ELFA Examines COVID-19-Related Legislative Impact on Bankruptcies and Repossessions

Among the many outcomes of the COVID-19 pandemic are the passage of challenging legislation and the issuance of far-reaching executive orders with protections that encompass prohibiting debt collection and repossession. An examination of these actions and their implications were addressed during the Equipment Leasing and Finance Association’s June 3 webinar, “COVID-19’s Hidden Costs: Bankruptcy, Repossessions & Hostile Legislation.”

A total of 235 industry executives participated in the online event sponsored by RTR Services and presented by Alexander Darcy, shareholder, Askounis & Darcy; Arlene Gelman, shareholder, Vedder Price; and Scott Riehl, ELFA vice president of state government relations, and moderated by Troy Kepler, general counsel of Channel Partners Capital. The panel offered examples of state legislative and executive order overreach, discussed bankruptcy considerations for equipment lessors and secured creditors, and addressed participants’ questions.

Among the range of legislative and legal information, below are five highlights presented during the webinar.

  1. Governors are wielding executive authority under emergency powers in ways not seen since the Great Depression. One example is an Illinois executive order that prohibits any vehicle repossessions — commercial or consumer — related to a loan or financing, including equipment finance agreements. It suspends the UCC Article 9-609 right to recover collateral and suspends the statutory section relating to title transfer of repossessed vehicles. There are some exceptions under the order, and while it doesn’t affect everybody, it is an example of how state legislatures and governors can take steps to restrict lenders’ rights.
  2. Bankruptcy cases move very quickly initially. Despite the impression that bankruptcies proceed slowly, events tend to move very quickly at the beginning of a bankruptcy case. Therefore, it is very important that a company’s internal procedures are up to par especially now when companies may be slowed by the pandemic. Bankruptcies are increasing and they are proceeding differently due to the pandemic. Check daily for bankruptcy notices and route them to the appropriate people, including in-house and outside counsel and the business person handling the matter.
  3. An automatic stay occurs upon a bankruptcy filing. The stay applies to all types of collection efforts — repossessions, lawsuits, dunning letters — and there is a clear line of demarcation in which all types of collection activities should stop. If a creditor is found to violate the automatic stay, damages can be assessed against them despite the fact that they are owed by the debtor. If the stay violation is willful, punitive damages may also be levied.
  4. Call your counsel if you have repossessed but not yet sold collateral at the time of the bankruptcy filing. Even if you are in a jurisdiction where an affirmative duty to return collateral exists, sometimes these situations can be informally resolved with just a phone call to the trustee or the debtor’s attorney to get a consensual lift stay order. Sometimes you will need to return the collateral and move to lift the stay, and you may even have facts that could support filing an emergency lift to the stay. Regardless of what the circumstances are, you should call your counsel when you are notified of a bankruptcy filing and ask what obligations and rights you have.
  5. Recently enacted legislation is projected to have a large impact on Chapter 11 filings. The Small Business Reorganization Act of 2019 was enacted to make Chapter 11 reorganizations easier and less costly for debtors. Effective in February 2020, the aggregate debt limit for debtors to qualify was increased under the CARES Act to $7.5 million from a little more than $2.7 million for cases filed after March 27, 2020. Other qualifications are that at least 50% of debt must be for commercial or business activities, but the primary activity cannot be owning single asset real estate.

The Equipment Leasing and Finance Association is the trade association that represents companies in the nearly $1 trillion equipment finance sector.

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