Dealing with Debtor/Creditor Issues: Options for Businesses in the Age of COVID-19 April 20, 2020 Connecticut Bar Association Commercial Law & Bankruptcy Section

Hon. Julie A. Manning, Chief U.S. Bankruptcy Judge, Bridgeport Hon. Ann M. Nevins, U.S. Bankruptcy Judge, New Haven Hon. James J. Tancredi, U.S. Bankruptcy Judge, Hartford Thomas J. Sansone, Carmody Torrance Sandak & Hennessey, New Haven Irve J. Goldman, Pullman & Comley LLC, Bridgeport Jeffrey M. Sklarz, Green & Sklarz LLC, New Haven

1 Disclaimer – Remarks of Judges

We truly appreciate all of our Bankruptcy Judges joining us today to provide an update concerning the operations of the Bankruptcy Courts.

To the extent the any of the Judges choose to comment on issues discussed by the lawyers today, nothing they say constitute official statements by them or the Court. Nothing the Judges say today can be quoted, referenced, or otherwise cited as authority in any case or for any other reason.

2 Agenda • Status of Courts update • Bankruptcy courts are open for Business • Access issues • Emergency General Orders • Conducting hearings • Workouts in the era of COVID-19 • CARES Act loan programs • Use of CARES Act as loan facilities in bankruptcy • CARES Act and the SBRA • The influence of COVID-19 on pending cases • Effect of COVID-19 on Bankruptcy Code mandated deadlines 3 Status of Courts

• The Connecticut Bankruptcy Court has continued to operate and is open for business • Hearings and Conferences that are held are proceeding telephonically • Evidentiary hearings and trials can be held and have been held by video • Video hearings are possible

4 Access to Courts

• Access to the Courthouses and Clerk’s Offices is limited

• In-person Court appearance are limited

• Use of technology

5 General Orders Regarding Court Operations and Access to Courthouses and Clerk’s Offices 7 General Orders have entered since March 12th

• General Order Regarding Court Operations under the exigent circumstances created by COVID-19—March 12, 2020 • Established telephonic appearance procedures • Allowed for in-person hearings as needed at Court’s discretion • Confirmed contact with Court through Courtroom Deputy email addresses

• General Order Regarding Restriction on Visitors to Courthouses— March 12, 2020 • Adopted District Court Order restricting access to Courthouses is persons traveled in countries/areas infected with virus or resided with or been in close contact with someone infected

6 General Orders Regarding Court Operations and Access to Courthouses and Clerk’s Offices • General Order No. 2 Regarding Court Operations under the exigent circumstances created by COVID-19—March 16, 2020 • Further guidance on hearing procedures • Modifications to contested matter procedures • Extensions of the Automatic Stay • Modification of procedures for deficiency notices • Chapter 13 Procedures

• General Order regarding Temporary Suspension of Requirement to Obtain Debtors Original Signature—March 23, 2020 • Modification of Administrative Procedures to allow counsel to file documents requiring debtor’s signature without counsel obtaining “wet ink” version for file

7 General Orders Regarding Court Operations and Access to Courthouses and Clerk’s Offices • General Order Regarding Restrictions on Access to the Clerk’s Offices—March 26, 2020 • Procedures for manual filing of documents and manual payment of fees • Restriction on access to Clerk’s Office and public computer terminals • General Order regarding extension of deadlines in connection with Notice of Continued 341 Meetings—March 26, 2020 • General Order No. 3 Regarding Court Operations under the exigent circumstances created by COVID-19 • Further addresses telephonic appearances, Contested Matters, Extensions of the Automatic Stay, Chapter 13 Procedures, and Deficiency Notices

8 Conducting Hearings, Conferences, Evidentiary Hearings and Trials

• Telephonic • Procedures Order: https://www.ctb.uscourts.gov/sites/ctb/files/Telephonic%20Vendor%20Regist ration%20Instructions.pdf • By Court Call • By Court Solutions

• In Person

• Video Conference

9 Workouts in the era of COVID-19: Judicial and Executive Orders Overview of Changes in State Court Practice • All notices pertaining to COVID-19 related changes in the judicial administration of cases can be found at: https://jud.ct.gov/COVID19.htm

• March 12, 2020 Judicial Notice: Courts will handle only top priority cases, designated as “Priority 1 Business Functions” • “Priority 1 Business Functions” are generally criminal arraignments and those involving domestic violence, and certain juvenile, family and domestic violence matters • Modified April 15, 2020 by Judicial Notice that Operating Superior Courts are now accepting non-priority civil and family filings • Judges will rule on certain civil non-arguable short calendar matters that have been marked, take papers, starting with May 4, 2020 calendar • Arguable motions that may require a hearing will not print at this time

