Bank Law Monitor

Bank Law Monitor

A Legal Blog for the Financial Services Industry

Expanded Bankruptcy Subchapter V Eligibility for Small Business Debtors Extended for Another Year

Posted in Bankruptcy, COVID-19

On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was signed into law. This legislation extends the increased debt limit for small businesses to be eligible to reorganize under subchapter V of the Bankruptcy Code. While the increase in this debt limit remains temporary, the extension gives many small businesses another year to consider subchapter V as a potential option for their emergence from the economic impacts of the COVID-19 pandemic.

What is Subchapter V of the Bankruptcy Code?

Subchapter V of the Bankruptcy Code is a recent addition to the Bankruptcy Code. It was established by the Small Business Reorganization Act of 2019 (SBRA), which went into effect on February 19, 2020. Subchapter V provides a quicker, simplified process small business debtors can elect to use for their chapter 11 bankruptcy reorganizations. Subchapter V’s streamlined process can provide significant benefits, often decreasing the time and legal expenses traditionally associated with chapter 11 bankruptcy reorganizations and allowing some small business owners to retain ownership of their businesses. As a result, subchapter V provides a more cost-effective and accessible option for addressing debts.

However, as originally enacted under SBRA, subchapter V eligibility was significantly limited. Only debtors with up to $2,725,625 in debt were eligible to use the subchapter V process. This debt limit left many small businesses unable to access the benefits of subchapter V.

The CARES Act Expands Subchapter V Eligibility

Shortly after subchapter V went into effect, an unanticipated development occurred: the unfolding of the COVID-19 pandemic and the accompanying economic impacts. In response, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted, taking effect on March 27, 2020.

The CARES Act included several bankruptcy-related provisions, including an increase to the debt limit for subchapter V eligibility. Under the CARES Act, debtors with up to $7,500,000 in debt could now use the subchapter V reorganization process. This amendment significantly expanded the availability of subchapter V reorganizations for small businesses, and many have utilized subchapter V for their reorganizations in the past year. But like much of the bankruptcy-related relief provided under the CARES Act, the increased debt limit for subchapter V eligibility is temporary and was scheduled to sunset on March 27, 2021.

The COVID-19 Bankruptcy Relief Extension Act of 2021 Extends Expanded Subchapter V Eligibility for Another Year

On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was signed into law. Among other relief, this legislation extends the higher $7,500,000 debt limit for subchapter V eligibility for another year. The new sunset date is March 27, 2022.

With many small businesses exploring how to recover from the economic consequences of the COVID-19 pandemic, this extension gives small businesses with between $2,725,625 and $7,500,000 in debt an additional year to consider filing bankruptcy under subchapter V. Congress has extended this eligibility at a critical time for the recovery of small businesses impacted by COVID-19.

HB 2009 Moves to Floor Vote

Posted in COVID-19, Foreclosure

On March 24, 2021, the Oregon House Committee on Banking and Labor voted to advance House Bill 2009 (HB 2009) to a floor vote. As detailed in our prior write-up of the Bill, HB 2009 would extend Oregon’s foreclosure moratorium for certain loans through 2021.

In advancing HB 2009 to a floor vote, the Committee on Labor and Banking adopted several material amendments to the Bill that limit its scope and clarify important provisions. Among others, the amendments

  • Alter the “emergency period” under HB 2009 to the period of December 31, 2020 to June 30, 2021, with two optional three-month extensions at Governor Brown’s election;
  • Clarify that the moratorium applies only to property on which is situated four or fewer “dwelling units”, in contrast to the undefined “improvements” that was used in the initial draft. This change hopefully clarifies that the moratorium will not apply to large apartment complexes; and
  • Restrict the Bill to properties that are “used primarily and designed solely for residential use.” This change could provide relief to agricultural and mixed-use property lenders to allow foreclosure and collection efforts to proceed.

Importantly, the amendments did not provide any type of safe harbor for lenders that complete foreclosures after the expiration of HB 4204 but prior to the date of HB 2009 becoming law. For those lenders, and their title insurance companies, it may be left to the courts to determine how HB 2009 will impact title. In those cases, we expect to see interesting federal and state constitutional challenges based on impairment of contracts, preemption, and unconstitutional takings.

Ninth Circuit Revives State-Law Class Action Claims against Financial Advisor

Posted in Trending News

On March 4, 2021, the United States Court of Appeals for the Ninth Circuit reversed a district court’s ruling and held that a putative class action alleging state-law fiduciary duty claims against a financial services and advisory firm (the “Financial Advisor”) could proceed despite the Securities Litigation Uniform Standards Act (“SLUSA”)’s bar on state-law securities class actions. Anderson v. Edward D. Jones & Co., L.P., No. 19-17520 (9th Cir. Mar. 4, 2021). Plaintiffs, clients of the Financial Advisor, alleged that the Financial Advisor had breached its fiduciary duties to them when switching from a per-transaction fee structure to a flat, annual-percentage-fee structure without conducting a suitability analysis for each client. Plaintiffs also cast the Financial Advisor’s failure to disclose that it had not conducted a suitability analysis as an omission actionable under Section 10(b) of the Securities Exchange Act of 1934. The district court dismissed the federal securities claims and held that the court lacked jurisdiction over the state-law claims due to the SLUSA bar. The Ninth Circuit reversed on the jurisdictional issue. Continue Reading

Oregon Legislature Introduces New Foreclosure Moratorium Bill (HB 2009)

Posted in COVID-19, Foreclosure

On February 9, 2021, the Oregon House introduced a second foreclosure moratorium bill related to COVID-19. Known as House Bill 2009 (HB 2009), the new legislation would extend Oregon’s now-expired foreclosure moratorium during an extended “emergency period” running retroactively from January 1, 2021 through at least September 1, 2021.

Similar to HB 4204, if signed into law, House Bill 2009 would:

  • Prohibit foreclosures and trustee’s sales during the new emergency period;
  • Limit lenders’ ability to impose default interest, late fees and other charges during the new emergency period;
  • Prohibit lenders from treating as a default a borrower’s failure to make a payment during the new emergency period;
  • Require lenders to allow borrowers to pay missed payments at a loan’s maturity;
  • Require lenders to provide notice to borrowers of their rights under the new legislation; and
  • Provide borrowers with a private right of action against lenders that violate the act, including the right to recover attorneys’ fees.

While HB 2009 is substantially similar to the relief provided under HB 4204, there are a few notable differences. Continue Reading