On January 14, 2021, the U.S. Supreme Court in City of Chicago vs. Fulton reversed a Seventh Circuit ruling that the City of Chicago violated the automatic stay created by car owners’ bankruptcy filings, when the City refused to immediately return the cars after the bankruptcy filing that had been impounded pre-bankruptcy for parking or traffic violations. Put another way, if a creditor is in possession of assets they seized prior to the bankruptcy filing, they do not necessarily have to return the repossessed property.
This unanimous ruling by the Supreme Court “resolves” a dispute among the federal appellate courts on a very discrete issue under Section 362(a) of the Bankruptcy Code.
The Third, Tenth, and District of Columbia Circuits had determined that creditors who maintained possession of seized property are NOT violating the automatic stay. Contrary to those Circuits, the Second, Seventh, Eighth, Ninth, and Eleventh Circuits found that holding on to seized property is a prohibited “act to exercise control over property” of the bankruptcy estate and therefore violative of the stay.
Justice Alito delivered the unanimous opinion of the Court. He wrote that the “most natural reading” of the Bankruptcy Code is that it “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” He further stated that the act of merely retaining possession of the repossessed property does not violate the automatic stay.
Justice Sotomayor, in her concurring opinion, highlighted the fact that the Justices did not decide whether other sub-sections of Section 362 may still require a creditor to return repossessed debtor property if the creditor is holding it for the purpose of extracting payment. She wrote her concurring opinion to emphasize that despite this ruling, the Court is not deciding whether and when Section 362’s other provisions may require a creditor to return property to the bankruptcy estate or debtor. See 362(a)(4) and (6). She also pointed out that this Opinion did not provide guidance as to how bankruptcy courts should actually enforce the creditor’s separate obligation to deliver property back under other sections of the Bankruptcy Code, including Section 542. Importantly, Justice Sotomayor articulated her social concerns as to how low-income communities are disproportionately burdened in this regard, as well as communities of color. She points out how many debtors who are affected by this problem rely on their cars to go to and from work and that in order to get their car back, they must rely on procedures in bankruptcy court which are extremely slow (proceedings to enforce turnover of property under Section 542) and how it is up to the legislatures to address this issue.
This opinion is a “must read” especially for consumer practitioners who represent not only creditors but debtors concerning the ability to retrieve repossessed property. Importantly, the Supreme Court in this opinion did not rule on whether debtors could achieve their desired results by invoking other provisions of Section 362 or 542, leaving the door open to other possible avenues of recourse.
Courts appeared to be split as to whether businesses are eligible for a Paycheck Protection Program (“PPP”) loan under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) if you are a business in bankruptcy. The CARES Act was created to, inter alia, provide small businesses with loans under the PPP to keep their workforce employed. Uncertainty quickly arose as to whether businesses in bankruptcy were proper candidates for these loans. Neither the statute nor the initial regulation disqualified them, but the SBA later adopted an application form which specifically disqualified them. The SBA disqualification was under the rubric that business debtors pose an “unacceptably high risk for an authorized use of funds or non-payment of unforgiven loans.” Further, the SBA posits that the PPP loans fall under the category referred to as Section 7(a) loans which embody the standard of the loan being of “sound value or so secured as reasonable to assure repayment.”
Earlier this year, bankruptcy courts in Florida, Washington, New Mexico and Tennessee found debtor’s exclusion from eligibility from the SBA/PPP loans to be unlawful, determining that the exclusion of business debtors from PPP loans while in bankruptcy was “arbitrary and capricious” and a violation of 11 USC Section 525(a), which in essence provides that a government unit may not discriminate with respect to a request for a grant based solely on the fact that they are a bankruptcy debtor. Other bankruptcy courts, such as in Delaware, New York, Maryland, Georgia and Maine, have found to the contrary and upheld the SBA’s position determining that business debtors are ineligible. Most recent rulings have sided with the SBA’s position that such businesses are ineligible for a loan, noting that while the bankruptcy exclusion may be harsh, it is within the SBA’s authority. For example, see In re Cosi, Inc. Case # 20-10417 ( Bankr. D. Del. April 30, 2020)
On December 22, 2020, a three-judge panel in the 11th U.S. Circuit Court overturned a Bankruptcy Court ruling and upheld the SBA rule that makes bankruptcy business debtors ineligible for the PPP loans. See Gateway Radiology Consultants, P.A. , No. 20-13462 (11th Cir.), wherein the 11th Circuit overruled the Bankruptcy Court which had found that the SBA was “arbitrary and capricious” in exceeding its authority by disqualifying businesses in bankruptcy proceedings from PPP availability. The 11th Circuit now joins the 5th Circuit in finding that the SBA does not exceed its authority in declining to grant PPP loans to business debtors. ( In re Hidalgo County Emergency Service Foundation, 962 F.3d 838 ( 5th Cir. 2020)).
