COMMERCIAL REAL ESTATE, BANKRUPTCY & PPP-EIDL LOAN ISSUES
- Debtor-in-Possession Responsibilities and Powers
Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company’s stock. A sole proprietorship (owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s). Accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case (partnership as debtor), however, the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case or the partners, themselves, may be forced to file for bankruptcy protection.
A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. 11 U.S.C. §§ 301, 303. A voluntary petition must adhere to the format of Form 1 of the Official Forms prescribed by the Judicial Conference of the United States. Unless the court orders otherwise, the debtor also must file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). If the debtor is an individual (or husband and wife), there are additional document filing requirements. Such debtors must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. A husband and wife may file a joint petition or individual petitions.
The courts are required to charge a $1,167 case filing fee and a $550 miscellaneous administrative fee. The fees must be paid to the clerk of the court upon filing or may, with the court’s permission, be paid by individual debtors in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. Fed. R. Bankr. P. 1006(b) limits to four the number of installments for the filing fee. The final installment must be paid not later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. Fed. R. Bankr. P. 1006(b). The $550 administrative fee may be paid in installments in the same manner as the filing fee. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 1112(b)(10).
The voluntary petition will include standard information concerning the debtor’s name(s), social security number or tax identification number, residence, location of principal assets (if a business), the debtor’s plan or intention to file a plan, and a request for relief under the appropriate chapter of the Bankruptcy Code. Upon filing a voluntary petition for relief under chapter 11 or, in an involuntary case, the entry of an order for relief, the debtor automatically assumes an additional identity as the “debtor in possession.” 11 U.S.C. § 1101. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee. A debtor will remain a debtor in possession until the debtor’s plan of reorganization is confirmed, the debtor’s case is dismissed or converted to chapter 7, or a chapter 11 trustee is appointed. The appointment or election of a trustee occurs only in a small number of cases. Generally, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs in cases under other chapters. 11 U.S.C. § 1107(a).
The debtor in possession or the trustee, as the case may be, has what are called “avoiding” powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within Ninety (90) days before filing the petition. But transfers to “insiders” (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing may be avoided. 11 U.S.C. §§ 101(31), 101(54), 547, 548. In addition, under 11 U.S.C. § 544, the trustee is authorized to avoid transfers under applicable state law, which often provides for longer time periods. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors.
Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise. 11 U.S.C. § 363(c). If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court.
A debtor in possession may not use “cash collateral” without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected. 11 U.S.C. § 363. Section 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.
When “cash collateral” is used (spent), the secured creditors are entitled to receive additional protection under section 363 of the Bankruptcy Code. The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession’s use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. 11 U.S.C. § 363(c)(4). A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide “adequate protection” to the creditor.
Adequate protection may be required to protect the value of the creditor’s interest in the property being used by the debtor in possession. This is especially important when there is a decrease in value of the property. The debtor may make periodic or lump sum cash payments or provide an additional or replacement lien that will result in the creditor’s property interest being adequately protected. 11 U.S.C. § 361.
When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved “super priority” over other unsecured creditors or a lien on property of the estate. 11 U.S.C. § 364.
Creditors’ committees can play a major role in chapter 11 cases. The committee is appointed by the U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor’s conduct and operation of the business; and participates in formulating a plan. 11 U.S.C. § 1103. A creditors’ committee may, with the court’s approval, hire an attorney or other professionals to assist in the performance of the committee’s duties. A creditors’ committee can be an important safeguard to the proper management of the business by the debtor in possession.
In some smaller cases the U.S. trustee may be unable to find creditors willing to serve on a creditors’ committee, or the committee may not be actively involved in the case. The Bankruptcy Code addresses this issue by treating a “small business case” somewhat differently than a regular bankruptcy case. A small business case is defined as a case with a “small business debtor.” 11 U.S.C. § 101(51C). Determination of whether a debtor is a “small business debtor” requires application of a two-part test. First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,490,925 or less. Second, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active and representative to provide oversight of the debtor. 11 U.S.C. § 101(51D).
In a small business case, the debtor in possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents and must attend court and the U.S. trustee meeting through senior management personnel and counsel. The small business debtor must make ongoing filings with the court concerning its profitability and projected cash receipts and disbursements and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax returns. 11 U.S.C. §§ 308, 1116.
