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25 January 2021 / Milos Gvozdenovic

2021 Consolidated Appropriations Act Places Limitations on Preference Demands

Topics: Bankruptcy


The Consolidated Appropriations Act of 2021
(CAA), recently signed into law on December 27, 2020, was primarily designed to extend several provisions of the CARES Act.  In addition, the CAA contains some important changes to preference actions brought by trustees and debtors under Section 547 of the Bankruptcy Code.  These changes are intended to protect landlords and suppliers who have agreed to provide temporary financial relief to debtors during the COVID-19 pandemic from being penalized in the event the debtor files for bankruptcy.  
 
For those unfamiliar with 11 U.S.C. § 547 of the bankruptcy code, this section provides the bankruptcy trustee, and under some circumstances the debtor, with great power to recover money and property transferred by the debtor to a creditor shortly before their bankruptcy filing.
 
The code as currently written allows the bankruptcy trustee to “avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor before such transfer was made” and “made while the debtor was insolvent.” 11 U.S.C. § 547(b).  These powers are not without limitations.  In order to be able to avoid the transfer, it must have been made “on or within 90 days before the date of the filing of the petition” or within a year of the petition date “if such creditor at the time of transfer was an insider[.]”  11 U.S.C. § 547(b)(4).  11 U.S.C. § 547(c) provides a list of additional limitations placed on the trustee when seeking to avoid a transfer by the debtor.  
 
The CAA has added changes to 11 U.S.C. § 547 to protect landlords of non-residential real property and suppliers of goods and services who received deferred payments from a debtor after March 13, 20201.  Under the CAA, the trustee or debtor is prohibited from recovering these deferred payments as a preference so long as the debtor and landlord (or supplier) meet three criteria: 
 
  1. The lease or executory contract was executed before the bankruptcy filing date; 
  2. The lease or executory contract was amended on or after March 13, 2020, to defer payments; and 
  3. The payments that were initially due under the lease or executory contract were actually deferred as agreed2.
The changes to 11 U.S.C. § 547 are not permanent as they have a sunset provision two years from the date the CAA was enacted3.
   
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
 
1Laurin, Paul; Scarlott, Allison M.; & Sigler, Molly N.  “9 Ways the Recent Stimulus Bill Affects Bankruptcy”.  National Law Review, Volume XI, Number 12.  January 12, 2021.  https://www.natlawreview.com/article/9-ways-recent-stimulus-bill-affects-bankruptcy. Accessed January 20, 2021. 

2Id. 

3Id. 
 
 

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