The Final Mile- The Future of Outstanding Main Street Lending Program Loans
The Main Street Lending Program (MSLP), launched in 2020 as part of the federal response to the COVID-19 pandemic, provided billions in liquidity to small and medium-sized businesses facing unprecedented economic disruption. The Federal Reserve Bank of Boston (FRBB), acting as the program’s administrator through a newly created special purpose entity, purchased a 95% participation interest in all eligible loans, with originating banks retaining the remaining 5% interest and servicing responsibilities. Loans issued under the MSLP ranged from a few hundred thousand dollars up to $50 million. Each loan had a five-year term with a 70% balloon payment due at maturity. The MSLP closed to new lending in January 2021.[1]
While some borrowers have secured short term extensions of several months up to one year in limited circumstances,[2] most outstanding loans will face maturity deadlines between now and early January 2026. As of October 31, 2025, approximately $1,086,818,968 in MSLP loan principal remained outstanding.[3] Many borrowers with outstanding MSLP loans may be unable to refinance the loans or pay them off at maturity. With the MSLP program scheduled to wind-down in the coming months, a critical question looms: what will happen to the nearly one thousand MSLP loans that may default as a result of maturity?
There Are Potential Options, but Uncertainty Remains
Principal Forgiveness. The federal statute governing MSLP provides that “[t]he principal amount of any obligation issued by an eligible business … under [the Main Street Program] shall not be reduced through loan forgiveness.”[4] This language makes clear that it is unlikely the FRBB will forgive any of the MSLP loans that mature in the next few months absent an act of Congress or the Executive branch that alters a fundamental tenet of the program.
Term Extensions. Under certain circumstances, the banks administering MSLP loans and the FRBB have granted borrowers short term extensions of the maturity date. Typically, these extensions have not exceeded six months. Even with extensions, these MSLP loans likely will mature within the next few months. As of now, the FRBB has indicated that further or longer-term extensions may not be available.
Individual Loan Sales. For MSLP loans that have defaulted prior to their maturity date, the FRBB has approved sales of these loans to the administering banks or third parties that express an interest in purchasing the defaulted loans if certain criteria are established. More detail about this process can be found here. Given the length of time required and administrative burden on the FRBB in approving individual loans sales, it seems unlikely that the FRBB could dispose of all of the remaining MSLP loans in this fashion before the program’s scheduled termination.
A Sale of the MSLP Loan Portfolio. As an alternative option, the FRBB could pool and sell one or more packages of outstanding MSLP loans. In fact, the standard terms and conditions of the participation agreement that governs each MSLP loan provides such a mechanism. As a condition to the FRBB purchasing a 95% interest in each MSLP loan, the administering bank executed an “assignment in blank,” providing advance consent to the transfer of the bank’s 5% interest in the loan to the FRBB in certain circumstances.[5] For example, in the event of a payment default by a MSLP borrower, including as a result of the scheduled maturity of the loan, the FRBB may “elevate” its participation interest by activating the assignment of an administering bank’s 5% interest in the loan pursuant to the Assignment Executed in Blank without any further consent by the administering bank.[6] In exchange, the FRBB is required to pay an “Elevation Transfer Fee.”[7] Upon the upcoming maturity of the majority of the outstanding MSLP loans, the FRBB could elect to exercise its “elevation” right in respect of a large pool of loans, or several smaller pools of loans, thereby taking full ownership of the loans to facilitate a portfolio sale without the administrative burden of seeking bank consent.
Another option is for the FRBB to sell only its participation interest and rights under the participation agreement, thereby leaving each bank administering MSLP loans with its 5% economic interest. Similar to an Elevation, the FRBB does not need the consent of the administering banks to sell its participation interests for loans that are in payment default.[8] It is unclear whether there would be buyers interested in purchasing the FRBB’s participation interests. Any such buyers would step into the shoes of the FRBB for purposes of the servicing arrangement with each administering bank.
Liquidation. The MSLP was designed as a stimulus program aimed at providing much needed liquidity to businesses impacted by the COVID-19 pandemic. Although the loans are recourse, and not forgivable unlike other pandemic stimulus programs, forcing businesses with MSLP loans to liquidate might be viewed as anathema to the program’s intent. By selling the loans into the private market at their market value, as discussed above, the FRBB could give struggling business the opportunity to restructure the MSLP loans rather the face liquidation. It could further allow the administering banks to recover all or a substantial percentage of their economic interest in the loans and remove themselves from the loan workout process.
Considerations for Borrowers. The MSLP contains a statutory prohibition on principal forgiveness. The statute’s plain language suggests the restriction is tied to the FRBB’s ownership,[9] although regulatory guidance is sparse. In the event a borrower’s MSLP loan is sold—whether as a single loan or as part of a pool of loans—borrowers should anticipate the opportunity to negotiate for new loan terms, including a potential reduction in principal amount if the circumstances warrant. If the FRBB exercises its right to elevate its participation interests and sell one or more loan pools, thereby replacing the current structure of a disparate group of banks that administer the MSLP loans with a single counterparty, borrowers might expect more consistency and predictability in pursuing workout negotiations. That said, some borrowers may have concerns with facing a new lender with which they have no prior relationship or business dealings. Many borrowers had pre-existing relationships with the banks that administer their MSLP loans. In that instance, borrowers that have misgivings about facing a new and unknown lender may decide to accelerate workout discussions with the banks currently administering the MSLP loans.
Considerations for Lenders. In the event the FRBB decides to elevate any MSLP loans or sell participation interests, the administering banks should understand their rights under the applicable documents. The form participation agreements provide for lenders to receive notice and to provide consent unless the transaction fits within the one of the specified exceptions, such as in the event the loan is in payment default.[10] If an MSLP loan is in default, the FRBB is free to sell, assign, or transfer its interests in MSLP loans without the banks consent, provided that (i) the transaction does not result in a violation of any terms of any loan documents, (ii) the transferee makes certain representations, warranties, and covenants already existing under the standard participation agreement, and (iii) the transferee (A) either (1) is organized under the laws of the United States or any state thereof or (2) has represented that no taxes will required to be withheld from the FRBB on account of any payments made to the transferee on account of the transferred interests, and (B) furnishes to the FRBB documents evidencing the transferees exemption from withholding of any tax imposed by any jurisdiction or to enable FRBB to comply with the laws relating thereto.[11] In the event the FRBB sells its participation interests in the MSLP loans to a non-government third-party, the transition away from federal oversight may inject uncertainty into the process, particularly the handling of distressed assets. Originating banks accustomed to the FRBB’s standardized directives may find communication and decision-making more challenging with one or more new participants. Divergent interests and strategies could complicate modifications, workout negotiations, and servicing logistics.
Looking Ahead
As the MSLP nears its final chapter, the outcome for business with outstanding MSLP loans remains uncertain. The FRBB has several options for winding down the program but has yet to give any indication about what course of action it will take. The possibility of a bulk portfolio sale by the FRBB raises certain practical and legal questions for both borrowers and lenders and could pave the way for potential loan workouts and restructurings. Key issues will hinge on the interplay of contractual consent rights, statutory restrictions, and the appetite of new investors to engage in creative workouts. In the months ahead, market participants should closely monitor regulatory signals and prepare for a potentially more fluid—and uncertain—environment for MSLP loans.
[1] A more detailed description of the background and mechanics of the MSLP can be found in previous Hunton articles on the topic at: COVID-19 Hangover: Lender Options for a Distressed Main Street Lending Program Loan & Running Out of Road: Workout Options for Main Street Lending Program Loans Nearing Maturity.
[2] See Financial Statements: MS Facilities LLC For the Years ended December 31, 2024 and 2023 and Independent Auditors’ Report, p. 19 n. 1-3.
[3] See Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act November 10, 2025. At the close of the third quarter of 2024 (last reported data), approximately 847 MSLP loans remained outstanding. See GAO-25-107246, Federal Reserve Lending Programs: Nearly Half of Main Street Program Loans are Fully Repaid, but Losses have Increased, (Dec. 19, 2024).