In contrast to other chapter 11 debtors, the small business debtor is subject to additional oversight by the U.S. trustee. Early in the case, the small business debtor must attend an “initial interview” with the U.S. trustee at which time the U.S. trustee will evaluate the debtor’s viability, inquire about the debtor’s business plan, and explain certain debtor obligations including the debtor’s responsibility to file various reports. 28 U.S.C. § 586(a)(7). The U.S. trustee will also monitor the activities of the small business debtor during the case to identify as promptly as possible whether the debtor will be unable to confirm a plan.
Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other chapter 11 cases. For example, only the debtor may file a plan during the first 180 days of a small business case. 11 U.S.C. § 1121(e). This “exclusivity period” may be extended by the court, but only to 300 days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. When the case is not a small business case, however, the debtor in possession or the trustee, as the case may be, has what are called “avoiding” powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within 90 days before filing the petition. But transfers to “insiders” (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing may be avoided. 11 U.S.C. §§ 101(31), 101(54), 547, 548. In addition, under 11 U.S.C. § 544, the trustee is authorized to avoid transfers under applicable state law, which often provides for longer time periods. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors. A court may extend the exclusivity period “for cause” up to 18 months.
- Disposition of Estate Property – Assets, Contracts, and Leases
Motions to sell are governed by 11 U.S.C. § 363. Section 363(b) provides that “[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). A trustee should be authorized to conduct a sale “if the decision is supported by ‘reasonable,’ ‘proper’ or ‘sound’ business judgment, a rule commonly referred to as the ‘business judgment test.’” In re SW Boston Hotel Venture, LLC, No. 10-14535-JNF, 2010 WL 3396863, at *3 (Bankr. D. Mass. Aug. 27, 2010) (cited in In re Genesys Research Institute, Inc., No. 15-12794-JNF, 2016 WL 3583229, at *18. (Bankr. D. Mass. June 24, 2016)). A trustee’s business decision should be approved by the Court unless it is shown “to be so manifestly unreasonable that it could not be based upon sound business judgment but only on bad faith, or whim or caprice.” White v. Official Committee of Unsecured Creditors (In re Cadkey Corp.), 317 B.R. 19, 22 (Bankr. D. Mass. 2004) (quoting In re Aerovox, Inc., 269 B.R. 74, 80 (Bankr. D. Mass. 2001)).
Assumption and Rejection: The Bankruptcy Code, 11 U.S.C. § 365, provides that, subject to court approval and certain limitations discussed below, debtors can assume or reject any executory contract or unexpired lease. It is an area of the law described as a “thicket . . . where . . . lurks a hopelessly convoluted and contradictory jurisprudence.” In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 690 (Bankr. S.D.N.Y. 1992) (quoting Andrew, Executory Contracts Revisited: A Reply to Professor Westbrook, 62 U. Colo. L. Rev. 1 (1991)). “[I]n no area of bankruptcy has the law become more psychedelic than in the one titled ‘executory contracts.'” Drexel Burnham, 138 B.R. at 690 (quoting Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989)).
What is an executory contract? The Code does not define “executory contract”, but most courts have adopted this definition: “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. R. 439, 460 (1973); In re Murexco Petroleum, Inc., 15 F.3d 60 (5th Cir. 1994); In re Texscan Corp., 976 F.2d 1269 (9th Cir. 1992); United States v. Floyd, 882 F.2d 233, 235 (7th Cir. 1989); Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989); In re Speck, 798 F.2d 279, 279-80 (8th Cir. 1986); Gloria Mfg. Corp. v. International Ladies Garment Workers’ Union, 734 F.2d 1020, 1021 (4th Cir. 1984); In re Chateaugay Corp., 130 B.R. 162, 164 (S.D.N.Y 1991); see generally Andrew, Executory Contracts In Bankruptcy: Understanding Rejection, 59 U. Colo. L. Rev. 845 (1988) (executory contract means “simply a contract under which (a) debtor and non-debtor each have unperformed obligations and (b) the debtor, if it ceases further performance, would have no right to the other party’s continued performance”); H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 347 (1977)(“[t]hough there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides.”). However, some courts have begun to move away from Countryman’s approach and have adopted a “functional approach” which works “backward from an examination of the purposes to be accomplished by rejection, and if they have already been accomplished then the contract cannot be executory.” See, e.g., In re Magness, 972 F.2d 689, 693 (6th Cir. 1992); In re Cardinal Indus., Inc., 146 B.R. 720 (Bankr. S.D. Ohio 1992) (discusses how 6th Circuit has adopted both Countryman definition and functional approach); In re General Dev. Corp., 177 B.R. 1000, 1013 (S.D. Fla. 1995); In re Drexel Burnham Lambert Group, Inc., 138 B.R. 703, 708 n.24 (Bankr. S.D.N.Y. 1992).