10 Workouts in the era of COVID-19: Judicial and Executive Orders March 19, 2020 Judicial Notice: • Immediate stay of all issued executions on evictions or ejectments through May 1, 2020 • All foreclosure sales scheduled in March, April and May rescheduled to Saturday, June 6, 2020 • Any law day set to run in March, April or May amended to provide that the first law day is now June 2, 2020 • All civil trials, trial management conferences, pre-trials, status conferences, J-ADR mediations and short calendars both arguable and non-arguable, are cancelled as long as Judicial Branch operations are limited to “Priority 1 Business Functions”

11 Workouts in the era of COVID-19: Judicial and Executive Orders March 24, 2020 Judicial Notice of Suspended and Amended Practice Book Rules: Among those Rules that would be of particular relevance to enforcement of creditors’ rights by civil action are: • Sec. 3-2. Time To File Appearance. Appearances must be filed within two days of the return day to avoid the filing of a Motion for Default for Failure to Appear. This requirement is suspended as no default orders are issuing at this time. • Sec. 11-14. –Short Calendar; Frequency; Time; Lists This section requires short calendar to be held at least once a month. The Judicial Branch does not expect to be able to comply with this (appears to have been superseded by April 15 Notice) • Sec. 17-30 (a) and (b). –Summary Process; Default and Judgment for Failure To Appear or Plead. There will be no enforcements of defaults for a summary process defendant’s failure to appear or failure to plead, which would otherwise be required within two days of the return date.

12 Workouts in the era of COVID-19: Judicial and Executive Orders March 30, 2020 Judicial Notice Re: Civil Scheduling Agreements and Case Management Orders: • Civil Scheduling Agreements and Case Management Orders are suspended until Judicial Branch operations are fully restored.

13 Workouts in the era of COVID-19: Judicial and Executive Orders Executive Orders • can be found at: https://portal.ct.gov/Office-of-the-Governor/Governors- Actions/Executive-Orders/Governor-Lamonts-Executive-Orders • EO No. 7D (3/16/20): Limits restaurant, bar, and private club operations to off-premise consumption of food and non-alcoholic beverages; Closure of off-track betting facility operations; and Closure of gym, sports, fitness, recreation facilities, and movie theaters. • EO No. 7H (3/20/20): "Stay Safe, Stay Home" restrictions on all workplaces for non-essential business – requires reduction of in-person workforces at any location by 100% and applies through 4/22/20 (likely to be extended). • EO No. 7T (4/2/20): Provision of non-essential lodging prohibited • EO No. 7X: For residential renters, prohibits service of notice to quit or service of summary process before July 1, 2020, and provides grace period of 60 days for April and May rent.

14 Workouts in the era of COVID-19: Judicial and Executive Orders March 31st Agreement with Banks and Credit Unions on Residential Mortgages • 90-day grace period for all mortgage payments • Relief from fees and charges for 90 days • No new foreclosures for 60 days • No credit score changes • Agreement does not apply to commercial mortgages, but advises that commercial mortgage borrowers “should know that all financial institutions are working proactively with each commercial borrower experiencing challenges” and that any “commercial customer having financial difficulty … should call their financial institution as soon as possible.” • Further description of the Agreement and a list of participating banks can be found on the CT Dept. of Banking website at https://portal.ct.gov/DOB/Consumer/Consumer-Help/COVID-19-Mortgage-Relief

15 Workouts in the era of COVID-19: Contract and Lease Issues Force Majeure • Defined as “an event or effect that can be neither anticipated nor controlled; esp. an unexpected event that prevents someone from doing or completing something that he or she agreed or officially planned to do.” Black’s Law Dictionary (11th ed. 2019). • A force majeure clause in a contract is a provision that defines the type of event that can excuse a party from performance. The clause must be in the contract to be effective, and will be applied by courts as written, not according to the legal definition of the term. See e.g. Perlman v. Pioneer Limited Partnership, 918 F.2d 1244, 1248 (5th Cir. 1990); Capital City Gas Co. v. Phillips Petroleum Co., 373 F.2d 128, 132 (2d Cir. 1967) • Typical examples of what a force majeure clause might include are both acts of nature, such as floods and hurricanes, acts of people, e.g. riots, strikes and wars, acts of government that might interfere with contractual performance, e.g. an executive order shutting down an entire business, or an epidemic or quarantine restriction which prevents a party from performing.

16 Workouts in the era of COVID-19: Contract and Lease Issues Force Majeure (cont.) • A force majeure clause might also excuse a party from performance when there occurs an unanticipated event that is “beyond its control,” which generally means that the party cannot have affirmatively caused the event and could not have taken reasonable steps to prevent it. • For a case applying the concept of what is “beyond a party’s control,” see International Automotive Showcase, Inc. v. SMG, 2004 WL 1833312, at *2 (Conn. Super. Ct. judicial district of New Haven July 21, 2004) (force majeure clause which released a party from its obligation to license the use of the New Haven Coliseum for a trade show for any “unforeseeable cause beyond the control” of the licensor was effective to excuse performance based on the unexpected closure of the facility by government authority).

