April 6, 2020 - Samuels Yoelin Kantor LLP

When I was a first year law student I learned about contract formation, contractual obligations, and breach of contract. We also learned about a term called Force Majeure. You may have recently seen the term.

Force Majeure is a French term that means something along the lines of “superior or irresistible force”, but it is also a term used in conjunction with contract law. In the context of contract law, force majeure is an uncontrollable event that prevents a party from fulfilling their contractual obligations. Force majeure is commonly thought of as a provision included in the terms and conditions of a contract. But, because “uncontrollable events which prevent a party from fulfilling their contractual obligations” seldom occur, especially on a wide spread basis, force majeure provisions aren’t invoked very often.

I have reviewed many contract provisions meant to excuse a party’s performance under a contract when circumstances beyond their control (such as wars, strikes, government actions, Acts of God, natural disasters) make it so that they can’t perform their obligations, but the events meant to invoke or trigger such contract provisions don’t occur very often. The current COVID-19 outbreak may qualify as such an event, especially in light of the fact that World Health Organization has declared COVID-19 a pandemic and the Governors of Oregon and Washington have issued shelter in place orders and have prohibited many commercial activities. The coronavirus pandemic will cause numerous businesses to not be able to perform their contractual obligations.

A business unable to perform its contractual obligations as a result of COVID-19 should determine if their contract includes a force majeure provision which excuses or delays their performance because of an uncontrollable event, such as the current outbreak. Because of the widespread affect coronavirus has and will have on the ability of a business to fulfill their contractual obligations, force majeure provisions will likely become heavily debated. Professionals across the country have already begun to discuss force majeure provisions and their effect on contract obligations.

Whether or not a force majeure provision excuses or delays a party’s obligation under a contract depends upon the specific language of the provision and the surrounding facts and circumstances. Every situation is different. But, even if a contract does not include a force majeure or similar provision, there may be other legal doctrines that excuse or delay performance, including impossibility or frustration of purpose. This is especially true in light of the recent government stay at home orders and prohibition of many commercial activities. In addition, as a general rule, recognized legal treatises hold that performance prevented by an act of God or other uncontrollable event may be excused.

The outbreak has had an adverse impact on many businesses. It is my hope that parties to a contract will act promptly and honor their implied duty to act in good faith and deal fairly with one another while addressing the adverse affects of the outbreak. If so, it won’t be necessary to argue over whether or not a contract provision, government action, or legal treatise excuses a party from performance under a contract.

If the outbreak has or will affect a party’s ability to fulfill their contract obligations, they should promptly notify the other party to their contract. The sooner the better. We don’t know how long it will take for the situation to improve. Document your communications. Provide details with regard to the impact on your business.

Whether the outbreak causes a business to not be able to provide the goods or services they contracted to provide or delays their ability to do so, or causes them to not be able to pay their bills, rent, or mortgage, if they want their performance to be excused or delayed they should act promptly and be transparent. If concessions or delayed performance are being sought by a party to a contract, they may be asked if they have sought assistance through the government relief programs or insurance coverage. Parties seeking to be excused from performance under a contract should be prepared to provide financial information regarding the impact of the outbreak and a business plan to address the impact.

Because every situation is different, if your business has or will be unable to perform your contractual obligations because of the outbreak, you should consider consulting with an attorney. Samuels Yoelin Kantor is available to assist with the legal issues raised by the COVID-19 outbreak. If you need legal advice or guidance, please feel free to reach out to us. Even if we’re working remotely, we’ll promptly get back to you.

Van M. White III has more than 20 years of experience as a lawyer in Oregon and Washington. Van has been a partner at Samuels Yoelin Kantor since 2001 and has served on the firm’s management committee since 2010.

