Congress provides flexibility for negotiations without worry of preference action in bankruptcy.

The new COVID-19 relief act includes an important but temporary change to bankruptcy preference actions. The change should allow commercial landlords and suppliers of struggling businesses to arrange for payment of past due rent or invoices in arrears for goods or services provided. Prior to this change, landlords and suppliers faced the possibility of seeing these payments taken in a bankruptcy via a preference action if the struggling business ultimately fails. Now there is a safe harbor to encourage these landlords and suppliers to work with these businesses.

To qualify for the exemption from preference claw back of these arrearage payments, the landlord or supplier must show the payments in question were made in connection with an agreement or arrangement with the debtor that deferred or postponed payment of rent or amounts due under a contract for goods or services. The arrangement must have been made after March 13, 2020, and it must not include, fees, penalties, or interest in an amount greater than what was scheduled to be paid or what would be owed if the debtor had made every payment due on time and in full. 

This last restriction will likely cause many previous arrangements reached not to qualify for the preference exclusion, as interest or contractual late fees are often included in the arrearage payments. However, if the struggling business has yet to file bankruptcy, there is an opportunity for landlords and suppliers to update their arrangements to establish an agreement that meets the exception if the current agreement does not. Preference actions generally look back to payments received in the 90 days before the bankruptcy filing. Changing your arrangement now to fit the exception should start the clock so that if 90 days pass before the struggling business files, your payments would be safe. 

If you have questions about your arrangement as a commercial landlord with a struggling tenant or as a supplier of goods and services with a struggling customer, we are happy to help you evaluate the benefits and detriments of arranging your agreement to resolve the arrearages owed to avoid preference action exposure.