Articles by Our Attorneys

The Small Business Reorganization Act (“SBRA”) codified amendments to the Bankruptcy Code and went into effect on February 19, 2020.  Prior to these amendments, small businesses attempting to reorganize under Chapter 11 of the Bankruptcy Code regularly faced tremendous hurdles in confirming a plan of reorganization and, if successfully confirming a plan, seeing that plan to completion.  These obstacles included the large expenses associated with Chapter 11 cases, the legal requirements imposed upon the reorganizing debtor under the bankruptcy laws and an often adversarial relationship between the reorganizing debtor and the unsecured creditors committee and/or the United States Trustee.

The amendments governing small business debtors are found in Subchapter V of the Code and serve to reduce the obstacles faced by small businesses attempting to reorganize.  These amendments are designed to reduce the time and cost of reorganization for small businesses, ease the burden of compliance, create a relationship with the case trustee that is more conducive to obtaining a consensual plan of reorganization, and provide the reorganizing debtor with new tools to deal with unsecured creditors. All of these changes should allow small business debtors to confirm more workable plans and successfully complete a reorganization.

Originally, the cap for filing as a small business debtor under Subchapter V was $2,725,625, at least 50% of which must have arisen from commercial or business activity.  Significantly, insider debt (essentially debt owed to the owner) is not counted towards the cap.  Under the recently passed CARES Act, the cap was raised to $7.5 million for cases filed on or before March 27, 2021, which will allow many more debt burdened small businesses to take advantage of the benefits of Subchapter V.

In the next few weeks, we will publish a companion article highlighting some of the more significant changes in Subchapter V.  These changes will illustrate how this new subchapter gives qualifying small businesses new tools for managing debt and creditors, and reorganizing under the bankruptcy laws.

On June 5, 2020, the President signed into law important revisions to the Payroll Protection Program, including significant changes to the requirements for PPP Loan forgiveness.

The changes are consistent with the bill passed by the House on May 28^th which are outlined in the Southern Chester County Chamber of Commerce Webinar. The webinar also includes an overview of the PPP loan forgiveness application process.

The highlights of the recently enacted changes to the PPP program include:

1. Small Businesses now have 24 weeks (instead of 8) to spend their PPP funds;
2. Borrowers have to spend at least 60% of the PPP Funds on payroll costs and can spend up to 40% on other approved expenses. The prior ratio was 75/25. It is important to note that if a business does not spend at least 60%  of their PPP funds on payroll expenses, ALL of the PPP funds become a loan;
3. Employers have until 12/31 (instead of 6/30) to bring employees back to full time status;
4. PPP recipients will also be able to take advantage of payroll tax deferrals; and
5. Any PPP funds that are not eligible for forgiveness will become a loan that can be repaid over 5 years (instead of 2).

 How the PPP program’s requirements apply to your business and its forgiveness application requires a very fact specific analysis. If you have questions about how to best your PPP funds or apply for loan forgiveness, please contact Mary Kay Gaver at [email protected].

Unlisted Resident Driver Exclusion Can Preclude Car Insurance Coverage

You and your boyfriend live together and one day he asks you to take his car and drive to the supermarket to get some groceries.  You get the distracted while driving, run a red light and cause an accident that injures someone. Are you covered by your boyfriend’s car insurance if the injured person sues you?

Maybe not, if the car insurance policy has an Unlisted Resident Driver Exclusion (“URDE”).

In August 2019, the Supreme Court of Pennsylvania decided the case of Safe Auto Insurance Company v. Oriental-Guillermo, 214 A.3d 1257 (Pa. 2019) which found that a URDE was valid and enforceable and excluded car insurance coverage for a live-in girlfriend driving her boyfriend’s car.

This decision can be applicable to other roommate situations and can result in accident victims being uncompensated or negligent drivers facing personal liability for car accidents that are not covered by insurance.

Facts of the Case

Rachel Dixon was driving a car owned by her boyfriend Renee Oriental-Guillermo when she was involved in an accident with another vehicle in which Priscilla Jimenez was injured.

