bankruptcy attorney with client

Bankruptcy Code Reverts To Pre-Covid Rules

On December 27, a number of changes to the bankruptcy code that were put in place to help creditors and debtors ride out the pandemic expired. The Hanson & Payne team has discussed this change with our Milwaukee area clients who may be impacted, but we thought it would be a good idea to share information about a couple of the key updates with a broader audience. 

Subsection 547(j) Commercial Tenant Preference Defense

When a debtor files for bankruptcy, the court may order any assets the filer transferred to creditors, or paid to companies it does business with, returned to the bankruptcy court so that it can be equitably distributed among all creditors. 

The bankruptcy trustee may generally claw back any payments made by a debtor if the payment was: 

(1) to or for the benefit of a creditor, 

(2) based on an antecedent debt, 

(3) made while the debtor was insolvent, 

(4) made within the 90 days before the bankruptcy petition was filed — or within one year if the creditor was an insider, and 

(5) provided the creditor with more than the creditor would have received in a hypothetical chapter 7 case.

This claw back is meant to guard against the preferential treatment of certain creditors and ensure all of a bankruptcy filer’s creditors are treated equally. But it is a bit unfair to companies who were unaware they were dealing with a business in financial distress, which is why the bankruptcy code includes several clawback defenses known as preference defenses. The three most common preference defenses are: 

(1) the contemporaneous exchange for new value defense, 

(2) the subsequent new value defense and 

(3) the ordinary course of business defense. 

When the pandemic hit, and businesses were ordered by the government to shut down, policymakers realized the usual preference defenses often did not apply. And businesses were hesitant to give other companies any wiggle room when it came to accepting postponed or deferred payments because they didn’t want to be punished if the other business ultimately filed for bankruptcy. 

In order to encourage businesses to be a bit more flexible, and not push other businesses into bankruptcy, Congress passed a temporary amendment to the bankruptcy code creating a new preference defense. Payments would not be subject to a clawback if:

(1) an agreement to postpone or defer payments due under a commercial lease or a contract for services or goods was entered into on or after March 13, 2020.

(2) The payments must not exceed the amounts due under the lease or executory contract.

(3) The “agreement or arrangement” may not include fees, penalties, or interest greater than the sum of fees, penalties, or interest provided for in the original lease or executory contract or the amounts that the debtor would owe if the arrearages had been paid on time and in full before March 13, 2020.

This amendment gave many businesses the flexibility they needed to keep things running even as businesses were temporarily shut down or saw a slow down. 

Flexibility For Commercial Leases

Another temporary change to the bankruptcy code was made to the rules on commercial leases.

Section 365(d)(4) of the Bankruptcy Code gives bankruptcy filers 120 days to reaffirm or terminate nonresidential real property (commercial) leases. A temporary amendment passed in response to the pandemic extended the period during which a filer can reaffirm or terminate a commercial lease to 210 days, and allowed the courts to grant debtors an additional 90 days if needed. 

A Full-Service Bankruptcy Firm In the Milwaukee Area

Despite their popularity, both of these amendments sunset on December 27, 2022, and the pre-covid law is back in place. However, they will continue to apply in any bankruptcy case that was filed before the sunset date.

The business-minded legal team at Hanson & Payne has helped countless business owners, commercial lenders, and commercial lessors in the Milwaukee area navigate the bankruptcy system. If you are looking for legal counsel in this challenging time, we would be honored to take your call. Contact us today to schedule an initial consultation.