Of the 5,593 pages comprising the Consolidated Appropriations Act, 2021 (“CAA”), signed into law on December 27, 2020, a few pages are relevant to suppliers and landlords party to executory contracts or nonresidential leases with distressed companies. Specifically, the CAA amends section 547 of the Bankruptcy Code to protect some deferred or postponed payments from avoidance as “preferential transfers” in bankruptcy proceedings.1 Generally, a debtor may avoid (claw back) payments made to unsecured creditors during the 90-day period prior to commencement of bankruptcy proceedings (the “Preference Period”) which were made outside of the ordinary course of business. Historically, such payments could be disgorged based on the presumption that the debtor preferred certain unsecured creditors over others—a violation of the Bankruptcy Code’s underlying policy that similarly-situated creditors be treated equally.
The CAA amends the Bankruptcy Code to protect payments made pursuant to deferral or other similar arrangements which were COVID-related. The amendment is limited in scope, as it applies only to arrearage payments that: (i) were made in connection with an agreement entered into on or after March 13, 2020 (the “Start Date”) to defer payments under an executory contract or lease of nonresidential real property; (ii) do not exceed amounts due under the contract or lease before the Start Date; and (iii) do not include fees, penalties, or interest imposed by the deferral agreement or for pre-Start Date payment defaults.2 The amendment sunsets on December 27, 2022 (the “Sunset Date”), but is applicable to bankruptcy cases that are pending on the date of enactment as well as those commenced prior to the Sunset Date.3
The exact scope of these new protections for suppliers and landlords will be clarified over time as courts interpret Congress’ intent. However, this new amendment—on top of the 2019 amendment to section 547 of the Code that required trustees and debtors to perform reasonable due diligence and consider affirmative defenses before seeking to avoid payments made during the Preference Period4 —will provide counterparties with more leeway to modify payment arrangements in distressed scenarios. Seward & Kissel’s Corporate Restructuring & Bankruptcy Group will continue to monitor the situation and remains accessible to clients dealing with this crisis.