Dixon lived with her with her boyfriend, Oriental-Guillermo and his car was insured by Safe Auto.  The Safe Auto car insurance policy  contained an Unlisted Resident Driver Exclusion  (“URDE”) which stated that the Policy excluded liability coverage  “that occurs while your covered auto is being operated by a resident of your household or by a regular user of your covered auto, unless that person is listed as an additional driver.”

It was undisputed that Dixon lived with Oriental-Guillermo and was not listed as an additional driver on the car insurance policy.

When Jimenez sued Dixon, she turned the claim into Safe Auto under the insurance policy that covered  her boyfriend’s car. However, Safe Auto denied coverage citing the URDE, arguing that the car insurance policy clearly stated that coverage would not apply to a resident using the vehicle who was not a listed as an additional insured.

The Supreme Court Decision

Since the Safe Auto car insurance policy provision was unambiguous and clearly excluded coverage, Dixon’s lawyer had to argue that the URDE was unfair and unenforceable because it was against Public Policy.  Dixon’s lawyers reasoned that the law seeks to limit the number of uninsured drivers in Pennsylvania and attempts to provide maximum feasible restoration to accident victims and that allowing the URDE to be enforced would deny Jimenez, as well as other accident victims, fair compensation for car accident injuries.

Safe Auto countered by arguing that Pennsylvania law also seeks to contain car insurance costs and providing broader coverage than that which is provided for in a car insurance policy increases, rather than decreases, insurance costs.

Ultimately, the Supreme Court noted that Oriental-Guillermo did not dispute that he was aware of the URDE and yet he allowed his girlfriend to drive his car, when he could have added her as an additional driver to the policy.  Adding her as an additional driver would have resulted in additional premiums, but also would have allowed Safe Auto to understand the full risk that it was insuring.

In the end the Supreme Court said that “insurers are not compelled to underwrite unknown and uncompensated risks” and it held that the URDE was not against Public Policy.  Instead, the URDE was enforceable and Dixon was not covered for the car accident.

Implications of the Decision

The implication for Jimenez was likely that she would be uncompensated for her injuries because Dixon was uninsured.

However, there are much broader implications of the Safe Auto Insurance Company v. Renee Oriental-Guillermo decision.  Not only would the Unlisted Resident Driver Exclusion apply in a relationship situation, but it could also apply in any roommate situation.  So, if you are living with friends at or after college and you borrow and wreck a friend’s car, his/her car insurance policy might not cover you for the damages and injuries.

Nevertheless, be aware that you may be covered by the liability coverage of other car insurance policies, like for your own car or perhaps for a relative you live with or another policy on which you are a named driver.  However, if you are not covered under any car insurance policy and find yourself victim to a URDE ,your personal assets could be at risk.

So, before you drive anyone else’s car, be sure that you have car insurance protecting you!

Pennsylvania Governor Tom Wolf issued an Order on May 7, 2020 that remains in effect until July 10, 2020 that no eviction proceeding against a tenant under the Landlord Tenant Act may be commenced or continue if already filed until July 10, 2020 or further Order of the Governor.

In addition, all residential mortgage foreclosures are stayed until July 10, 2020 so they cannot be commenced and if they have started the mortgage foreclosure is stayed until July 10, 2020.

That means if you cannot pay your rent or you cannot pay your mortgage, your landlord or lender cannot do anything to evict you from the property until at least July 10, 2020.

Even after July 10, 2020, there is a good chance that your lender will be willing to enter into a mortgage modification agreement to help you stay in your home or you can defend the mortgage foreclosure by raising defenses such as the Doctrine of Frustration of Contractual Purpose or Impracticability of Performance.  Another defense is discharge by supervening frustration.  Another defense would be breach of the duty of good faith and fair dealing if your lender fails to act reasonably in light of the circumstances.  Force Majeure is a common clause in contracts that essentially freezes both parties from liability or obligation when an extraordinary event or circumstance occurs.  All of these would be defenses to a mortgage foreclosure or action by your landlord to evict you. 

All of these defenses are available and if none of them are successful, bankruptcy is always an option to help you stay in your home.

The Payroll Protection Program (“PPP”), established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is designed to provide cash, in the form of a potentially forgivable loan, to enable small businesses and their employees to survive the economic devastation wrought by the COVID-19 pandemic.  While we are still waiting for more definitive guidance from the government on how PPP funds can be used and will be forgiven, the following is some general guidance based on the information that has been provided by the SBA to date.   This information is not meant to substitute for individual advice from your lender and/or professional advisors.

