Paycheck Protection Program (PPP) Flexibility Act of 2020: COVID-19

As published earlier, President Trump signed the CARES Act (the “Act”) on Friday, March 27, 2020. The Paycheck Protection Program (the “PPP”) included in the Act dedicates $669 billion for businesses with 500 or fewer employees (including employees of your other affiliated entities) – that were in operation prior to February 15, 2020. This week the U.S. Congress made significant changes to important terms of the PPP loan program, primarily geared towards easing the burden of loan forgiveness for all borrowers. However, the deadline for receiving a PPP loan remains as June 30, 2020.

LOAN MATURITY EXTENDED• In the event a loan is not 100% forgiven, maturity date of the loan is extended from 2 years to 5 years
• The 1% interest rate and all other terms of promissory notes remain the same
• Borrowers are encouraged to work with their lenders to modify their specific loan terms

LOAN FORGIVENESS PERIOD EXTENDED
• The forgiveness period and covered period are extended to the earlier of:
– 24 weeks after disbursement of the loan; or
– December 31, 2020

PAYROLL COSTS AND NON-PAYROLL COSTS
• At least 60% of the loan proceeds must be used for payroll costs, in contrast to the previous 75% requirement
• At most 40% of the loan proceeds can be used for non-payroll costs (rent, utilities and mortgages), in contrast to the previous 25% requirement

REDUCTION IN NUMBER OF FULL-TIME EQUIVALENT EMPLOYEES
• The Act extends the date for the rehiring of employees or restoring salaries from June 30, 2020 to December 31, 2020 in order to avoid a reduction of forgiveness
• Two exceptions to the previously stated reductions in forgiveness (for the period ending December 31, 2020):
1. If the borrower, in good faith, can document an inability to rehire the same or similar employees that were employed as of February 15, 2020; or
2. If the borrower, in good faith, can document an inability to return to the same level of business activity before February 15, 2020 due to social distancing, sanitation and any other customer safety requirements related to COVID-19. Additionally, any requirements/guidance as promulgated by Health and Human Services, the Centers for Disease Control or the Occupation Safety and Health Administration are allowable reasons

DEFERRAL OF LOAN PAYMENTS AND PAYROLL TAXES
• Loan payments can now be deferred until the date lenders receive remittance from the SBA
• If borrower does not apply for loan forgiveness, then borrower can defer loan payments until 10 months after the end of the new covered period (see above)
• Borrowers can now defer 50% of payroll tax payments until December 31, 2021 and remaining 50% until December 31, 2022. Such deferred payroll taxes are to be accrued between March 2020 and end of the year 2020

ADDITIONAL INFORMATION
The attorneys at Underwood are available to answer questions regarding the Act. Please reach out to your contact at Underwood or to Mitchell Moses (mjm@uwlaw.com; (806) 239-9992).




Payroll Protection Program Safe Harbor: COVID-19

As published earlier, President Trump signed the CARES Act (the “Act”) on Friday, March 27, 2020. The Paycheck Protection Program (the “PPP”) included in the Act dedicates $669 billion for businesses with 500 or fewer employees (including employees of your other affiliated entities) – that were in operation prior to February 15, 2020. As a requirement in applying for a PPP loan, small business owners must certify in good faith that the “current economic uncertainty makes the loan request necessary to support ongoing operations”. In an effort to prevent large businesses with significant market share from getting large PPP loans, SBA issued guidance on May 13th outlined here.

SAFE HARBOR
• SBA provides a safe harbor that looks favorably upon borrowers (collectively with their affiliates) who received PPP loans of less than $2 million, meaning those borrowers will be automatically deemed to have made a good faith certification
• Borrowers who received PPP loans of at least $2 million and cannot prove good faith must return the full loan amount by May 18, 2020 or otherwise may be subject to audit and enforcement proceedings by the SBA and other federal agencies

OTHER RECENT DEVELOPMENTS
• Partnerships that have already received PPP loans can subsequently increase their loan amount to include compensation for their partners, if not done so already
• In such event the lender must submit a request through SBA’s E-Tran Servicing system provided it has not yet submitted the SBA Form 1502 report to the SBA

REMAINING PPP APPROPRIATIONS
• As of May 14, 2020, $120 billion is remaining for the SBA to issue additional PPP loans

ADDITIONAL INFORMATION
The attorneys at Underwood are available to answer questions regarding the Act. Please reach out to your contact at Underwood or to Mitchell Moses (mjm@uwlaw.com; (806) 239-9992).




COVID-19 and The CARES Act- Temporary Amendments to Bankruptcy Code

By Roger Cox *

            The so-called CARES Act, passed in response to the COVID-19 pandemic, includes temporary amendments to the Bankruptcy Code – highlighting, in one case, the potential impact of a relatively new statute designed to provide streamlined relief to small businesses.

