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Latest CARES Act Includes Significant, Albeit Temporary, Provisions to the Bankruptcy Code Affecting Commercial Landlords, Tenants and Suppliers

By Bernkopf Goodman on 01.20.2021
Posted In: Client Alerts

On December 27, 2020, the second CARES Act was signed into law, providing an additional $900 billion in pandemic relief. Less publicized are several changes the Act made to the United States Bankruptcy Code that are applicable to commercial landlords, tenants, and suppliers. A summary of these changes follows:

Altered Preference Periods for Suppliers and Commercial Landlords

Under revised Code § 547(b) – the preference avoidance section which allows a trustee (or a debtor) to recover payments made by a debtor to a creditor during the 90 day period before the debtor filed for bankruptcy – a trustee cannot now recover, as a preferential transfer, covered rental arrearages payments or covered supplier arrearages payments which are generally defined as past due payments that have been deferred by agreement between the debtor and a commercial landlord or a supplier of goods. This preference exclusion may not exceed contractually agreed-upon amounts in place prior to March 13, 2020. This change expires after two years but will remain applicable for cases filed during the two-year period.

Commercial Lease Assumption/Rejection Periods Have Been Extended

As reported in a prior Bernkopf Goodman publication (Bankruptcies Are on the Rise in the Wake of the COVID-19 Pandemic: An Industry-By-Industry Assessment, April 10, 2020), the original CARES Act created a new section in the Bankruptcy Code known as subchapter V (providing additional relief for “small business debtors”). Under the new CARES Act, subchapter V debtors who experience a pandemic-related financial hardship may apply to the Bankruptcy Court for an extension of the time for performance of commercial lease obligations beyond the current extension period to the earlier of: (i) an additional 60 days; or, (ii) the time period for assumption or rejection of the lease. Payment of these obligations is treated as an administrative expense.

In addition, the time in which debtors have to assume or reject a commercial real property lease has been extended from 120 days to 210 days.

These changes expire after two years but will remain applicable for cases filed during the two year period.

Creation of a New CARES Act Forbearance Claim

Revised Code § 501 has created a supplemental claim for mortgage lenders called a “CARES forbearance claim” for the amount of a previously granted forbearance claim under the original CARES Act in connection with federally backed mortgage or a multi-family mortgage loans (as defined in the new CARES Act). The supplemental claim must include details of the forbearance agreement or loan modification and must be filed not later than 120 days after the end of the forbearance period. This Code amendment expires after one year.

Chapter 13 Discharge Relief

Revised Code § 1328 authorizes the Bankruptcy Court to enter a Chapter 13 discharge for individual debtors even if they defaulted on a mortgage for up to three months as a result of pandemic-related financial hardship, or if the debtors’ plans provide for a cure of a mortgage default and the debtors entered into forbearance or loan modification agreements with their mortgage servicers. This amendment expires after one year.

Individual Debtors May Now Be Entitled to CARES Act Relief

The new CARES Act also provides that individual debtors cannot be denied CARES Act relief on the basis of their past or current bankruptcy filings. Some bankruptcy courts previously held that debtors filing for bankruptcy were ineligible for CARES Act relief. However, this amendment will not become effective until the SBA Administrator submits a written determination to the Office of the U.S. Trustee concerning such eligibility. This amendment expires in two years regardless of whether the SBA Administrator determines if debtors are eligible for CARES Act relief.

COVID-19 Response Team