[4] 15 U.S.C. § 9042(d)(3).
[5] See Participation Agreement Under the Main Street Lending Program: Standard Terms and Conditions, § 3.1.
[6] See id. at §§ 1.2, 15.1
[7] See id. at §§ 1.2, 15.4
[8] See id. at § 10.1(a)
[9] See 15 U.S.C. § 9042(d)(3) (“(d) Financial protection of government (3) The principal amount of any obligation issued by an eligible business, State, or municipality under a program described in subsection (b) shall not be reduced through loan forgiveness.” (emphasis added).
[10] See Participation Agreement Under the Main Street Lending Program: Standard Terms and Conditions, § 10.1.
[11] Id.
When Financial Stress Becomes Distress
Business stress can be caused by many factors, including slipping revenues, regulatory or technological changes, and macroeconomic factors that push interest rates higher, to name a few.
A company may be able to navigate its stresses, whatever they may be, back to clear waters. Consider: pivots in business strategy, strategic hires, and equity infusions to reduce the cost of capital. A stressed business may (or may not) benefit by retaining outside experts, such as management consultants.
A distressed business is altogether different. The word implies a business that is at least arguably insolvent or quickly on its way to becoming so.
At that point, the legal and practical landscape starts to change:
Corporate directors and officers, who previously could focus exclusively on maximizing value for the business’s owners, must spend much of their time managing the distress itself.
The skills that management consultants typically deploy to advise healthy and even stressed companies are generally ineffective, leading to the need to sometimes retain specialty ‘turnaround advisors.’
Directors, who could previously focus solely on owners’ interests, must now also consider the interests of the company’s creditors in ways they did not have to before. Decisions like paying some creditors rather than others, moving assets, and continuing to accept credit terms can come under scrutiny later, and the right answers are often not clear. As Jordan Leu of King & Spalding explains, once a company enters distress, it’s not just about survival; it’s about making choices that maximize the value of the overall enterprise.
But financial distress can be reversed, or at least its impact on stakeholders can be muted. The key is to understand the available options, act early, and make informed decisions with the right help.
Options for the Distressed Business
Once distress is apparent, the next step is to figure out a path. There are several tried-and-true strategies that a financially distressed company can employ, and they are not necessarily mutually exclusive. The best path(s) for any given situation is not always clear cut, and each has its own set of pros and cons. Some (just some) of the factors that drive which path a company should take include:
The cause(s) of its distress
How big the company is, in terms of its financial metrics and headcount
Its ability to generate gross revenue and its ability to cut costs
Its capital structure (e.g., whether its equity is closely or widely held, whether it has secured debt)
Its relationships with key creditors
Its geographic footprint
Whether its owners have provided personal guarantees
Broader industry trends or supply chain risks
“There’s no one-size-fits-all solution. Every business has its own ecosystem, including creditors, lenders, and owners, all of whom have different needs and leverage points,” notes Jonathan Friedland, corporate and corporate restructuring attorney with Much Shelist, P.C.
Let’s unpack these options one by one.
Chapter 11 Bankruptcy
When people hear ‘bankruptcy,’ they often think of failure. However, Chapter 11 of the US Bankruptcy Code is more akin to a reset button. It allows a company to pause collections, reorganize debt, and either keep operating or sell assets under court supervision.
The moment a business files for Chapter 11, an ‘automatic stay’ kicks in. That means creditors must stop trying to collect debts, file lawsuits, or repossess property without first getting the bankruptcy court’s permission to do so. The company generally becomes a ‘debtor-in-possession,’ (DIP) meaning it continues day-to-day operations but must report to the court and creditors. A key advantage of DIP status is ‘debtor-in-possession financing.’ This special type of lending arrangement helps companies continue operating during the process, with the lenders often receiving priority repayment.
Taking a step back, Friedland summarizes the end goal of Chapter 11 as follows: “Some companies (i.e., debtors) can use Chapter 11 to restructure their debts, and emerge as a ‘reorganized company’ that continues to operate. This often means that those who owned 100% of the company before the bankruptcy continue to own 100% after. Other companies emerge from Chapter 11 and continue in business, but under an ownership structure that has changed in some way. Other companies end up being sold in Chapter 11 ‘free and clear’ of liens, claims, and encumbrances under Section 363.”
Chapter 11 is strong but expensive medicine. It comes with court costs, professional fees, and public disclosure requirements. For smaller companies, Congress added Subchapter V, a streamlined version that’s faster and less expensive.
Assignment for the Benefit of Creditors (ABC)
An Assignment for the Benefit of Creditors (ABC) is a state-law alternative to bankruptcy. The rules vary by state. Some, like California and Delaware, have detailed statutes governing ABCs. Others, like Illinois, rely on case law. The main job of an assignee is to sell the company’s (i.e., the assignor’s) assets and distribute the proceeds to creditors.
“Speed and flexibility are the ABC’s biggest strengths. It lets everyone move on quickly while maximizing value,” underscores Richard Corbi of the Law Offices of Richard J. Corbi PLLC.
An ABC can be considered a state law rough equivalent to Chapter 7 bankruptcy, with some advantages. Read more in “Selling Distressed Assets: The Assignment for the Benefit of Creditors Alternative.”
ABCs are likely to grow rapidly in use over the next decade, according to Friedland, as states adopt the recently promulgated Uniform ABC Act. For more information on that, you may wish to read, “Brought to You by the Makers of the UCC: The Uniform Assignment for Benefit of Creditors Act.”
Creditor Workouts and Compositions
If the business is still viable, creditors may agree to modify repayment terms without the need for a bankruptcy or ABC. This is called a ‘workout’ or ‘composition agreement.’
In a workout, the debtor negotiates directly with lenders or vendors to extend payment deadlines, reduce interest, or restructure loans. It’s informal but effective if everyone cooperates.
As Steven Nerger of Nerger Advisory Services notes, “A successful workout isn’t just about math; it’s about rebuilding trust and showing lenders you have a credible plan.”
A composition agreement is a formal contract where multiple creditors agree to accept partial payments, perhaps over time, in full satisfaction of what’s owed.
The main advantage of these approaches is flexibility: no court, less publicity, and lower cost. The downside is the risk of ‘holdouts’ (stakeholders who refuse to agree). These parties may cause a deal not to happen at all or may end up ‘free-riding.’
Article 9 Sales
For lenders holding collateral, Article 9 of the Uniform Commercial Code provides a path for a secured creditor to recover and sell its collateral without having to go through bankruptcy court. A lender can seize pledged assets and sell them in what’s called an ‘Article 9 sale,’ as long as the sale is commercially reasonable.
When a company is a borrower under a secured loan, Friedland explains, it often pledges substantially all of its assets as security for the loan. And both borrowers and guarantors sometimes pledge their equity in companies as collateral.
When a borrower defaults on a loan, a secured creditor can foreclose on and sell all the collateral pledged by both the borrower and the guarantor. Buyers often prefer buying in an Article 9 sale because they’re quick and they perceive an ability to sometimes get a bargain.
At the same time, purchasing though Article 9 carries some risks. If a sale isn’t handled properly, it can invite more trouble down the line,” warns Leu.
The Buyer’s Perspective in Distressed Transactions
Buying assets from a distressed business can be an incredible opportunity if done correctly. Distressed acquisitions can present an opportunity to acquire valuable equipment, customer lists, or intellectual property. Prices are often low, but risk is high. Buyers need to look beyond the price tag and ask key questions:
Am I buying assets ‘free and clear’?
Are there hidden liabilities?
Do I need the secured lender’s support?
Buyers want certainty, which is why due diligence is crucial. Whether buying through a 363 sale in bankruptcy or an Article 9 sale, it is essential to review title, liens, and tax records carefully.
A key theme common to any distressed purchase: making a proper record of the sale process, being commercially reasonable, is critical from a buyer’s perspective to protect against the risk of being sued later for paying less than reasonably equivalent value for what is purchased. For more information on this, read “The Myth of the Newspaper Being a Commercially Reasonable Notice.”
