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Fed Announces Program to Bolster Payroll Protection Program Lending by Large Banks

The Federal Reserve appears to be taking action designed to bolster the Payroll Protection Program by allowing banks to sell the low-interest loans (which are capped at $10 million) to the U.S. central bank for cash. This move is designed to ease previously reported concerns among banks, particularly Chase and Bank of America, about getting stuck holding the low interest loans and administering them. Details on this action are expected to be announced later this week. The American Bankruptcy Institute reports that this move could make the program more attractive to lenders, given the fees of up to 5 percent banks can earn for what now amounts to processing the paperwork. Read More
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Merchant Cash Advances and Covid-19 - A Double Whammy.

Businesses that have obtained financing through Merchant Cash Advances, and that have been shuttered by the Covid-19 pandemic, may be hit with a double-whammy — reduced cash flow to pay critical expenses (e.g., payroll) and aggressive collection efforts from cash hungry merchant cash lenders. This phenomenon is discussed in a recent article from NBC News: https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346?cid=eml_nbn_20200403 Businesses struggling with Merchant Cash Advances may be able to benefit from the expedited Chapter 11 processes available under the recently enacted Small Business Restructuring Act (a “Subchapter 5” filing). FactorLaw has previously reported how a Subchapter 5 filing can be used by small businesses dealing with financial distress. FactorLaw attorneys are available to discuss how the SBRA can help businesses deal with Merchant Cash Advance issues. Read More
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The Payroll Protection Program -- Offering Help to Small Businesses.

On April 2, 2020, the Small Business Administration issued guidance on the Paycheck Protection Program contained  in the recently enacted  Coronavirus Aid, Relief, and Economic Security Act (a/k/a the CARES Act). The Paycheck Protection Program will provide up to $349 billion in loans to eligible small businesses (generally a business with fewer than 500 employees), independent contractors, and self-employed individuals to cover payroll and other costs. Key highlights of the Paycheck Protection Program include:  -100% of the loan’s principal may be forgiven if borrowers satisfy certain conditions. – The loans will have a two-year term with payments deferred for six months. – The loans will carry an interest rate of 1%. – The loans will be in the amount of the lesser of $10 million or an amount calculated on a specified payroll-based formula. More information, including eligibility criteria, can be found in the guidance issued by the Small Business Administration. [INSERT LINK https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf] The application process for the Paycheck Protection Program opened officially on April 3, 2020 but several banks are still in the process of developing procedures to accept applications. The funds are available on a first come first serve basis. The attorneys at FactorLaw will continue to monitor legal and regulatory developments to assist clients during the current crisis.  Read More
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The Illinois Department of Financial and Professional Regulation Announces Help for Consumers and Small Businesses Struggling to Make Payments on their Debts Due to the COVID-19 Crisis and Guidance for its Regulated Financial Sectors

On Monday, March 30, 2020, the Illinois Department of Financial and Professional Regulation announced a series of actions to ensure the protection of Illinoisans in many areas of small business and consumer borrowing, servicing, and collections. The link to the guidance put forth by the IDFPR can be found at https://www.idfpr.com/News/2020/2020%2003%2030%20IDFPR%20financial%20guidance.pdf Read More
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Access to Covid-19 Small Business Loan Program Expected Later this Week

Steven Mnuchin has announced that further details on accessing the SBA’s Covid-19 relief loan program should be available later this week. At this point, applications for the program are not available, but Mnuchin’s announcement hopefully means they will be offered very soon. Small-business owners can go to any of the existing SBA lenders, as well as any FDIC-insured institution, credit union or financial-technology lender that has signed up for the program. Anecdotal information indicates that the competition for these loans could be fierce, with lenders focusing on the needs of existing borrowers first. Read More
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When Does the Covid-19 Crisis Compel a Bankruptcy Option for Small Businesses and their Owners