This sudden economic downturn will cause a large number of individuals and corporate entity debtors to consider bankruptcy in order to get a better handle on their financial situation. While many associate declaring bankruptcy as an admission of failure or destitution, bankruptcy can actually offer debtors a path toward recovering from a devastating financial situation. When considering whether bankruptcy is the right option for your situation, it is essential to have a basic understanding of how bankruptcy works and the initial actions you should take should you need to proceed with bankruptcy.

Understand the Different Types of Bankruptcy

The different types of bankruptcy are referred to as “Chapters”, and likely only one form will apply to a specific situation.

Chapter 7 Liquidation
- The simplest and most common bankruptcy, a “straight bankruptcy”.
- Individuals and most corporate entity debtors can qualify for Chapter 7.
- Debtors are not required to submit to a repayment plan, but it does require liquidation of all nonexempt assets to payback creditors.
Chapter 11 Reorganization
- Form of bankruptcy for both individuals and corporate entity debtors.
- Rather than liquidation, the debtor submits a reorganization plan that explains how it will be able to repay creditors over a period of time.
Chapter 13 Debt Adjustment
- Form of bankruptcy for individual debtors only.
- The individual debtor must have a certain level of income to qualify.
- Rather than liquidating all assets, it allows the debtor to protect certain property and have enough time to pay off your debts within a monthly payment plan.

There are other much less common chapters of bankruptcy, but 7, 11 and 13 are the most utilized.

To properly prepare for bankruptcy, there are also a number of steps we recommend.

Gather Financial Statements

Regardless of the form of bankruptcy applicable to the situation, the first step requires getting financial statements in order. Order copies of all banking and financial account statements, obtain past filed federal and state tax returns, and figure out your income level from pay stubs, Form W-2 and Form 1099 and more. Depending on the amount of disposable income available, a debtor may or may not qualify for different chapters of bankruptcy.

Prepare an Asset List

Bankruptcy also requires a list of all assets and property owned. This does not mean listing out every piece of furniture or article of clothing, but rather a list of every significant asset that has actual value. Real property, bank accounts, investment accounts, retirement accounts, vehicles, luxury items all need inclusion on an asset list.

Get Current with Taxes

Debtors not current with their federal and state taxes will often encounter great difficulties in qualifying for bankruptcy. Tax returns determine past and current earning and asset holdings, and inform the IRS whether a debtor owes any additional taxes beyond W-2 withholding or past payments made. Any tax owed on returns not yet filed is also not dischargeable in bankruptcy.

Prepare a List of Creditors

Bankruptcy requires a debtor’s complete disclosure of all debts not only to the court, but also to all creditors. Any creditor left out will not be included in the bankruptcy, which could cause massive complications for a debtor thinking it will get a clean slate. Ordering a credit report from one of the three major credit agencies is a good way to confirm that no creditor is left off the list. The creditor list needs to include all secured, unsecured, and priority unsecured creditors. If you owe back taxes, the IRS is also considered a creditor.

Avoid Fraudulent Transfers

In the period leading up to a bankruptcy, a debtor’s actions and transfers will receive heavy scrutiny from both the court and creditors. If one attempts to sell, transfer or hide assets before a bankruptcy, the court may block the discharge of any debts and the debtor may even be subjected to criminal penalties. Payments in the ordinary course of business are permitted, and transfers or sales made in furtherance of paying debts and expenses are also allowed, but may require additional explanation and verification from the court and creditors. Also avoid preferential transfers to family member debts as those will also be potentially considered fraudulent transfers.

Retain Qualified Counsel

Navigating the complex bankruptcy laws also requires having effective legal representation. Our team of experts at SYK can help you make the right decisions and provide the advice you need in the event of bankruptcy.

Nicholas D. Rogers joins SYK Estate Planning and Taxation practice with a passion for helping individuals, small business and nonprofits. His practice includes a focus on estate planning, federal and state tax controversy, business formation and planning, as well as trust and estate administration.

Contracts, Coronavirus, and Force Majeure: How Does COVID-19 Affect Contract Obligations?

How to Prepare for Bankruptcy

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