These are difficult times for many landlords and suppliers. The last thing a landlord or supplier wants to see in the midst of the pandemic-fueled retail industry meltdown is an order from a bankruptcy court requiring them to reach into their pockets and return money paid to them from their now bankrupt tenant or customer. But this is exactly what many landlords and suppliers are facing, including in large bankruptcies such as Sears and others. But there is good news on the horizon in the form of a new law that may permit suppliers and landlords to retain money received from bankrupt customers and tenants that they previously would have had to repay to the bankrupt estate.
As many businesses are unfortunately aware, Section 547 of the Bankruptcy Code permits a bankruptcy trustee (or a debtor in possession) to claw-back certain transfers, i.e. payments, made by a debtor prior to its bankruptcy. In general, these are payments made relatively shortly before the bankruptcy and are known as “preferences” in the bankruptcy world. In theory, clawing back these preferences prevents a debtor from preferring or taking care of its most important business partners ahead of other creditors who would otherwise be left to foot the bill during the debtor’s slide into bankruptcy.
The Bankruptcy Code, however, provides a number of defenses to preference actions. If you find your business subject to a preference action, you should contact legal counsel to evaluate the applicability of these defenses and advocate to limit your preference exposure so that you can try to keep more of the money you have already earned.
In addition to those existing defenses, Congress recently passed the Consolidated Appropriations Act of 2021 (the “CAA”), which amends the preference statute to provide an additional defense to landlords and suppliers. Specifically, it limits the bankruptcy trustee’s ability to recover deferred payments made by a debtor to a landlord or supplier during the prescribed lookback period under certain circumstances. To qualify, the following conditions must be met:
- The payment was made in connection with an agreement or arrangement between the debtor and the landlord or supplier to defer or postpone payments due under a lease of non-residential real property or an executory contract for goods or services;
- The agreement or arrangement was made or entered into on or after March 13, 2020;
- The amount paid pursuant to the agreement or arrangement does not exceed the amount that would have otherwise been due under the existing lease or executory contract before March 13, 2020; and
- The amount paid does not include any fees, penalties or interest in an amount greater than what would have been due before March 13, 2020 absent the parties’ arrangement.
This amendment, codified in sections 547(j)(1) and (2) of the Bankruptcy Code, became effective on December 27, 2020 and will sunset on December 27, 2022 unless otherwise extended.
If you find your business in the unfortunate position of having a tenant or customer that has filed for bankruptcy, the new CAA could prove beneficial to keeping the money you have earned right where it belongs: in your pocket. In these uncertain times, we encourage you contact experienced bankruptcy counsel to ensure that you get the most benefit possible under the Bankruptcy Code for the goods and services you have provided.
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Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.
The firm’s Bankruptcy & Financial Restructuring practice counsels clients in all aspects of troubled credit situations, in and out of the bankruptcy courts and foreclosure lawsuits.
Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.