Is the contract “executory”?
Contracts where performance remains due on both sides are executory. See, e.g., In re Columbia Gas Sys., Inc., 50 F.3d 233 (3d Cir. 1995) (settlement agreement may be an executory contract); Matter of C & S Grain Co., 47 F.3d 233, 237 (7th Cir. 1995) (“For the purposes of the Bankruptcy Code, an executory contract is one in which the obligations of each party remain substantially unperformed. Consequently, when the debtor … has breached the contract pre-petition with the result that the other party has no further duty to perform, … the contract is no longer executory for purposes of section 365.”); In re Spectrum Information Technologies, Inc., 190 B.R. 741, 747 (Bankr. E.D.N.Y. 1996) (“contracts where one party has completed performance are excluded from the ambit of section 365”); In re Hooker Investments, 145 B.R. 138, 144 (Bankr. S.D.N.Y. 1992) (employment contracts are executory contracts).
Contracts in which one party has no post-petition obligation or no obligation other than the payment of money are not executory. See In re Munple, Ltd., 868 F.2d 1129 (9th Cir. 1989) (real estate brokerage commission agreement not executory even though payment of fee was conditioned upon closing of sale); In re Newcomb, 744 F.2d 621, 624 (8th Cir. 1984); Chesapeake Fiber Pkg. v. Sebro Packaging Corp., 143 B.R. 360 (D. Md. 1992) (agreements conveying patent rights are not executory contracts); In re Spectrum Information Technologies, Inc., 190 B.R. 741, 748 (Bankr. E.D.N.Y. 1996) (“where the only performance that remains is the payment of money, the contract will not be found to be executory”); In re F.B.F. Indus., Inc., 165 B.R. 544, 549 (Bankr. E.D. Pa. 1994) (promissory notes are not executory contracts); In re U.S. Metalsource Corp., 163 B.R. 260, 269 (Bankr. W.D. Pa. 1993) (terminable-at-will employment contracts are not executory contracts because debtor’s only legal obligation is to pay severance pay); In re Chateaugay Corp., 102 B.R. 335, 348 (Bankr. S.D.N.Y. 1989) (safe harbor leasing and tax benefit transfer agreements not executory contracts or unexpired leases); In re Structurlite Plastics Corp., 86 B.R. 922 (Bankr. S.D. Ohio 1988); In re Wisconsin Barge Line, 76 B.R. 695 (Bankr. E.D. Mo. 1987) (contracts under which debtors’ only duty was to pay retrospective premiums were not “executory”).
A contract substantially performed is not executory. In re Pacific Exp. Inc., 780 F.2d 1482, 1487 (9th Cir. 1986) (emphasis mine); In re Sundial Asphalt Co., 147 B.R. 72, 80 (E.D.N.Y. 1992) (contract for sale of land ceases to be executory when court issues decree of specific performance); In re Norwood Chevrolet Co., 143 B.R. 804 (Bankr. D.R.I. 1992) (substantial performance by both parties precludes rejection of contract).