17 Workouts in the era of COVID-19: Contract and Lease Issues Equitable Nonforfeiture • Applies in the lease context where, even after the service of a notice to quit and commencement of summary process for nonpayment of rent, the court will prevent a lease forfeiture if: (1) tenant’s breach was not willful or grossly negligent; (2) if evicted, tenant will suffer a loss wholly disproportionate to landlord’s injury; and (3) landlord’s injury is reparable. PIC Associates, LLC v. Greenwich Place GL Acquisition LLC, 128 Conn. App. 151, 157 (2011). • “Willful” in this context is defined as “intentional conduct designed to injure for which there is no just cause or excuse.” Id. at 259. • In a bankruptcy proceeding, the prepetition service of a notice to quit will have terminated the lease, rendering it unavailable for assumption or assignment. In re Masterworks, Inc., 94 B.R. 262, 267-68 (Bankr. D. Conn. 1988). • The equitable nonforfeiture doctrine can, however, be raised to prevent the lease termination, but the bankruptcy court must determine that the lease would have been saved under state law. Id. at 268.

18 Workouts in the era of COVID-19: Contract and Lease Issues Commercial Impracticability • In the absence of a force majeure provision in a contract, a party might still be excused from performance under the doctrine of commercial impracticability, or as the Restatement of Contracts puts it, “discharge by supervening impracticability.” Restatement (Second) of Contracts §261.

19 Workouts in the era of COVID-19: Contract and Lease Issues Commercial Impracticability (cont.) • Elements of commercial impracticability are (O’Hara v. State, 218 Conn. 628, 637 (1991): • Performance must be impracticable. Greater cost or financial burden is not enough unless it is significant and arises from “exceptional circumstances.” • Nonoccurrence of the event was a basic assumption on which contract was made, i.e., its occurrence must be found by a court to be something the parties assumed would not occur during the contract term and must not have been foreseen or reasonably foreseeable at the time of contracting • Impracticability in performing must have resulted without the fault of the party seeking to be relieved from the contract • the party has not assumed a greater obligation than the law imposes. • The Restatement specifically provides that if a governmental regulation or order makes performance impracticable, it will be considered an event whose nonoccurrence was a basic assumption on which the contract was made -as long as the governmental action was not foreseeable at the time of contracting. Restatement (Second) of Contracts §264

20 Workouts in the era of COVID-19: Contract and Lease Issues Commercial Implacability (cont.) • Example: The unexpected “credit freeze” in the financial markets following the collapse of Lehman Brothers was held by one Connecticut court to be an unforeseen exceptional circumstance which excused a party from going through with a $205 million real estate purchase which it had counted on financing with a mortgage loan of $160 million, where the loan could not be obtained due to the credit freeze. Dryland Steamboat Rd. v. GRC Realty Corp., 2010 WL 4276761 (Conn. Super. Ct. judicial district of Stamford- Norwalk July 20, 2010). But see LSREF2 Baron, LLC v. Beemer & Associates XLVII, LLC, 2011 WL 6838047 (M.D. Fla. Dec. 29, 2011) (economic downturn, even drastic recession, not the type of unanticipated event that would relieve sophisticated parties from their contracts).

21 Workouts in the era of COVID-19: Workout Considerations • Collateral value, typically in a liquidation • Assessment of core strength of business • Credibility/trustworthiness and skill of ownership and management • Compensation to insiders • Is financial weakness temporary or expected to be ongoing • Evaluation of legal remedies and difficulty/cost to pursue • Can any potential counterclaims or defenses be eliminated • Can additional guarantees or collateral be obtained • Primarily from borrower’s perspective, will the workout repair its balance sheet to the degree necessary, and in particular, what concessions can be achieved from vendor/unsecured debt

22 Workouts in the era of COVID-19: Forbearance Agreements • Typically entered into with principal secured lender, whereby lender agrees to forestall pursuing its remedies for short period of time, typically 60-90 days, in anticipation of borrower fixing its financial issues during that period • Common features: • Temporarily eliminates or reduces payment obligations • Lender forbearance to a specified date or event • Specific financial and narrative description of defaults • Borrower acknowledgment of defaults and release of lender from potential claims, counterclaims or defenses • Conditions to forbearance, such as periodic financial reporting, e.g., daily receipts and disbursements, and retention of all borrower funds in an account with lender • Schedule of payment deferrals and eventual resumption of payments • Possible increase in interest rate • Forbearance fee • List of events that will terminate Forbearance Agreement • Note, the ABA Business Bankruptcy Committee is in the process of creating a model form forbearance agreement

23 Summary of Financing Options Under CARES Act • EIDL Loans: out of money for now • Not specifically created by Act, but expanded • PPP Loans: out of money for now • Main Street Lending Program (“MSLP”): not up and running yet

24 EIDL Loans • Direct from SBA, following disaster declaration • $2 million cap • 3.75% interest rate • Up to 30 years to repay • Underwriting, collateral, PG • Proof of ability to repay • ~30 days to get money • $10,000 grant available within 48 hours • Cannot obtain credit elsewhere

25 PPP Loans • Generally 500 of fewer employees (exception: NFPs that are Medicaid funded are still eligible even if they have more than 500 employees) • For the hospitality industry (NAICS Code 72, Accommodation and Food Services) the 500 employee cap applied per location, so large companies that own hotels or restaurants with multiple locations may still qualify as small businesses if each location has less than 500 employees. • Otherwise apply SBA affiliation rules • Franchises qualify as well. • The terms “employee” is defined broadly and includes full and part-time. • Loan Amount: 2.5x the average total monthly payments for payroll; capped at $10 million. • Loan guarantees by government, but funded through private lenders. • Independent contractors and sole proprietors may apply.

