Major League Baseball (MLB) is scheduled to begin its COVID-delayed season on July 23, but the MLB teams’ Minor League counterparts will have no 2020 campaign. Their season has been canceled. Many Minor League teams are now seeking victories in court, suing their insurers for denying them coverage under their insurance policies for business interruption and income loss.
COVID-19, Economic Crisis Put Pressure on CLOs
As state and local governments throughout the country attempt to find a balance between re-opening the economy and sheltering in place, fears persist that the COVID-19 pandemic has already set in motion the next financial crisis. Early in the pandemic, we wrote about various types of debt that might melt down because of increased borrower defaults, including securities backed by student loans, auto loans, and commercial mortgages.[1]
Supreme Court Rules CFPB’s Structure Must Be Modified
While declining to rule that the Consumer Financial Production Bureau (CFPB) itself is unconstitutional — a position taken by many of the agency’s opponents since it began operating in July 2011 — the U.S. Supreme Court ruled today, June 29, 2020,that the CFPB’s structure violates the Constitution. In a 5-4 decision, the Court held that the structure put in place when the Dodd-Frank Act created the CFPB unconstitutionally insulates the agency from presidential oversight and must be modified. In so holding, the Court rejected a restriction that the Dodd-Frank Act placed on the president’s ability to fire the agency’s director.
Florida’s Uniform Commercial Real Estate Receivership Act – A New Statutory Framework for Receiverships
In March, the Florida Legislature passed CS/HB 873, approving the Uniform Commercial Real Estate Receivership Act (“UCRERA”). First drafted in 2015 by the Uniform Law Commission, UCRERA has already been adopted by seven states: Arizona, Maryland, Michigan, Nevada, Oregon, Tennessee, and Utah. If Governor DeSantis signs the bill, UCRERA will become effective July 1, 2020, and will be codified under Chapter 714 of the Florida Statutes. With the anticipated large volume of commercial foreclosures due to COVID-19 and expectations of resulting delays in the foreclosure process, this Act could have significant immediate effects. It would likely provide relief that commercial lenders and other parties have sought to protect their interests in real property, as well as incidental personal property related to or used in operating the real property.
Proposed PPP Flexibility Act Would Relax Certain Current Loan Requirements
Businesses that receive forgivable loans through the Paycheck Protection Program (PPP) would get additional time and greater flexibility to make use of those funds under proposed legislation approved last week by the U.S. House of Representatives. By a 417-1 vote, the House passed on for the Senate’s consideration the PPP Flexibility Act. That Act, if it becomes law, would give employers 24 weeks to spend the money and have the loans forgiven. The current permitted period is just eight weeks.
As Businesses Re-open, Congress Mulls Shielding Them From Liability
Talk of a broader “re-opening” of the economy has led to a fierce debate in Congress about whether it would be advisable to include, as part of a new COVID-19 legislative relief package, provisions creating certain immunities from potential liability for businesses that re-open. Specifically, some U.S. senators want to insulate companies from liability for claims by employees or customers that their health was compromised by unsafe workplace conditions that the company permitted to exist. Others say leaving employees or customers with little to no legal recourse for coronavirus exposure would be unjust, and may even make employees less willing to return to work in the first place. This debate is, in turn, sparking a re-examination of other related legal issues, like what the “standard of care” should be for protecting health at workplaces, whether that standard should be federal or local, whether standards should be established on an industry-by-industry basis, and what insurance coverage companies might have for claims by employees or customers that they were exposed to COVID-19 on the company’s premises.
Florida Foreclosures Continue To Be Suspended
On May 14, 2020, Florida Governor Ron DeSantis issued Executive Order Number 20-121, extending his April 2, 2020 Executive Order 20-94 suspending all foreclosure actions through June 2, 2020. While the preamble to Governor DeSantis’ Executive Order makes clear that the purpose is to provide temporary relief to Floridians with single-family mortgages, the Executive Order goes further – it suspends all foreclosure actions, including commercial foreclosures. Though the deadline under Governor DeSantis’s Executive Order is now set to expire on June 2, 2020, a Florida Supreme Court Order on May 4, 2020, limiting court proceedings through May 29, 2020, and suspending jury trials through July 2, 2020, as well as orders from each of the circuit courts, makes clear that foreclosure sales will continue to be suspended for at least the next few weeks.
