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In the depths of the financial panic from COVID-19 last year, the Federal Reserve offered to lend to a wide swath of businesses — something it had never done before. Yet it struggled to find takers, the Wall Street Journal reported. The Main Street Lending Program aimed to help pandemic-hit businesses that were too small to borrow in the bond market but might need more help than a small-business loan from the popular Paycheck Protection Program. “There was a program here that looked nice on paper, but in practicality, it has not worked,” said Mike Cazaz, chief executive of Werner Aero Services, a New Jersey supplier of aircraft engines and parts that couldn’t get a loan under the program. Washington, D.C., was happy to rely on the Fed because it had the chops to get a program for medium-size businesses up and running fast. Its apolitical reputation reduced concern about loans being steered to big donors. The Treasury Department became a Fed partner to absorb any loan losses. But the experience revealed the limitations of running a relief program through the Fed and exposed gaps in the government’s ability to deliver aid to companies that can’t raise money on Wall Street. For months, many banks weren’t interested in participating. Demand picked up only in recent weeks after word came that the program would be ending. “There is a cost if, whenever we have [financial panics], we do programs that only help large institutions, because in the long run that makes it much riskier to be a small or medium-size firm,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which has administered the Main Street program. Many such businesses could fall through the cracks, he said, accelerating a long-running consolidation in which larger companies with access to low-cost credit increase market share. Read more. (Subscription required.) 

In related news, thousands of minority-owned small businesses were at the end of the line in the government’s coronavirus relief program as many struggled to find banks that would accept their applications or were disadvantaged by the terms of the program, the Associated Press reported. Data from the Paycheck Protection Program released Dec. 1 and analyzed by the Associated Press show that many minority owners desperate for a relief loan didn’t receive one until the PPP’s last few weeks while many more white business owners were able to get loans earlier in the program. The program, which began April 3 and ended Aug. 8 and handed out 5.2 million loans worth $525 billion, helped many businesses stay on their feet during a period when government measures to control the coronavirus forced many to shut down or operate at a diminished capacity. But it struggled to meet its promise of aiding communities that historically haven’t gotten the help they needed. Read more. 

With his presidential inauguration just weeks away, Joseph R. Biden Jr. is confronting an economic crisis that is utterly unparalleled and yet eerily familiar. Millions of Americans are out of work, small businesses are struggling to survive, hunger is rampant, and people across the country fear getting kicked out of their homes, the New York Times reported. The moment was similarly perilous exactly 12 years ago, when Biden was the vice president-elect and preparing to take office. “I remember the utter terror,” said Cecilia Rouse, who was an economic adviser in the Obama White House and has been chosen to lead Mr. Biden’s Council of Economic Advisers. The $900 billion pandemic relief plan that moderate lawmakers powered through Congress last month provides the incoming administration with some breathing room. This second tier of aid will deliver $600 stimulus checks, assist small businesses and extend federal unemployment benefits through mid-March. But as Biden has made clear, it is simply a “down payment” — a brief bridge to get through a dark winter and not nearly enough to restore the economy’s health.

By Thomas J. Salerno
Stinson LLP

On December 23, 2020, Congress passed the Combined Consolidated Appropriations Act, 2021, which includes the Coronavirus Economic Relief for Transportation Services Act and Coronavirus Response and Relief and Relief Supplemental Appropriations Act (H.R. 133) (the "CARES ACT II") , which provides for another $284.45 billion in "PPP Second Draw Loans" ("PPP III Loans"). While over four months had passed since the lapse of the prior PPP loan program, struggling businesses throughout the U.S. breathed an audible sigh of relief. As CARES Act II contained numerous provisions related to stimulus and aid availability separate from PPP III Loans. Despite threats of veto, President Trump signed the bill on December 27, 2020. Did CARES Act II "fix" the issue and definitively do away with any future litigation in this area? Of course not. Instead, there is a mixed bag in CARES Act II — some good news for some debtors, bad news for other debtors, and a pretty much sure bet for future litigation concerning the latter. Read the full commentary.

As the pandemic intensified, even companies with enough cash to try to reorganize in court lost faith that they’d be able to stay open after cutting their debts, Bloomberg News reported. On March 28, Carol and Henry Huffman of Pike Creek, Delaware, simply closed down their specialty catering shop, the Cheese Chalet, and walked away rather than seek court protection from creditors and chance a reopening. “Waiting was not an option,” Carol Huffman said. “They kept saying there might be another shutdown in the fall.” Hundreds of thousands of small business owners made the same decision in 2020, according to researchers. Collectively, they laid off millions of employees and walked away from small stores, restaurants and other enterprises in a wave of silent closures. Next year may be different if the widespread rollout of a vaccine gives entrepreneurs hope that cutting debt under court oversight is once again worth it. “Bankruptcy requires people to be hopeful that there will be a better future on the other side,” said Prof. Jared Ellias of the University of California's Hastings College of the Law. “I suspect you will see a serious bounce in Q1 and Q2 especially. The driver isn’t going to be the pandemic. The driver is going to be the vaccine.” A spate of shutterings would typically cause bankruptcies to surge, according to a paper by academics at the University of Illinois, Brigham Young University and Harvard Business School. But in 2020 they declined as some business owners walked away while others received enough government support to delay reorganizations. Through November, 20 percent fewer business cases were filed compared to the same period last year, according to statistics from the American Bankruptcy Institute. A new provision of the bankruptcy code, known as Subchapter V, started this year and was designed to make the process cheaper and easier for companies with less than $7.5 million in debt. So far, about 1,300 such cases have been filed, said Ed Flynn, a consultant with ABI who studies bankruptcy statistics. Some small companies want to wait before filing for bankruptcy under Subchapter V rules because the process comes with tight deadlines for proposing a debt-cutting plan, said Matthew C. Zirzow, a bankruptcy lawyer in Las Vegas who led two companies through the process in Nevada and has many more clients waiting to file. “They don’t want to file Subchapter V too soon,” he said in an email. “It may have a great business when things bounce back that is well worth eventually reorganizing, but who is to say when that will happen?” Banks and landlords have been far more willing to work with struggling firms during the pandemic, keeping some out of bankruptcy for longer, Ellias said. “The normal mechanisms of debt collection are not working because banks are holding off on collecting,” he said.