For your information, FactorLaw has prepared the following discussion of how and when chapter 11 can be a viable option for small businesses (or their owners) that are dealing with financial distress caused by the Covid-19 Crisis (the “CVC”).   Although the Courts in Cook County and the collar counties right now are largely closed for civil matters, the Bankruptcy Courts in Chicago are open and new cases can be filed and administered during these unprecedented times.  We hope you find the following discussion useful and we welcome any questions you might have.   The Highly Vulnerable Business The first tranche of businesses likely to face immediate and severe financial distress due to the CVC likely will be those where demand for goods or services is immediately and drastically reduced (or eliminated) and that have high costs that cannot be easily ratcheted down without impairing the business or incurring unsustainable liabilities.  Businesses whose cash flow or business model have otherwise suffered critical disruption due to the CVC also are likely to suffer extreme financial distress, as are businesses that were teetering before the CVC.  The likely candidates in this category include restaurants, small hotels/motels, small retailers, and businesses that support these establishments.     Highly vulnerable businesses are less likely to have sizeable long-term debt and usually do not fund operations through a revolving line of credit, although some may, particularly if the business owns real estate.  In many cases, credit relationships exist at the vendor level and major stakeholders are suppliers and landlords.  Such businesses also may have used shareholder loans, merchant cash financing or other high-interest products to sustain operations.  Depending upon cash reserves and the ability to reduce operating expenses swiftly, the optimal strategy for the highly vulnerable business is to (1) reduce operating expenses as much as possible during the CVC, with the hope of reengaging in the future and (2) exacting concessions from creditors.  Highly vulnerable businesses also might try to take advantage of the myriad programs at the Federal and State levels to assist troubled businesses, although the response time for these programs currently is not known and some of these programs may not be available if a business reduces its work force. Pursuing these options may require contacting landlords and other creditors, including high interest rate lenders and labor unions, and requesting some type of forbearance or waiver, which should be reduced to writing if possible, particularly in light of the requirement for modifications to be in writing under the Illinois Credit Agreements Act.  Such businesses also need a unified response from management/ownership and if the key decision makers are not aligned, the most effective responses may be unachievable.  Although the wisdom of a chapter 11 filing for a highly vulnerable business should be carefully explored, particularly because chapter 11 relief can be a drastic remedy, it can help preclude a recalcitrant lender or creditor from exercising non-judicial remedies, including setting off bank deposits, sweeping cash to apply to the loan or refusing to perform under a bilateral agreement.  A chapter 11 bankruptcy also can help to preserve asset value to the extent the CVC or other issues threaten that value, particularly if an operational shutdown threatens important contracts because of termination clauses.  On the other hand, the automatic stay may be less relevant to stopping judicial remedies right now because most civil court proceedings and enforcement actions in Cook County and the collar counties have been shut down as part of the shelter in place orders issued in Illinois.  Thus, highly vulnerable businesses might consider a bankruptcy filing to (1) liquidate the business in an orderly fashion, including by selling assets, to avoid the loss of all value, (2) impede a pesky lender or other creditor that threatens to exercise nonjudicial remedies or rights that, if implemented, will make re-engaging impossible or very costly once the CVC has passed, (3) stabilize an imploding business so that it can obtain a breathing spell to pursue other options, including the lending programs recently implemented, (4) limit the forfeiture of rights and property, or (5) facilitate prompt access to additional capital. With respect to the first item – liquidating or selling assets in a coordinated fashion – section 363 of the Bankruptcy Code authorizes the sale of assets free and clear of liens.  It also gives the purchaser protection from trailing claims, including successorship liability claims.  If a highly vulnerable business wishes to engage in a substantial sale transaction and has identified a purchaser, bankruptcy may be a good option fo… Read More
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WSJ Reports that Small Business Lenders are tightening standards in response to current economic uncertainty.

In today’s challenging economic environment a lifeline for small businesses may be harder to access — high interest rate small business loans. According to a report in the Wall Street Journal from March 28, 2020, “banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses. That means many people could find it hard to get credit just when they most need it, as the novel coronavirus pandemic puts thousands out of work.” https://www.wsj.com/articles/people-need-loans-as-coronavirus-spreads-lenders-are-making-them-tougher-to-get-11585357440?shareToken=stc8b569a61bc24802a8132278b06cf715 Read More
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SBRA's Debt Ceiling Increased to $7.5 million - More Businesses and Individuals will Qualify

The massive economic stimulus plan circulating in Congress right now will permit more businesses or individuals to take advantage of Subchapter 5 of the Bankruptcy Code (which FactorLaw has analyzed in prior posts) by increasing the debt cap from $2,700,000 to $7,500,000. The 880 page Senate Bill (the Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’) was unanimously approved by the Senate last night and will now go to the House. Reports are that the legislation will be approved by the House and signed by the President today or soon thereafter. If enacted without further change, the legislation will expand SBRA’s expedited processes to more businesses and individuals engaged in business by substantially increasing the debt cap. For cases filed within the next year, the SBRA will be available to debtors that have less than $7,500,000 of aggregate noncontingent liquidated, secured and unsecured debts. Read More
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Covid-19 Federal Disaster Loans for Small Businesses and Nonprofits.

We have been alerted by an email from the Kreshmore Group, an advisory firm in Illinois, about a new programs called the “COVID-19 Federal Disaster Loans for Small Businesses and Nonprofits According to the email from Kreshmore: On 3/19/2020, the SBA issued an administrative declaration that Economic Injury Disaster Loans (EIDLs) are available for small businesses and private nonprofits due to the Coronavirus (COVID-19) pandemic. Highlights of this economic relief program include: ● Up to $2,000,000 in relief assistance for qualified applicants*   ● Interest rate is 3.75% for small businesses and agricultural cooperatives ● Interest rate is 2.75% for nonprofits● Up to 30-year repayment terms ● Incident application period is through 12/17/2020  *Certain restrictions and conditions appplySome pertinent links associated with this SBA Disaster Loan program include: Application website → SBA Disaster Loan Assistance SBA loan form → SBA Disaster Loan Form Pertinent loan links: → Tax Information Authorization (IRS Form 4506T). → Personal Financial Statement (SBA Form 413). → Schedule of Liabilities (SBA Form 2202). FDIC FAQs (FDIC FAQs). Further information from Kreshmore about this program can be obtained from Ian Cumberland (847) 275-4065 or Tom Varga (630) 667-5730 Read More
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Noting split of authority, 6th Circuit BAP holds debtor's discharge precluded creditor from recovering under prepetition guaranty.

