These are unusual times to say the least.  Over the years, many of us have seen local bank failures (Bank of New England being one), several recessions and downturns, and subsequent recoveries and cycles.  However, this pandemic is a first for almost all of us.  The personal tragedies that it has caused have been staggering, and the impact upon our lives at home and at work, and both emotionally and, in many cases, financially, has been substantial.

Over the years, Cooley, Shrair P.C. has represented lenders in loan transactions, loan workouts, foreclosure matters (both commercial and residential), and Article 9 secured party sales and has also served as lender’s counsel in Chapter 7, 12 and 13 bankruptcy cases in Massachusetts as well as Connecticut.

The economic impact on existing loans caused by the pandemic is no doubt being felt by almost all lenders, and what lies ahead is uncertain.  It may be a good time to review those loans showing signs of weakness, whether evidenced by missed payments or covenants, decreasing collateral values or other financial indicators, and this office is available to assist in such review.

The following are some of the things this office would recommend you consider for any loan on your watch list:

DOCUMENT REVIEW

Review the loan documentation for completeness and any deficiencies;

Review the default provisions to confirm existing defaults, if any;

COLLATERAL REVIEW

Consider obtaining updated appraisals where appropriate, especially where a foreclosure is anticipated;

Review the status of real estate taxes and other municipal liens with any mortgage loan not being escrowed for such liens;

Check your UCC filings for proper and timely filed continuation statements;

Check the status of title certificates for loans secured by titled vehicles;

Check online to see if attachments or other junior liens have been filed with the real estate records or the UCC filing offices;

LOAN MODIFICATIONS

Review the loan transaction and history to determine if a loan modification is in order;

FORBEARANCE AGREEMENTS

Review the loan transaction and history to determine, due to an existing default or defaults, a forbearance agreement (which can also include provisions modifying loan terms where appropriate) is recommended in order to preserve the default and shorten notice periods applicable to a possible foreclosure or other actions;

BANKRUPTCY

Anticipate the possibility of bankruptcy and its impact on any loan, especially with respect to any payment or collateral furnished within the last 90 days to you by any borrower, guarantor or anyone else obligated with respect to the loan;

Where a bankruptcy is anticipated or a reasonable possibility, have counsel review the risk that any prospective transfer to the lender may be avoided by the bankruptcy trustee as a preference or fraudulent transfer under applicable bankruptcy law;

If any borrower, guarantor or other obligor files bankruptcy, consult with counsel to determine whether an appearance in the case is warranted to protect your rights; whether to attend the trustee’s meeting of creditors to examine the debtor at the hearing or obtain other information about the debtor and the debtor’s assets helpful to your loan; whether to prepare and file a proof of claim to protect your rights to any distribution to be made to creditors; or whether a motion for relief from stay or to dismiss the bankruptcy is appropriate in order to proceed against your collateral.

COVID-19 IMPACT

Determine what covid-19 related federal and state laws may impact your rights and remedies, or their enforcement, at this time, with respect to any loan that may be a prospect for a workout;

Determine what federal or state laws are pending before congress or the state legislature and should be considered as part of your loan review;

With respect to any such covid-19 related laws, determine which laws affect only residential loans, but not commercial loans, or affect only loans in default due to the covid-19 crisis.

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The above highlights many, but not all, of the matters that should be considered for review at this time. Others may appear following a closer examination of the bank’s file.  It is our hope that you have found the recommendations above helpful and a good starting point for reviewing any loan situation of concern to you during these unusual times.  Please do not hesitate to contact us if you have questions or comments or could use the assistance of this firm in any way.  In the meantime, stay safe.

How might this office help someone having difficulty paying their debts.

If you have debt that you are having trouble repaying, this office can discuss with you your bankruptcy and non-bankruptcy options.

How might a bankruptcy initially help?

The filing of a bankruptcy case imposes an automatic order requiring your creditors to cease all efforts to collect your debts without the court’s permission, whether your debts are unsecured or secured. This order, commonly referred to as the “automatic stay,” is often useful when seeking to stop a foreclosure sale or a collection lawsuit.

How might a bankruptcy help you with your unsecured debts?

The filing of a chapter 7 bankruptcy case may allow you to discharge your personal liability for your unsecured debts.

How might a bankruptcy help you if you have a secured loan, such as a home mortgage loan, that you are having difficulty paying?

The filing of a chapter 13 bankruptcy case may allow you to keep your home provided you can support a repayment plan approved by the court.

Can a bankruptcy help me if a creditor has sued me and recorded an attachment or judgment lien against my home?

A bankruptcy filing may allow you to remove such lien to the extent if it interferes with the equity in your home.

The above questions are just a few of the ones that commonly arise in personal bankruptcy matters. If you would like to learn more about your bankruptcy and non-bankruptcy options with respect to your debts, please feel free to contact Attorney John Davis with this office.

