Insights

There are few things as daunting to a vendor or supplier as its counterparty’s bankruptcy. The likelihood of a significantly discounted recovery for goods and services provided and potential loss of a customer may have long-lasted impacts on profitability.  Even worse, however, is the prospect that payments received in good faith prior to a debtor’s bankruptcy filing may be at risk of recoupment. In this alert, we address the risk that such payments are voidable as preferential transfers. Section 547 of the Bankruptcy Code codifies the power of the debtor to recover payments that were made within the 90 days preceding the filing. Very generally, a debtor (or trustee) may recover any transfer that is (i) made to or for the benefit of a creditor (e.g., a payment or grant of lien), (ii) on account of antecedent debt (i.e., a debt already incurred), (iii) made while the debtor was insolvent, (iv) within the 90 days prior to the petition date (or one year for insiders), and (v) that enables the creditor to receive more that it would have in a liquidation. The parties’ respective intent is irrelevant.

On June 6, 2023, The Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury’s Office of the Comptroller of the Currency (OCC) issued final joint guidance for banking organizations on managing risks associated with third-party relationships.  Previously, the Board (2013), FDIC (2008) and OCC (2013 and 2020) had all issued their own separate guidance for their respective supervised banking organizations. After extensive review and analysis of comments provided from July-October 2021 on proposed interagency guidance, the prior issuances by separate regulators were rescinded and replaced by the final joint interagency guidance[1].  The guidance was over ten years in the making, and corresponds with an observed increase in the number and types of third-party relationships used by banks.  The use by banks of fintech companies is a prime example; there has been an explosion in the variety of services offered to banks by such companies.  The guidance is intended to promote a consistent message on risk management from the agencies, and to more clearly articulate risk-based principles for third-party risk management.

During the first quarter of 2022, Crowell’s Bankruptcy, Restructuring, and Insolvency (BRI) team continued developing valuable blog content focused on the latest developments across the world of bankruptcy and financial restructuring both in the US and the UK. Our Restructuring Matters Blog tracks and evaluates significant developments on a number of issues and cases to keep readers updated on major bankruptcy decisions and trends, developments in best practices for various finance and restructuring strategies, and the potential impact of the major case decisions and trends for various business sectors.

The merchant cash advance (“MCA”) industry recently provided two different bankruptcy courts with an opportunity to consider the characterization of MCA funding transactions as either “true sales” of receivables or “disguised loans”. [1] MCA funders typically provide cash to a financially distressed company in exchange for a percentage of that company’s future receivables collection. Companies in need of liquidity will often seek to monetize their receivables, either by selling them (i.e., a true sale) or using them as collateral for a loan (i.e., a secured loan). Recognizing the benefits of having an ownership interest in such assets in case of a counterparty’s bankruptcy, MCA funders typically attempt to structure their transactions as “purchases” of a company’s future receivables. For that same reason, a bankruptcy trustee or a debtor-in-possession will often argue that these transactions are really “disguised loans” and that the MCA funder is only a secured creditor of the bankruptcy estate that owns the receivable.  

The Federal Reserve Bank of Boston (the “Boston Fed”) announced on July 6, 2020 that the Main Street Lending Program (the “Program”) is now fully operational. The Boston Fed is purchasing, through a special purpose vehicle established specifically for the Program (the “Program SPV”), participation interests in eligible Program loans that lenders submit to the Program. Participating lenders are encouraged to begin submitting qualifying loans. 

On June 8, 2020, the Board of Governors of the Federal Reserve (the “Federal Reserve”) announced a further revision to the terms of borrower eligibility for a term loan under its Main Street Lending Program (the “Program”). These revisions are designed to encourage more small and medium-sized businesses to participate in the Program. Originally announced on April 9, 2020, the Program operates through three types of loans (the New Loan Facility (“MSNLF”), the Priority Loan Facility (“MSPLF”), and the Expanded Loan Facility (“MSELF”). These loan facilities are authorized under Title IV of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The special purpose vehicle created to support the Program will purchase up to $600 billion in loan participations from eligible lenders. The MSNLF and MSPLF provide terms and conditions for loans to Eligible Borrowers which are made by Eligible Lenders after April 8, 2020. The MSELF provides terms and conditions for loans to upsize an Eligible Borrower’s existing loan facility that had been made by an Eligible Lender prior to April 8, 2020. The Program is administered by the Federal Reserve Bank of Boston (the “Boston Fed”) and is intended to facilitate lending to small and medium-sized businesses that were financially stable prior to the COVID-19 pandemic so that they may maintain operations and payroll during the COVID-19 emergency period.

