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In terms of response to the Covid-19 Pandemic, the US has been a global pacesetter. They have reached herd immunity fairly quickly and are even proposing that Americans can walk about in public without their masks on by September.
In terms of the business response to the crisis; there was an impact as the country had to shut down to prevent the spread of the virus, but business has recovered quickly and the country is well on its way to responding to the crisis.
This is the second article focusing on the Government Reform Measures that were provided during the Pandemic. The information comes from research done by Insol International. In this article, we will focus on the US.
Our focus will be through the lenses of: legislative reforms impacting on stakeholders dealing with companies in financial distress, and, legislative reforms for companies in financial distress.
Legislative reforms impacting on stakeholders dealing with companies in financial distress
Employees
The Families First Act was signed into law on 18 March 2020 and provided all US businesses with fewer than 500 employees75 offsetting tax credits for paid leave taken by employees for their own health needs or to care for ill family members or children whose school or childcare is unavailable due to Covid-19.76 These paid-leave provisions are an expansion of the pre-crisis Family and Medical Leave Act (FMLA).
Employers were also required to continue providing any leave offered prior to the Covid-19 crisis. The Families First Act did not alter an employer’s obligations with respect to applicable state and local laws, which may be more generous.77 Pursuant to extensions by the CARES Act II and the American Rescue Plan, continuing tax credits are currently available to employers who voluntarily provide paid sick and family leave through 30 September 2021.
Additionally, the CARES Act amended the Families First Act to permit employees laid off after 1 March 2020 who had previously worked for a specific employer for at least 30 days to be immediately eligible for 12 weeks of enhanced FMLA leave on rehire.79 On 6 April 2020, the US Department of Labor (DOL) issued temporary regulations on how these changes should be implemented by employers (DOL Regulations).80 These permitted employers to elect to exempt employees that are ‘healthcare providers’ or ‘emergency responders’ from eligibility for paid leave to ensure full staffing in the healthcare and emergency services sectors. Both of these terms are broadly defined and include not only frontline service providers, but also researchers and non-professional hospital staff. The new regulations also provide guidance on employees taking intermittent paid leave by agreement with employers.
On 3 August 2020, a federal district court invalidated portions of the DOL Regulations.81 In response, on 11 September 2020, the DOL’s Wage and Hour Division (WHD) announced revisions to the relevant regulations, clarifying workers’ rights and employers’ responsibilities regarding paid leave under the Families First Act, including that leave eligibility required availability of work; that intermittent leave required employer approval; narrowing the definition of ‘healthcare provider’; and clarifying certain supporting documentation and notice requirements in connection with leave requests under the Families First Act.82 The revised DOL Regulations became effective on 16 September 2020.
Additionally, households with 2019 and 2020 adjusted gross income below $150,000 received tax rebates.
Lenders
The PPP discussed above will be administered by private commercial banks backed by a 100% government guarantee through the end of 2020 and a reduced guarantee following that date.
Section 4008 of the CARES Act permitted the Federal Deposit Insurance Corporation (FDIC) under the Dodd-Frank Act to establish a program to guarantee debt for solvent insured depository institutions through 31 December 2020.
Following enactment of the CARES Act, the Consumer Financial Protection Bureau (CFPB), the Board of Governors of the Fed, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency (OCC), and the Conference of State Bank Supervisors issued a joint statement assuring mortgage servicers of their ‘flexible supervisory and enforcement approach during this emergency regarding certain consumer communications required by the mortgage servicing rules’ and notifying them of relief from certain mortgage-servicing rules to provide short-term modifications quickly.
As discussed further in section 4 (Financial and regulatory measures) below, state and federal regulators have encouraged lenders to grant forbearance and modify loan obligations beyond the obligations of the CARES Act applicable to federally backed mortgages and as discussed above, lenders also are granted relief from accounting standards for treatment of modified loans.
As introduced in section 1.2.2 above, mortgagors under federally backed residential and multifamily mortgages experiencing Covid-related hardship can request payment forbearance for up to 12 months. In connection therewith, the Economic Aid Act creates a new supplemental ‘CARES forbearance claim’ for mortgage lenders under section 501 of the US Bankruptcy Code, for the amount of a federally backed mortgage loan or federally backed multifamily mortgage loan that was not received by an eligible creditor during the forbearance period of a loan granted forbearance under the CARES Act.
The lender must file the claim within 120 days of the end of the forbearance period (even if the general claims bar date has passed), and include details of the arrangement. Notably, even if a debtor has already confirmed a bankruptcy plan, it may be modified upon request by a party in interest to include the CARES forbearance claim. This amendment terminates on 27 December 2021.
Third parties
The Cares Act II encourages commercial landlords and suppliers to enter into arrangements that provide a distressed tenant / customer with limited payment relief, in exchange for reduced preference exposure should the tenant / customer become a bankruptcy debtor.
Section 547(b) of the US Bankruptcy Code generally allows a bankruptcy trustee or debtor in possession to avoid certain payments made under certain conditions, including made within 90 days of filing for bankruptcy.