Government-Mandated Closures, Direct Physical Loss, and the Explosion of Litigation Seeking Business Interruption Insurance Coverage
On April 20, 2020, Colorado Governor Jared Polis laid out an ambitious plan to dramatically reduce the restrictions on personal movement and business operations created by last month’s “Stay-at-Home” Order.[1] Dubbed the “Safer-at-Home” Order, this modification (and others like it in various other states) provided a glimmer of hope to citizens who have been largely confined to their residences since March 26.
The push to safely restart the American economy does not alter the fact that a growing number of businesses have already suffered — and are continuing to suffer — devastating economic losses as a consequence of the COVID-19 public health emergency. They are increasingly looking to their insurance policies for coverage. Despite the well-intentioned efforts of some state legislatures to require insurance companies to pay business interruption claims, it currently appears unlikely that federal, state and local governments will mandate that carriers pay these claims. [2] Accordingly, the courts will be the primary mechanism for assessing policyholders’ rights to business interruption coverage under their policies. Since late March, more than 75 lawsuits seeking business interruption coverage have been filed against insurance companies. This post will examine one of the seminal cases likely to be relied upon in challenging insurers’ failure to provide coverage under these policies. It will also discuss a recent decision from the Supreme Court of Pennsylvania that should provide plaintiffs some hope as this emerging body of case law develops further.
Lawsuits Allege Preferential or Self-Serving Disbursement of PPP Funds by Major Banks
In response to the severe economic disruptions caused by COVID-19, Congress took unprecedented fiscal steps to inject liquidity into the economy. One of Congress’ most significant actions was the CARES Act, which included the $349 billion Paycheck Protection Program (PPP), providing forgivable loans to businesses to cover payroll expenses.[1] However, the program ran out of money within only two weeks of its launch [2]Congress then replenished PPP funds in a second round of PPP funding that started on April 27.[3] Some reports indicate that a third wave of PPP funds might be on the way as part of anticipated future legislation. [4]
Frustration over the availability and distribution of PPP funds has begun sparking litigation. In one increasingly common type of such suits, small business owners have sued multiple big banks that administered the PPP funds, alleging various theories of liability. One such case recently was initiated in federal court in Maryland, and epitomizes one of the theories of liability being invoked. In that case, the plaintiffs (small businesses) alleged that Bank of America gave preferential treatment to its existing customers.[5] Under this “gating” policy, BoA purportedly obtained PPP funding for its customers, but delayed processing non-customer applicants, causing them to miss out on funding altogether. [6] The Maryland federal judge, though, rejected the small businesses’ request to stop BoA from “gating” applicants based on its preferred eligibility requirements. The plaintiffs are now seeking to appeal that decision to the Fourth Circuit Court of Appeals.
A Resurgence of Residential Mortgage Repurchase Claims on the Horizon
A surge in repurchase claims against mortgage originators may be imminent as aggregators and servicers face nonpayment of debt obligations and liquidity shortfalls resulting from an increase in residential mortgage loans put in forbearance. In the coming weeks, it is likely that an unprecedented number of borrowers will avail themselves of mortgage relief provided under the CARES Act. As that number rises exponentially, aggregators and servicers, who are responsible for advancing funds on certain types of loans, will be looking for ways to minimize their losses and transfer risk.
Under Section 4022 of the CARES Act, borrowers of residential loans that are either insured or guaranteed by the federal government, or owned or securitized by government-sponsored entities (“GSEs”), such as Fannie Mae or Freddie Mac, may request postponement of their mortgage payments. This section provides that if a borrower submits a request to the loan servicer, affirming that he or she has a financial hardship that directly, or even indirectly, results from COVID-19, the servicer is obligated to grant the borrower a 180-day forbearance on mortgage payments. This forbearance can be extended up to a period of an additional 180 days, which means that borrowers may effectively defer payments on their mortgage for up to a year. No proof of hardship is required, only an attestation. The loan does not have to be in default status, or even be delinquent, for the borrowers to obtain such relief. During the forbearance period, in addition to not paying principal and interest, borrowers are not responsible for any fees or penalties.