On May 27, 2020, the Federal Reserve Bank of Boston (the “Boston Fed”) released borrower and lender operational documents, including proposed loan document covenants for the Main Street Lending Program (the “Program”) in anticipation of the Program’s launch. Additionally, the Board of Governors of the Federal Reserve (the “Federal Reserve”), released a revised Frequently Asked Questions (“FAQs”) document, providing further guidance to borrowers and lenders in addition to clarification of previously issued FAQs. 

On April 30, 2020, the Federal Reserve announced the expansion of its Main Street Lending Program (the “Program”) to facilitate lending to businesses beyond the small and medium-sized businesses for which the Program was initially established under the Coronavirus Aid, Relief, and. Economic Security Act (“CARES Act”). The Program will be operated through three facilities, namely (i) the Main Street New Loan Facility (“MSNLF”); (ii) the Main Street Expanded Loan Facility (“MSELF”) and (iii) the new Main Street Priority Loan Facility (“MSPLF”), with similarities and differences among the facilities.

This week, Treasury published additional guidance regarding funding under the Air Carrier Payroll Support Program (Division A, Title IV, Subtitle B of the CARES Act) and an update on payments made under the program. Treasury advised that it has received hundreds of Payroll Support Program applications and that earlier this week it disbursed $2.9 billion as the initial payments to two major airlines and 54 smaller passenger air carriers. Additional payments will be made to approved applicants on a rolling basis, though Treasury has not committed to a specific timeline.  

On April 17, 2020, the Federal Reserve Bank of New York (NY Fed) released a set of Frequently Asked Questions (FAQs) to address inquiries about the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF). The FAQs include further details about the two program facilities, which were created on March 23, 2020 by the Board of Governors of the Federal Reserve System (Federal Reserve) under its emergency lending authority under Section 13(3) of the Federal Reserve Act and are funded in part by investments from the Department of Treasury (Treasury) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

The CARES Act created a $46 billion pool of funds for loans and loan guarantees for the aviation industry and national security-related businesses. The total amount is further allocated to three separate buckets: 

As the COVID-19 pandemic continues to wreak havoc on global markets and businesses for the foreseeable future, lenders will be confronted with difficult choices and often no-win situations and may be forced to choose among exercising rights and remedies, honoring their existing obligations through debt restructures, and protecting their interests in extending new credit through traditional or government-sponsored programs. This unprecedented health crisis has caused nearly every business to take stock of its cash flow and operations, as well as to develop contingency plans to survive disruptions that may have already occurred. Government regulators have issued guidance strongly encouraging lenders to work with borrowers impacted by COVID-19, and lenders need to be prepared to assess funding requests and quickly evaluate the rapidly changing credit risk to their portfolios caused by the coronavirus and the national and international efforts, including shutdown of business operations, to slow COVID-19’s further spread.

Treasury recently announced additional guidance regarding the Payroll Support Program under Title IV of the CARES Act, which provides payroll support for American workers employed by passenger air carriers, cargo air carriers, and certain contractors to Part 121 air carriers. This guidance modifies Treasury's earlier requirement that applicants offer warrants, options, preferred stock, debt securities, notes, or other financial instruments as compensation for the provision of payroll support. 

As part of a larger $2.3 trillion liquidity package, effective as of April 9, 2020, the Board of Governors of the Federal Reserve System (the “Fed”) with the financial support of the Department of the Treasury, has established the Main Street New Loan Facility (the “MSNLF”) and the Main Street Expanded Loan Facility (the “MSELF”). These loan facilities are authorized under Title IV of the recently enacted CARES Act economic stimulus legislation. The MSNLF provides terms and conditions for loans to Eligible Borrowers which are made by Eligible Lenders after April 8, 2020.  The MSELF provides terms and conditions for loans to upsize an Eligible Borrower’s existing loan facility if it had been made by an Eligible Lender prior to April 8, 2020. The combined MSNLF and MSELF programs will be up to $600 billion. The Federal Reserve will commit to lend to a newly created special purpose vehicle (the “SPV”) which will in turn purchase 95% of a loan made by an Eligible Lender pursuant to the MSNLF or the MSELF thereby creating additional liquidity for Eligible Lenders to issue additional loans under these programs.  It is important to note that Eligible Borrowers may not participate in both programs nor may an Eligible Borrower participate in the Fed’s Primary Market Corporate Credit Facility. Businesses, however, that have participated in the SBA’s Paycheck Protection Program are eligible to participate in either of the MSNLF or the MSELF.  Prior to opening up the application process, the Fed is soliciting comments on this and its other COVID-19 related programs recognizing that “businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds.” Comments may be submitted to the Fed through the following link through April 16, 2020: https://www.federalreserve.gov/apps/contactus/feedback.aspx?refurl=/main/.