The SBA guidance that has generated the most urgent questions from our clients is the recent SBA statement reminding businesses that they had certified that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  This guidance was issued in response to reports of PPP loans being made to national restaurant chains with large cash reserves and organizations like the Los Angeles Lakers.  While our guidance has been that PPP loan funds were not intended to be funds of last resort, determining if your business could make the certification at the time your application was submitted is a very fact specific inquiry that should be discussed with your attorney and accountant. The SBA has advised Borrowers that if they conclude that they cannot make the certification in good faith, they have until May 14, 2020 to return any PPP funds to their lender and be released from any obligations under the PPP program. 

The goal of every business receiving a PPP Loan is to maximize the funds that will be forgiven. That will require you to monitor and document your use of all PPP funds. A good first step is to segregate PPP money from other business funds.  PPP money should be clearly differentiated from other business funds. The most effective way to do this is to maintain PPP money in a separate bank account. In order to qualify for maximum (principal) loan forgiveness, you will be required to show that all of the PPP money was used for permissible purposes over the eight-week period after the loan is received, namely payroll expenses (a minimum of 75% of the funds) and allowable business expenses (a maximum of 25% of the funds).  A separate account, comprised exclusively of PPP money, will facilitate your tracking the use of these funds to show you met these benchmarks. 

Some or all of the PPP Loan may not be forgiven if during the eight-week loan period you reduce your full-time employee head count or if you decrease salaries and wages by more than 25% for any employees making less than $100,000 a year.  A hard deadline of June 30, 2020 is set for restoring full time employment and salary levels for any changes made between February 15 and April 26, 2020.  The SBA recently provided guidance that if you have laid off an employee and offer them employment on the same terms after receiving a PPP Loan, but the employee declines to accept that employment, that employee will not be included in the calculation for loan forgiveness.

Payroll costs include 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, sick leave, health care benefits, including insurance premiums and payment of any retirement benefits. Allowable payroll-related costs also include state and local taxes assessed on compensation.  However, the CARES Act does not, in defining payroll costs, include the employee’s and employer’s portion of federal payroll taxes, the employee’s income taxes required to be withheld by the employer, or payments to independent contractors.

As stated earlier, up to 25% of PPP funds may be used on certain business expenses, assuming you can show those expenses existed on or before February 15, 2020. These expenses include mortgage interest payments (not including mortgage pre-payments or mortgage principal payments), rent payments, utility payments, interest payments on other business debt obligations, or the refinancing of an SBA Economic Injury Disaster Loan made between January 31 and April 3, 2020 if that loan was used to pay payroll costs. 

To substantiate both payroll costs and allowable business expenses during the eight-week loan period, you should be meticulous in maintaining, and be able to produce, documentation, including all of the documentation submitted in applying for the PPP loan. A schedule detailing how the PPP money was spent should be kept. Documents evidencing gross payroll, including payroll records through your payroll services provider, should be on the ready as should evidence of expenses (canceled checks, mortgage statements, bills, etc.).  If you use a third-party payroll provider, you should ask them how they are tracking these expenses and what reporting will be available at the end of the 8-week period.

Following the guidelines outlined above will allow you to document for your lender how your PPP funds were used and should maximize the amount of the PPP loan that is forgiven. If any portion of your PPP loan is not forgiven, it will accrue interest at a rate of 1% per year and will need to be repaid within two years, with payments beginning in six months. You should review the terms of your PPP Note for exact terms and dates for when any payments would begin. 

Since guidance from the government regarding PPP is ongoing and not formalized, there continue to be many unanswered questions relating as to the interpretation of the Act and loan forgiveness.  If you have questions or concerns about your PPP Loan including best use of those funds and your obligations, please contact our COVID-19 response team by sending an email to [email protected]. 

1 Two valuable resources for borrowers are the PPP Information Sheet for Borrowers and the PPP Loans FAQ’s, both publications issued by the SBA in consult with the Department of Treasury and available at the home.treasury.gov website.  The FAQ is updated frequently so it is important to be certain you are relying on the most current guidance.

