As noted in our earlier post, the Small Business Reorganization Act (SBRA), which became effective February 19, 2020, was enacted to address concerns that typical chapter 11 reorganization cases were too expensive and burdensome for smaller businesses. In order to address those concerns, Congress created subchapter V (read as “five”) of chapter 11, which provides a more streamlined, and less costly, process for a “small business debtor” navigating through the reorganization process. This post briefly discusses subchapter V.

The most obvious change is that a trustee is appointed in every subchapter V case. The trustee’s primary role is to facilitate the formulation of a plan of reorganization and generally to keep the reorganization on track. A committee of creditors, which is typically appointed in a chapter 11 case, will not be appointed in a subchapter V case without a Bankruptcy Court order for cause. This reduces the cost of the reorganization because a debtor is responsible for the payment of the costs of a committee, including its attorneys’ fees.

Several of the amendments provided in subchapter V cases are intended to streamline the plan confirmation process. A debtor is not required to prepare a disclosure statement and only the debtor can submit a plan of reorganization, reducing the cost and eliminating the complications involved with a contested confirmation hearing involving competing plans. A plan must be filed within 90 days after the case is filed, absent an extension of time granted by the Bankruptcy Court for circumstances that are not justly attributable to the debtor. This is a significant reduction in the 300-day plan filing deadline of a typical small business debtor chapter 11 case.

The process and requirements for confirming a plan were also simplified for small business debtors. First, a debtor does not have to obtain the acceptance of an impaired class of creditors in order to confirm a plan. Administrative expense claims can be paid over the life of the plan, rather than in cash at the effective date of the plan. Cram down (confirming a plan over the objection of creditors) remains an option for a subchapter V debtor, but the absolute priority rule has been eliminated, meaning that equity holders in a debtor can retain their interests even if unsecured creditors are not paid in full.

A plan must still be fair and equitable in order to be confirmed. However, similarly to chapter 13 case, a plan will be deemed fair and equitable if a debtor commits all of its “projected disposable income” or property of equivalent value for a minimum of three years and a maximum of five years. The debtor must demonstrate a reasonable likelihood that it will be able to make all payments required by the plan and must provide appropriate remedies to protect creditors if it fails to make the required payments. If a plan is confirmed under the cram down provisions, all property acquired by the debtor post-petition becomes property of the estate.

There are other significant changes that may be relevant in specific cases. Even with the streamlining and simplification, the reorganization process remains difficult and complex. The amendments to chapter 11 should make the reorganization process feasible for many more small business debtors. Blanco Tackabery is prepared to assist you with navigating through the bankruptcy process. If you have questions, contact Jim Vaughan or Ashley Rusher for assistance.

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Jim Vaughan has more than 30 years of experience representing lenders in commercial loan workouts, bankruptcy cases and commercial litigation.  This, coupled with his accounting background and business skills developed running a solo law practice for twelve years, gives him a common sense, results-driven approach to counselling clients and serving their needs effectively and efficiently.

The Small Business Reorganization Act (SBRA) became effective February 19, 2020. The SBRA was enacted to address concerns that typical chapter 11 reorganization cases were too expensive and burdensome for smaller businesses. In order to address those concerns, Congress created subchapter V (read as “five”) of chapter 11, which provides a more streamlined, and less costly, process for navigating through the reorganization process.

Before the SBRA was passed, financially troubled businesses had to choose between a complex and costly chapter 11 case or a chapter 7 liquidation. Many small businesses that had the potential to survive were unable to afford to successfully navigate through the chapter 11 process. The intent of Congress in enacting the SBRA was to provide a vehicle that would permit more struggling smaller businesses to survive the reorganization process.

Initially, the SBRA made subchapter V available to a “small business debtor” that had debts of approximately $2.7 million or less. Unlike a chapter 11 case, a trustee is appointed to assist with the confirmation process. Many of the more costly reporting requirements of chapter 11 were eliminated and numerous changes were made that were intended to make it easier for small business debtors to confirm a plan of reorganization. In effect, a subchapter V case is a combination of a typical chapter 11 case and a chapter 13 case, which is limited to individuals.

At the time SBRA was enacted (August 23, 2019), Congress was unaware of the ensuing COVID-19 pandemic. Realizing the potential negative impact the pandemic could have on businesses, and small businesses in particular, in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress amended the SBRA barely one month after it became effective to increase the debt threshold for a “small business debtor” from $2,725,625 to $7,500,000 for a period of 12 months ending March 27, 2021. This increase will greatly expand the availability of a streamlined bankruptcy reorganization for smaller businesses.

Even with the enactment of the SBRA, bankruptcy is a complex matter. Blanco Tackabery is prepared to assist you with navigating through the bankruptcy process. If you have questions, contact Jim Vaughan or Ashley Rusher for assistance.