Navigating Trouble With Strategy and Realism
Financial distress doesn’t just test balance sheets; it tests leadership. The best leaders face the situation honestly and communicate openly with employees, vendors, and lenders. Even in the most challenging times, clarity and consistency can preserve both relationships and value. While financial distress is tough, it doesn’t have to be the end. The key is to act quickly, understand the available legal options, and seek advice early.
Here are a few final takeaways:
Don’t ignore warning signs; cash crunches rarely fix themselves.
Understand fiduciary duties once insolvency approaches.
Consider all available restructuring tools.
Communicate honestly with creditors and stakeholders.
Bring in experienced legal and financial advisors.
This article was originally published on November 24, 2025 here.
Ninth Circuit Enjoins California Climate Risk Disclosure Law as CARB Moves Forward with Implementation
Ninth Circuit Grants Motion Requesting that SB 261 Be Enjoined Pending Appeal
On November 18, 2025, the U.S. Court of Appeals for the Ninth Circuit issued a two-sentence order granting a motion to enjoin enforcement of SB 261 (“Climate-Related Financial Risk”). See Chamber of Commerce of the United States of America et al. v. California Air Resources Board et al., Case No. 25-5327 (9th Cir.), Doc. 44. The underlying motion had requested that the Ninth Circuit enjoin CARB from applying or taking any action to enforce SB 261 or SB 253 (“Climate Corporate Data Accountability Act”) against the Chamber’s members and members of the co-plaintiff associations pending appeal. The appeal concerns a lower court order denying injunctive relief during the pendency of plaintiffs’ constitutional challenge to SB 253 and 261. Last month, the Ninth Circuit assigned the motion for junction to a merits panel and scheduled argument for January 9, 2026, causing the plaintiff associations to seek emergency relief from the U.S. Supreme Court in light of the upcoming January 1, 2026, compliance deadline for SB 261.
The Ninth Circuit provided no explanation of the decision to grant the plaintiffs’ motion for injunction as to SB 261, but presumably the upcoming compliance deadline was a consideration. In light of this development, the U.S. Chamber and its co-petitioners withdrew their emergency petition filed last week with the U.S. Supreme Court. Oral argument before the Ninth Circuit is still scheduled for January 9, 2026, where the lower court’s denial of the request to preliminarily enjoin SB 253 and 261 will be at issue.
The Ninth Circuit’s order does not address whether the scope of the injunction is limited to the plaintiffs in the litigation or whether SB 261 enforcement is enjoined more broadly. CARB was asked during the public workshop it held on SB 261 and 253 implementation (summarized below) on the same day of the Court’s order whether it would pursue enforcement of SB 261 as to non-parties to the litigation, in light of the Court’s order. A CARB attorney responded during the workshop that the issue is still under review because the order had just been issued.
CARB Holds Public Workshop on SB 253 and 261 Compliance and Implementation
Also on November 18, 2025 (contemporaneous with the Ninth Circuit order issuance), CARB held a public workshop to present new information on compliance deadlines and substantive obligations under SB 253 and 261. In anticipation of the workshop, CARB posted updated SB 253 and 261 guidance to its resources page, including updated FAQs and a final version of the SB 261 Compliance “Checklist.”
Key takeaways from the workshop and the updated guidance documents are as follows:
SB 261 Compliance for “Early-Stage” Analysis. The updated Checklist emphasizes that companies in the early stages of evaluating climate-related risks may begin by disclosing how those risks relate or may be relevant, even if no material risks have been identified or actions taken. CARB “encourages” such companies to include in their disclosures a description of gaps, limitations, and assumptions made as part of their assessment of climate-related issues. CARB’s staff stated during the workshop presentation that they do not expect companies to be developing new data or methods for the first reports due January 1, 2026—rather, staff emphasized a “provide what you have” approach to discharging the reporting obligation.
SB 253 Deadline and Enhanced Enforcement Discretion for Initial Reports. CARB plans to propose an August 10, 2026, deadline for the first reports due under SB 253, covering Scope 1 and 2 emissions (see updated FAQ # 3). CARB also re-enforced the “report what you have” message of its December 2024 enforcement discretion notice but signaled additional leniency—stating in the workshop and its updated FAQs that, if an entity was not collecting data or planning to collect data at the time the enforcement discretion notice was issued, it is not expected to submit Scope 1 and 2 reporting data in 2026. Instead, such entities “should submit a statement on company letterhead to CARB, stating that they did not submit a report, and indicating that in accordance with the Enforcement Notice, the company was not collecting data or planning to collect data at the time the Notice was issued” (see FAQ # 19). Further, CARB stated that it will not require limited assurance for SB 253 data submissions due in 2026 (see FAQ # 20).
Implementation Fees. CARB expects to issue invoices for the implementation fees authorized under both SB 253 and 261 on September 10, 2026, and emphasized that fees will be assessed on an entity-specific basis. Fees will be equal for all reporting entities, and each covered entity in a corporate family will trigger a separate fee obligation. The first phase of CARB regulations—expected to be published late 2025-early 2026, with Board approval and adoption expected in the first quarter of 2026—will largely be focused on the administration of the fee provisions of the laws, in addition to codifying the SB 253 compliance deadline.
Applicability. CARB also provided additional guidance on how companies should evaluate whether SB 253 and 261 apply to them, although ultimately such clarifications will not have legal effect until CARB completes its rulemaking process next year. Nonetheless, CARB specified that:
“Doing business in California” for purposes of SB 253 (and potentially SB 261) will be defined by reference to the “doing business” definition in California Revenue & Tax Code (RTC) § 23101, but only paragraphs (a) and (b)(1) & (2) of that section, meaning that only the in-state sales thresholds would be relevant to determining whether an entity is “doing business,” not the property or payroll thresholds.
Annual revenue will likely be defined by reference to the RTC § 25120(f)(2) “gross receipts” definition (see FAQ # 4). Thus, annual revenue for purposes of SB 253 and 261 applicability would be verifiable in a company’s FTB tax filings (g., Form 100, Schedule F, Line 1a “gross receipts” for corporations, see Workshop Presentation Slide 21).
Parent-Subsidiary Relationship. CARB clarified during the workshop that “parent-subsidiary relationships do not determine which entities are regulated” (Workshop Presentation Slide 26), and, where a parent entity has a subsidiary doing business in California, the parent will not be automatically deemed to be doing business in California—rather, “[i]nclusion criteria should be assessed on an individual company basis,” and both the parent and the subsidiary should “assess their own compliance obligations based on the criteria outlined in the statute” and CARB’s proposed definitions summarized above (FAQs # 12-13).
Unfortunately, for most companies, the Ninth Circuit ruling and new CARB guidance come late in the compliance planning process and create much uncertainty about next steps. There is not a uniform answer as to how to proceed, as each company is differently situated in terms of preparation, corporate structure, and other factors.
Hannah Flint contributed to this article
Treasury Department Announces Audit of Preference-Based Contracts and Task Orders
In an announcement made earlier this month, the U.S. Treasury Department unveiled “a comprehensive audit of all contracts and task orders awarded under preference-based contracting, totaling approximately $9 billion in contract value across Treasury and its bureaus.” The Treasury Department added that “[t]he audit will examine potential misuse of the Small Business Administration’s [SBA] 8(a) Business Development Program, and other initiatives that provide federal contracting preferences to certain eligible businesses.” Treasury’s announcement follows on that department’s “suspension of all contracts and task orders with ATI Government Solutions” last month. Public records and a post on social media site X by the SBA Administrator reveal that the SBA had suspended ATI, a Native-American-owned business, from the SBA’s 8(a) program in October because of allegations of misuse of the 8(a) program. Treasury’s announcement is also consistent with the SBA’s prior announcement of “an immediate and full-scale audit of the agency’s 8(a) Business Development Program,” which began in June.