26 PPP Loans

• Loan proceeds can be used for: “payroll costs” (a defined term under the Act), mortgage interest, rent, utilities, and other debt obligations incurred before the covered period. Tipped employees payroll can be included. • Payroll amount is capped at $100,000 per employee pro rated for the covered period (February 15 – June 30, 2020). • Ex patriot workers are excluded. • K-1s: Self-employed owners who receive a K-1 have their compensation included in the calculation (up to $100,000). • Schedule C: 2019 Net Profit (Line 31 of Sch. C).

27 PPP Loans

Additional Elements • No requirement to seek credit elsewhere • Maximum maturity of 10 years • Interest rate not to exceed 4% • At least 6 months deferral of P&I (up to 1 year) • SBA to write rules to specify mechanism • No prepayment penalties

28 PPP Loans Permitted Uses • Owner compensation replacement based on 2019 net profits, capped at $100,000 per partner. • Employee payroll costs. • Costs related to the continuation of group healthcare benefits during paid leave (sick, family or medical). • Business rent and utilities. • Mortgage interest (not principal). • Note: if you work out of your home, you cannot deduct home mortgage payments (although home mortgage interest is generally otherwise deductible). • Interest payments on other debt incurred prior to 2/15/20 (such amounts are not eligible for loan forgiveness). • Refinancing an SBA EIDL loan made between 1/31/20 and 4/3/20.

29 PPP Loans Forgiveness • 75% of loan proceeds must go toward payroll costs • For purposes of determining percentage of use (but not for forgiveness), the amount of any refinanced EIDL loan will be included • Up to the full principal amount of the loan plus accrued interest may be forgiven. • Actual amount of loan forgiveness will depend, in part, on amount spent over the covered period on: • Payroll costs up to $100,000 per employee (8-week max. per employee is $15,385), as well as covered benefits for employee, including health care costs, retirement contributions, and SUTA. Benefit costs for owners are NOT forgivable. • Owner compensation (limited to 8/52 of 2019 net profit, per owner). • Payment of mortgage interest for obligations incurred prior to 2/15/20. • Rent payment on lease agreement in force prior to 2/15/20, to the extent deductible as business rent expense. • Utility payments under service agreements dated prior to 2/15/20. 30 PPP Loans

Documentation for Forgiveness • Form 941 and state quarterly wage unemployment insurance tax reporting forms (or equivalent payroll processing reports). • Supporting documentation evidencing claimed business expenses (mortgage interest, rent, utilities, etc.) • 2019 Form 1040 Schedule C that was provided with the PPP Loan application. • Payroll ledgers

31 MSLP Loans Key Programs for SMBs • Main Street New Loan Facility (“MSNLF”): New loans. • Main Street Expanded Loan Facility (“MSELF”): Upsize existing loans. • Primary Market Corporate Credit Facility (“PMCCF”): Purchase of corporate bonds and syndicated loans.

Other Programs: • Secondary Market Corporate Credit Facility • Term-Asset Backed Securities Loan Facility • Municipal Liquidity Facility • PPP Lending Facility

32 MSLP Loans: MSNLF • New Loan • Eligible Borrowers: • Up to 10,000 employees; or • Up to $2.5 billion in revenue • Eligible Lenders: Any federally insured lending institution • Loan Terms: • Min. loan size: $1 million • Max. loan size: Lesser of (a) $25 million or (b) 4x 2019 EBITA, less committed and available credit • 4 year maturity • 1 year deferred P&I • Rate: SOFR + 250 – 400 basis points • No prepayment penalty • Collateral Requirement: None (yet) • Origination Fee: 1% origination fee on the principal of the loan

33 MSLP Loans: MSELF • Borrower must be seeking to upsize a loan made prior to 4/8/2020 • Eligible Borrowers: • Up to 10,000 employees; or • Up to $2.5 billion in revenue • Eligible Lenders: Any federally insured lending institution • Loan Terms: • Min. loan size: $1 million • Max. loan size: Lesser of (a) $150 million, (b) 30% borrowers available credit, or (c) 6x 2019 EBITA, less committed and available credit. • 4 year maturity • 1 year deferred P&I • Rate: SOFR + 250 – 400 basis points • No prepayment penalty • Upsize must take place after April 8th for loans originated before then • Collateral Requirements: collateral pledged under prior loan, pro rata on total loan amount (maybe a concern for lenders if their collateral is diluted)

