Understanding the COVID-19 Relief Amendments to the U.S. Bankruptcy Code

As COVID-19 changed everything that we know into the “new normal,” the U.S. Bankruptcy Code was amended as part of the CARE’s Act, at least on a temporary basis. Several bankruptcy code amendments under the CARE’s Act relate specifically to real estate issues in the bankruptcy code. 

Shortly before the outbreak of COVID-19, the bankruptcy code was amended to include a new subchapter of Chapter 11 called Subchapter V. This subchapter went into effect on Feb. 19, 2020. Originally, Subchapter V was limited to persons or companies engaged in business with less than $2.7 million of non-contingent debt. The CARE’s Act increased this limit to $7.5 million. This provision is scheduled to sunset March 2022, but it is widely expected that the higher debt limit will be continued beyond that point, as Subchapter V has become an increasingly popular chapter for debtors to file under for relief. The vast majority of Chapter 11 cases qualify for Subchapter V relief. 

The changes to the bankruptcy code relating to real estate also relate to Subchapter V cases.  Under §365(d)(3) of the bankruptcy code, a Chapter 11 debtor is required to continue to pay rent and to comply with all other obligations under a commercial lease. However, the court can extend the time for a debtor to perform under the lease for up to 60 days after the bankruptcy filing. This section of the bankruptcy code has been amended to allow the bankruptcy court to extend the 60 days for an additional 60 days but only for a Subchapter V debtor that is experiencing or has experienced a material financial hardship due, directly or indirectly to the COVID-19 Pandemic. 

The CARES Act also extended the time for all Chapter 11 debtors, whether in Subchapter V or not, to assume or reject a lease of commercial real estate. Under the bankruptcy code, a Chapter 11 debtor has up to a total of 210 days to decide whether to assume or reject a non-residential real property lease. This time period has been extended for an additional 90 days. This provision, however, along with the Subchapter V provision, sunsets in December 2022. It remains to be seen if these two extensions will be renewed by Congress before they expire.

Finally, the bankruptcy code has been amended to provide limited relief to landlords that received rent payments on non-residential real property within the 90 days of bankruptcy that otherwise would be a preferential transfer under §547 of the code. The CARES Act excepts out from a preferential transfer a payment for a “covered rental arrearage.” Such a covered rental arrearage is a payment of arrearages that were made pursuant to an agreement or arrangement entered into on or after March 13, 2020, between the debtor and the lessor to defer or postpone the payment of rent or other periodic charges under an unexpired lease of non-residential real property. This amendment sunsets in December 2022 but is applicable to any cases filed before the sunset date. 

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