The CARES Act II prohibits a debtor from avoiding ‘a covered payment of rental arrearages’ and ‘a covered payment of supplier arrearages’ that resulted from an agreement with its commercial landlord or supplier to defer payments if all of the following elements are satisfied:
- the non-residential lease or executory contract predated the bankruptcy case;
- the parties amended the lease or contract after 13 March 2020; and
- the amendment deferred or postponed payments otherwise due under the lease or contract. This amendment terminates 27 December 2022 (but remains applicable to any cases filed before the amendment’s sunset).
Unemployed individuals
The CARES Act also broadened eligibility for unemployment benefits and increased those benefits. The CARES Act included the ‘Relief for Workers Affected by Coronavirus Act,’ which provided pandemic unemployment assistance (PUA), including $600 in federal weekly compensation in addition to what was authorized under state law for up to 39 weeks (i.e. 31 Dec. 2020), and also created new benefits for self-employed individuals.87 ‘Covered individuals’, including independent contractors, self-employed individuals and those with a limited work history who are not ordinarily eligible for unemployment benefits,88 are eligible if they are unemployed, including partially unemployed, as a result of Covid-19 closure orders affecting their workplace or childcare provider, or their own or family illness or death from Covid-19.89 Benefits are also extended to individuals who have exhausted regular state and federal unemployment benefits.90 The CARES Act further provided funding for states that have ‘short-time compensation programs’ to offer partial unemployment benefits due to reduced hours and offers grants to create such programs in other states.91
The CARES Act II includes the Continued Assistance for Unemployed Workers Act of 2020 (Unemployed Workers Act),92 which extended PUA for an additional 11 weeks for a total 50-week period (i.e. 27 March 2021) but reduced the weekly federal assistance to $300. The Unemployed Workers Act also added paid sick leave and paid family leave benefits to independent contractors; and also permitted unemployed or underemployed independent contractors who have an income mix from self-employment and employer wages to receive PUA. Other state benefits, as well as the legal definition of what constitutes an independent contractor require determination on a state-by-state basis.
The American Rescue Plan further extends PUA (at the $300 level) by an additional 29 weeks through 6 September 2021,93 and waives federal income taxes for certain unemployment benefits received in 2020.
Legislative reforms for companies in financial distress
Revision of obligations of directors and managers
No change has occurred to directors’ or managers’ duties with respect to companies in financial distress. However, note that to be eligible for the PPP, a business concern cannot retain as a member of the board of directors a person who is a resident of the People’s Republic of China.
Adoption of any other pre-insolvency measures
In a joint statement, the Board of Governors of the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ‘encouraged banking organizations to use their capital and liquidity buffers as they respond to the challenges presented by the effects of the coronavirus’, while ‘continuing to manage their capital actions and liquidity risk prudently’.
The clear intention is for banks and other financiers to therefore seek to resolve insolvency matters with distressed companies and individuals informally and without resort to statutory insolvency processes.
Changes to the insolvency process (business debtors)
On 20 February 2020, the Small Business Reorganization Act of 2019 (SBRA) became effective.97 The SBRA removes certain costly requirements of chapter 11, such as automatic formation of a committee of unsecured creditors; supervision by the US Trustee; preparation of a plan disclosure statement and creditor voting on a reorganisation plan; for businesses with total debt of no more than $2,725,625 (SBRA debt threshold) on the date a bankruptcy case is commenced (commonly known as the petition date). A plan must be filed within 90 days of the petition date, but may be approved, with equity retaining ownership, even if all creditors are not paid in full or without contributing new value.
Also of note, claims integral to administration of the case, such as professional fees, may be paid overtime, rather than on the date the plan is confirmed, as is otherwise required to confirm a plan in chapter 11. A private trustee will be appointed in every small business case to facilitate the plan of reorganisation but will not displace existing management.
The CARES Act increased the SBRA debt threshold to qualify as a small business debtor to $7.5 million.98 Under the CARES Act and the CARES Extension Act, this relief is set to expire on 27 March 2022.
The CARES Act II enacted other amendments to the US Bankruptcy Code. In addition to the provisions discussed elsewhere herein, one major form of relief the CARES Act II gives debtors under the US Bankruptcy Code is the 90-day extension of time they have to determine whether to assume or reject their unexpired non-residential real property leases pursuant to section 365(d).
All debtors now have 210 days (extended from 120) after they file for bankruptcy to assume or reject such leases, with the possibility of another 90-day extension for cause. In addition, small business debtors under subchapter V may receive an additional 60 days beyond the 60 statutory days to perform under a non-residential real property lease. In the landlords’ favour, their claims for these unpaid obligations during the extension will be treated as administrative expenses. These amendments are scheduled to terminate on 27 December 2022 (but the relief will continue to be available to any debtor whose case files before the amendment’s expiration).