The 8(a) program, which takes its name from Section 8(a) of the Small Business Act of 1958, is intended “to assist eligible small disadvantaged business concerns compete in the American economy through business development” through training, technical assistance, and contracting opportunities. To qualify for the SBA’s 8(a) program, businesses must, among other things, constitute a “small business” under the regulations set forth at 13 C.F.R. Part 121; be “unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States”; and demonstrate “potential for success.” Given the current administration’s stated opposition to what it considers to be discriminatory government programs, it is certainly possible that Treasury’s department-wide audit may well expand to include not just 8(a) program contractors but also those participating in the Service-Disabled Veteran-Owned Small Business (SDVOSB), Women-Owned Small Business (WOSB), and HUBZone programs.
According to the Treasury announcement, its “acquisition professionals have been instructed to require detailed staffing plans and monthly workforce performance reports for all service contracts. These tools will help detect non-performance and pass-through contracting that could point to potential fraud.”
Consequently, given that the object of the audit is to detect fraud, it would be prudent for contractors operating pursuant to preference-based small business programs to:
Review all contracts and task orders awarded under any preference-based initiative for compliance with eligibility and performance requirements;
Ensure that its small-business partners are performing the required share of work and that no arrangements resemble an impermissible “pass-through” structure;
Maintain clear records of work allocation, certifications, and communications that evidence compliance with contract and task order requirements; and
Establish protocols for responding to audit requests and consider engagement with counsel for proactive risk assessment.
Listen to this post
Caveat Venditor and Sellers Beware- New Rules require Product Guarantee Information for All Consumer Products
The European Commission (EC) continues with its agenda on enhancing consumer rights and empowering consumers for the green transition. Most recently, in late September 2025, the EC adopted an Implementing Regulation (EU) 2025/1960 (new Regulation) that looks to provide consumers across the European Union (EU) with clear information on their legal rights when there is something wrong with a product they have purchased.
From 27 September 2026, all websites and physical shops in the EU selling goods of any type to consumers will be required to prominently display a new mandatory notice reminding consumers about their legal guarantee rights. This extends beyond categories such as electronics and appliances and applies to clothing, shoes, accessories, furnishings, décor, toys, beauty products, and more.
Consumer brands and resellers should therefore carefully review their guarantee policies in EU Member States now to ensure compliant processes and terms are in place and point of sale materials and online copy are prepared and distributed in time for the go-live date next year. This alert considers the key requirements and how they differ from the position today.
Legal Guarantee v Commercial Guarantee
Before we dive into the new Regulation and what it means for your business, it is important to ensure that different types of guarantees are understood. There are two distinct types of guarantees, namely, legal guarantees and commercial guarantees.
Legal Guarantees
Legal guarantees (also known as “statutory warranty rights”) are mandatory legal protections for consumers imposed by statute in the event a product does not conform to the mandatory requirements, including not complying with its description or if it has a defect during the legal guarantee period. These rights are enshrined in EU consumer protection law and cannot be excluded by the seller. The Sales of Goods Directive (EU) 2019/771 entitles consumers to a minimum of two years’ legal guarantee following purchase, with some Member States (including Spain and Portugal) providing for longer periods of protection. During the legal guarantee period, a consumer may require the direct seller of a nonconforming product to repair or replace it free of charge and, in some circumstances, to provide a price reduction or a refund. In some EU Member States, whilst the law initially provides for a “no questions asked” approach (i.e. a presumption that the defect/nonconformity was present on purchase), after the first 12 months the onus shifts to the consumer to prove this. Thus, in those markets a legal guarantee can become more difficult for a consumer to rely upon in practice after the first year.
Commercial Guarantees
Commercial guarantees (also sometimes referred to as “manufacturer warranties” or “durability guarantees”) are optional, enhanced rights sometimes offered by traders in their discretion. These are additional to the consumer’s rights under its legal guarantee—for instance, longer protection, broader coverage (not just covering manufacturing defects but also wear and tear or certain forms of damage by the consumer or loss), or extra entitlements (e.g. replacement during repair, drop-off at any authorised dealers, etc.). Commercial guarantees can be offered free-of-charge or for a fee. Importantly, a commercial guarantee does not exclude the consumer’s legal rights imposed by law. Additionally, a commercial guarantee must offer some further rights for the consumer that go above and beyond the mandatory legal guarantee. A reseller cannot simply restate the consumer’s legal rights, since this could mislead a consumer who may be led to believe the seller is offering something better than its competitors when it is actually standard and automatic. The Sales of Goods Directive (EU) 2019/771 states that the conditions of a commercial guarantee should be clearly set out in an accompanying statement where a manufacturer or trader offers a commercial guarantee.
There is often some confusion among shoppers and traders alike about consumers’ entitlements under these separate guarantees. Additionally, there is broad inconsistency across websites regarding how legal guarantee rights are presented and explained to consumers (if at all). The new Regulation aims to address these weaknesses, equip consumers with clearer information about their rights, and compel noncompliant sellers to avoid shirking their duties when something goes wrong.
Harmonised Notices and Labels for Guarantees
The new Regulation introduces harmonised notices and labelling for all products sold across the EU and aims at introducing a set of uniform product markings across the EU.
These include:
A Mandatory Harmonised Notice on the Legal Guarantee
As depicted below and downloadable as a pdf here, a mandatory harmonised notice on the legal guarantee clearly states what the consumers’ legal guarantee rights are and provides high-level guidance on how a consumer can make a claim under the legal guarantee for nonconforming goods. The mandatory harmonised notice will need to be prominently displayed in all retail premises, both online and offline, across the EU.
Image Source: European Union Website
An Optional Harmonised Label for Certain Free-of-Charge Commercial Guarantees if Offered by the Manufacturer or Seller
This is depicted below and available here. This label is only intended to be used where a company offers a free guarantee that lasts longer than the minimum legal guarantee period and covers the entire product. The idea behind this label is to demonstrate to consumers that the manufacturer has sufficient trust in its products’ durability to guarantee that the goods will maintain their expected functionality and performance through normal use for the number of years specified on the durability guarantee label (shown as “XX” in the draft label). The full terms of the commercial guarantee must still be set out in the brand’s commercial guarantee statement.
Image Source: European Union Website
As explained above, the commercial guarantee needs to be enhanced/in addition to the mandatory legal guarantee, and the enhancement doesn’t have to be in terms of duration necessarily.
What are the Sanctions for Getting This Wrong?
Sanctions will be covered by national legislation of each Member State. It is also important to note that consumer protection organisations will be alive to the new requirements and may initiate their own investigations.
Time to Sharpen the Pencil
Now is the time to (re)assess any “guarantees” that your company is offering, to ensure that:
You (or the direct resellers of your products) are respecting consumers’ legal guarantee rights;
Any commercial guarantees being offered are clear and meet the above requirements; and
Your physical and online points of sale and those of your partners gear up to comply with the new Regulation’s notice requirement.
This reform also presents an opportunity to showcase the trust you have in your products (and stand out from your competitors) by displaying an additional product durability label going forward.
