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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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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); Nat’l Lumber Co. v. Reardon (In re… Read More
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FactorLaw's Summary and Analysis of the Small Business Reorganization Act

1. THE SUBCHAPTER 5 ELECTION. Chapter 11 now contains a “Subchapter 5” which applies only to “small business debtors” that make a so-called “Subchapter 5” election. See 11 U.S.C. §§ 1181-1195. Absent such an election, the small business case will be administered under the existing small business provisions of Chapter 11. Although the 2005 BAPCPA amendments to the Bankruptcy Code streamlined the Chapter 11 process for small business debtors (i.e., a plan has to be confirmed within 300 days), the process was still viewed as too onerous and expensive for those that qualified. Subchapter 5 provides small business debtors the option of using a new law designed to make the chapter 11 process faster and cheaper, including the process for selling a distressed business under a plan. It brings to Small Business Cases under Chapter 11 features previously available only in Chapter 12 or 13 cases. SBRA also reshuffles the leverage between debtors and creditors and tries to promote consensual outcomes. 2. THE INTERIM BANKRUPTCY RULES. Interim amendments to the Federal Rules of Bankruptcy Procedure also have been promulgated to guide cases where the debtor has made the Subchapter 5 election. The interim bankruptcy rules, including Interim Bankruptcy Rule 1020, implement the SBRA. New forms also may be forthcoming. 3. MAKING THE ELECTION. The Subchapter 5 election must be made on the petition for relief for voluntary cases or within 14 days after the order for relief in involuntary cases. Although the Subchapter 5 election is made when the bankruptcy petition is filed, Rule 1020(b) suggests the petition can be amended to make the Subchapter 5 designation after the filing. Doing so may not be advisable, however, because a delayed election may cause key deadlines to be missed. Another potential issue involves the retroactive application of the SBRA to cases pending before its effective date. 4. ELIGIBILITY CRITERIA. Subchapter 5 cases are available to any entity or individual engaged in commercial or business activity with aggregate and liquidated debts of not more than $2,725,625, of which more than 50% is commercial or business debt. The new law helps clarify eligibility. More than 50% of the debt has to be commercial or business. In view of SBRA’s changes to the absolute priority rule, inter alia, individual chapter 11 debtors with primarily business debts should consider whether they can make the Subchapter 5 election. The eligibility requirements to be a small business debtor have been modified insofar as more than 50% of the debt now must be from the commercial or business activities of the debtor and the exclusion for single asset real estate debtors has been clarified. 5. CRAMDOWN VS. CONSENSUAL PLANS: SBRA differentiates between confirmation under §1191(a) and 1191(b). Section 1191(a) deals with a plan that is accepted by all classes of claims – i.e., a consensual plan. Section 1191(b) addresses a “cramdown plan.” As discussed herein, certain SBRA provisions apply, or do not apply, depending upon whether the plan is consensual or not. Existing law differentiates between a consensual plan and a cramdown. However, the requirements to confirm a cramdown plan are essentially the same as the requirements for a consensual plan, other than the absolute priority rule. The SBRA eases the burdens for confirming a cramdown plan and thus provides debtors with more leverage to negotiate concessions from creditors. Conversely, debtors fare better under SBRA if they are able to negotiate a consensual plan. As discussed herein, the SBRA tries to foster consensual plans. 6. NO ABSOLUTE PRIORITY RULE. Like in Chapter 13, the absolute priority rule does not apply with respect to classes of unsecured creditors when the debtor makes the Subchapter 5 election. Thus, the owners of the business can retain their ownership interest even if unsecured claims are not paid in full. Similarly, an individual debtor can retain property even if they do not pay unsecured creditors in full. Secured creditors, on the other hand, still must be paid in accordance with §1129, but like before, their claim can be bifurcated into a secured and unsecured portion. Also, secured creditors can still make the §1111(b) election. Prior to SBRA, the owners of a small business debtor could not retain their ownership interests unless all creditors, including unsecured creditors, were paid in full. Similarly, an individual that qualified as a small business debtor could not retain any property absent payment in full of all creditors. Paying creditors in full prior to allocating value to equity was codified in the “fair and equitable” test of §1129(b), which also codified the absolute priority rule. The absolute priority rule is a long-standing requirement of chapter 11 and in the past could be a strong impediment to the confirmation of a plan. Under SBRA, to be “fair and equitable” as to unsecured creditors, the small business debtor n… Read More
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Governor of New York Limits Power of Merchant Cash Advance Lenders to Use Confessions of Judgment

As a follow-up to our series of articles on the use of Merchant Cash Advances (see here, here, and here), we learned today that New York Governor Andrew Cuomo signed a bill last week aimed at preventing predatory lenders from using the state’s court system to seize the assets of small businesses nationwide. According to Bloomberg, “the new law prohibits use of confessions of judgment against individuals and businesses located outside of the state.” As we learn more about this new legislation (as well as the efforts in Congress to limit confessions of judgment), we will update our postings. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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Small Business Reorganization Act Enacted

As discussed in a previous post, on Friday, the Small Business Reorganization Act was signed into law and will take effect in 180 days. The new law, which FactorLaw will further summarize in future blog posts, adds a new subchapter to the Bankruptcy Code that is designed to make the process less expensive and more feasible for small businesses (defined as persons engaged in a commercial or business activity with aggregate and noncontingent debts of less than $2,725,625). The American Bankruptcy Institute indicates that some have estimated that about half the chapter 11 cases filed today could qualify for treatment under this new law. Stay tuned as we continue to monitor these changes. If you would like to speak to one of our experienced attorneys regarding your business, please call (312) 878-6976 or fill out a contact form here. Read More
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Seventh Circuit holds that a debtor's "contingent future interest" in tenancy by entireties property is not exempt.