34 MSLP Loans: MSELF Additional Restrictions

• Upsized loan proceeds will not be used to repay or refinance pre-existing loans or lines of credit. (Note, this doesn’t make sense since the MSELF is supposed to allow the borrower to upsize prior facilities and cannot be used in addition to the MSNLF. Does this mean a roll up is not allowed?) • Neither Lender nor Borrower will cancel or reduce, or seek to cancel or reduce, existing lines of credit to the borrower • Reason for borrowing is due to COVID-19 • Borrower will use reasonable efforts to maintain payroll • Borrower must follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under CARE

35 MSLP Loans: MSNLF/MSELF Borrower Covenants • Borrower needs money due to COVID-19 • Borrower will “make reasonable efforts” to maintain its payroll (must retain 90% of payroll through 9/30/2020) • Proceeds not used to repay/refi existing loans • Borrower will maintain existing credit lines and not seek to cancel or reduce them • Borrower will follow compensation limitations of CARES Act • Borrower is not in bankruptcy • No outsourcing jobs for 2 years following repayment • No cancelling CBAs for 2 years following repayment • Neutrality in union organizing • If appropriate, provide the government with an “upside” equity position • Other appropriate terms and conditions • It is not clear how many of these would apply to non-public closely held companies. For example, would the government really take a debt or equity stake in a relatively small privately held business? Unlikely. • Would it require collateral for its loan? Unknown, even though its not supposed to. • Will these loans ultimately be forgiven?

36 MSLP Loans: MSNLF/MSELF Lender Covenants

• Lender may sell up to a 95% participation in loans to a SPV to be created by the Fed. The SPV will be the intermediary through which the Fed funds and buys MSNLF loans. • Lenders and the SPV share risk pari pasu • Lender must pay a 1% “facility fee” to the SPV • SPV will pay lender a 0.25% servicing fee • The SPV will stop buying participations 9/30/2020 • Lender Covenants: • Won’t reduce or cancel lines • Will not use proceeds to repay earlier loans

37 MSLP Loans: Compensation Limits • Any non-union employee/officer with more than $425,000 in 2019 compensation cannot have their total compensation for any 12- month period exceed their 2019 compensation. • For any employee/officer/agent with more than $3 million total compensation in 2019, the person’s 12-month earnings cannot exceed $3 million plus 50% of the excess he or she earned over $3 million in 2019. Example: Jane Goodseller earned $5 million in 2019. For the 12-months following the extension of a MSNLF loan, she cannot earn more than $3 million + 50% of $2 million. Thus her maximum earnings are $4 million. • Severance payment cannot exceed two times their 2019 salary.

38 MSLF Loans: PMCCF • The SPV will purchase (i) qualifying bonds as the sole investor; and (ii) portions of syndicated loans or bonds at issuance. • Asset Criteria: At the time of purchase by the PMCCF, assets must meet the following criteria: • Bonds (as sole investor): (i) issued by an eligible issuer (described below); and (ii) have a maturity of 4 years or less. • Syndicated loans and bonds: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less. • The PMCCF will cease 9/30/2020 • The Facility may purchase no more than 25% of any loan syndication or bond issuance. • Pricing: • Individual bonds: market price, plus a 1% facility fee. • Syndicated loans and bonds: same pricing as other syndicate members, plus a 1 % facility fee on PMCCF’s share. • Fees: 1% commitment fee.

39 MSLF Loans: PMCCF Eligibility

• Eligible Businesses • The issuer is a business that is created or organized in the US or under the laws of the US with significant operations in and a majority of its employees based in the US. • Satisfies minimum credit rating requirement • Satisfied CARES Act conflict of interest rules (i.e. no loans for Jared!) • Ineligible Businesses: • Issuer is an insured depository institution or depository institution holding company (no banks), as such terms are defined in the Dodd-Frank Act. • Issuer has received other CARES Act support (or similar support)

40 MSLF Loans: PMCCF Limitations

• Refinancing Debt: 3 months ahead of maturity, issuers may approach the PMCCF to refinance outstanding debt. • Additional Debt: Issuers may seek to issue additional debt (must have rating reaffirmed at BB-/Ba3 or above). • Issuer-Borrowing Threshold: borrowing may not exceed 130 % of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020. • SPV Leverage: • When buying bonds/syndicated loans: Treasury equity will be leveraged 10:1 • When buying other assets: SPV will leverage “its” equity 7:1 It is not clear what this means precisely.

