New COVID-19 Relief Package Provides Some Preference Relief

Types : Alerts

As most know, the second COVID-19 relief package included another round of stimulus checks, an extension of the eviction moratorium, and expanded unemployment benefits. However, what you may not realize is that the new law also impacted many federal laws, including the Bankruptcy Code. Of particular importance, the second COVID-19 relief package reduced preference exposure for suppliers of goods and services and commercial landlords, at least temporarily, through a change to 11 U.S.C. § 547 (“Section 547”).

A preference action is an action brought by the trustee of a bankruptcy estate pursuant to Section 547 to recover payments of antecedent debt made by the debtor to a creditor in the 90-day period (or longer with respect to “insiders” of the debtor) before the debtor filed for bankruptcy to the extent that such payments provided the creditor with an advantage vis-à-vis other creditors. The purpose of Section 547 is to ensure that a debtor did not favor one creditor at the expense of other creditors in the three months prior to bankruptcy.

The Text – The second COVID-19 relief package added new subjection (j) to Section 547, which carves out an exception to preference actions for “covered payments of rental arrearages” and “covered payments of supplier arrearages.”[1]

Covered Payments of Rental Arrearages – The payment of arrearages made in connection with an agreement or arrangement “between the debtor and a lessor to defer or postpone the payment of rent and other periodic charges under a lease of nonresidential real property … made or entered into on or after March 13, 2020.”

Covered Payments of Supplier Arrearages – The payment of arrearages made in connection with an agreement or arrangement “between the debtor and a supplier of goods or services to defer or postpone the payment of amounts due under an executory contract for goods or services … made or entered into on or after March 13, 2020.”

Payment Cap – To be covered, the amount paid pursuant to the agreement or arrangement cannot exceed the amount owed under the lease or contract at issue before March 13, 2020, and it cannot include fees, penalties, or interest in an amount greater than the amount of fees, penalties, or interest scheduled to be paid under the lease or contract or that the debtor would owe if the debtor had made every payment due under the lease or contract on time and in full before March 13, 2020.

Sunset – The bill provides that new subjection (j) will expire two years from the date of the enactment of the act, although it will remain applicable to any cases filed during those two years.

The purpose of this new exception is to assist struggling companies (due to the pandemic) who are trying to work out past-due debt with their creditors.  This new exception provides protection to those creditors by protecting them from having those payments clawed back in a future bankruptcy proceeding.  Whatever your opinion of the new exception may be, we expect that it will play a major role in bankruptcy proceedings over the next two years.

Montgomery McCracken has experienced attorneys in its Bankruptcy & Financial Restructuring Practice Group who are available to assist you or your company if you are served with a preference demand. Montgomery McCracken’s attorneys are also available to provide assistance to trustees who are prosecuting preference actions. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.

[1] An arrearage is an amount of money that is owed that should have been paid earlier.