In In re Orlandi, 19-8001 (6th Cir. BAP Feb. 28, 2020), the Sixth Circuit BAP held that a chapter 7 debtor’s liability on a lease guaranty had been discharged when the guarantor/debtor filed for bankruptcy relief years earlier. Thus, the landlord could not pursue a claim against the guarantor/debtor for unpaid rent owed by the underlying tenant for occupancy years later. This case is not notable for what it held, but for its discussion (and ultimate rejection) of contrary decisions holding that a pre-petition guaranty can still obligate a debtor for some post-discharge liabilities. Because these contrary decisions are at odds with bedrock bankruptcy precepts — i.e., a discharge cleanses a debtor of all dischargeable obligations — a discussion of the case and the contrary decisions is in order. In Orlandi, the debtor owned a business called Studio 26 and guaranteed its obligations under a lease with LFLP. The debtor filed a chapter 7 case, disclosed the guaranty obligation and provided notice to LFLP. Studio 26 then extended the lease for 5 years and continued to occupy the premises.  When Studio 26 defaulted under the lease extension, LFLP pursued collection of unpaid rent from the debtor pursuant to his guaranty, arguing that the discharge injunction was irrelevant because the 2011 lease extension resurrected the debtor’s personal guaranty and the language in the original lease and the lease extension contained a survivability clause that superseded the bankruptcy filing and discharge. The debtor then brought an action against LFLP for violating the discharge injunction, arguing the liability on the lease guaranty had been eliminated by the discharge the debtor received when he filed his chapter 7 case years earlier. The bankruptcy court ruled for the debtor and awarded over $10,000 in attorney’s fees and costs. On appeal, the BAP concluded, based upon Taggart v. Lorenzen, _ U.S. _, 139 S. Ct. 1795 (2019), that damages for violating the discharge injunction were not appropriate because the caselaw did not unambiguously hold that the obligation had been discharged. That ultimate holding provided the foundation for the Orlandi court to examine the divergent views on the issue. Consistent with one’s ordinary expectations in light of the Bankruptcy Code’s broad definition of a claim and its goal of providing the debtor a fresh start, the BAP held the liability on the guaranty was a contingent claim and thus the debtor could not be held liable under the guaranty because that claim had been discharged. See In re Lipa, 433 B.R. 668; Russo v. HD Supply Elec., Ltd. (In re Russo), 494 B.R. 562 (Bankr. M.D. Fla. 2013); In re Stillwell, No. BK08-82997-TLS, 2012 WL 441193 (Bankr. D. Neb. Feb. 10, 2012); Fravala v. E Holdings, Ltd. (In re Fravala), Bankr. No. 3:11-bk-48-PMG, Adv. No. 3:16-ap-132-PMG, 2017 WL 3447936 (Bankr. M.D. Fla. Aug. 10, 2017); Motley v. Equity Title Co. (In re Motley), 268 B.R. 237 (Bankr. C.D. Cal. 2001). The BAP’s holding was guided, in part, by the Bankruptcy Code’s overarching goal of allowing the debtor to deal with all of its obligations in the case and to obtain a fresh start. The BAP expressly rejected an alternative line of cases holding that there is no contingent claim to be discharged without a post-petition right to payment.  These cases indicate the contractual obligation is not discharged and survives as to post-discharge advances.  Thus, absent an affirmative action by the debtor to terminate or revoke the guaranty, it may be enforced as to obligations incurred post-petition. See Weeks v. Isabella Bank Corp. (In re Weeks), 400 B.R. 117, 124 (Bankr. W.D. Mich. 2009) (“no dischargeable ‘claim’ (i.e., an enforceable obligation) can arise on account of a debtor’s guaranty of future indebtedness until a new advance has in fact been made”); Dulles  Elec. & Supply Corp. v. Shaffer (In re Shaffer), 585 B.R. 224, 230 Bankr. W.D. Va. 2018) (debtor’s discharge did not discharge liability under a pre-petition continuing guaranty for post-petition credit extensions); Graybar Elec. Co. v. Brand (In re Brand), 578 B.R. 729, 734 (D. Md. 2017) (“the unpaid amounts arising from [the primary obligor’s] post-petition purchase orders, even if owed by [the debtor] pursuant to her unrevoked pre-petition guaranty, were not pre-petition debts discharged through [the debtor’s] bankruptcy”); Wuthrich v. Amer Sports Winter & Outdoor Co., No. C-14-0871 EMC, 2015 WL 1503424 at *4-5 (N.D. Cal. April 1, 2015) (debtor’s obligation under pre-petition continuing guaranty not discharged as to post-petition obligations that did not exist pre-petition, were not routinely occurring or predictable (such as a guaranty of a monthly rental obligation), and where the so-called “contingency” of the claim “did not turn on events or actions of a third party” but was completely within the debtor’s control); N… Read More
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