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.
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.
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.
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
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
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
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…
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
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.
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.
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
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.
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.
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
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…
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.
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.