            Small Business Reorganization.  The Small Business Reorganization Act of 2019 (“the SBRA”) became effective February 19, 2020.  Codified as a new subchapter V. of Chapter 11 of the Bankruptcy Code, this was originally available to debtors whose obligations were primarily business related, having a debt load of $2,725,625.00 or less. 

            SBRA Debt Limit Increased.  Under the CARES Act, the SBRA eligibility limit has been increased (for a period of one year) to $7,500,000.00.

            SBRA “Streamlines” Small Business Cases. Accordingly, small business debtors who fit this newly expanded eligibility limit may seek Chapter 11 relief without being subject to the extraordinary cost and uncertainty of a Chapter 11.  SBRA debtors, for example, escape the burdensome United States Trustee fees, creditors’ committees are generally not appointed; however, a standing trustee will be appointed in every SBRA case. Only the debtor may file a plan, a disclosure statement may not be required, and a SBRA plan may be confirmed even if all impaired classes vote to reject the plan.  New time limits apply. 

            Effect on Creditors. Generally, creditors who hold fully secured claims may not see much of a difference; however, unsecured creditors (or those whose claims are proportionately secured) will lose what little leverage they may have had in a conventional Chapter 11 given the effective lack of voting and the effective absence of the absolute priority rule at plan confirmation.  In short, all creditors may lose some leverage, but arguably, the cost of SBRA cases may be much less.

            Consumer Cases.  The CARES Act also amends Chapter 7 and 13 in the context of consumer bankruptcies.  Generally, CARES Act and similar stimulus payments will generally not be included in the definition of “income” for eligibility purposes for a consumer Chapter 7, nor will such payments be included in the calculation of “disposable income” for Chapter 13 plan confirmation purposes.  Chapter 13 debtors with existing confirmed plans who have suffered a “material financial hardship” due to the pandemic may be allowed to seek plan modifications – notably, this may include extension of a payment for up to seven years after the first plan payment was due.

Commentary:

            These provisions are generally set to sunset one year after the effective date of the CARES Act.  That said, with additional legislation expected, any deadlines or monetary thresholds remain fluid.  In the meantime, however, creditors of small businesses may see more SBRA filings than originally anticipated now that the limitation has nearly been tripled.

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2018-20), and a former contributor to the SMU Law Review.  He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization.  Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.




Midsize Business Loan Program: Coronavirus Economic Stabilization Act

President Trump signed the CARES Act (the “Act”) on Friday, March 27, 2020. The Paycheck Protection Program ( the “PPP”) included in the Act has garnered much of the public’s attention to date. An Interim Final Rule related to the PPP was issued by the Small Business Administration on April 2, 2020. With the marquee piece of the Act now moving forward, attention has turned to other aspects of the Act.

This Alert focuses on Title IV of the Act, also referred to as the Coronavirus Economic Stabilization Act of 2020. Title IV of the Act provides $500 billion to Treasury’s Exchange Stabilization Fund to provide liquidity to eligible businesses, states and municipalities. The $500 billion is broken down to two categories:
1. $46 billion: Designated to provide direct loans for a short list of distressed, industry-specific companies, including air carriers and businesses critical to maintaining national security (collectively, the “B (1)-(3) Funds”).
2. $454 billion: Designated for loans, loan guarantees and investments in support of eligible businesses, states and municipalities (collectively, the “B (4) Funds”).

Title IV of the Act directs the Treasury Secretary to implement a program that provides financing to banks and other lenders that make direct, low-interest (maximum 2.00%) loans to eligible businesses, including, to the extent practicable, nonprofit organizations (the “Midsize Business Loans”). The Midsize Loans are independent of loans issued under the PPP. Payments on any Midsize Business Loan will be deferred for a period of 6 months (or longer at the Treasury Secretary’s discretion) but are not forgivable.

Below is a summary of the provisions relating to the Midsize Business Loans. It is anticipated the U.S. Department of Treasury and the Federal Reserve Board will provide guidance on the Midsize Business Loans within the next two weeks. Guidance related to the B (1)-(3) Funds is required by Monday, April 6th, at which point the Department of Treasury will shift its focus to the B (4) Funds. SUCH GUIDANCE WILL PROVIDE FURTHER DETAIL ON THE ADMINISTRATION OF THE B (4) FUNDS AND MAY MATERIALLY CHANGE THE SUMMARY BELOW. If the process to obtain B (4) Funds is anything like the process to obtain a PPP loan, we recommend clients contact their primary banking relationship soon to be included on the distribution of any updated Midsize Business Loan requirements.

OVERVIEW OF MIDSIZE BUSINESS LOAN
Midsize Business Loans may be provided to (i) “eligible businesses” and (ii) nonprofit organizations (to the extent practicable), with between 500 and 10,000 employees. (Sec. 4003(c)(3)(D)(i)). “Eligible businesses” are defined to include:
1. Air carriers (though such amount is limited); or
2. a United States business “that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under Act.” (Sec. 4002(4)).
Such businesses must have been (i) created or organized in the United States or under the laws of the United States and (ii) have significant operations in and a majority of its employees based in the United States. (Sec. 4003(c)(3)(C)).