41 Which MSLF is best? MSNLF • Term loan • Does not have other available credit or no existing credit facility • Has not taken out prior loans (other than PPP or EIDL loans) • Don’t qualify for PPP loan or amount is insufficient for needs • Need funds for other than “covered” purposes under PPP (i.e. operating expenses) MSELF • Term loan • Looking to upsize an existing credit facility (pre-4/8) without additional collateral PMCCF • Rated company • Does not satisfy the size criteria for MSNLF or MSELF • Can be a much larger facility (up to 130 % of outstanding bonds/loans on any day between 3/2/2019 and 3/22/2020) • Negotiated price • More flexible – may allow for revolving credit

42 CARES Act Facilities in Chapter 11 EIDL Loans • A debtor in bankruptcy cannot apply for EIDL loans based on underwriting standards • Secured, personally guaranteed • Generally “all assets” • SBA will appear through AUSA • No special treatment in bankruptcy because they are government loans • SBA Guidance: SOP 50-52-2 Disaster Loan Servicing & Liquidation, Office of Capital Access, SBA (Sept. 1, 2015) - https://www.sba.gov/sites/default/files/sops/SOP_50_52_2.pdf • Write off of EIDL loan constitutes COD income, SBA will issue 1099-C 43 CARES Act Facilities in Chapter 11: EIDL Loans

• The SBA will generally work with borrowers • Remember, the loan will generally be secured by all assets of the debtor, so you need to speak with the SBA prior to filing to reach agreements on cash collateral

44 CARES Act Facilities in Chapter 11

PPP Loans • Unsecured, no personal guarantee • 75% to be used for payroll • DIP cannot get a PPP loan • Nothing says a company cannot take out a PPP loan and then file bankruptcy – question is: what happens next? • Advanced by a bank, not the SBA directly

45 CARES Act Facilities in Chapter 11: PPP Loans Cash Collateral Issues • Are co-mingled funds “cash collateral” of the secured lender? • UCC §§ 9-312(b)(1), 9-314 – security interests in deposit accounts perfected only by control • UCC § 9-104 – control means: • The money is in the account at the secured creditor/bank • Entry into a deposit account control agreement (DACA) between secured party/bank and third-party depository • Thus, if PPP loan proceeds are maintained in an account of the business at the secured creditor/bank, the secured lender likely has control, and the funds would be cash collateral (given the PPP loan was likely advanced by that bank, it’s a good chance control exists) • However, if the proceeds are kept in a separate account at a different bank, without a DACA, the funds are not cash collateral, even under an all assets UCC

46 CARES Act Facilities in Chapter 11: PPP Loans

Confirmation Issues • PPP loans are unsecured • Thus, in a POR they would likely be classified without GUCs unless an argument could be made for different treatment • If used according to their statutory purpose, PPP loans are forgivable, thus, they may not be a debt come confirmation under the correct circumstances

47 CARES Act Facilities in Chapter 11: PPP Loans Concerns • Loan proceeds become cash collateral? • In this case, it is hard to believe that the secured creditor would not want the proceeds used for forgivable purposes. • Debtor uses proceeds for non-forgivable purposes but seeks to discharge liability? • If PPP loan was taken out without the intent to repay, DIP officers and directors could have personal liability for fraud; possible crimes under CARES Act • May present a confirmation issue under 1129(b)(3) (“The plan has been proposed in good faith and not by any means forbidden by law….”) – is discharging a PPP loan “forbidden by law” if the funds were used for an unauthorized purpose?

48 CARES Act Facilities in Chapter 11: PPP Loans

PPP Loans as Entrance Financing • A PPP loan may be a good source of entrance financing – covers payroll, rent, mortgage interest payments, and utilities for 8 weeks. • Other collections can be used for operations, adequate protection. • Since PPP loans are forgiven, if spent correctly, it can provide a company with additional short term liquidity. • Caution, there is no guidance yet as to whether such a strategy would be rendered illegal by the SBA.

49 CARES Act Facilities in Chapter 11: MSLP Loans

MSNLF/MSELF • Cannot be accessed by DIPs • Underwriting will be required • Originating bank retains a 5% interest • NLF – Unsecured term loan • ELF – Secured term loan (with no new collateral, or so it appears)

• Might work as entrance facilities or to be entered into after final decree, but will require a lot of discussion with lender.

50 CARES Act Facilities in Chapter 11: MSLP Loans

PMCCF • Syndicated loans or bonds • Not for DIPs • More flexible • Security interest not clear • May allow for a revolving facility • Can be used to refi debt (in a narrow way)

51 CARES Act Facilities in Chapter 11: Take Aways

• None are perfect fits for chapter 11 use • Possible option to use as entrance financing • DIPs are barred (as of now) from accessing • Lots of questions concerning how banks/courts will react to treatment in bankruptcy

52 The CARES Act and the SBRA

• SBRA enacted into law on August 23, 2019 and became effective on February 19, 2020 as Subchapter V of Chapter 11, Title 11 • Must affirmatively elect treatment on the petition • The Act increases the debt limit to access the procedures to $7.5 million (from $2,725,625) • This may provide a solution for companies hard hit by a short but extreme loss of revenue. • SARE debtors may not elect subchapter V.