A contract or lease no longer in existence is not executory and cannot be assumed. See In re Stewart Foods, Inc., 64 F.3d 141 (4th Cir. 1995) (“a debtor-in-possession does not have the option of rejecting or assuming non-executory contracts and remains bound by the debtor’s obligations under those contracts after the bankruptcy filing.”); In re Thompson, 186 B.R. 301, 307 (Bankr. N.D. Ga. 1995) (contract terminated prepetition “cannot be revived solely by virtue of a bankruptcy petition. Filing for bankruptcy relief does not confer new rights on a debtor in regard to terminated agreements and a debtor is not permitted to cure his defaults and/or assume such agreements.“); In re Coast Cities Truck Sales, Inc., 147 B.R. 674, 677 (D.N.J. 1992); In re Interco Inc., 135 B.R. 634 (Bankr. E.D. Mo. 1992) (abandoned contract not executory); In re B & K Hydraulic Co., 106 B.R. 131 (E.D. Mich. 1989) (life insurance policy which lapsed under its own terms post-petition was not assumable by trustee). However, the termination process must be complete and not subject to reversal. See Moody v. Amoco Oil Co., 734 F.2d 1200 (7th Cir.), cert. denied, 469 U.S. 982 (1984); In re Triangle Lab., 663 F.2d 463 (3d Cir. 1981); In re Iriss, 630 F.2d 1370 (10th Cir. 1980) (contract terminated before filing cannot be assumed or rejected); Ross v. Metro. Dade County, 142 B.R. 193 (S.D. Fla. 1992) (discussing test for whether contract is terminated for § 365 purposes); In re Masterworks, Inc., 100 B.R. 149 (Bankr. D. Conn. 1989) (terminated franchise agreement was executory where time for cure had not expired when bankruptcy was filed). Compare In re Huffman, 171 B.R. 649, 653 (Bankr. W.D. Mo. 1994) (lease terminated prepetition cannot be assumed) with In re Morgan, 181 B.R. 579, 584 (Bankr. N.D. Ala. 1994) (a terminated lease is not the same as an expired lease and may be assumed). A contract is not terminated merely because the debtor defaults or breaches the contract prepetition. In re Nemko, Inc., 163 B.R. 927, 939 (Bankr. E.D.N.Y. 1994).
Postpetition, Pre-Rejection or Assumption Treatment of Executory Contracts.
The status of an executory contract between filing of petition and assumption or rejection is subject to controversy. “Exactly how and when executory contracts come into the estate has been the source of continuing controversy and progressive development. One view, the exclusionary analysis, holds that executory contracts remain outside the estate prior to assumption. The competing view is that they enter the estate initially but are thereafter subject to abandonment via rejection.” In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 701 (Bankr. S.D.N.Y. 1992). Compare In re Albion Disposal, Inc., 152 B.R. 794, 806-07 (Bankr. W.D.N.Y. 1993); In re Alert Holdings, Inc., 148 B.R. 194, 203 (Bankr. S.D.N.Y. 1992); In re Seymour, 144 B.R. 524 (Bankr. D. Kan. 1992); Drexel Burnham Lambert Group,, 138 B.R. at 701-02 (all holding that executory contracts are property of estate) with In re Qintex Entertainment, Inc., 950 F.2d 1492, 1495 (9th Cir. 1991) (“An executory contract does not become an asset of the estate until it is assumed pursuant to § 365.”).
Status of Parties To The Unassumed/Unrejected Contract. During the period a contract is unassumed and unrejected, the rights, duties and obligations of the debtor are unclear. See In re Holly’s Inc., 140 B.R. 1213 (Bankr. W.D. Mich. 1992). However, the contract is generally thought of as remaining “in effect” and the non-debtor parties are bound to honor it and perform. See In re Whitcomb & Kelly Mortgage, 715 F.2d 375 (7th Cir. 1983); In re Leslie Fay Companies, Inc., 166 B.R. 802, 808 (Bankr. S.D.N.Y. 1994); cf. In re Continental Airlines, 981 F.2d 1450, 1459-60 (5th Cir. 1993) (court’s discussion shows that contract continues to exist post-petition stating that “[a]n agreement cannot ‘exist’ for one purpose yet take on a ‘nonexistent’ quality which works to the advantage of one party or the other.”); In re Modern Textile, Inc., 900 F.2d 1184, 1191 (8th Cir. 1990) (executory contracts are “an existing and continuing legal obligation of the debtor” subject to rejection); In re Public Serv. Co., 884 F.2d 11 (1st Cir. 1989) (dicta); In re Continental Energy Assoc. Ltd., 178 B.R. 405 (Bankr. M.D. Pa. 1995) (Bankruptcy court may compel the non-debtor party to an executory contract to continue to perform post-petition, “provided that [the court] diligently guard[s] the interests of the non-debtor party to the contract.” Although the cost of the services provided “will often times … be measured by reference to the contract which presumably has been negotiated at arm’s length,” that is not required; court may order payment of only the “reasonable value of the material or services supplied.”); In re Thomas Co., Inc., 166 B.R. 677 (Bankr. C.D. Ill. 1994) (executory contract remains in existence until rejected).
Claims based on the unassumed and unrejected contract may be entitled to an administrative expense priority. In re Bridgeport Plumbing Prods., Inc., 178 B.R. 563 (Bankr. M.D. Ga. 1994) (creditor may file an administrative expense claim for the “reasonable value of the use” of the creditor’s property during the gap period); In re Sharon Steel Corp., 161 B.R. 934, 937 (Bankr. W. D. Pa. 1994).