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Jim Vaughan has more than 30 years of experience representing lenders in commercial loan workouts, bankruptcy cases and commercial litigation.  This, coupled with his accounting background and business skills developed running a solo law practice for twelve years, gives him a common sense, results-driven approach to counselling clients and serving their needs effectively and efficiently.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) included the Paycheck Protection Program (PPP) to encourage small business employers to continue to retain and pay employees during the economic slowdown. The PPP has been extremely popular, with the initial funding in the amount of $349 billion being completely allocated within 2 weeks. Congress enacted a second round of funding, which became available on April 27, 2020. The second round of funding is expected to be quickly exhausted and a third round of funding is expected.

The general parameters of the PPP are as follows:

1. An employer with 500 or fewer employees can borrow a maximum of two and one-half months of its average payroll expenses (up to a $10 million cap);
2. The employer must use at least 75% of the funds for eligible payroll expenses;
3. The employer must not use more than 25% of the funds for other eligible expenses, including mortgage interest (but not principal), rent, utilities and interest on pre-existing debt. All of these obligations must have been in existence as of February 25, 2020; and
4. The funds allocated to payroll must be expended within 8 weeks of the date the funds are received.

If the funds are used within the parameters of the PPP, the entire balance of the loan can be forgiven. To the extent funds are not used within the parameters, that portion of the funds converts into a loan with terms specified in the CARES Act.

Each of the elements of a PPP loan is subject to limitations and there is some uncertainty as to how some of the provisions will be applied. Blanco Tackabery is prepared to assist you with navigating the PPP process. Contact Jim Vaughan for assistance.

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Jim has more than 30 years of experience representing lenders in commercial loan workouts, bankruptcy cases and commercial litigation.  This, coupled with his accounting background and business skills developed running a solo law practice for twelve years, gives him a common sense, results-driven approach to counselling clients and serving their needs effectively and efficiently.

In my last post, I addressed the legal concepts of force majeure, impossibility and frustration of purpose in the context of real estate contracts and leases.  In general, these concepts all relate to how an unforeseen catastrophe may affect a party’s duty to abide by the terms of a contract.  A similar concept that applies to the sale of goods is “commercial impracticability.”  As contract disputes arise from coronavirus-related delays within the supply chain, buyers and sellers will debate whether the pandemic made delivery of promised goods “impracticable.”

The Uniform Commercial Code (or UCC) is a model set of laws that governs commercial transactions including the sale of goods.  Virtually all states in the U.S. have adopted the UCC as part of their statutes, although some minor differences can be found on a state-by-state basis.  UCC Section 2-615 (as adopted in North Carolina as N.C. Gen. Stat. § 25-2-615) addresses the defense of commercial impracticability, which can excuse a seller from timely delivery of goods due to unforeseen circumstances.  Under North Carolina law, a seller can be excused where:

1. Performance has become impracticable.  While impracticality is a lower standard than impossibility, it will still require unusual circumstances.  For example, a mere increase in the cost of obtaining the goods is not a sufficient excuse; but a “severe shortage of raw materials or of supplies” due to a major calamity may suffice.

2. The impracticability was due to the occurrence of some contingency which the parties expressly or impliedly agreed would discharge the promisor’s duty to perform.  Where delivery of the goods becomes impracticable because of an event or circumstance that could not have been foreseen by a reasonable person, an implied agreement to excuse performance may be found.

3. The promisor did not assume the risk that the contingency would occur.  If the seller agreed to be liable for delivery even in the event of a catastrophe, the defense of commercial impracticality will not apply.

4. The promisor seasonably notified the promisee of the delay in delivery or that delivery would not occur at all.  The seller must give the buyer notice of the problem in a timely manner.

The N.C. Court of Appeals has stated that “when an exclusive source of supply is specified in a contract or may be implied by [the] circumstances . . . failure of that source may excuse the promisor from performance.”  However, absent a “single source clause” in a contract or other evidence that the parties knew the seller had only one source to obtain the promised goods, a seller may not be excused merely because it could not obtain goods from its anticipated supplier.  Accordingly, in the 1996 case of Alamance County Board of Education v. Bobby Murray Chevrolet, Inc., a General Motors dealer was not excused from delivering 1,200 school bus chassis to a group of school systems, even though its anticipated supplier, GM, could not timely provide the goods.  Although the dealer referenced “GM” goods in its bid, the contract also said that “products of any manufacturer may be offered.”  The N.C. Court of Appeals therefore held that the dealership could have sourced the goods from another supplier and was liable for $150,000 in additional cost that the school systems had to incur to obtain the goods from another seller.