53 The CARES Act and the SBRA

SBRA Basics • Courts have held that debtors whose chapter 11 cases were filed before February 19, 2020 can elect treatment as a “small business debtor” under SBRA, if they meet eligibility requirements, by amending their chapter 11 petitions to so elect or seeking that treatment by motion, effectively making SBRA retroactive: • In re Ventura, 2020 WL 1867898 (Bankr. E.D.N.Y. Apr. 10, 2020) • In re Bello, 2020 WL 1503460 (Bankr. E.D. Mich. Mar. 27, 2020) • In re Body Transit, Inc., 2020 WL 1486784 (Bankr. E.D. Pa. Mar. 24, 2020) • In re Moore Properties of Person County, LLC, 2020 WL 995544 (Bankr. M.D.N.C. Feb. 28, 2020) • In re Progressive Solutions, Inc. (Bankr. C.D. Cal. Feb. 21, 2020)

54 The CARES Act and the SBRA

Debt Limits • Originally, to qualify as a “small business debtor,” debtor’s aggregate noncontingent liquidated secured and unsecured debts could not exceed $2,725,625, but CARES Act increased debt limitations to $7.5 million with a one-year sunset provision • Excludes debts owed to one of more affiliates or insiders of the debtor • For any guaranteed debt by the debtor where the guarantee is absolute and unconditional, it will likely be considered noncontingent and liquidated to the extent there is a default on the principal obligation guaranteed • At least 50% of debts must arise from commercial or business activities of debtor

55 The CARES Act and the SBRA Principal features of SBRA • No creditors’ committee unless court orders one for cause (§§1181(b), 1102(a)(3)) • No disclosure statement required unless the court orders one for cause, in which case either the plan itself can be considered adequate disclosure, the court could approve a disclosure statement submitted on standard forms, and court can conditionally approve pending confirmation hearing (§§1181(b), 1187(c), 1125(f)) • No US trustee fees (28 USC §1930(a)(6)) • While debtor does remain in possession, automatically appoints Subchapter V trustee whose principal function is to supervise and monitor the case and to facilitate development and confirmation of a consensual plan (§1183) • Section 1183 enumerates trustee’s duties, which notably do not include, inter alia, investigating acts, conduct and financial affairs of debtor unless, for cause and on request of a party in interest, the court orders an investigation. • Only debtor may file a plan, which must be filed within 90 days of petition date, subject to extension if need therefor is attributable to circumstances for which debtor should not justly be held accountable (§1189) • Allows for modification of residential mortgage if loan proceeds were not used primarily to acquire residence but instead were used in debtor’s business (§1190(3))

56 The CARES Act and the SBRA

Cramdown Plans: • All requirements of section 1129(a) still must be met, except subsections (8) (all classes must accept or be unimpaired), (10) (at least one impaired accepting class) and (15) (best efforts test for individual plan) • no requirement that there be at least one impaired, accepting class of creditors, i.e., even if all classes reject, cram down is still available • new “fair and equitable” standard that eliminates the absolute priority rule and in place, imposes a requirement that debtor’s “projected disposable income” must be applied to plan payments for three years or, if the court orders, up to five years; or the value of proposed plan distributions in the applicable payout period is not less than projected disposable income for that period (§1191(c)(2)) • “disposable income” means income not reasonably necessary to pay for expenses necessary to continue and preserve business operations (§1191(d)(2))

57 The CARES Act and the SBRA Cramdown Plan (cont.) • In addition, for an individual debtor, “disposable income” means income that is not reasonably necessary for support of debtor or his or her dependents or to pay a domestic support obligation coming due after the filing of the petition ((§1191(d)(1)) • For individual plans, the new “projected disposable income” standard supplants §1129(a)(15), which, if invoked by an unsecured creditor, requires that an individual debtor distribute property equal to or greater than projected disposable income, as defined in §1325(b)(2), for the longer of five years or the period for which the plan provides payments. • Discharge will not occur until debtor completes all payments due within first three years of plan or such longer period, not to exceed five years as the court may fix. • Subchapter V trustee remains in place to make plan payments unless the plan or confirmation order provides otherwise

58 The CARES Act and the SBRA Cramdown Plans (cont.) • Administrative expenses do not have to be paid on confirmation, but can be paid through the plan ((§1191(e)) • Feasibility requirement modified to require finding that debtor will able to make all plan payments or has a “reasonable likelihood” of doing so (§1191(c)(3)(A)) • Plan must provide appropriate remedies on default, “which may include liquidation of nonexempt assets” (§1191(c)(3)(B)) • Cramdown requirements for secured claims remain unchanged • Section 1111(b) election can still be made. Since there likely will be no disclosure statement, Interim Bankruptcy Rule 3017 provides that in a Subchapter V case, the election may be made not later than a date the court may fix • Postconfirmation modification of plan permitted during plan term if circumstances warrant and cramdown confirmation requirements under §1191(b) are met (only debtor may request modification) (§1193(c))

