You have likely seen stories in the newspaper or on social media about the Paycheck Protection Program (PPP) made available by the federal government under the Coronavirus Aid, Relief, and Economic Security Act.
Under the PPP, loans of up to $20 million can be made to qualifying businesses with the opportunity of forgiveness of up to the full principal amount. According to the U.S. Small Business Administration (SBA), “The PPP is intended to provide economic relief to small businesses nationwide adversely impacted by the Coronavirus Disease 2019 (COVID-19).”
But, with the economic downturn sparked by the coronavirus crisis, many businesses are facing tough decisions about the future in spite of available resources like the PPP.
A fairly common business strategy for companies facing unforeseen events causing a temporary decline in gross revenue is to file for reorganization under Chapter 11. It seems logical if the SBA wants to help business during the COVID-19 pandemic, that a business which is in enough trouble to file Chapter 11 would be able to obtain a PPP loan.
Unfortunately, the SBA’s actions paint another picture, as the agency has issued an interim final rule providing that debtors in bankruptcy are ineligible for PPP loans. This stands in contrast to a provision of federal law (11 U.S.C. § 525(a)) which prevents the government from denying grants to a debtor solely because it has filed for bankruptcy. As a result of the provision, debtors have asked bankruptcy courts to enter orders enjoining the SBA from denying their applications.
This conflict has caused a split in the courts on whether being in bankruptcy effects PPP loan eligibility.
Bankruptcy courts in Maine and Vermont have entered orders enjoining the SBA from denying applications based on bankruptcy. In other cases, a bankruptcy court in Delaware has refused. A court in Texas issued an order requiring the SBA to consider a debtor’s application, but the Fifth Circuit then heard an accelerated appeal and vacated this order.
Bankruptcy cases in the Tulsa area are heard by the United States Bankruptcy Court for the Northern District of Oklahoma. To the best of my knowledge, this issue has not come up in a Chapter 11 case in our area.
Additionally, Oklahoma falls within the jurisdiction of the Court of Appeals for the 10th Circuit. Recently, a New Mexico court that also falls within the 10th Circuit held that the SBA’s decision to exclude debtors from the PPP violated federal law. This ruling is not binding on an Oklahoma court, but a judge in our state may consider the New Mexico court’s reasoning.
Due to these factors, the ability of a company to obtain a PPP loan after filing bankruptcy is uncertain at best.
As a result, the current wisdom is that companies eligible for a PPP loan that are planning to file a Chapter 11 should apply for and obtain the PPP loan before they file a bankruptcy case. Even still, the SBA might argue that use of funds by a debtor is unauthorized and seek to deny PPP loan forgiveness.
The resolution of these issues is simply unclear.
Mark A. Craige is a Crowe & Dunlevy attorney and member of the firm’s Bankruptcy & Creditor’s Rights Practice Group.
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