always was. The urgency of getting these loans approved plus the importance of social distancing makes verifying the applicant’s information no easy task. Although the SBA’s regulation says that “PPP loans for existing customers will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance,” the question arises whether a PPP loan application for an existing customer is considered a new account for FinCEN Customer Due Diligence (“CDD”) Rule purposes. Fortunately, the SBA and the Treasury Department issued revised FAQs addressing that question and explaining that, for PPP loans to existing customers, lenders do not have to re-verify information that had been previously provided and verified and do not even have to collect and verify missing information in the first instance “unless otherwise indicated by the lender’s risk-based approach to BSA compliance.” Paycheck Protection Program Loans Frequently Asked Questions (FAQs) (Apr. 8, 2010). We expect the final SBA regulation to be updated to reflect this important clarification.
Continue Reading Compliance for PPP Loans: Different Questions for Different Lenders

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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?

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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

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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