Effect of Debtor’s Failure To Act. An executory contract which is not assumed or rejected during the bankruptcy will be unaffected by the bankruptcy filing, will pass through to, and be binding upon, the reorganized debtor. In re Polysat, Inc., 152 B.R. 886, 890 (Bankr. E.D. Pa. 1993); International Union v. Miles Mach. Co., 34 B.R. 683, 687 (E.D. Mich. 1982) (collective bargaining agreement which is ignored during bankruptcy survives confirmation and is binding upon the debtor); Matter of Central Watch, Inc., 22 B.R. 561, 565 (Bankr. E.D. Wis. 1982).
When Must the Decision Be Made. Trustee or DIP is allowed a “reasonable time” to decide whether to assume or reject. See Theater Holding Corp. v. Mauro, 681 F.2d 102, 105 (2d Cir. 1982). What constitutes “reasonable time” is left to bankruptcy court’s discretion. Id.; see also In re Beker Indus., 64 B.R. 890, 896-97 (Bankr. S.D.N.Y. 1986). Factors include:
- The nature of the interests at stake;
- The balance of harm to the litigants;
- The good to be achieved;
- The safeguards afforded the litigants;
- Whether the action to be taken is so in derogation of Congress’ scheme that the court may be said to be arbitrary;
- With respect to a lease:
(a) whether the debtor is presently paying for the property;
(b) the importance of the leased asset to the debtor’s plan of reorganization; and
(c) whether the debtor has taken steps to formulate a plan.
The creditor may move the court to compel the debtor to decide in a shorter time frame. § 365(d)(2).
Postpetition contracts are not subject to assumption or rejection. In re Lesle Fay Co., Inc., 168 B.R. 294, 300 (Bankr. S.D.N.Y. 1994) (collecting cases).
Cash Collateral and Debtor Financing Issues
Debtors seeking to reorganize under Chapter 11 of the Bankruptcy Code frequently need to use their cash and proceeds therefrom in order to continue with their business operations. However said cash and proceeds are often subject to security interests of pre-petition lenders and debtors must obtain court authorization to use this “cash collateral”. 11 U.S.C. § 363(b). The Court must ensure that, to the extent the debtor is entitled to use cash collateral, there is adequate protection of the creditor’s security interest so as to maintain the “benefit of the bargain” that the secured creditor originally made with the debtors. 11 U.S.C. §§ 361, 363(e). This requires a showing that the value of the creditor’s security interest is protected and the debtor’s use of cash collateral will not threaten that interest. H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 339 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787; 2 Collier on Bankruptcy ¶ 363.03 (15th ed. 1993). As one court explained:
In reviewing an application under 11 U.S.C. § 363 which provides for the use of cash collateral, the Court must balance two irreconcilable and conflicting interests. The holder of a lien on cash collateral must not be left unprotected by unrestricted use of the collateral by the debtor. However, the purpose of Chapter 11 is to rehabilitate debtors and generally access to cash collateral is necessary in order to operate a business.
In re Stein, 19 B.R. 458, 459 (Bankr.E.D.Pa.1982). [2] Another court observed that, in view of the broad powers given a trustee (or debtor-in-possession under § 1107), “it is apparent that the Congress intended business under reorganization to proceed in as normal a fashion as possible.” In re Prime, Inc., 15 B.R. 216, 219 ((Bankr.W.D.Mo.1981), citing Matter of Sullivan Ford Sales, 2 B.R. 350 (Bankr.D.Me.1980).
The pertinent inquiry to ascertain whether the Bank’s security interest is adequately protected requires a determination of the value of the Bank’s interest and whether the debtors’ proposed use of their cash collateral would impair that interest. H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 339 (1977); 2 Collier on Bankruptcy ¶ 363.03 (15th ed. 1993). Adequate protection will take many forms, only some of which are set forth in section 361 of the Bankruptcy Code, 2 Collier on Bankruptcy § 361.01[1] at 361-6 (15th ed. 1993) and must be determined based upon equitable considerations arising from the particular facts of each proceeding. In re Briggs Transportation Company, 13 C.B.C.2d 1289, 780 F.2d 1339 (8th Cir.1985); In re High Sky, Inc., 4 C.B.C.2d 1290, 15 B.R. 332 (Bankr.M.D.Pa.1981).