Weekly Bankruptcy Alert November 24, 2025 (For the Week Ending November 23, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
9 Crosby LLC(New York, NY)
Traveler Accommodation
Manhattan(NY)
$100,000,001to$500 Million
$100,000,001to$500 Million
11/17/25
Bellerose Terrace LLC(Boston, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
11/18/25
805 Main Street, LLC(Boston, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
11/19/25
Nicklaus Companies, LLC2(Palm Beach Gardens, FL)
Management of Companies and Enterprises
Wilmington(DE)
$10,000,001to$50 Million
$500,000,001to$1 Billion
11/21/25
ASI Elston LLC3(Columbus, OH)
Household and Institutional Furniture and Kitchen Cabinet Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$500,000,001to$1 Billion
11/22/25
Clearside Biomedical, Inc.(Alpharetta, GA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$1,000,001to$10 Million
$50,000,001to$100 Million
11/23/25
McHugh Junk Removal Inc.(Lancaster, MA)
Not Disclosed
Worcester(MA)
$100,001to$500,000
$500,001to$1 Million
11/24/25
Chapter 7
DebtorName
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
407 Smiley Crossing LLC (Attleboro, MA)
Activities Related to Real Estate
Boston(MA)
$10,000,001to$50 Million
$10,000,001to$50 Million
11/17/25
Trust Construction Corp.(Tewksbury, MA)
Not Disclosed
Worcester(MA)
$0to$50,000
$100,001to$500,000
11/18/25
CLA General Construction, Inc.(Framingham, MA)
Not Disclosed
Worcester(MA)
$0to$50,000
$500,001to$1 Million
11/18/25
Advans IT Services, Inc.(Worcester, MA)
Not Disclosed
Worcester(MA)
$0to$50,000
$1,000,001to$10 Million
11/19/25
R. James Flooring, Inc.(Newport, RI)
Building Finishing Contractors
Providence(RI)
$0to$50,000
$100,001to$500,000
11/20/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: GBI Services, LLC, N1JN-V, LLC, Nicklaus Real Estate Licensing, LLC, Nicklaus Project Management Services, LLC, Nicklaus Advisory, LLC, Nicklaus Design, LLC, Nicklaus Interactive, LLC, Nicklaus Brands, LLC, Nicklaus International Brand Management, LLC, Jack Nicklaus Golf Club, LLC, Nicklaus Golf Equipment Company, L.C..
3Additional affiliate filings include: American Signature, Inc., American Signature Home Inc., American Signature USA Inc., ASI Pure Promise Insurance LLC, ASI – LaPorte LLC, ASI POLARIS LLC, ASI Thomasville LLC, American Signature Woodbridge LLC.
Tax Court Confirms Codified Economic Substance Doctrine Requires Threshold Relevancy Determination, Upholds 40% Strict-Liability Penalty
Patel v. Commissioner, 165 T.C. No. 10 (Nov. 12, 2025), gave the US Tax Court its “first opportunity to examine when the codified economic substance doctrine applies.” Patel at *16. The Tax Court made two key holdings:
Section 7701(o) requires a relevancy determination that “is not coextensive with the two-part test set forth in section 7701(o)(1)(A) and (B).” Patel at *17.
Adequate disclosure to reduce the 40% economic substance penalty imposed by sections 6662(b)(6) and (i) must be made at the time the return is filed and not at a later time. Patel at *30.
Relevancy determination
Section 7701(o) provides:
Sec. 7701(o). Clarification of economic substance doctrine.—
(1) Application of doctrine.—In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
While the Internal Revenue Service (IRS) endorses a seemingly limitless application of the codified economic substance doctrine, taxpayers contend that it does not apply to every transaction. Rather, the plain language of section 7701(o)(1) requires a threshold relevancy determination. If the economic substance doctrine is not relevant, the inquiry ends.
There are very few cases that have considered whether section 7701(o) requires a threshold relevancy determination. And those that have found that section 7701(o) does not impose a separate relevancy requirement. See Liberty Global, Inc. v. United States, No. 20-cv-63501, 2023 WL 8062792 (D. Colo. Oct. 31, 2023); Chemoil Corp. v. United States, No. 19-cv-6314, 2023 WL 6257928 (S.D.N.Y. Sept. 26, 2023). While Liberty Global was appealed to the US Court of Appeals for the Tenth Circuit – and many speculate the Tenth Circuit may clarify that there is a relevancy requirement – the Tax Court beat the appellate court to the punch.
The Tax Court’s holding had solid statutory support. The plain language of section 7701(o)(1) states: “In the case of any transaction to which the economic substance doctrine is relevant…” After quoting these words, the Tax Court stated, “we easily conclude that the statute requires a relevancy determination. To put it plainly—the statute says so, right there, on its face.” Patel at *17.
Adequate disclosure of transactions
The second key holding in Patel is that the taxpayers in the case are liable for a 40% penalty for engaging in a transaction that lacks economic substance that was not adequately disclosed. Section 6662(b)(6) imposes a 20% penalty on transactions that lack economic substance. This penalty is increased to 40% under section 6662(i) if the transaction is not adequately disclosed.[1]
In the current wave of economic substance challenges, it is unclear what constitutes adequate disclosure under section 6662(i) such that the 20% (instead of the 40%) penalty applies. Based on current audit activity, it’s not clear whether an adequate disclosure must be attached to the tax return or can be made at a later time – perhaps at the beginning of an audit.
Patel clarified this issue. The Tax Court found that adequate disclosure for purposes of section 6662(i) means that a statement is attached to a tax return or relevant facts or sufficient information is provided on the tax return “to enable [the IRS] to identify the potential controversy involved.” Patel at *30. Because the taxpayers in Patel did not attach such a statement or provide such information on their returns, the taxpayers did not make adequate disclosure. As a result, the Tax Court held that section 6662(i) applies to increase the penalty from 20% to 40%.
Practice points
While the taxpayers lost in Patel, the Tax Court’s relevancy determination may nevertheless help other taxpayers that are facing economic substance challenges. Taxpayers facing such challenges should consider developing arguments that the economic substance doctrine is not relevant to the transactions at issue. These arguments provide taxpayers with an additional defense.
The Tax Court’s 40% penalty determination is a good reminder of the importance of detailed disclosures at the time tax returns are filed. Easier said than done as it is not always easy to predict which transactions the IRS may challenge as lacking economic substance. Nevertheless, if there is a risk that certain tax planning – even long-respected tax planning transactions – may be challenged on economic substance grounds, taxpayers should consider making a protective disclosure with their returns.
___________________________________________________________________________
[1] Both the 20% and 40% penalties are strict-liability penalties that are not subject to any defenses, including reasonable cause.
Ninth Circuit Pauses Looming California SB 261 Compliance Deadline; CARB Clarifies Related Guidance
On Nov. 18, 2026, the United States Court of Appeals for the Ninth Circuit issued a preliminary injunction enjoining the enforcement of California’s SB 261, which had an initial compliance deadline of Jan. 1, 2026. The same day, the California Air Resource Board (CARB) issued updated guidance concerning its rule-making efforts for both SB 253 and 261.
The Ninth Circuit’s injunction may provide temporary relief to companies doing business in California, since the initial Jan. 1, 2026, deadline is no longer enforceable. However, SB 261 has not been invalidated, and since the ultimate outcome of the underlying litigation is unclear, covered entities may wish to continue preparing for SB 261 compliance in the near term.
We have updated the below FAQ to reflect CARB’s updated guidance.
What Are These Laws?
California SB 253 (the Climate Corporate Data Accountability Act) requires regulated companies to annually disclose their emissions beginning in August 2026.
California SB 261 (the Climate-Related Financial Risk Act) requires regulated companies to disclose climate-related financial risks and mitigation measures every other year. The Ninth Circuit has paused enforcement of SB 261.
Who Is Subject to These Laws?
Revenue thresholds. Public and private U.S. entities “doing business in California” with annual revenues exceeding $500 million in revenue in the prior fiscal year are subject to SB 261. SB 253 has a higher revenue threshold of $1 billion in the prior fiscal year.
Rulemaking uncertainty and doing business in California. The California Air Resource Board (CARB) is in the process of developing its regulations implementing the laws but is not expected to have final regulations in place until sometime in 2026. The regulations may clarify some of the open questions under both laws, including how to calculate revenues and what “doing business in California” means. Pending final regulations, CARB’s current guidance indicates that revenues should be calculated on a global basis (not just from California), and that “doing business in California” means engaging in transactions for financial gain within California, being organized or commercially domiciled in California, or having California sales exceeding specified thresholds ($735,019 for 2024). Merely owning property or having payroll in California are no longer considered factors in determining “doing business in California” under CARB’s updated guidance. Further, under the current guidance, entities controlling more than 50% of an entity doing business in California may be deemed to be doing business in California themselves.
