Maryland Bankruptcy Court Decides PPP Funds and Lease Denial Damage Claims Are Not Considered for Debtor Eligibility Requirements in Subchapter V, Chapter 11 | Miles and Stockbridge PC

The Small Business Restructuring Act, 2019, Pub. L. 116-54, 133 Stat. 1079 (August 23, 2019) (SBRA) came into effect on February 19, 2020. The SBRA, among others, created a new Subchapter V under Chapter 11 of Title 11 of the United States Code. Its goal was to provide commercial debtors with a more streamlined Arkansas bankruptcy process for debt rehabilitation and restructuring compared to a traditional Chapter 11 case. Another goal was to reduce the time and expense of small business reorganizations compared to a traditional Chapter 11 case. to the current Chapter 11 process.

A debtor is required to choose to proceed under subchapter V and must meet certain eligibility conditions. One requirement is that the debtor must be a person or entity engaged in a commercial or commercial activity with “a total of liquidated debts secured and unsecured as of the date of filing the petition” in the amount of $ 2,725,625 or less, excluding debts owed to affiliates or insiders of the debtor. With the enactment of Coronavirus Aid, Relief, and Economic Stability Act of 2020, Pub. L. 116-136, 134 Stat. 281 (2020) (CARES Act), the debt ceiling was temporarily increased until March 27, 2021, to $ 7,500,000.

Case law interpreting the SBRA remains limited, and many decisions published to date focus on the debtor’s ability to choose subchapter V in a case pending when the SBRA came into force or when a debtor attempts to choose subchapter V after expiry of the time limits. In an unpublished notice, the United States Bankruptcy Court for the District of Maryland recently ruled on the eligibility requirements for the debt threshold under Subchapter V. In Regarding Parking Management, Inc., Case n ° 20-15065, Doc. No. 224 (Bankr. D. Md., August 28, 2020), the debtor filed amended schedules in his file to include the funds he received under the Paycheck Protection Program (PPP) under the CARES Act . The inclusion of these funds in the debtor’s schedule increased the total debt reflected in the schedule well above the limit of $ 7,500,000. The parties objected to the debtor’s eligibility to sue under Subchapter V on the basis of the above and also asserted that the claims arising from the rejection of certain leases after the petition further increased the overall debts in the -beyond the debt eligibility ceiling. If PPP funds or claims for damages for lease rejection were included in the calculation of the debt limit of $ 7,500,000, the debtor would not be eligible for subchapter V relief.

The court ruled that neither PPP funds nor damages for refusal of lease should be included in the calculation of the debt eligibility ceiling. PPP funds, the court said, were both contingent and unliquidated at the time the case was filed. In support of the conditional nature of the liability, the court held that remission is “the essential feature of the obligor’s obligation under the PPP rating and PPP requirements” and that any repayment obligation must be triggered by the use by the debtor of funds for ineligible expenditure. or by the debtor’s failure to meet other criteria relating to employees. The court further concluded that the debtor’s obligations under the PPP note were not liquidated as the amount of liability, if any, was indeterminate at the time of filing the case and would only be determined a later date depending on the debtor’s use of PPP funds.

The court also concluded that the claims for damages for rejection of the lease were conditional upon the filing of the case. In reviewing the process for rejecting leases in a bankruptcy case, the court noted that rejection of the lease requires court approval and the act of rejection occurs after the date of the petition. As a result, any claim arising from a rejection of a lease was a conditional obligation of the debtor until the rejection was approved, even though many leases were rejected “on” the date of the petition. According to the court, all the lease rejections were post-petition events. As a result, the lease rejection requests were conditional from the filing of the case and then became unconditional on approval of the rejection by the court after the petition.

This case provides guidance to debtors considering an election from Subchapter V to Chapter 11 who may not at first glance appear to fall below the qualifying debt ceiling and offers them the opportunity to implement the process more cost-effectively and more streamlined of the SBRA. Miles & Stockbridge continues to monitor the changing legal landscape under subchapter V of Chapter 11.

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