Chef Matthew Kelly is one of the few restaurateurs who has fought property insurers over pandemic business restrictions and won, the Wall Street Journal reported. His establishments are part of a group of restaurants that a North Carolina state court sided with this fall. The insurer has appealed the decision, which found the plaintiffs were entitled to payouts under business-interruption coverage. “I’m excited that we’ve made it this far, but that excitement and the win does not translate into relief until the job is completed,” Kelly said. Cases such as Kelly’s are keeping hope alive that some small businesses may receive insurance money to help them rebound from government-ordered shutdowns. In hundreds of lawsuits across the country, mostly small businesses have sued their property-insurance companies for refusing to pay out “business interruption” claims tied to the pandemic. Many insurers say their policies contain clear language excluding virus-related claims, while most claims also haven’t met their policies’ criteria. Many courts have backed up the insurers in their denials of payouts, but businesses are making progress. Of the roughly 100 rulings in suits pitting businesses against insurers, about three-quarters have been in favor of insurers, according to a COVID-19 litigation-tracking effort at the University of Pennsylvania Carey Law School.

President Trump unexpectedly capitulated yesterday and signed the stimulus bill into law, releasing $900 billion in emergency relief funds into the economy and averting a Tuesday government shutdown, the Washington Post reported. White House officials didn’t explain why the president decided to suddenly back down and sign into law a bill he had held up for nearly a week and had referred to as a “disgrace” just days earlier. Trump signed the bill while vacationing in Florida and on a weekend when he had allowed unemployment benefits for 14 million Americans to expire. He had demanded changes to the stimulus and spending package for a week, suggesting he would refuse to sign it until these demands were met. This continued defiance caused lawmakers from both parties to panic over the weekend, worried about the implications of a government shutdown during a pandemic. It was unclear what prompted him to change his mind late Sunday, but he was under tremendous pressure from Republicans to acquiesce. The package will extend aid to millions of struggling households through stimulus checks, enhanced federal unemployment benefits, and money for small businesses, schools and child care, as well as for vaccine distribution. It also repurposes $429 billion in unused funding provided by the Cares Act for emergency lending programs run by the Federal Reserve. Read more.

Click here for the text of the legislative package signed into law yesterday: 

President Donald Trump injected confusion into the outlook for COVID-19 relief yesterday, demanding changes to the bipartisan legislation approved by Congress less than 24 hours earlier, Bloomberg News reported. In a surprise video announcement posted on his Twitter account, Trump called the bill a “disgrace” and said it was full of “wasteful and unnecessary” items. He demanded that lawmakers increase the stimulus checks due to go out to most Americans from the “ridiculously low” amount of $600 to $2,000 — or $4,000 for a couple. “I am asking Congress to amend this bill,” Trump said. “Send me a suitable bill or else the next administration will have to deliver a COVID relief package. And maybe that administration will be me, and we will get it done.” The attack on Monday’s legislation, which included $900 billion in relief along with $1.4 trillion in government funding through next September, marked a sudden change after the administration had endorsed frantic negotiations among congressional leaders to get a deal after months of stalemate. If the president doesn’t sign the legislation by Dec. 28, government funding would lapse after midnight that day, and it would suspend benefits from the previous COVID relief bill that expire at the end of the month, including a moratorium on evictions and extended unemployment insurance — all of which were addressed in the giant package approved on Monday night. Read more.

In related news, the $27 billion cash infusion for U.S. transit agencies that Congress included in year-end legislation will help avoid draconian service cuts but still leaves them facing sharp declines in ridership and gas-tax revenue for years to come, Bloomberg News reported. The measures provide $14 billion in transportation-related aid in the nearly $900 billion COVID-19 relief bill, and $13 billion in annual appropriations in the $1.4 trillion government funding measure that were both adopted on Monday. “It buys us some more time,” said Paul P. Skoutelas, president and chief executive officer of the American Public Transportation Association, which lobbies for transit agencies. “It doesn’t solve the problem by any means.” Skoutelas said that ridership on American transit systems has dropped 60 percent this year from pre-pandemic levels. He estimated that it could take several years before ridership returns to anything remotely close to normal levels, despite promising developments with COVID-19 vaccine deployment. Read more.

To view a copy of the whole COVID-19 relief and government funding package, please click here.