CARB’s initial list. CARB published its preliminary list of about 4,000 entities that may have a reporting obligation under SB 253 and SB 261.1
What Is Required of Covered Entities?
SB 253 – disclosure of emissions. Beginning in 2026, subject entities must publicly disclose Scope 1 greenhouse gas (GHG) emissions (from owned or operated facilities) and Scope 2 GHG emissions (from consumed electricity, heating, or cooling) annually and must include Scope 3 GHG emissions (indirect or downstream emissions such as from purchased goods or business travel) starting in 2027. A third-party consultant must be retained to certify such emissions.
SB 261 – disclosure of climate risks and mitigation measures. Covered entities must publish biennially a climate-related financial risk report (following the Task Force on Climate-Related Financial Disclosures (TCFD) framework or equivalent). The TCFD framework calls for the disclosure of (i) the organization’s governance around climate-related risks and opportunities, (ii) the actual and potential impacts of climate-related risks and opportunities on the organization’s business, strategy, and financial planning, (iii) the metrics and targets used to assess and manage relevant climate-related risks and opportunities, (iv) and details regarding how the organization identifies, assesses, and manages climate-related risks.
Considerations
Stakeholders may wish to analyze whether their organizations meet the “doing business in California” and revenue thresholds under either SB 253 or SB 261, even if they have not been identified on CARB’s initial list.
If filings are required, an organization may wish to retain qualified counsel and/or an experienced consultant firm. In addition, companies should consider identifying an internal compliance team with clear functional roles to begin preparing any required SB 253 or 261 filings as soon as possible. Qualified counsel may help enhance statutory compliance in a manner that mitigates potential legal exposure that might result from climate-based statements and representations, while a qualified consultant could assist in data collection and preparation of the required reports.
1 Companies potentially subject to SB 253 or 261 regulations must still comply with statutory requirements even if not listed by CARB.
Washington’s Four-Month Window- A Limited-Time Amnesty Program for International Sellers
Foreign companies selling into Washington State may have just received an unexpected gift. The Washington Department of Revenue has announced a temporary International Remote Seller Voluntary Disclosure Program, running from Feb. 1 through May 31, 2026—providing international businesses an opportunity to address tax compliance with reduced consequences.
Why This Matters Now
Companies headquartered outside the United States that have been selling into Washington without registering for state taxes may already be on borrowed time. Washington’s enforcement efforts have been ramping up, and discovery through normal audit procedures may result in a seven-year lookback period, interest, and penalties possibly reaching 39% of taxes due.
This voluntary disclosure program offers an alternative approach. Program Details
Instead of facing the potentially harsh reality of full penalties and extended lookback periods, qualifying international sellers may benefit from:
Shortened lookback periods: Four years plus the current year for business and occupation taxes, and 12 months for uncollected retail sales tax.
Penalty relief: Up to 39% in penalties may be waived, including a 5% assessment penalty, a 5% unregistered penalty, and a 29% late payment penalty.
Streamlined resolution: All unreported tax liability may be summarized in a single assessment.
Qualification Requirements
This program targets a specific group: foreign companies without current Washington tax registration. To qualify, a business must be headquartered outside the United States and who have not engaged with Washington—meaning no active registration, no prior contact from the Department of Revenue, and no history of tax evasion or misrepresentation in reporting tax liabilities.
The program offers a 15-day anonymous application window, allowing companies to test the waters before fully committing to disclosure.
The Clock Is Ticking
Washington is offering this program for four months, and applications are processed in order of receipt. Companies that submit complete applications—including detailed financial information, business activity questionnaires, and supporting documentation—will be prioritized over incomplete submissions.
Strategic Considerations
For international companies evaluating their options, this program presents a classic risk management decision. Companies may consider participating in Washington’s temporary program or continuing their current approach, recognizing that Washington continues to develop its enforcement capabilities.
Participating companies face a one-year lookback period and substantially reduced penalties. Those that do not participate and are subsequently discovered face the full weight of Washington’s enforcement powers: seven-year lookbacks, maximum penalties, and no negotiating leverage.
The 15-day anonymous application period offers an opportunity to gauge potential exposure without immediate commitment, though companies note that Washington has built in strict timelines throughout the process, and missing deadlines would mean forfeiting all program benefits.
Takeaways
While the state’s ability to enforce a judgement against a wholly foreign entity may depend on the facts and circumstances, foreign businesses selling directly into Washington should consider this opportunity. Washington’s limited voluntary disclosure program represents an opportunity for international sellers to resolve their tax obligations on potentially favorable terms. The narrow qualification criteria, strict deadlines, and complex application requirements, however, make the program sufficiently complex.
Foreign companies that have been operating in the gray areas of Washington’s tax requirements should evaluate whether to engage in the program before the amnesty period kicks off early next year.
The application window closes May 31, 2026. Companies considering participation may wish to act quickly to ensure they can meet all program requirements and deadlines.
Suppliers Beware- Delaware Bankruptcy Court Rejects Ordinary Course Defense for Preference Payment Within Standard Credit Terms
US bankruptcy law is designed to promote and reconcile two core policy objectives: providing relief to financially distressed debtors and ensuring the equitable treatment of creditors vis-à-vis the debtor and other creditors.
In furtherance of these policies, the Bankruptcy Code authorizes a debtor or bankruptcy trustee to initiate a lawsuit to claw back a payment made to a vendor within 90 days before the bankruptcy case, if it was made on account of an existing debt and allowed the vendor to receive more than they otherwise would have received in a hypothetical liquidation had the payment not been made. These payments are called “preferences” because they ostensibly prefer certain creditors by providing a higher percentage of recovery than other similarly situated creditors — a result that chafes with the bankruptcy policy of equal treatment within creditor classes. Therefore, creditors who receive such payments are required to return them to the bankruptcy estate for pro rata distribution to the creditor body in accordance with statutory priorities, unless they can establish a defense.
US Congress recognized that creditors faced with the prospect of forfeiting preferential payments were likely to stop doing business with financially troubled customers, thereby impairing the other core bankruptcy policy of facilitating the debtor’s reorganization and fresh start. To blunt this effect and encourage creditors to continue doing business with distressed customers, the Bankruptcy Code establishes defenses for transactions conducted in the ordinary course of business (either subjectively or objectively), or which otherwise provide “new value” to the debtor contemporaneously with or subsequent to the challenged preference. While these concepts may seem relatively straightforward, they have spawned a tangled web of judicial opinions that threaten to undermine the policy of encouraging creditors to continue extending goods and services to customers with heightened bankruptcy risk.
A recent decision from the US Bankruptcy Court for the District of Delaware highlights the increasing uncertainty for trade creditors in this area and the importance of developing proactive strategies for managing preference liability.
The CalPlant Case
CalPlant I Holdco LLC operated a plant that converted rice straw into fiberboard. CalPlant sourced supplies from a company called Industrial Finishes and Systems Inc. under a consignment arrangement in which CalPlant would periodically report usage and based on that usage, Industrial would issue invoices with net 30 payment terms. On September 30, 2021, Industrial issued an invoice for $72,978.53. CalPlant initiated payment in that amount the same day and Industrial recorded the payment on its books as of October 4. CalPlant filed for bankruptcy on October 5.
On October 27, 2025, the Delaware Bankruptcy Court ruled that the payment was a preference recoverable by CalPlant’s liquidating trustee even though the payment was made within the parties’ longstanding contractual terms.
Industrial argued the payment was subjectively ordinary course between the parties because it was within the contractual net-30 payment terms, was in a typical amount, was made using a typical payment form, and was not the product of high-pressure payment tactics. Alternatively, Industrial argued that the payment was objectively made according to ordinary business terms, which it supported with affidavits from employees stating that the contractual arrangement and payment terms with CalPlant were similar to Industrial’s terms with other customers.