REQUIREMENTS OF MIDSIZE BUSINESS LOAN APPLICANT
Conditions (unless waived by the Treasury Secretary):
1. Dividends. The borrower will be prohibited from paying dividends or making other capital distributions on its common stock during the term of the loan, and for a year after the date the loan is no longer outstanding (Sec. 4003(c)(3)(A)(ii)(I));
2. Stock Buybacks. The borrower cannot make stock buybacks of equity securities of the borrower, or any parent of borrower, that are listed on a national securities exchange (except to the extent required by a preexisting contract), during term of the loan, and for a year after the date the loan is no longer outstanding (Sec. 4003(c)(3)(A)(ii)(I)); and
3. Employee Compensation. The borrower must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid as follows:
    a. Employees receiving more than $425,000 per year cannot receive (i) more compensation than they received in 2019 (except for compensation determined through a collective bargaining agreement entered into prior to March 1, 2020) or (ii) severance pay or other benefits upon termination greater than twice the 2019 compensation amount. (Sec. 4003(c)(3)(A)(ii)(III) referencing Sec. 4004(a)(1)).
    b. Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million. (Sec. 4003(c)(3)(A)(ii)(III) referencing Sec. 4004(a)(2).

• Certifications by Borrower:
1. Impact of COVID-19. The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
2. Intent to Maintain Compensation. Funds will be used to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020;
3. Intent to Maintain Workforce. The borrower intends to restore not less than 90% of the workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the borrower no later than 4 months after the termination date of the public health emergency in response to COVID-19;
4. Domestic Status. The borrower is (i) created or organized in the United States, (ii) domiciled in the United States, and (iii) has significant operations and a majority of its employees based in the United States;
5. No Bankruptcy. The borrower is not a debtor in a bankruptcy proceeding;
6. No Outsourcing. The borrower will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment;
7. Collective Bargaining Obligations. The borrower will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after; and
8. Neutral in Organizing Efforts. The borrower will remain neutral in any union organizing effort for the term of the loan (Sec. 4003(d)(2)(D)(i)(I)-(X)).

OTHER BORROWER CONSIDERATIONS IN TITLE IV
• Additional eligibility restrictions are likely to be included in forthcoming regulations.
• There is no process available today to apply for a Midsize Business Loan. Regulations are in the process of being prepared that will implement the program, but the Act does not include a specific timeline for the launch of this particular program. All Midsize Business Loans under Section B (4) must be made prior to December 31, 2010.
• The Midsize Business Loan requirements currently do not include any specific conditions related to prudential considerations (i.e., borrower’s ability to pay back the loan), minimum amounts of collateral, or limitations on uses of loan proceeds. Such conditions (or others) may be added as the Treasury Department and the Federal Reserve publish additional details concerning the implementation of the Midsize Business Loan program pursuant to future regulations and guidance.
• Midsize Business Loans shall be treated as indebtedness for tax purposes. (Sec. 4003(h)).
• Additionally, subsequent guidance and regulations may include “class” waivers of specific restrictions on stock buybacks, dividends or executive compensation on a sector-wide or case-by-case basis, as contemplated by Section 4003(c)(3)(A)(iii) of Title IV.
• Note that Midsize Business Loans shall be treated as indebtedness for tax purposes. (Sec. 4003(h)).
• Midsize Business Loans are not permitted to be made to “covered entities”, which are defined as any entity in which 20% or more (by vote or value) of the equity of such entity is owned by the President, Vice President, head of an Executive department, or Member of Congress, or any spouse, children, son-in-law, or daughter-in-law of the foregoing (each, a “Covered Individual”). (Sec. 4019).

LENDER CONSIDERATIONS IN TITLE IV
• Although the forthcoming regulations may provide additional restrictions, Title IV of the Act only provides that the direct loans would be made by “banks and other lenders”.
• While the Treasury Secretary has broad discretion over the Midsize Business Loan Program, note that the applicable taxpayer protections and other requirements under section 13(3) of the Federal Reserve Act related to collateralization, taxpayer protection and borrower solvency still apply. (Sec. 4003(c)(3)(B)).
• Midsize Business Loans must be offered as part of a bilateral loan agreement and may not be issued as part of (i) a syndicated loan, (ii) a loan originated by a financial institution in the ordinary course of business, or (iii) a securities or capital markets transaction. (Sec. 4003(c)(3)(A)(i)(II)).