LOANS TO SMALL BUSINESSES

On Friday, April 24, 2020, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act (“PPP Enhancement Act”) which allows continuation of the Paycheck Protection Program loan program (PPP), administered by the Small Business administration (SBA). The PPP Enhancement Act adds $310 billion to the $350 billion that was previously allocated to this program and quickly spent to fund loans for small businesses. $60 billion of the new funding is set aside for PPP loans from small banks, community financial institutions, and credit unions, with the objective of increasing the number of loans to smaller businesses. Processing of previously filed but not yet funded applications is scheduled to begin on Sunday, April 26 and new Applications on Monday, April 27.

Eligibility. Generally a business is eligible for a PPP loan if it has 500 or fewer employees whose principal residence is in the United States. Also eligible for PPP loans are independently owned franchises, non-profit (501(c)(3) organizations, sole proprietorships, the self-employed and independent contractors, that meet the 500 or fewer employee and U.S. residency requirements. In addition, agricultural producers, farmers and ranchers are eligible for loans if they otherwise meet the eligibility requirements.

Use of Loan Proceeds. The PPP loan guarantees a business eight weeks of payroll and other costs to enable the business to remain viable and to pay wages and benefits to its employees. Therefore, under this Program, at least 75% of the loan proceeds must be used for the following payroll costs:

• Salary, wages, commissions, tips (capped at $100K per employee)

• Employee benefits including costs for vacation, parental, family medical or sick leave

• State and local taxes assessed on compensation (capped at $100K per)

• For Sole Proprietors: wages, commissions, income, or net earnings from self-employment (capped at $100K)

• Seasonal businesses: average monthly Payroll Costs between Feb 15 and Jun 30 (capped at $100K per)

• New Business: average monthly Payroll Costs from Jan 1 to Feb 29 (capped at $100K per)”

Special rules apply in determining the amount of “payroll costs” for independent contractors and sole proprietors. This means that even individuals that own a business, but have no payroll costs, may be eligible for a PPP loan.

In addition to payroll, 25% of the loan amounts may be used for the following:

• Rent and lease costs defined as rent obligations obtained under an agreement in force before February 15, 2020.
• Utility costs defined as payment for service of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
• Mortgage interest paid on mortgages incurred before February 15, 2020

Size of Loan. Generally, the maximum loan amount is the lesser of (1) $10 million, or (2) 2.5 times the average total monthly payments by the applicant for payroll costs. Borrowers may base aggregate payroll costs and employee counts on either calendar year 2019 or the 12-month period preceding the application.

Loan Forgiveness. A major benefit of the PPP loan is that it may be forgiven if the loan proceeds have been spent on qualifying costs. During the 8-week period following the day the funds are transferred into the borrower’s account, the “loan origination date” (Covered Period), the borrower may have debt forgiven to the extent the amounts are paid or incurred for payroll costs, interest on mortgages, rent, and utilities, as described above. Any debt forgiven will not be taxable to the borrower.

Reduction of Amount Forgiven, The PPP is designed to help businesses maintain employees during this economic downturn. With that as the goal, if the business experiences a reduction of its workforce or a reduction of salaries and wages during the Covered Period, the loan forgiveness is reduced. calculated as follows: the amount of the projected loan forgiveness is multiplied by a fraction the numerator of which is the monthly average full- time equivalent (FTE) employees during the Covered Period and the denominator is the monthly average FTE employees during either the period February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020; this represents the amount that is not forgiven. For seasonal employers, the measurement period is February 15, 2019 – June 30, 2019.

Example: Springtime Company received a PPP loan. Following the Covered Period, Springtime Company determines its potential loan forgiveness amount is $100,000. The average number of FTEs during the Covered Period (the 8 weeks post-loan origination) is 100. The average number of FTEs from February 15, 2019 – June 30, 2019 is 200. Based on these values, the amount of loan forgiveness is $50,000 calculated as follows: 100 / 200 x $100,000. The remaining balance of the PPP loan will be guaranteed by the SBA and have a maximum 10-year maturity. The current loan maturity term is two years.

In addition to workforce reduction, a salary reduction may also cause a reduction in the loan amount forgiven. The amount of loan forgiveness is reduced by any reduction in the salary of certain employees (only employees that earned less than an annualized rate of $100,000 a year during 2019 are counted) that is in excess of 25% of the total salary of the employee during the most recent full quarter during which the employee was employed.

Example Summer Company receives a PPP loan. After the Covered Period (8-week period following the loan origination date), Summer Company determines that its potential loan forgiveness amount is $100,000. Employee A worked for Summer Company last year. Employee A has a salary of $80,000. During the first quarter of 2020, Employee A’s salary was $20,000. If Summer Company reduces Employee A’s salary by more than $5,000 a quarter (more than 25% based on most recent full quarter salary, calculated), the amount in excess of $5,000 must reduce the loan forgiveness.

Effect of Re-Hiring

If the business is able to re-hire employees and restore salaries by June 30, 2020, the business is not required to reduce the loan forgiveness.