The Bankruptcy Court rejected both arguments and granted summary judgment to the liquidating trustee. First, while the payment was made within the contractual 30-day credit terms, the court held it was not subjectively ordinary because CalPlant historically took about 28-30 days to pay (rather than processing payment immediately). Second, the court held that the affidavits from Industrial’s employees were insufficient to establish that the payment was objectively ordinary because they failed to:
Demonstrate sufficient industry expertise beyond the employees’ experiences as Industrial employees.
Speak to industry practices beyond Industrial.
Address whether it was industry standard for a customer to make a payment at the outset of the contractual 30-day payment period.[i]
Takeaways for Vendors
The CalPlant decision has troubling implications for vendors who rely on the ordinary course of business defense to continue extending goods and services to troubled customers on credit. Although there is precedent for an early payment to be deemed a preference, there is typically additional evidence such as pressure by the creditor or favoritism by the debtor. It is remarkable and seemingly contrary to underlying bankruptcy policy that a timely payment made by ordinary methods and in accordance with the parties’ longstanding contract, without evidence of pressure or favoritism, would be deemed outside of the ordinary course of business between the parties solely because the debtor processed the payment earlier within its contractual payment window.
The court’s observations regarding proof of industry standards set a similarly high bar for passing the objective test for ordinary course transactions. Parties should be prepared to present evidence, and likely expert testimony, regarding market business terms rather than relying on their own (even extensive) experiences and practices. However, if a preference defendant establishes that their business terms are market and the payment was made in accordance with those terms, the defendant should receive the benefit of the defense. The Bankruptcy Code asks whether the payment was “made according to ordinary business terms.” It does not ask for a further showing of industry trends regarding the timing of payments within a market 30-day payment window.
The elevation of payment timing over all other considerations threatens to make the ordinary course of business defense too hypertechnical, uncertain, and unreliable to further the policy of inducing creditors to extend goods and services on credit to distressed customers, as even a timely payment made in accordance with a longstanding market contract may be deemed outside of the ordinary course of business. Vendors and other creditors who wish to continue doing business with at-risk customers should take additional steps to protect themselves against preference liability, such as a pledge of collateral, letter of credit, third-party guaranty, or restructuring of payment terms to qualify for a new value defense.
[i] Industrial also argued that even if the payment was not deemed ordinary course, it was nonetheless protected by contemporaneous new value defense because CalPlant issued the payment contemporaneously with its receipt of Industrial’s invoice. The court rejected this argument because the payment must be contemporaneous with the value (i.e., the product), not the invoice for product previously supplied. While the court’s conclusion on this point was correct, the court seemed to imply that a payment on account of antecedent debt could not qualify for the contemporaneous exchange defense. That is incorrect because the contemporaneous exchange defense is only ever reached if the debtor or trustee first carries their burden of establishing a payment on account of antecedent debt.
Listen to this article
Portrait of a Bad Faith Bankruptcy
You have to work really hard to file a Chapter 11 case that gets dismissed from the jump. Bankruptcy courts tend to bend over backwards to avoid smothering a case in the crib. A recent decision from the U.S. Bankruptcy Court for the District of Delaware illustrates one such example. In In re Bedmar, LLC, the court dismissed a Chapter 11 case despite hundreds of millions in liabilities and some sophisticated corporate restructuring.
In 2020, National Resilience, Inc. (“NRI”) was formed in response to the COVID-19 pandemic with a mission to enhance U.S.-based pharmaceutical manufacturing capabilities. NRI embarked on an aggressive expansion strategy, purchasing and leasing manufacturing plants, laboratories, and development facilities throughout the United States. But two years later, demand did not match its expansion and NRI sought to rid itself of underperforming and underutilized sites to remain viable.
Rather than restructure all its debts in Chapter 11, NRI tried to slice-and-dice its way out of its problems. NRI executed a series of complex corporate transactions culminating in the creation of Bedmar, LLC. Bedmar was formed just six days before its bankruptcy filing and it was like the pound — designed to hold dogs. It acquired all the non-performing leases and lease guaranties and just enough cash to pay lease rejection damages. It had no employees, no business operations, and no source of income. It was designed for one function: to file bankruptcy and cap lease liabilities at far less than their full contractual value. The strategy was funded by $135 million in bridge financing from existing shareholders, with the understanding that successful lease rejection would preserve value for the remaining enterprise.
Bedmar filed for Chapter 11 protection and immediately moved to reject all its leases. The company proposed a reorganization plan that would pay landlords the full amount of their statutorily-capped lease rejection claims—a fraction of what they would receive under the full lease terms—while leaving the profitable portions of the enterprise (outside of bankruptcy) untouched.
The landlords were having none of it. They moved to dismiss the case for lack of good faith with the simple argument that this wasn’t a legitimate bankruptcy filing but an abuse of the Bankruptcy Code designed to escape contractual obligations. The court agreed.
The court began with a fundamental question: was Bedmar actually in financial distress? While the company’s liabilities exceeded its assets on paper, the court found this “financial distress” was manufactured rather than genuine. These facts were telling:
Bedmar was created specifically for the bankruptcy filing
The lease payments were current with no defaults or pending litigation
The company was allocated precisely enough cash to pay expected capped lease claims and professional fees
Bedmar had no business operations, employees, or income source
The “distress” resulted from corporate engineering, not operational failures
As the court observed: “The financial distress was not organic or genuine, it was manufactured.” This artificial distress couldn’t satisfy bankruptcy law’s requirement that debtors face legitimate financial difficulties to justify Chapter 11 relief.
The court also found that Bedmar’s filing served no valid bankruptcy purpose. The Bankruptcy Code is designed to either preserve going concerns or maximize value for creditors. Bedmar accomplished neither. Bedmar wasn’t preserving a going concern—it had no business to preserve. Worse, the filing didn’t maximize estate value but rather redistributed value from landlords to NRI’s shareholders.
Finally, the court found that NRI put Bedmar in Chapter 11 to obtain tactical litigation advantages. Internal emails from NRI’s CEO revealed the strategic nature of the filing, describing the use of “a legal tool to rid Resilience of the toxic sites” to create “a profitable core that will only grow from here” and provide “the best path to return value to shareholders.” Stripping assets from entities subject to lease obligations and transferring them to a bankruptcy entity designed to cap those obligations fell squarely within the prohibition against filings made merely to obtain tactical litigation advantages.
Bedmar offers several important takeaways for companies considering creative restructuring strategies:
Courts will look beyond financial statements to determine whether distress is genuine or manufactured.
The Bankruptcy Code’s protections are for companies with legitimate financial crises, not a “Get Out of My Contract For Free” card.
When a company is formed specifically to file bankruptcy, courts will examine whether the filing serves legitimate bankruptcy purposes or merely provides tactical advantages.
Internal communications revealing tactical motivations can be fatal to demonstrating good faith, as NRI learned when the CEO’s emails became evidence of improper purpose.
The Bedmar dismissal reflects bankruptcy courts’ ongoing efforts to patrol the boundaries between legitimate financial distress and strategic manipulation. Despite Bedmar’s ham-handed effort, creative corporate engineering is legally possible and won’t result in dismissal. The question is whether such engineering, when combined with a bankruptcy filing, serves legitimate bankruptcy purposes or merely provides tactical advantages at creditors’ expense.
Ninth Circuit Partially Pauses Enforcement as CARB Attempts to Clarify Disclosure Laws
In September, we provided a Bracewell Update discussing the California Air Resources Board’s (CARB’s) Preliminary List of Reporting/Covered Entities relating to the state’s climate disclosure laws—the California Corporate Greenhouse Gas Reporting Program (SB 253) and the Climate Related Financial Risk Disclosure Program (SB 261). As detailed in our prior article, SB 253 requires US companies with total annual revenues in excess of $1 billion that do business in California to annually disclose their scope 1, 2 and 3 greenhouse gas (GHG) emissions for the prior fiscal year. SB 261 requires US companies with total annual revenues exceeding $500 million that do business in California to publish biennial climate-related financial risk reports.