COVID-19 Update: Payroll Protection Program

President Trump signed the CARES Act (the “Act”) on Friday, March 27, 2020. The Paycheck Protection Program (the “PPP”) included in the Act dedicates $349 billion for businesses, including nonprofits under 501(c)(3), veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees (including employees of your other affiliated entities) – that were in operation prior to February 15, 2020. Alternatively, businesses with more than 500 employees can apply either based on SBA’s industry size standards or “alternative size standards” based on tangible net worth and average net income. The PPP will be administered through the Small Business Administration (the “SBA”) and funds will be disbursed by banks in the form of a forgivable loan guaranteed by the SBA under the terms of the Act. Regular guidance on the PPP is available on the U.S. Department of Treasury website.

OVERVIEW OF PAYROLL PROTECTION LOAN
• Maximum loan amount – 2.5 times the average monthly Payroll Costs (defined below)
• Loan forgiveness – Subject to the forgiveness requirements set forth below, funds used to pay Payroll Costs, utilities, rent and some interest will be forgiven
• PPP loans do not require a personal guaranty or any collateral
• Amounts not forgiven will bear interest at 1.00% and must be repaid in 2 years
• Loan payments will be deferred for at least six months

APPLYING FOR A LOAN
• Most lenders began accepting applications for PPP loans from small businesses and sole proprietorships on Friday, April 3, 2020 and for independent contractors and self-employed individuals on Friday, April 10, 2020
• The form PPP loan application is posted on the U.S. Treasury Department’s website and can be found here: PPP Borrower Application
• The U.S. Treasury Department has also published guidance for borrowers on its website that can be found here: Borrower Information

PAYROLL COSTS
• Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
• Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
• State and local taxes assessed on employee compensation; and
• For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment (capped at $100,000 on an annualized basis for each employee).

FORGIVENESS
Repayment: Borrowers will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Only up to 25% of the loan can be used for costs other than payroll costs.
Deferral: Any loan payments will be deferred for at least six months.
Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount to a number below the monthly average headcount from February 15, 2019 – June 30, 2019 or January 1, 2020 – February 29, 2020 (your choice).
Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made at most $100,000 annualized in (measured during the 8-weeks following the PPP loan date compared to the most recent full quarter prior to getting the PPP loan).
Re-Hiring: Employers have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

ADDITIONAL INFORMATION
The attorneys at Underwood are available to answer questions regarding the Act. Please reach out to your contact at Underwood or to Mitchell Moses (mjm@uwlaw.com; (806) 239-9992).

i DISCLAIMER: PURSUANT TO THE ACT, THE SMALL BUSINESS ADMINISTRATION AND THE U.S. TREASURY DEPARTMENT ARE AUTHORIZED TO ISSUE ADDITIONAL REGULATIONS AND INTERPRETATIONS THAT MAY CHANGE OR ADD TO THE TERMS AND CONDITIONS STATED HEREIN AND IN THE ACT.




Insurance and Force Majeure, and COVID-19

Many of our clients are experiencing Coronavirus related business losses. There may be one or more different factors causing these business disruptions and losses and each raises a host of legal questions. Do I have insurance to cover these losses? Did I have a covered physical loss? What caused the loss, is it excluded, or is it concurrent? What other coverages may be available under my policy? Are there civil authority, extra expense, ingress/egress, service interruption, contamination or communicable disease coverages or is there a bacteria/virus exclusion? If sued for a Coronavirus event, will I have coverage to defend and indemnify my business? Are my officers and directors’ coverages or employer liability coverages implicated? What about workers’ compensation insurance?

In addition to the insurance questions presented, our clients are asking about what happens if a contract cannot be performed either by their business or by a business with whom they have an agreement (often described as a force majeure event)? What risks do they face and what recourse is available to them, if any, under these circumstances?

The COVID 19 crisis is drawing many private businesses, courts, governmental entities, and insurance carriers into uncharted waters. Navigating through this crisis will not be easy. To our clients, we recommend: (a) review your insurance policies, being especially sensitive to the wide array of possible provisions and exclusions that affect coverage; (b) consider carefully the notice requirements for filing claims with your insurance carrier; (c) determine how best to value or calculate the losses you have suffered; and (d) think about how you might mitigate or reduce your covered losses. Each of these considerations present complicated issues that must be prudently navigated.

If you have a contract with a force majeure clause, carefully review the contractual definitions. Determine whether performance may be impracticable if the Uniform Commercial Code is applicable. How courts interpret these clauses is important to understand.

Answers to your insurance questions will vary based upon the particular language of your insurance policy, the facts surrounding your claim, and the statutes and judicial decisions applicable in your state. The same is true for force majeure provisions-implicating the language, facts, and law of your specific situation.

Underwood’s Lawyers are sensitive to the legal questions presented by these unprecedented times. We welcome the opportunity to assist you in analyzing these complex issues and finding the best path forward. To discuss this further please contact Wade Arnold (Wade.Arnold@uwlaw.com) who is heading that group.