Whether COVID-19 will provide an excuse for not delivering promised goods will depend on the provisions of a given contract – including provisions allocating risk or specifying whether the seller is restricted to one supplier.  It will also depend on when the contract was formed.  Whether the coronavirus pandemic was foreseeable in mid-2019 is an entirely different question from whether it was foreseeable at the start of 2020.  Furthermore, the analysis will be affected by whether the seller gave timely notice of delay.  In cases where a seller cannot timely deliver goods due to COVID-19 issues, an attorney who is familiar with the UCC can help analyze whether the failure is excusable – or whether it creates a viable claim by the buyer for money damages.    

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations.

In a recent post, I discussed the effect of COVID-19 on real estate closings.  Another topic affecting the real estate industry is whether coronavirus will excuse tenants from paying rent.  While tenants of all sorts may experience difficulty paying rent in light of current economic challenges, commercial leases present an especially complex legal issue.  In the commercial context, a tenant may find itself not only short of cash, but expressly prohibited from operating its business as intended.

Legal concepts that are important in evaluating whether a commercial tenant might be excused from its lease obligations include “force majeure” and the doctrines of “impossibility” and “frustration of purpose.”  Each of these concepts has been examined by North Carolina courts in the context of landlord-tenant disputes.

Force Majeure

Leases sometimes include force majeure provisions that expressly address the parties’ obligations in the event of an “act of God” or other catastrophe.  If a lease contains such a provision, its wording will be critical.  For example, in a 2018 case before the N.C. Business Court, a law school lost its license to operate and argued that it should be excused from performing its obligations as a tenant.  (South College Street, LLC v. Charlotte School of Law, LLC, 2018 NCBC 80.)  While the lease contained a force majeure provision that excused performance based on “inability or delays in obtaining governmental permits,” the provision expressly stated that it only applied to duties “other than the payment of any monetary sums due hereunder” – a detail on which the court relied in finding that the tenant breached the lease by failing to pay rent.  Obviously, if the parties to a lease clearly agree in writing that unexpected catastrophes will not excuse the payment of rent, a tenant will be severely constrained in arguing otherwise.

Impossibility & Frustration of Purpose

The doctrines of impossibility and frustration of purpose are also important – particularly when a lease does not contain a force majeure provision that squarely addresses the crisis at hand.  These legal concepts were examined in the N.C. Court of Appeals case of WRI/Raleigh, L.P. v. Shaikh, 183 N.C. App. 249 (2007).  There, a tenant in a shopping center learned, after signing a lease to operate a restaurant, that applicable city ordinances required a much larger “grease trap” than what the premises contained — and that, based on the layout of the premises, a new grease trap system would likely experience repeated clogging.  The court found that the tenant breached the lease after he did not open his business and returned the keys to the landlord.  The doctrine of impossibility applies where “the subject matter of the contract is destroyed” or it is otherwise literally impossible to adhere to a contract.  The court noted that, where the premises still existed and a new tenant was in fact actually operating a restaurant in the space, the doctrine of impossibility was inapplicable.  The court also discussed the similar doctrine of frustration of purpose, which applies where performance under a contract is possible, but an event which was not reasonably foreseeable makes the contract of virtually no value.  The jury in the case decided that the predicament could have been reasonably foreseen.

Other Guidance from N.C. Courts

Other North Carolina landlord-tenant cases provide further guidance on these doctrines:

• In Taylor v. Gibbs, 268 N.C. 363 (1966), the N.C. Supreme Court held that a tobacco farm tenant breached its lease by failing to pay the full rent.  While the tenant argued that unanticipated “acreage-poundage” regulations limited his yield, the lease was enforced as written, despite any “unforeseen and unexpected eventuality.”

• In Knowles v. Carolina Coach Co., 41 N.C. App. 709 (1979), the Court of Appeals held that a tenant breached its lease by failing to pay rent.  The tenant rented a bus station from Carolina Coach to operate a ticket agency for carriers including Carolina Coach.  When Carolina Coach suspended operations because of a labor strike, the ticket agency was still required to pay rent.  The court noted that fluctuation of traffic levels in the station was a normal business risk that should not have been “beyond the imaginations of the contracting parties” and could have been specifically addressed in the lease.

• In Tucker v. Charter Medical Corp., 60 N.C. App. 665 (1983), the Court of Appeals likewise found that frustration of purpose did not apply.  There, a tenant leased premises to build a hospital.  Although the city denied approval for a certain hospital building, the court held that the building could have been built if the tenant had not requested a rezoning – and, in any event, the lease did not restrict use of the premises to a hospital.

