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Unsung Cyber Hero Adventures

On June 4, 2020, Steven Teppler and I (Joe Rosenbaum) were guests of Gary Berman, host of “Unsung Cyber Hero Adventures”.  You can watch the entire interview “The Judicial System & Cybersecurity” and many more on his “Unsung Cyber Hero Adventures” TV Network!

There is also a comic series and you can find out more by looking at  The CyberHero Adventures: Defenders of the Digital Universe.  The comic series, the streaming interview series and much more are all the brainchild of Gary L. Berman, a career marketing consultant and entrepreneur whose company – and the families it supported – fell victim to a prolonged series of insider cyber attacks.  Feeling powerless, Gary decided to educate himself about cybersecurity, attending conferences, listening to podcasts and learning from the real heroes, the cybersecurity experts in law enforcement, government, education, and business.

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COVID-19 and Force Majeure: What’s In Your Contract?

At the beginning of April, Legal Bytes highlighted some of the pros and cons of attempting to use a Force Majeure (Excusable Delay) clause in contracts as the basis for delaying or even failing to perform under a contract. See COVID-19: May the Force (Majeure) Be With You.   Now in early June, a bankruptcy judge in Illinois has opined on at least one instance where a party to a real estate lease agreement can take advantage of such a clause. For those of you inclined to read the entire decision you can check out In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523 (Bankr. N.D. Ill., Eastern Division, June 3, 2020).

The specific language in the lease agreement is critical to this analysis, so this is the relevant language in the contract the court cites in the opinion:  “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by … laws, governmental action or inaction, orders of government…. Lack of money shall not be grounds for Force Majeure.” (emphasis is mine).  The Bankruptcy Court held Executive Order 2020-7, the Stay-at-Home Order, issued by Illinois Governor Pritzker on March 16, 2020, “unambiguously” triggered the force majeure clause, holding the order constituted both “governmental action” and an “order of government.”

In its motion, the landlord claimed banks were still open, the tenant was still able to write checks and mail them to the landlord, that the tenant could still operate it’s take out and delivery service, that in order to obtain funds the tenant could have applied for and received an SBA loan, but more importantly that lack of money was specifically and explicitly stated in the clause as “not grounds for Force Majeure. ”  In dealing with the landlord’s motion, the Bankruptcy Court first noted neither the bank’s being open or closed or the tenant’s ability to write checks and mail them were relevant or responsive to the tenant’s arguments or for that matter the specific language of the force majeure clause.  More significantly, the Court rejected the landlord’s argument that the failure to perform was due to a lack of money – something specifically noted in the clause. To this the Court stated that not only was the tenant under no legal obligation (either in the lease or at law) to apply for an SBA loan to pay the rent, but the Illinois Governor’s Executive Order was the proximate cause of the tenant’s inability to pay rent and that the Executive Order clearly impaired the tenant’s ability to operate fully and generate the same amount of revenue as it might under normal circumstances.

That said, the Bankruptcy Court did take into account the fact that the restaurant (tenant) was not completely shut down and could still provide take-out and delivery services and decided that the tenant should still pay some rent, but in an amount “in proportion to its reduced ability to generate revenue due” as a result of the imposition of the Executive Order.  Neither landlord or tenant had suggested a way to determine a reasonable proportion so the Court essentially decided that since the tenant estimated the kitchen (the facilities within the premises still available for use in fulfilling a take-out and delivery service) represented about 25% of the total square footage, the Court partially excused the tenant from paying the full rent while the Executive Order remained in effect.

It is important to note this is a proceeding in bankruptcy court and even in that context is technically not binding on other jurisdictions.  It is also important to note that even though the contract clause carved out “lack of money” as a basis for invoking the clause, the specific reference to “governmental action” and “orders of government” gave the court a foothold to decide that these facts, although perhaps causing a lack of revenue, where the basis for invoking the clause and awarding the tenant partial relief from it’s full payment obligation.  As with all decisions of the courts, they are very fact-specific, although it may be interesting to see if other courts begin to use the reasoning as having some precedent value in these unprecedented times.

If you need more information or have any questions, don’t hesitate to contact Angela Gonzalez or me, Joe Rosenbaum, or the Rimon Law lawyer with whom you regularly work.

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Congress Provides Additional PPP Flexibility

H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020, passed by Congress on June 3rd, was signed by the President and became effective on June 5. 2020. The legislation makes some significant changes to the Payroll Protection Program (PPP). For our previous posts on the subject go to our most recent post on the subject PPP Loan Forgiveness Application which has links to all our prior postings.

If you want to read the entire text of the new law, you can read or download a personal copy Paycheck Protection Program Flexibility Act of 2020 , but in short (OK, it’s actually not that short) here goes:

Loan Maturity:  PPP loans made on or after June 5th will have a maturity of at least five years up to a maximum of ten years from the date  the borrower applies for forgiveness.  Although the new law only applies to loans made after June 5th, it does allow borrowers who received loans prior to that date to mutually agree to modify the maturity dates and conform to the extended time periods;

Covered Period Extended:  Under the new amendment, for both existing and new loans, in order to determine the amount to be forgiven, the period will now start on the origination date of the loan (i.e., the date the funds are disbursed per the SBA) and ending either 24 weeks (168 days) after the loan origination date, or December 31, 2020, whichever is earlier.  If you received a PPP loan before June 5, you can decide to use the 8 week period under the original CARES Act if you prefer;

Reduction of FTE/Salaries Safe Harbor Deadline Extended:  The new deadline for restoring FTE and salary/wage levels to their February 15th status, originally required by June 30th has now been extended to December 31, 2020.  In addition, the recently enacted amendment to the CARES Act provides that the amount of the loan that will be forgiven will be determine without regard to any reductions as a result of: (a) an inability to rehire individuals who were employees on February 15th and to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (b) the inability to come back to the level of business that existed before February 15th in order to comply with requirements or guidance from the Secretary of Health and Human Services, the CDC, or OSHA, from March 1st until December 31, which inability is related to requirements needed to maintaining standards applicable to COVID-19 for health, sanitation, social distancing or other worker or customer safety.  PPP borrowers should be prepared to substantiate (document) their good faith inability to hire/re-hire or return to pre-February 15th business levels and it is likely that information will be requested with any applications for forgiveness.

Using Loan Proceeds:  For both existing and new PPP loans, the new legislation provides that at least 60% must be used for covered payroll costs and up to 40% can be used to pay covered non-payroll costs (e.g., timely payment of interest on covered mortgage loans, covered lease, rent and utility payments.

Payment Deferral Period Extended:  Payments of principal and interest on PPP loans will be deferred until SBA determines the amount of the loan that will be forgiven and pays that amount to the lender.

If a Borrower Doesn’t Apply for Forgiveness: If a borrower does not apply for PPP loan forgiveness within 10 months after the end of that borrower’s “covered period,” payments of principal and interest will begin at the end of that 10-month period.  If a borrower has a pre-June 5th PPP loan who choose to continue to use the 8 week covered period under the original CARES Act, if the borrower hasn’t applied for forgiveness, those payments will begin 10 months after the end of that 8 week period.

Employer Payroll Taxes:  Under the new law, even if a Borrower receives forgiveness of the PPP loan, they can still defer paying employer payroll taxes as permitted by the original CARES Act.

While it is likely there will be additional clarifications and updated or revised guidelines as new questions arise, the new law provides welcome relief by extending deadlines, especially how forgiveness rules will be interpreted and applied.  We will keep you posted, but as always, if you have questions or need more information you can contact me, Joe Rosenbaum, or any of the legal professionals with whom you regularly work at Rimon Law.