On Tuesday, November 18, 2025, CARB hosted a third public workshop to address comments received regarding applicability, deadlines, reporting requirements and other topics ahead of the upcoming initial reporting deadlines. The same day, the Ninth Circuit enjoined enforcement of the SB 261 Climate Related Financial Risk Disclosure requirements pending an appeal of a challenge to those requirements.[1] The Court did not enjoin enforcement of the SB 253 requirements.
Ninth Circuit Order Pauses SB 261 Enforcement
The US Chamber of Commerce and other business groups challenged both SB 253 and SB 261 in January 2024, arguing that both laws violated the First Amendment.[2] The District Court denied plaintiffs’ request for preliminary injunction,[3] and plaintiffs appealed the denial to the Ninth Circuit and requested an injunction pending appeal. Without providing any reasoning, the Ninth Circuit granted the injunction request for SB 261 and denied the request for SB 253.[4] This means California may not enforce the requirements of the Climate Related Financial Risk Disclosure Program until the Court has made a ruling on appeal. Oral argument is currently scheduled for January 9, 2026, after the initial SB 261 reports are due on January 1. During the public workshop, CARB staff indicated they were still reviewing the order and provided the guidance discussed below. Bracewell will continue to monitor for litigation updates and additional guidance published by CARB that takes this decision into account.
CARB Changes Direction on “Doing Business in California”
CARB acknowledged significant shortcomings during the public workshop related to its published list of reporting/covered entities. CARB’s acknowledgements included recognizing that the California Secretary of State database fails to include revenue and may include incomplete or outdated data, and that several major companies are missing from the database list that CARB believes meet the eligibility thresholds for SB 261 and SB 253. In turn, CARB emphasized that the list should not be used as a compliance tool and reiterated that “[e]ach potentially regulated entity remains responsible for compliance.”[5]
CARB stated that it is turning back to the California Revenue and Tax Code (“RTC”) for defining “doing business in California” and “revenue” for purposes of applicability. In doing so, CARB explained that corporate tax filings contain the most up-to-date data. Accordingly, CARB has proposed the following definition of “doing business in California” in accordance with RTC § 23101 (but omitting § 23101 (b)(3)-(4) related to property holdings and payroll):
Actively engaging in any transaction for the purpose of financial gain or profit and any of the following conditions is met during any part of a reporting year:
The entity is organized or commercially domiciled in this state;
Sales, as defined in The Revenue and Taxation Code subdivision (e) or (f) of Section 25120 as applicable for the reporting year, of the entity in this state exceed the inflation adjusted thresholds of seven hundred thirty-five thousand and nineteen ($735,019) (2024). For purposes of this paragraph, sales of the entity include sales by an agent or independent contractor of the entity. For purposes of this paragraph, sales in this state shall be determined using the rules for assigning sales under Sections 25135 and 25136, and the regulations thereunder, as modified by regulations under Section 25137.
CARB stated that if a company files tax returns with the California Franchise Tax Board, then it “automatically” meets the above requirements provided in the definition of “doing business in California” for the purposes of SB 253 and 261.[6] Further, CARB maintains that it will utilize the RTC definition of “gross receipts” at RTC § 25120(f)(2) for defining “revenue” for purposes of SB 261 and SB 253 because gross receipts is verifiable on FTB tax filings. Accordingly, “revenue” is proposed to mean:
The gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code, as applicable for purposes of this part. Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold.
CARB noted that “applicability would be determined by the lesser of the entity’s two previous fiscal years of revenue” in order “[t]o account for annual changes in revenue.”[7]
CARB Clarifies that Parent and Subsidiaries Determine Applicability Separately
Recognizing the many comments received regarding parent-subsidiary relationships, CARB clarified that “[i]nclusion criteria should be assessed on an individual company basis.”[8] While a parent company may report on behalf of its subsidiary, the parent-subsidiary relationships do not determine which entities are regulated. It is possible that a subsidiary could be subject to reporting requirements while a parent company is not, and vice versa.
Deadlines and Guidance for SB 261 Reporting Requirements
Deadlines. CARB maintained that reports should be posted to entities’ websites and links to reports on the CARB docket by January 1, 2026. CARB stated that the docket will open December 1, 2025 so that entities can meet the January 1 deadline. CARB may issue further guidance regarding deadlines in light of the Ninth Circuit decision.
Reporting Frameworks: CARB continued to state that companies may use one of several frameworks, including TCFD Final Report of Recommendations from 2017 or later versions, International Financial Reporting Standards (IFRS) Disclosure Schedules, or any “report developed in accordance with a regulated exchange, national government, or other governmental entity.”[9]
Requirements: CARB has not updated the draft checklist posted on September 2, 2025 and discussed in our last update. Reporting entities are expected to use “best efforts” in complying with the checklist, including providing the best available data, explaining their process, and identifying any gaps in data, key assumptions, and difficulties faced in generating reports. Additionally, CARB expects that each report should: “contain a statement on which reporting framework is being applied; discuss which recommendations and disclosures have been compiled and which have not; and provide a short summary of the reasons why recommendations/disclosures have not been included as well as discussion of any plans for future disclosures.”[10]
Deadlines and Guidance for SB 253 Reporting Requirements
Deadlines: CARB has pushed back anticipated deadlines for reporting Scope 1 and Scope 2 emissions to August 10, 2026. Reporting Scope 3 emissions data will not be required until at least 2027.
Reporting Templates: CARB published a template for Scope 1 and 2 emissions on October 10, but CARB stated that use of the template is optional for initial 2026 reporting. If companies already generate reports that cover Scope 1 and 2 emissions, then CARB is allowing submittal of those reports.
Requirements: If the reporting entity’s fiscal year ends between January 1st and February 1st, 2026, then the entity will report data from the fiscal year ending in 2026. However, if the reporting entity’s fiscal year ends between February 2nd and December 31st, 2026, then the reporting entity will report data from the fiscal year ending in 2025.[11] In any event, CARB intends to give each reporting entity at least six months after end of their fiscal year to submit their report.
CARB maintained that if companies were not collecting data in December 2024, when CARB’s Enforcement Notice was issued, they are not required to submit Scope 1 and 2 reports but must submit a statement on company letterhead indicating that they were not collecting data at the time the notice was issued.[12] Additionally, CARB confirmed that data assurance is not required for 2026 reporting.
CARB Continues to Welcome Public Comment
While the comment period for CARB’s Draft Reporting Template for Scope 1 and Scope 2 GHG Emissions closed on October 27, 2025, CARB indicated they are still welcoming and evaluating stakeholder feedback to inform subsequent rulemaking for SB 253 and SB 261 to take place in Q1 2026. Additionally, CARB has invited feedback on Scope 3 reporting categories.
CARB indicated that the public comment period will be open for the 45-day comment period upon publication of the notice package for the initial rulemaking.
Lily Walton contributed to this article
[1] US Chamber of Com., et al. v. Randolph, No. 25-5327 (9th Cir. Nov. 18, 2025) (order granting injunction pending appeal in part).
[2] See Complaint for Declaratory and Injunctive Relief, US Chamber of Com., et al. v. Randolph, No. 2:24-cv-00801 (C.D. Cal. Jan. 30, 2024).
[3] See US Chamber of Com., et al. v. Randolph, No. 2:24-cv-00801-ODW (PVCx) (C.D. Cal. Sept. 11, 2025) (order denying plaintiffs’ motion for preliminary injunction).
[4] US Chamber of Com., No. 25-5327.
[5] CARB, SB 253/261/219 Public Workshop: Update on California Corporate Greenhouse Gas Reporting and Climate-Relate Financial Risk Disclosure Programs (Nov. 18, 2025) at 18 (available at https://ww2.arb.ca.gov/sites/default/files/classic/SB%20253%20261%20Nov%20Workshop%20slides_v2.pdf) (“Public Workshop Presentation”).
[6] Public Workshop Presentation at 21.
[7] Id. at 23.
[8] Id. at 28.
[9]Id. at 35.
[10] Id. at 36.
[11] Id. at 11.
[12] Id. at 12.