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The Calm Before The Storm

The Calm Before The Storm

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Apr 21, 2020
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By Daniel M. Stolz, Esq.

The COVID-19 pandemic has caused an unprecedented interruption of the U.S. economy and economies all over the world. Unemployment rates are skyrocketing, and all but businesses deemed “essential” have been forced to close. Recently, Governor Murphy ordered nearly all construction activities in the State shut down.

With such unprecedented economic distress, one would expect an avalanche of bankruptcy filings. To date, the exact opposite has occurred. The volume of personal and business bankruptcy filings over the last two months have been dramatically lower than the norm. While there have been some filings of very large companies in Delaware and the Southern District of New York, the only large bankruptcy filing in New Jersey has been the Modell’s Sporting Goods case. Even in that Chapter 11 case, the Bankruptcy Judge employed an obscure and never previously used provision of the Bankruptcy Code, to suspend the bankruptcy case through April 30th.

On March 19, 2020, Governor Murphy entered an Executive Order regarding residential foreclosures and evictions. While the Executive Order did not prohibit landlords and lenders from proceeding with evictions or foreclosures, the Order immediately prohibited the removal of tenants or homeowners from their residences for a period of two months. What will happen at the end of this two-month moratorium is anyone’s guess.

Although landlords and lenders to businesses are not similarly restrained from proceeding with evictions, foreclosures and lawsuits, there is little evidence of an increase in these types of actions. Indeed, some major restaurant chains have written to their landlords advising that they will not be paying rent while they are closed. It is highly unlikely that the landlords will move to evict these major restaurant chains. If they were to proceed in such a manner, where would they find a new tenant?

We are clearly in “unchartered waters.” There is little doubt that many businesses, especially retail establishments, will not survive this crisis. Even with government assistance, those businesses with limited resources will not be able to afford the expenditures necessary to restart their businesses. All experts predict a tidal wave of individual and business bankruptcies in the coming months. When and how that wave of bankruptcy filings will occur remains to be seen.

For those businesses who will consider seeking protection through the Bankruptcy Courts, a bankruptcy statute which became effective on February 19, 2020 might provide some relief. That new provision of the Bankruptcy Code, commonly known as “Subchapter V,” deals with small business reorganizations and seeks to streamline and make less expensive reorganization under Chapter 11 for smaller businesses. When the statute was enacted, the debt limit for eligibility for Subchapter V was $2.5 million of total debt. The CARES Act, enacted following the COVID-19 outbreak, expanded the debt limit for Subchapter V cases from $2.5 million to $7.5 million of total debt, for the next year. This will open Subchapter V to a much broader spectrum of businesses financially devastated by the COVID-19 crisis.

BMK is committed to helping businesses chart a successful course through these “rough waters.” Should you have any questions pertaining to bankruptcy matters related to COVID-19, you may reach Daniel M. Stolz at (973) 346-7600 or DStolz@wjslaw.com

Daniel M. Stolz, Esq. is Of Counsel to the firm of Brown, Moskowitz & Kallen and the Managing Member of Wasserman, Jurista & Stolz, P.C. Mr. Stolz is the former Chair of the Bankruptcy Law Section of the New Jersey State Bar Association and has been practicing bankruptcy and insolvency law for 40 years.

The article is not and cannot be construed as legal advice.

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