As discussed in previous posts, the 2021 Consolidated Finance Law (the “Law”) was enacted on December 27, 2020, largely to address the harsh economic impact of the COVID-19 pandemic. For bankruptcy litigators – or any business that has been frustrated with receiving a demand letter after one of its clients filed for bankruptcy – one particular amendment stands out in the sprawling 5,593-page bill. The law amended Section 547 of the Bankruptcy Code to provide providers and owners with additional potential challenge to actions taken to “recover” payments made by a debtor within 90 days of bankruptcy.
In general, article 547 of the Bankruptcy Code allows a bankruptcy trustee (or debtor-operator) to recover certain payments made by a debtor to his creditors in the 90 days preceding a bankruptcy, unless the creditor can establish one of the legal defenses, including:,that is to say, a contemporary exchange); (2) payment was made in the ordinary course of business (that is to say, in the same way that payments were made before the debtor experienced financial hardship) or under normal commercial terms; or (3) the obligee has provided additional goods and services to the obligor on credit after receiving payment. The purpose of Section 547 is to prevent creditors from rushing to break up a financially troubled business and, more importantly, to ensure that certain creditors do not receive preferential treatment from the business. while others remain in charge.
The Act added a new section 547 (j) to the Bankruptcy Code, generally providing that a trustee (or debtor-in-charge) cannot avoid and collect as a preferential transfer:
An arrears payment under a commercial real estate lease made “in connection with” an agreement or arrangement between the debtor and its landlord entered into on or after March 13, 2020 (the date on which former President Trump declared an national emergency due to COVID-19 pandemic) to defer or postpone payment; Where
A payment of overdue amounts made to a supplier of goods and services “in connection with” an agreement or arrangement between the debtor and the supplier entered into on or after March 13, 2020.
This new provision, which expires on December 27, 2022, is subject to certain limitations, including:
Payment cannot exceed the amount that was otherwise due under the lease with the landlord or the enforceable contract with the supplier before March 13, 2020; and
Payment cannot include fees, penalties or interest for deferred payments initially due before March 13, 2020.
The policy objectives underlying the new section 547 (j) seem obvious: (i) to ensure that owners and suppliers are not penalized for accepting deferred payments (out of the ordinary course) under agreements that they have entered into with companies hit hard by the global pandemic, and (ii) encourage owners and suppliers to seek financial accommodations with their struggling counterparties in the future, instead of exercising default and termination rights under existing agreements. While beneficial, these policy objectives conflict to some extent with the general objective of Section 547 of ensuring equal distributions for all creditors of distressed businesses. Notably, the law does not protect certain types of creditors – such as lenders – even though an agreement by a creditor to accept a deferred payment would, in all likelihood, be as beneficial to a struggling business as the agreement of a supplier or an owner to do it.
In any event, the very language adopted by Congress leaves a lot of room for interpretation. For example, a payment to a supplier must be made under a “binding contract”. But it is not clear whether the contract must still be “enforceable” on the date of the petition. If the supplier accepts an otherwise exempt deferred payment and then terminates the contract before bankruptcy, does the supplier still benefit from section 547 (j)?
In addition, it is likely that the courts will be faced with questions regarding what constitutes a postponement “agreement” or “arrangement” for the purposes of the law, and whether such an agreement or arrangement qualifies for protection if the postponement. or the deferral of payment of arrears is part of a larger agreement to restructure the business relationship of the parties involving various forms of consideration. Finally, the wording of the law can allow the parties to potentially play against the system. For example, section 547 (j) is an exception to the cancellation power under 547 (b), not a defense, meaning that payments to owners and suppliers initiated during the year preceding bankruptcy also appear to be subject to the exemption. Thus, affiliates with inter-company debts may be encouraged to enter into out-of-court agreements to defer payments with the aim of ensuring that catch-up payments are exempt from cancellation.
Only time (and the courts) will tell whether this new provision achieves the objectives set by Congress and what avenues parties can exploit to capitalize on this otherwise well-meaning response to the fallout from the coronavirus pandemic. In the meantime, owners and suppliers who deferred payments during the pandemic should make sure to document these deferrals – and avoid charging interest or penalties prohibited by law – in order to take advantage of Section 547 (j). in the event of bankruptcy of their tenant or client.
© 1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.Revue nationale de droit, volume XI, number 33