With regard to a lien of this nature, i.e., a “floating lien” of a blanket nature on changing and cycling soft collateral [3], the appropriate adequate protection, and the concomitant valuation of collateral appropriate for a determination of adequate protection, is a showing that the level of such a fluctuating base of items of collateral that are constantly cycling through different shapes and forms, as the business operation continues, will in fact remain at the same magnitude (in terms of ongoing operational values) during the relevant period of debtor-in-possession business operation in the chapter 11 reorganization proceedings.
The appropriate view of a relevant period for this purpose is not a “snapshot” showing a fluctuation downward, during one selected short period of the business operation, but rather a “motion picture” showing the cycling of soft collateral during a period long enough to evaluate the question of whether the secured creditor is or is not being exposed to a substantial danger of a permanent decline in the level of the soft collateral supporting its floating lien. If the debtors make a solid showing that their continued operation of their business during the relevant period will pose no serious danger of such a decline, there is no need for any additional adequate protection in terms of “new money” to be infused into the enterprise by the equity holders or junior creditors to protect the secured creditor’s present position in the collateral. On the other hand, if the evidence before the Court establishes that a permanent decline in the soft collateral level is likely, the Court generally will require infusion of cash by the investors in the enterprise to assure adequate protection of the security interest involved, under the rubric that the Court will not allow the debtors to “risk other people’s money” to salvage their own position.
The rationale for this approach stems from the underlying rationale of chapter 11 itself, i.e., a rehabilitative proceeding in which the goal is to restructure the debtors’ finances and operations in such manner as will extract the maximum intrinsic value of the enterprise. Since the equity holders and the general unsecured creditors are at the bottom of the “totem pole” of priority of claims against the assets of the enterprise, it is often tempting for those junior interests to don rose-colored glasses in evaluating the prospects for future operations and reorganization. It is the Court’s task to scrutinize the data and projections supplied by the debtors with this danger in mind. When the issue is raised early in the reorganization proceeding, the Court will generally permit the business operation to continue, at least to the point of plan formulation, if the debtors make a solid evidentiary showing to support their projections that survive the appropriate scrutiny. It is always a difficult judgment call early in the case but I believe these debtors have met that standard.
In In re T.H.B. Corp., 85 B.R. 192 (Bankr.D.Mass.1988), the bankruptcy court was presented with a cash collateral request and held that, because the senior lienholder’s security interest was adequately protected, the debtor could use its cash collateral. In making its adequate protection determination, the court noted as an alternative basis for decision that under one theory of adequate protection “the concept consists of stability in collateral value rather than any particular level of value.” Id. at 194, citing Bankers Life Insurance Co. v. Alyucan Interstate Corp., 12 B.R. 803 (Bankr.D.Utah 1981) and United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 368, 108 S.Ct. 626, 629, 98 L.Ed.2d 740 (1988). The court further observed that part of the Bank’s adequate protection was the “fact that the proceeds of accounts receivables are being used by the Debtor to generate new inventory and accounts”, Id. at 193, and that “[t]he use of the Bank’s cash collateral … is an element of the Bank’s adequate protection”, Id. at 195, similar to my findings in this case.” See also Federal Nat. Mort. v. Dacon Bolingbrook Assoc., 153 B.R. 204, 214 (N.D.Ill.1993) (security interest adequately protected to extent debtor reinvested rents in operation and maintenance of the property); In re Stein, 19 B.R. 458, 460 (1982) (cash collateral usage allowed where such use is essential “in order to meet operational costs” … and where the “secured position can only be enhanced by the continued [business] operation….”).
PPP & EIDL: Paycheck Protection Program & Economic Injury Disaster Loans
The Paycheck Protection Program (PPP) ended on May 31, 2021. For information about loan forgiveness, first and second draws, lender information, counseling, training and data go to: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program. Here are a handful of case cites, Eleven (11) actually, which have been most cited (from One (1) to Eleven (11)) across the country. Time permitting, we’ll discuss a couple of them.