In April 3, 2020 guidance, the Financial Crimes Enforcement Network (FinCEN) provided limited relief from beneficial ownership verification requirements for federally-insured depository institutions and federally insured credit unions that offer Paycheck Protection Program (PPP) loans to existing customers under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It also has suspended implementation of a February 2020 ruling on certain Currency Transaction Report (CTR) filing obligations. Finally, FinCEN has recognized that the COVID-19 pandemic may cause “reasonable delays in compliance” with Bank Secrecy Act (BSA) reporting obligations, and has established an online contact mechanism for regulated financial institutions to communicate concerns about COVID-19, while reminding them that it generally expects them “to continue following a risk-based approach, and to diligently adhere to their BSA obligations.” The Office of the Comptroller of the Currency (OCC) issued guidance on April 7, 2020 supporting FinCEN’s approach.

On April 6, 2020, the Federal Reserve Bank of New York (NY Fed) issued the first in what will be a series of guidance and instruction packages for access to Federal Reserve liquidity support programs funded in part by the CARES Act. The initial guidance package provides information regarding the Commercial Paper Funding Facility (CPFF), which has been established to enable firms to access credit to fund short term operational needs by enhancing the liquidity of the commercial paper market. The CPFF will be structured as a credit facility funded by the NY Fed to a special purpose vehicle (SPV), which will purchase from eligible issuers (rated at least A1/P1/F1) three-month U.S. dollar denominated unsecured and asset-backed commercial paper (subject to certain limits on an individual issuer basis). The SPV will commence purchasing commercial paper on April 14, 2020 and will continue such purchases through March 17, 2021 (unless extended by the NY Fed).

One of the significant lifelines to the aviation industry provided by the CARES Act is financial assistance for payroll support in the form of a grant. This is part of an overall multi-billion dollar financial support package for the aviation industry which also includes direct loans and loan guarantees. The payroll support provisions (CARES Act §§ 4112-4117) cover U.S. providers of commercial air transportation operating both large and small aircraft, transporting passengers or cargo. This program also covers contractors to Part 121 air carriers (typically, airlines), including contractors performing catering services, loading and unloading property on and from aircraft, assistance to passengers with disabilities, airport ticketing and check-in functions, ground handling, aircraft cleaning, sanitation and waste removal, or subcontractors performing these functions.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package, was approved by the U.S. House of Representatives by a voice vote on March 27, 2020 despite opposition from certain Republican members who were seeking a roll call vote. The package was approved unanimously by the U.S. Senate with a vote of 96-0 on March 25, 2020. It is the third coronavirus emergency response bill considered this month in Congress, which passed the Coronavirus Preparedness and Response Supplemental Appropriations Act on March 6 and the Families First Coronavirus Response Act on March 18.

In response to the COVID-19 pandemic, the Financial Crimes Enforcement Network (FinCEN) on March 16, 2020, issued guidance asking regulated financial institutions to contact FinCEN and their functional regulator as soon as practicable if they have concerns that the pandemic may delay filings required by the Bank Secrecy Act (BSA). The guidance implicitly recognizes the impacts that COVID-19 has had on AML compliance teams and work processes, and the steps many financial institutions are taking to attempt automation or remote operation of parts of their programs.

Unlike the financial crisis of 2008, when dislocations in the capital markets were at the root of the credit crunch and ensuing economic instability, the current market upheaval is healthcare driven. This has a profound impact on how effectively U.S. federal banking regulators can assist in mitigating the effects of COVID-19. The central issue is how quickly banks can provide their business customers with the necessary assistance to help customers continue business operations.