COVID-19 induced closures and restrictions have caused economic hardship for many businesses. As a result, some companies are pursuing business interruption claims, seeking to enforce force majeure clauses in contracts, and considering bankruptcy. The intersection of bankruptcy and COVID-19 induced business decisions was the topic of the webinar Business Bankruptcy Institute: Business Disruption in the Age of COVID: How to Use Force Majeure Clauses and Insurance Claims to Enhance Recovery presented by Richard D. London, Esq. of Richard D. London & Associates, P.C., Jeffrey Scholnick, Esq. of Silverman, Thompson, Slutkin White, Eric S. Steiner, Esq. of Steiner Law Group, LLC and Bud Stephen Tayman, Esq. of Bud Stephen Tayman, P.A., Joyce A. Kuhns, Esq. of Offit Kurman, P.A., John D. Baumgartner, CIRA, CDBV of Stout Risius Ross, LLC and Robert S. Thomas, II, Esq. Chapter 13 Trustee, Office of the Chapter 13 Trustee.
Faculty provided insight into how business interruption claims can be used to increase recovery in bankruptcy cases. These types of claims may become the property of the bankruptcy estate and, if they have merit, will generate funds for the estate and, consequently, creditors. Whether a claim is considered property depends on when the claims were filed and whether a debtor is seeking Chapter 7, 11, or 13 relief; only certain claims that arise after a Chapter 7 or Chapter 13 petition is filed will be considered the property of the estate. In some instances, a debtor can exempt certain assets, including insurance claims, from the property of the estate, but these exemptions only apply to individual debtors and not businesses.
There was a discussion regarding who can file an adversary proceeding to obtain benefits paid under a business interruption claim; debtors, trustees, debtors in possession, U.S. trustees, and even creditors could file these types of cases. Whether a bankruptcy court can resolve a lawsuit arising out of a business interruption claim is currently disputed among the courts and largely depends on whether the action is considered a core proceeding.
The panel also discussed force majeure clauses. In the context of bankruptcy, a force majeure clause can be raised as a defense to payment of a commercial obligation; it is not a claim so much as it is a defense to a claim that a creditor might bring. A contract may not necessarily include the phrase force majeure but may refer to an “Act of God” or use similar terminology as a basis for excusing the performance of a contract. In the absence of a force majeure clause, other common law defenses to performance of a contract include impossibility of performance and frustration of purpose.
Additionally, there was an explanation of how business interruption claims are liquidated in Chapter 7 and 13 bankruptcy cases. When an entity or individual files for Chapter 7 bankruptcy, a trustee will be appointed to determine what assets can be liquidated for the benefit of the estate. If a debtor has a business interruption claim prior to filing for bankruptcy, the trustee must assess whether the claim can generate funds for the estate to make a meaningful distribution. If the trustee believes the claim has merit and should be pursued, it will appoint special counsel to litigate the claim, and any funds received will be disbursed per the bankruptcy code. Under Chapter 13, a debtor can retain assets and can remain in control of causes of actions or claims, including business interruption claims. Any interest the debtor may have in an insurance claim will become the property of the estate, though.
The presentation ended with a discussion on enhancing recovery and minimizing loss in the age of COVID-19 through business interruption claims and force majeure clauses. COVID-19 edicts negatively impacted restaurants, bars, retail stores, and fitness centers, and many of these businesses sought relief through Chapter 11 bankruptcy. Bankruptcy does not negate lease obligations, though, as the bankruptcy code mandates timely performance of all contractual obligations. There are statutory and common law defenses to performance, however, including force majeure clauses, that have been used to excuse the performance of obligations under leases while COVID-19 mandates are in effect. The faculty then explained that the end of COVID-19 relief and the failure of many businesses to convert to on-line operations may fuel the next round of bankruptcies. Many of these bankruptcy cases will involve the evaluation and prosecution of business interruption claims, and the faculty identified the key considerations for litigating business interruption claims in the context of bankruptcy proceedings.