59 The CARES Act and the SBRA Consensual plans • Shall be confirmed if all requirements of section 1129(a) are met, other than subsection (15) • Administrative expenses must be paid on confirmation • Subchapter V trustee discharged upon substantial consummation of plan • Discharge occurs upon confirmation • Postconfirmation modification not permitted after substantial consummation (§1193(b)

60 The influence of COVID-19 on pending cases

Mothballing and Other Special Case Administration Orders • Seminal and prototype order entered in In re Modell’s Sporting Goods, Inc., Case No. 20-14179 (VFP) (Bankr. D. N.J. March 27, 2020) (ECF No. 166) • Pursuant to sections 305 and 105 of the Bankruptcy Code, suspends jointly administered chapter 11 cases until April 30, when a further extension will be considered • Suspends all deadlines that would otherwise occur until suspension period terminates • Parties permitted to seek relief from court for exigent and unforeseen circumstances • Authorizes payment of “essential expenses,” and the deferral of all others, including payment of rent

61 The influence of COVID-19 on pending cases

In re Craftworks Parent, LLC¸ Case No. 20-10475 (BLS) (Bankr. D. Del. March 30, 2020) (ECF No. 217): Order (I) Establishing Temporary Procedures and (II) Granting Related Relief • Establishes special lease rejection procedures, initiated by Rejection Notice • Establishes special stay relief and other motion filing procedures related to lift stay motions, motions or applications for administrative expense, motions to compel assumption or rejection or for payment of rent under sections 365(d)(3) or (d)(5), whereby settlement is encouraged and no hearings scheduled prior to April 30 or such later date as determined by the Court

62 The influence of COVID-19 on pending cases In re Pier 1 Imports, Inc., Case No. 20-30805 (KRH) (Bankr. E.D. Va. April 6, 2020) (ECF No. 493): Order (I) Approving Relief Related to the Interim Budget, (II) Temporarily Adjourning Certain Motions and Applications for Payments, and (III) Granting Related Relief • Authorizes temporary shutdown of operations until notice of intent to reopen filed after consultation with DIP lender (the “Limited Operation Period”) • Authorizes critical expense budget for payment of wages, utilities, insurance, security, trust fund taxes and “other corporate and professional costs,” with deferral of all other payments, including payment of rent and payments to vendors and suppliers (except for debt incurred in suspension period) • Debtors to make good faith efforts to pay deferred payments within 45 days following Limited Operation Period • Adjourns to next omnibus hearing that is no less than 45 days after end of Limited Operation Period motions seeking payment of expenses not in interim budget, lift stay and adequate protection motions and motions to compel rejection or assumption

63 The influence of COVID-19 on pending cases

Orders entered in In re Sakon, Case No. 19-21619 (Bankr. D. Conn. 2019) (Tancredi, J.) • Orders granting and extending temporary stay of proceedings due to pro se debtor’s medical complications (ECF Nos. 64, 79) • Order denying temporary stay of proceedings – which requested a 21-day extension of all existing deadlines to file responsive pleadings due to COVID-19 – in favor of promptly addressing extension motions on a matter by matter basis

64 Effect of COVID-19 on Bankruptcy Code Mandated Deadlines • SARE Cases – 90 day deadline to file a plan or make adequate protection payments otherwise stay relief is granted under § 362(d)(3).

Considerations • May make sense to file a plan early given valuations may be lower, particularly based on income analysis • Beware of the 1111(b) election • Secured creditors gives up deficiency/unsecured claim and must be paid full amount of secured claim over life of plan • Can create feasibility issues • But, do banks really want real estate back?

65 Effect of COVID-19 on Bankruptcy Code Mandated Deadlines • Section 365(d)(4) – Limitation on ability of DIP to extend time assume/reject non- residential real estate leases without landlord consent, beyond 210 days following the petition date. • “No subsequent extensions may be granted by the court without the prior written consent of the lessor in each instance.” 2 Norton Bankr. L. & Prac. 3d § 46:41 (2020)

Considerations • So long as a motion to assume is filed prior to the deadline, it can be acted on after the deadline. In re Simbaki, Ltd., 520 B.R. 241, 245 (Bankr. S.D. Tex. 2014); In re Eastman Kodak Co., 495 B.R. 618, 622 (Bankr. S.D.N.Y. 2013) • Under certain circumstances, an appropriate assumption motion could be filed and later withdrawn. • All “gap” rent must be paid on an administrative basis.

66 Effect of COVID-19 on Bankruptcy Code Mandated Deadlines • SBRA Deadlines: • 60 days from petition date to hold status conference and present plan outline, which must be filed 14 days prior to the status conference • 90 days to file a plan • Note, court can extend these deadlines for cause based reasons beyond the debtor’s control

Considerations • Certainly COVID-19 is beyond the debtor’s control. • Courts will likely afford reasonable extensions of these deadlines so long as the excuse is legitimate and the debtor is complying with operating criteria generally. Talk to the trustee!

67 Questions?