Oct 28, 2021
Cited Anywhere: 27
Cited Here: 0
… and local governments; and $349 billion to fund the new Paycheck Protection Program (“PPP”), which provided potentially forgivable loans to small businesses for use meeting payroll and, to a lesser extent, rent and other operating costs. See Pub. L. No. 116-136, §§ 601(a), 1102(a), 1107(a)(1), 2102(d), 2201(a), (f).8 The CARES Act also increased funding…
Dec 22, 2020
Cited Anywhere: 22
Cited Here: 3
… Radiology Consultants is a small business debtor in an active Chapter 11 bankruptcy proceeding seeking a loan under the Paycheck Protection Program (PPP). The problem for Gateway is that the Small Business Administration, which Congress authorized to implement the PPP and to issue regulations on the subject, has issued a rule that makes bankruptcy debtors ineligible for PPP loans. Gateway…
May 15, 2020
Cited Anywhere: 16
Cited Here: 1
… (2020). Under a CARES Act provision entitled “Keeping American Workers Paid and Employed Act,” Congress created the Paycheck Protection Program (“PPP”), authorizing the SBA to guarantee up to $349 billion in PPP loans. In April 2020, Congress increased the amount to $659 billion. The PPP is intended to “[i]ncrease[ ] eligibility for certain small businesses and organizations.” 15 U.S.C. § 636…
Mar 4, 2021
Cited Anywhere: 12
Cited Here: 4
….† Park, Circuit Judge:In March 2020, Congress created the Paycheck Protection Program (“PPP” or “Program”), which authorized the Small Business Administration (“SBA”) to guarantee favorable loans to certain businesses affected by the COVID-19 pandemic. The SBA Administrator promulgated regulations imposing several longstanding eligibility requirements on PPP loan applicants…
May 27, 2021
Cited Anywhere: 12
Cited Here: 0
… as evidence of discrimination and concluding that “proving broad sociological propositions by statistics is a dubious business”). The government fails that burden here. It gives only a few examples of statistical disparities between women-owned and male-owned businesses. For just one: The government cites a survey that purports to show that women who received Paycheck Protection Program loans asked for 40% less funding…
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Jun 22, 2020
Cited Anywhere: 9
Cited Here: 3
… and unemployment soared. Congress responded with the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 134 Stat. 281 (2020) (“CARES Act”). The CARES Act, inter alia , made $659 billion of government-guaranteed loans available to qualified small businesses through the Paycheck Protection Program (“PPP”).1…
Jan 26, 2022
Cited Anywhere: 2
Cited Here: 0
… entertainment in the form of nude or nearly nude dancing. They seek to obtain loans under the second round of the Paycheck Protection Program enacted by Congress to address economic disruption caused by the COVID-19 pandemic. By statute, Congress excluded plaintiffs and several other categories of businesses from the second round of the Program. See 15 U.S.C. § 636(a)(37)(A)(iv)(III)(aa…
Mar 16, 2022
Cited Anywhere: 2
Cited Here: 0
…). Congress initially authorized $349 billion in PPP loan commitments, but, after those funds were quickly depleted, added another $310 billion one month later and eventually extended a third round of PPP funding at the end of 2020. See CARES Act § 1102(b), 134 Stat. at 293; Paycheck Protection Program and Health [28 F.4th 410] Care Enhancement Act, Pub. L. No. 116-139, § 101…
Sep 15, 2021
Cited Anywhere: 0
Cited Here: 0
…. ON MOTION FOR STAY PENDING APPEAL Per Curiam.Plaintiffs in this case are about fifty businesses all over the country that offer live adult entertainment in the form of nude or nearly nude dancing. They seek to obtain loans under the second round of the Paycheck Protection Program enacted by Congress to address economic disruption caused by the Covid-19 pandemic. By statute, Congress excluded plaintiffs…
Mar 16, 2022
Cited Anywhere: 0
Cited Here: 0
… In response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”), which established the Paycheck Protection Program (“PPP”). The PPP authorized the 1 Small Business Administration…
May 23, 2022
Cited Anywhere: 0
Cited Here: 0
… did not rely on the ground.”). In support of its allegations of illegal prioritization of loan applications, Studio 1220 points primarily to statistics about the total number and size of loans administered by all lenders under the Paycheck Protection Program…
About COVID-19 EIDL
This federal small business loan program supports small businesses’ recovery from the COVID-19 disaster’s economic impacts by providing accessible and borrower-friendly capital.
- Notice: the COVID-19 EIDL program is not accepting new applications, increase requests, or reconsiderations.
- As of January 1, 2022, SBA stopped accepting applications for new COVID EIDL loans or advances.