In re Jaffe, 18-2726 (7th Cir. August 5, 2019), the Seventh Circuit held that a homeowner’s “contingent future interest” in an otherwise exempt form of home ownership – tenancy by the entireties – was not exempt and was instead property of his bankruptcy estate. This decision not only resolves a dispute among lower courts regarding the exempt status of homes held in tenancy by the entireties, but it also means that a home held in tenancy by the entireties that is exempt on the bankruptcy filing date can lose that status if during the bankruptcy case the property is sold or one of the spouses passes away. Under Illinois law, real estate jointly owned by a husband and wife can be held in a “tenancy by the entirety.” As a general rule under Illinois law, real estate held in a tenancy by the entirety is exempt from the claims asserted against one spouse. In other words, the creditors of only one spouse cannot enforce their judgments against property owned like this. Id. at 13 (“The main protection that Illinois law provides tenants by the entirety is that a creditor is unable to force the sale of the property to collect a debt against only one of the tenants.”). In the Jaffe case, a creditor obtained by default a $500,000 judgment against the debtor, a lawyer, in a malpractice case in 2005. The creditor recorded the judgment, giving her a lien on the debtor’s real estate. Ten years later, the debtor filed a chapter 7 petition. In the bankruptcy case, the debtor exempted his home on the grounds that he owned it with his wife in tenancy by the entireties. During the bankruptcy case, the debtor’s wife passed away, but the debtor continued to argue the exemption was available because, at the time he filed the bankruptcy case, the home was exempt. The Seventh Circuit analyzed the different interests related to tenancy by the entireties property and ultimately concluded, based upon Illinois law, that the debtor held not a single interest, but a bundle of rights: The Illinois legislature enumerated the precise interests tenants by the entirety enjoy individually, including the following contingent future interests: “(a) an interest as a tenant in common in the event of a divorce, (b) an interest as a joint tenant in the event that another homestead is established, and (c) a survivorship interest in the entire property in the event of the other tenant’s death.” 765 ILCS 1005/1c. Id. at 4. The Circuit Court then analyzed whether the Bankruptcy Code exempted the entire bundle of rights, or just the right as a tenant by the entirety. Based upon the language of § 522(b)(3)(B), the Court concluded that the “exemption applies ‘to the extent that such interests as a tenant by the entirety,’ meaning the precise interests that the debtor holds as a tenant by the entirety, are exempt under state law.” Id. at 10. In other words, the Seventh Circuit held that the “contingent future interests”, including the right to own the property individually upon the death of one spouse, were not exempt from creditor claims. And as the bankruptcy court noted, because the creditor “had a lien on Jaffe’s contingent future interest, she has a lien on his current interest as fee simple owner” upon the passing of Mrs. Jaffe.” See In re Jaffe, Case No. 15-39490 (Bankr. N.D. Ill. June 7, 2017). The Seventh Circuit’s opinion in Jaffe clarifies the law in the Northern District of Illinois. Prior to the case, several bankruptcy courts (including the bankruptcy court hearing the underlying bankruptcy case of Mr. Jaffe) had concluded that the contingent future interest was not exempt under Illinois law and that a debtor could not avoid a judgment lien that had been recorded against property held in a tenancy by the entireties. The District Court decision reversing the bankruptcy court in the Jaffe case introduced a conflict between the lower courts in the Seventh Circuit, which now appears to have been resolved by the Circuit Court’s ruling in Jaffe. Agenda for Mack Industries September 2020 Omnibus Hearing Agenda Posted for August 20 Omnibus Hearing in Mack Industries Case Mack Industries July Omnibus Hearing Agenda U.S. TRUSTEE PROGRAM EXTENDS TELEPHONIC OR VIDEO SECTION 341 MEETINGS TO CASES FILED THROUGH OCTOBER 10, 2020 Mack Industries Omnibus Hearing Agenda Read More
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Consumer Debt Rising

According to an article appearing today on the website for the American Bankruptcy Institute, the American middle class is falling deeper into debt to maintain a middle-class lifestyle. The ABI article is based upon a Wall Street Journal analysis. According to the ABI and WSJ: “Incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy. Consumer debt, not counting mortgages, has climbed to $4 trillion — higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding. Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages. Auto debt is up nearly 40 percent adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11 percent in a decade, to $32,187, according to an analysis of data from credit-reporting firm Experian. Unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big banks for borrowers and loan volume. The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.” Read More
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Podcast - Panel for Consumer Commission discusses recommendations on BAPCPA's Credit Counseling requirement

Members of ABI’s Commission on Consumer Bankruptcy discuss the recommendations in the Final Report focused on the Code’s credit counseling and financial management course requirements, and asks the question: do the new provisions make a financial clean-slate more challenging for debtors? The round-table discussion podcast features FactorLaw’s Consumer Bankruptcy expert Ariane Holtschlag, and can be accessed below, or you can click here to go to the ABI article directly. In addition, click here to download a copy of the Final Report of the ABI Commission on Consumer Bankruptcy. Read More
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Chicago Appellate Court directs City of Chicago to release impounded vehicles when owner files Chapter 13 petition.

Seventh Circuit directs City of Chicago to release impounded vehicles and affirms holding in Thompson. Read More
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