Thus, furloughing or laying off employees prior to the PPP loan does not prohibit a business from applying or receiving a loan but the amount of the forgiveness may be diminished if the employees are not re-hired.

To the extent the PPP loan is not forgiven, it will have:

• A 2-year term (decreased from the maximum maturity of 10 years under the Act),
• An interest rate of 1% (increased from prior Treasury guidance that set the interest rate at 0.5%),
• Principal and interest deferred for 6 months.

Economic Injury Disaster Loan (EIDL) Program

In addition to the PPP loans, the Cares Act also “re”-funds the SBA administered Economic Injury Disaster Loan (EIDL) program, adding $20 billion to it. An EIDL is a loan of up to $2 million designed to help small businesses that experience an economic hardship as the result of a declaration of disaster. Generally the loan may be used to pay fixed debts, payroll, accounts payable Increased costs due to supply chain disruption and other operating expenses that could have been paid had there not been a disaster. However, specific loans depend upon the actual amount of economic injury that a business has suffered; this amount is determined by the SBA on a case-by-case basis after the business applies.

For the period January 31, 2020 – December 31, 2020, businesses eligible for an EIDL include any business with not more than 500 employees, small businesses as otherwise defined under this program, sole proprietorships, independent contractors, non-profits, ESOPs, agricultural enterprises (subject to the SBA’s affiliation rules governing financial assistance programs).

EIDL terms are for 30 years, and interest rates are capped at 3.75% for small businesses (2.75% for non-profits). The first month’s payments are deferred a full year from the date of the promissory note.

In addition, the business may request an advance on its EIDL loan of up to $10,000 (“Grant”) to pay allowable working capital needs which will be disbursed within a short time of applying. This Grant is not required to be repaid, even if an eligible borrower is ultimately denied an EIDL. The amount of the EIDL in excess of the Grant is not eligible for forgiveness.

A business may qualify for both an EIDL and a PPP loan, but the funds must be applied toward different expenses. In addition, if the business receives an EIDL and a PPP loan, the amount of the Grant will be subtracted from the amount forgiven under the PPP loan.

Since SBA loans are made on a first-come, first-served basis, IT’S TIME TO APPLY FOR PPP AND EIDL LOANS, before the funds are depleted.

Another impediment related to residential foreclosure

Following a foreclosure, we all have been faced with the prospect of evicting the homeowner who becomes as we all thought, a tenant-at-will. The general rule was to provide a 30-day notice of termination of tenancy and then to begin a summary process hearing to evict the post-foreclosure “tenant” from the property.

A case which was just decided from the Southeastern Housing Court found that based upon the fact that there is no agreement between the homeowner and the lender as to its post-foreclosure tenancy status, that the 90-day notice period provided in the eviction statute applies for the purposes of the Notice to Quit for possession.

As you know, each case is fact specific and the court made clear that under these facts, a 30-day notice to quit was insufficient.

We think that this topic will start to appear more frequently as debtors continue to look for more creative ways to delay the inevitable. Some lenders are simply offering a cash payment following a foreclosure in exchange for keys.

The general rule is that an IRA which you created or inherited from your spouse is 100% protected from creditors in bankruptcy or general creditors. If, however, you inherit an IRA from a third party,then based upon a recent Supreme Court decision, the proceeds from that IRA are no longer protected from creditors of your bankruptcy. A suggested way around this problem would have been for the owner of the IRA to create a spendthrift trust and leave the proceeds of the IRA to that trust. If you inherit an IRA and have creditors you should meet with an attorney.

Many people do not seek legal representation in their divorce case in fear of their inability to pay attorney fees.

Whether you are the plaintiff or the defendant in a divorce case, the probate and family court can order one spouse to pay a retainer fee for an attorney for the other spouse. The plaintiff or defendant must prove to the court that he or she does not have enough money to pay the retainer for an attorney and the other spouse has enough income or assets to pay for the retainer. The court will look at the financial statements of both parties to determine if it should order one party to pay the other parties legal fees.

By law, you are required to take minimum required distributions when you attain age 70 ½ from an IRA which you created or which your spouse created.

In the event that you inherit an IRA from a third party, other than your spouse, then you will be required to take minimum distributions beginning the year after the IRA’s creator died. The amount varies depending on the beneficiary’s age. If you fail to take the required minimum distribution, then you will incur a 50% penalty and income which you fail to take will be included in your federal and state income for the year in question. An exception to the rule is that if the creator died before attaining age 70 ½ then you will incur no penalty if you take all of the funds within five years after the creator’s death.

Despite popular belief a couple cannot get an annulment because their marriage was short. To get an annulment, a party must prove that the marriage is “void” or “voidable”.

Your marriage is void if, one of the parties is already married to someone else or you married a close relative or close relative by marriage. A marriage is voidable if: for example, one of the spouses did not have the mental capacity to consent to the marriage at the time or one of the spouses was not old enough to get married. If one spouse has requested an annulment because the marriage is voidable, and the other spouse does not want their marriage annulled, he/she can request to affirm the marriage.