Legislative Update

Coronavirus Aid, Relief, and Economic Security (CARES) Act 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (the "CARES Act"). The legislation, which earlier that day had quickly passed the House of Representatives, having passed 96-0 in the Senate on March 25, provides $2 trillion in economic stimulus to U.S. industries and citizens confronting the challenges of the COVID-19 pandemic.

Section 1113 of the CARES Act includes several important bankruptcy provisions designed to assist financially distressed consumers and small businesses. Key provisions include:

• Changes to the Small Business Reorganization Act of 2019 that increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the Bankruptcy Code from $2,725,625 in debt to $7,500,000. The debt threshold will revert to $2,725,625 after one year.
• A clarification that the calculation of "disposable income" in section 1325(b)(2) of the Bankruptcy Code for purposes of confirming a chapter 13 plan does not include coronavirus-related payments.
• An amendment to the definition of "current monthly income" in section 101(10A) of the Bankruptcy Code to exclude coronavirus-related payments from the federal government for purposes of determining whether a debtor is eligible for relief under chapters 7 and 13.
• A change to section 1329 of the Bankruptcy Code to permit the modification of a chapter 13 wage earner plan after confirmation "if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic" and to permit a post-modification creditor repayment plan of up to seven years after the initial plan payment was due.

These bankruptcy provisions sunset within one year.

Section 1102 of the CARES Act provides that any business that employs not more than 500 employees shall be eligible to receive a forgivable loan under the Small Business Act of as much as $10 million to be used for employee payroll and related benefits, mortgage payments, rent, utilities, and certain other expenses. Although the CARES Act says nothing about excluding companies in bankruptcy from receiving Paycheck Protection Program loans, on April 15, 2020, the Small Business Administration released an interim rule stating that companies in bankruptcy are not eligible for loans under the program and that any company that files for bankruptcy before receiving funds under the program must withdraw its application. The rule almost immediately led to litigation seeking to preclude or enjoin its enforcement. See, e.g., Hidalgo County Emergency Serv. Foundation v. Carranza (In re Hidalgo County Emergency Serv. Foundation), No. 20-02006 (Bankr. S.D. Tex. Apr. 25, 2020); Calais Regional Hospital v. Carranza (In re Calais Regional Hospital), No. 20-1006 (Bankr. D. Maine May 1, 2020); Roman Catholic Church of the Archdiocese of Santa Fe v. U.S. (In re Roman Catholic Church of the Archdiocese of Santa Fe), No. 20-1026 (Bankr. D.N.M. May 1, 2020); Springfield Hospital, Inc. v. Carranza (In re Springfield Hospital, Inc.), No. 19-10283 (Bankr. D. Vt. May 4, 2020).

Section 4003(D) of the CARES Act authorizes the Secretary of the Treasury to provide financing to banks that make direct, low-interest loans to eligible businesses with between 500 and 10,000 employees, provided that the borrower certifies, among other things, that: (i) the funds it receives will be used to retain at least 90 percent of the recipient's workforce, at full compensation and benefits, until September 30, 2020; (ii) the recipient will not pay common stock dividends or repurchase its stock while the loan is outstanding, except as contractually obligated to do so as of the enactment date; (iii) the recipient will not outsource or offshore jobs or abrogate collective bargaining during the term of the loan and for two years afterward; and (iv) "the recipient is not a debtor in a bankruptcy proceeding."

A more detailed summary of the CARES Act is available here.

Proposed Amendments to Commodity Futures Trading Commission Bankruptcy Rules

On April 14, 2020, the Commodity Futures Trading Commission approved proposed amendments to Part 190 of its rules governing bankruptcy proceedings of commodity brokers, including futures commission merchants and derivatives clearing organizations. The proposed amendments, intended to update Part 190 comprehensively to reflect current market practices, include provisions: (i) establishing a policy preference for transferring (rather than liquidating) positions of public customers and their proportionate share of associated collateral; (ii) establishing a new subpart C to Part 190 to govern the bankruptcy of derivatives clearing organizations; and (iii) augmenting the discretion given to bankruptcy trustees to adapt to the unique characteristics of a particular commodity broker bankruptcy.

The comment period on the proposed amendments expires July 13, 2020.