- As of May 6, 2022, SBA is no longer processing COVID-19 EIDL loan increase requests or requests for reconsideration of previously declined loan applications due to a lack of available funding.
- As of May 16, 2022, the COVID-19 EIDL portal (covid19relief1.sba.gov, also known as the “RAPID portal”) is closed. Borrowers who need copies of their loan documents can contact us at 833-853-5638. Please allow 3-5 business days to receive your materials.
Existing borrowers
- Learn how to manage your loan, including how to monitor loan status, make payments, and request a COVID EIDL increase.
Loan details
- In response to COVID-19, small business owners, including agricultural businesses, and nonprofit organizations in all U.S. states, Washington D.C., and territories were able to apply for the COVID-19 Economic Injury Disaster Loan (EIDL). New applications are no longer being accepted.
- FAQ regarding COVID-19 EIDL
- Product: Loan directly from SBA that must be repaid; low-interest, fixed-rate, long-term loan to help overcome the effects of the pandemic by providing working capital to meet operating expenses
- Uses of Proceeds: Working capital to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, and other ordinary business expenses, and to pay business debt incurred at any time (past, present, or future)
- Maximum Loan Amount: $2 million. Note: SBA began approving loans greater than $500,000 on October 8, 2021.
- Loan Term: 30 years
- Interest Rate: Businesses: 3.75% fixed
- Private nonprofit organizations: 2.75% fixed
- Payment Deferment: Payments are deferred for the first 2 years (during which interest will accrue), and payments of principal and interest are made over the remaining loan term. No penalty for prepayment.
- Fees For loans $25,000 or less: No fees if applying directly through SBA
- For loans greater than $25,000: One-time $100 fee for filing a lien on borrower’s business assets plus costs to file lien on real estate when applicable
- For loans greater than $500,000 where real estate was pledged as collateral: One-time $100 fee for filing a lien on borrower’s business assets. Additionally, the borrower was responsible for recording the real estate lien and paying the associated fees.
- Collateral Required for loans greater than $25,000
- Personal Guaranty Required for loans greater than $200,000
Program updates
- As of September 8, 2021, new COVID EIDL policy changes took effect as follows:
- Maximum loan cap increased from $500,000 to $2 million
- Use of funds was expanded to include payment and pre-payment of business non-federal debt incurred at any time (past or future) and payment of federal debt
- Extend the deferment period to 24 months from origination for all loans (existing loans with a less than 24-month deferment will be adjusted)
- Affiliation requirements simplified to an affiliate is a business that you control or in which you have 50% of more ownership
- Developed additional path to meet program size standards for businesses assigned a NAICS code beginning with 61, 71, 72, 213, 3121, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812.
- Exclusivity Period: From September 8, 2021, to October 8, 2021, the above policy changes were applicable to applications for <$500K while applications for >$500K received the policy changes on and after October 8, 2021
Loan eligibility
- To obtain a loan via COVID EIDL, small business owners must have met the eligibility requirements outlined in Section 2 of the FAQS. Additionally, below were the credit score requirements:
- $500,000 or under: 570
- Greater than $500,000: 625
- IRS Tax Authorization Form 4506-T for COVID EIDL
- Applicants were required to submit a signed and dated IRS Form 4506-T for COVID EIDL authorizing the IRS to release business tax transcripts for SBA to verify their revenue.
Supplemental materials
- FAQ Regarding COVID-19 EIDL
- Cross-program eligibility on SBA COVID-19 relief options
- FAQ Regarding Participation of Faith-Based Organizations in PPP and EIDL
- FAQ Regarding Agricultural and Farm Loan Collateral Security and the SBA EIDL Program
Supporting resources
- FAQ Regarding COVID-19 EIDL
- Intake application form checklist (archived after Dec. 31, 2021) – No new applications after December 31, 2021
- Intake Form Example (archived after Dec. 31, 2021)
- Portal Walk-Through Checklist
- COVID-19 September 8, 2021 Policy Changes
- For help with EIDL, call 833-853-5638 (TTY: 855-440-4960) or email disastercustomerservice@sba.gov. For help with Targeted EIDL Advance, email TargetedAdvance@sba.gov.
- The COVID-19 EIDL Customer Service Center is open 8:00 a.m. to 8:00 p.m. ET, Monday through Friday. When emailing SBA, remember to always include your loan or application number as well as reason for request in the email subject line. In the body of the email, include your loan or application number, reason for request, business name, applicant name and contact information.