Changes to the insolvency process (individual debtors)
To provide relief to individuals seeking to file for bankruptcy, the CARES Act and CARES Act II make the following notable amendments to the bankruptcy process for individual debtors:
- As discussed further in Section 2.2 above, mortgagors under federally backed residential and multifamily mortgages experiencing Covid-related hardship can request payment forbearance for up to 12 months. In connection therewith, a mortgage lender receives a new supplemental ‘CARES forbearance claim’ under section 501 of the US Bankruptcy Code, for the amount of a federally backed mortgage loan or federally backed multifamily mortgage loan that it did not receive during the forbearance period.99 The lender has 120 days following the end of the forbearance period to file its CARES forbearance claim. This amendment terminates on 27 December 2021;
- The CARES Act II provides that any refund payable by reasons provided thereunder shall not be subject to the operation of any bankruptcy or insolvency law.100 The CARES Act amended the US Bankruptcy Code definition of ‘income’ to exclude federal Covid-related relief payments. The CARES Act II further exempted federal Covid-related relief payments to individuals from estate property. Accordingly, individuals and families facing hardship can use the federal payments they receive without losing them to the estate;
- Both the CARES Act and CARES Act II provide individual debtors with greater flexibility in connection with a debt repayment plan for individual wage earners under chapter 13 of the US Bankruptcy Code. Specifically, the amendment empowers a bankruptcy court with greater discretion to grant chapter 13 debtors a discharge under section 1328 of the US Bankruptcy Code even where (a) the debtor defaults on residential mortgage payments on account of a material Covid-related financial hardship, as long as the default occurs (i) on or after 13 March 2020, and (ii) that the default is on not more than three monthly payments; and / or (b) the debtor’s confirmed plan provides for curing the debtor’s mortgage defaults but the debtor subsequently enters into a qualifying loan modification or forbearance agreement with the lender (allowing that particular debt to ride through). This amendment terminates on 27 December 2021.
- The CARES Act II amends section 525 of the US Bankruptcy Code, in promoting debtor protection against discriminatory treatment, to clarify that individual debtors cannot be denied the following CARES Act relief on the basis of a past or present bankruptcy filing: (a) the right to obtain a foreclosure moratorium and the right to request forbearance (15 U.S.C. § 9056); (b) the forbearance of mortgage payments for multifamily properties (15 U.S.C. § 9057); and (c) the temporary moratorium on eviction filings (15 U.S.C. § 9058). This amendment terminates on 27 December 2021;
- The CARES Act II provides debtors relief from the requirement under US Bankruptcy Code section 366 to make a utility deposit to avoid termination of services during bankruptcy. Under the amendment, debtors can avoid the usual adequate assurance requirement if they make a utility payment within 20 days of filing and continue to make utility payments as they come due. This amendment terminates on 27 December 2021;
- The CARES Act II provides an exemption for customs brokers who collect and pay duties to Customs and Border Patrol on behalf of debtor importers from the US Bankruptcy Code’s avoidance provisions when an importer files bankruptcy. Specifically, the CARES Act II amends section 507(d) of the US Bankruptcy Code to provide that a party that pays the US government a customs duty on behalf of a debtor importer is subrogated to the government’s priority status under section 507(b)(8)(F) for customs duties. This provision expires on 27 December 2021.
Rescue financing
With regard to the First Draw PPP Loans, there has been conflicting views on whether debtors under the US Bankruptcy Code are eligible for PPP Loans. In enacting the PPP, the CARES Act did not address such eligibility question; however, the SBA took the firm position that companies that have filed for bankruptcy protection are ineligible for PPP. As a result, numerous bankruptcy debtors sued the SBA. One federal circuit court determined that SBA can properly exclude debtors from the PPP, and another determined that it lacked jurisdiction to provide injunctive relief against the SBA.101 Outside of those two circuits (which governs the federal district courts in six states), federal bankruptcy and district courts that have weighed the issue have been almost equally split regarding whether such exclusion falls lawfully within102 or unlawfully exceeds103 the SBA’s authority. These issues are unresolved.
The Economic Aid Act provides an opening for debtors’ eligibility for PPP to be memorialized, but it requires an affirmative act by the SBA administrator that has not yet been taken and is not encouraged by the SBA’s historic position — and then would only apply to a limited group of debtors. The Economic Aid Act sets up a conditional amendment to the US Bankruptcy Code to expressly permit small business debtors proceeding under subchapter V to obtain PPP Loans pursuant to section 364 of the US Bankruptcy Code.104 However, the condition is that such amendment will only become effective if and when the SBA administrator, in its sole discretion, submits a written determination to the Office of the US Trustee affirming that bankruptcy debtors are eligible for the PPP. One debtor sought a US federal district court order to require the SBA administrator to give its consent under this provision of the CARES Act II, but the court denied the motion.105 A new SBA Administrator took the position effective 16 March 2021.106 As of the date of publication, no such written determination has been issued.
If the amendment is given effect, a debtor would file a motion with the bankruptcy court to obtain Covid-related funding under the CARES Act, and the court would hold an expedited hearing within seven days. If authorized, the loan proceeds, if not forgiven, would be treated as a priority claim ahead of administrative expenses. If the amendment is given effect, it will terminate on 27 December 2022.
The full Insol International infographic can be accessed here.