2 Employees earning greater than $100,000 annually may have their salaries reduced by more than 25%, although not below $100,000, without running afoul of loan forgiveness.  PPP money should be clearly differentiated from other payroll money when compensating these individuals during the loan period.

3 Excluding family and sick leave eligible for a credit under the Families First Coronavirus Response Act (“FFCRA”).

It’s been seven weeks since we were driven into semi-isolation. For most of us, it came without warning, separated  us from our accepted daily lives, our families, colleagues and friends, and forced upon us a new reality and an altered perspective. For those of us who are “senior citizens” and especially susceptible to this Covid-19 virus, it has brought into stark contrast ourselves and those on the front lines – doctors, nurses, police officers, EMT’s, military personnel, truck drivers and deliverymen, food suppliers, warehouse workers and so many other brave souls actively engaged while this “war” is on. While staying out-of-the-way, we are buoyed by John Milton’s observation, “They also serve who only stand and wait”.

Even in this dark and foreboding time of economic uncertainty and deprivation for so many, this time of “living dangerously”, the strength and spirit of the American people has once again arisen on so many fronts, much like it has done before during the Second World War, 911 and other hard and uncertain times. But it now appears that folks are getting antsy and business owners and their employees deprived of their livelihoods by government enforced closures have just about had enough, and are demanding to get back to work. Seems to me a real necessity that can’t be long denied, one way or the other.

It has been especially fortuitous, however, that we find ourselves in the 21st century, a time when our home computers, email, Zoom, Skype and other electronic services allow us to connect to those with whom we routinely personally interacted most every day before this chastisement struck. The business and professional worlds have become “virtual”. We can now visit with our physician and our lawyer, live and in person, on our computers and fulfill a host of tasks without leaving the safe harbor of our homes, that we once accomplished from or in an office. From here on, it’s sure to change the way our society does business. Over the past few years record-keeping has gone “virtual’ as well, replacing the now antiquated “paper file”, with apologies to us “old-timers” who still much prefer “hard copies”. Speaking from personal experience, I haven’t been in my law office for two months, yet have computer access to all of the client files for which I have responsibility. So, I have continued to work from home and communicate with colleagues and clients, thanks to these modern-day technological advances.

For those of us hunkered down at home, the slow emergence of Spring, bringing with it warmer days, and even here in Pennsylvania occasional days of sunshine, has freed us during a portion of the work day and weekends to spend some time out-of-doors, preparing the flower beds  for planting, working through Spring clean-up, filling our flower pots with pansies and sweet alyssum and starting the summer  “Victory” garden. That last item is what those of us with inherited “farmer” DNA consider a ritualistic “labor of love”, and in these days might well be considered a real necessity. In my experience of practicing law and judging legal cases for many years, I have always found it one of the most satisfying of life’s pleasures. As one grows older, you come to fully appreciate the continuing ability to enjoy a multi-dimensional life as a priceless gift from the good Lord.

When we began to experience the empty grocery shelves and experienced some difficulty in getting necessary provisions by “virtual” shopping, I thought a few chickens might be a good idea, yielding fresh eggs in the morning, and maybe, “a big fat hen” for Sunday dinner. My apologies to those gentle readers who didn’t grow up on a farm in the post-depression 1940’s just after the War years, who might shirk from such barbarity, but it’s what we county boys did before supermarkets. I must confess that in my youth I routinely collected eggs from the hen house and lopped off a few heads, at parental direction of course. On reflection though, I decided that wouldn’t be such a good idea given the foxes who reguarly visit our yard of a morning hoping for a fat squirrel for breakfast. The foxes are smart critters and “know” the squirrel’s hang around the bird  feeders. They also have distinct appetites for chickens.

Mary Wade Myers, Esquire, a now-retired member of the Chester County Bar, used to grace the pages of the Bar Associations “New Matter” quarterly magazine with accounts of her life away from the practice of law on her farm, tending to her stock, which brought to life for all of us the agrarian pursuits that provided her such joy. She had the literary gift that allowed her to imbue those creatures she cared for with their own quirks and personalities. I thought about her as I prepared this article, since she always reminded me that lawyers and judges are “folks” just like everybody else, which is the message I hope comes through in what I have said here. By the way, the old fellow pictured on the John Deere that accompanies this bunker report is the author.