• In Crabtree Valley Investment Group, LLC v. Steak & Ale of N. Carolina, Inc., 169 N.C. App. 825 (2005), a tenant was evicted for failure to pay rent during a period of time in which the tenant was awaiting receipt of a W-9 tax form from the landlord.  The tenant argued that a force majeure provision excused performance based on events beyond the tenant’s control.  The court stated that receipt of the W-9 was not legally required for the tenant to pay the rent and that receiving the W-9 prior to payment was merely the tenant’s internal policy.

• In the Charlotte School of Law case, the Business Court also rejected an argument of frustration of purpose – not only because the parties had agreed on how to allocate risks in their force majeure provision, but because the tenant had other options for using the premises.  Specifically, the lease allowed the premises to be used for purposes other than a school – and it generally allowed the tenant to assign the lease or to sublease to another party.

Looking Forward

At the current moment, North Carolina civil courts are essentially frozen, and litigation over non-payment of rent is temporarily hindered.  However, once courts are again operational, litigation over unpaid rent may be abundant.  Whether landlords will, as a business decision, want to evict mass numbers of tenants in a shaky economy will have to be seen.  However, issues about force majeure, impossibility and frustration of purpose will certainly arise.  Disputes may turn on the particular language of a lease provision – or on facts such as whether a “stay at home” order totally outlawed a particular business from operating or merely made it more difficult to generate revenue.

Landlords and tenants who expect a dispute should review their leases carefully, with the assistance of an experienced lawyer.  Landlords should also review their standard lease forms now with an outlook to the future.  While current disputes may turn on the language of leases that were signed years ago, the COVID-19 crisis is a reminder that catastrophes will happen again.  When they do, it will be beneficial to have planned ahead.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot has a broad range of experience with real estate disputes in contexts ranging from shopping centers to affordable housing complexes.

As the world hunkers down in response to COVID-19, the virus presents many questions for the real estate industry – and the potential for disputes about whether a deal can close in light of the current “lockdown” environment.  This issue may arise in commercial or residential contexts.  However, particularly with regard to home sales, whether a seller must vacate his or her house at this time (or a buyer must complete a transaction that was premised on the ab­­­­­ility to currently undertake a move) can raise serious health and safety concerns.

While the economy has dramatically slowed, real estate marketing and home sales continue – at least in many areas.  Here in North Carolina, for example, the governor’s “stay at home” order exempts “essential” businesses, including:  professional services, such as “real estate services (including brokerage, appraisal and title services)”; legal services; financial and insurance institutions; and “critical trades” like moving and relocation services.  Business can go on, even if in a “socially distanced” way.  But can a party to a real estate contract be forced to close a deal now?   There is no clear answer for every case; however, various factors should be considered.

• Residential or commercial?  Whether a contract is residential or commercial may be important.  For instance, in a residential context, a seller’s health could be put at risk, if he or she is forced to vacate a home now.  This concern may not apply in a commercial setting.  But special circumstances might apply to businesses as well.  If a buyer agreed to buy a property in order to operate a business and a state or local order now prohibits (or drastically impedes) such a business from operating, it could be argued that the entire purpose of the deal has been “frustrated” and that the buyer should be excused from its obligations.
• Force Majeure.  Does the contract have a “force majeure” provision that specifically addresses “acts of God” and other unexpected calamities?  In a large commercial transaction, it probably does.  In a standard form residential contract, maybe not.
• Postponement.  Can the parties mutually agree on terms to postpone the closing?  The N.C. Association of Realtors recently issued a COVID-19 Addendum form to supplement the standard sales contract.  The addendum allows the parties to extend deadlines and provides other related terms.  Of course, if no one knows exactly how long we will be affected by COVID-19, even negotiating an extended closing deadline might be tricky.
• Leasing Options.  In some situations where a seller may not wish to currently vacate a property, it may be workable to close a sale and then have the seller continue to occupy the property under a lease.  In North Carolina, a standard Seller Possession After Closing Agreement might be used – or a more detailed formal lease could be drafted by a lawyer.
• Stay at Home Orders.  What are the terms of all applicable “stay at home” orders in your locality?  Consider that local orders may be more restrictive than any statewide order.
• Litigation.  If the parties cannot negotiate a resolution, what are their options?  Potentially, if a real estate contract is breached, the non-breaching party could sue for “specific performance” (a court order forcing the other party to complete the deal) or for “damages” (money lost as a result of the breach).  In some circumstances, such action may be necessary.  However, with courts currently restricting hearings and other litigation activities, a resolution in court may not be quickly achieved.  Moreover, existing legal precedents may not be completely reliable to predict how judges and juries will view the very “novel” issues presented by COVID-19.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot has a broad range of experience with real estate disputes law in contexts ranging from shopping centers to affordable housing complexes.