On December 27, 2020, President Trump signed the Bipartisan-Bicameral Omnibus COVID Relief Deal, which temporarily amended the bankruptcy code to allow PPP loans to some business debtors, but with the caveat that this change only would become effective if the SBA agrees to allow PPP loans in bankruptcy. Query as to whether this amendment changes the status quo on this issue at all, and why the SBA would do a 180 turn at this juncture.
To avoid the denial of a PPP loan, some businesses who otherwise would need bankruptcy protection have chosen to not file for bankruptcy relief at all, or once in a bankruptcy dismiss their bankruptcy to pursue PPP loans. Questions to ponder here are: whether a debtor who receives a PPP loan and then files for bankruptcy protection (as part of a pre-ordained plan) must disgorge the PPP loan, whether PPP loans received prior to a bankruptcy filing may be used as cash collateral in a later bankruptcy filing for purposes other than those allowed under SBA guidelines, the commingling of PPP loan funds with other bankruptcy proceeds, etc.
To discuss issues regarding PPP loans, creditors rights and bankruptcy or business workouts, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at firstname.lastname@example.org.
In my 35 years of being a bankruptcy practitioner, little did I think that I would ever quote Bette Davis from the movie, “All About Eve”, when she warns: “Fasten your seatbelts- you’re in for a bumpy ride”. Not only has the COVID-19 pandemic been unfathomable and the bumpiest of rides (and we do not even now know where it will take us), it has been devastating to our health and everyday well being. In fact, it is predicted to cost the world-wide economy at least $2.7 trillion. Realistically, we can expect to see a new wave of restructurings in the restaurant, hospitality, energy, manufacturing, transportation and the real estate industries. Further, this situation will affect relationships between landlords and tenants, lenders and borrowers and employers and employees. With “stay at home orders”, close of businesses, employees are losing jobs and filing unemployment claims at unprecedented rates.
The Coronavirus Aid, Relief and Economic Security Act of 2020 ( “CARES Act” ) signed into law on March 27, 2020, in conjunction with the Small Business Reorganization Act of 2019 (the “SBRA” ) which became effective a month prior, will act as a lifeline to small businesses and will also make bankruptcy options much more attractive for individuals. Together, the new legislation will streamline existing rules governing the efforts of small businesses to reorganize under Chapter 11 and individuals under Chapter 13.
For example, the CARES Act raises the maximum debt level limit of the new small business reorganization originally under SBRA to qualify from $2,725,625 to $7,500,000, allowing for increased access to the bankruptcy process (increase in debt limit expires on March 27,2020 unless it is extended by Congress). According to a recent study by the Brookings Institute, this expanded eligibility could help save an estimated seventy (70) percent of all businesses that might have to file for bankruptcy.
Further, the SBRA makes it easier for companies to retain their small businesses and makes it more difficult for creditors to contest Chapter 11 cases. Other critical provisions of the CARES Act provide that: a Plan must be filed by the debtor within ninety days of the bankruptcy; a Trustee will be appointed to assist in the proceeding; and a creditors committee will not be appointed ( critical to the saving of time and expense of the proceeding).
Individuals who are experiencing hard times due to pay cuts, job losses and illness due to the coronavirus may not be able to meet their monthly expenses and may feel hopeless and at a loss at to how to proceed. The first step may be to contact your landlord or mortgage company to see if you can defer a few months of payments perhaps to the end of the lease or mortgage. Next, for car leases, contact your leasing company who also may consider deferring a few months’ payments to get you through the crisis. If those steps do not resolve your money issues, you may have to consider filing a personal bankruptcy in a Chapter 7 or 13. If that is the avenue which is pursued, your stimulus payment ( $1200) will not be considered in your income calculation for eligibility for Chapter 7 or your disposable income calculation for Chapter 13 plan payment considerations.
If you have any questions about personal or business bankruptcies, the CARES ACT, or the new small business bankruptcy under Chapter 11 (Sub-Chapter V), please contact Leslie Beth Baskin, Esquire at: email@example.com or 215-241-8926.