Chapter 11 Debtors With Confirmed Plans Are Now Eligible For PPP Loans | McCarter & English, LLP

The Small Business Administration (SBA) has issued new guidelines declaring Chapter 11 debtors with confirmed plans eligible for Paycheck Protection Program (PPP) loans. The new directive creates an exception to the SBA’s general rule that any entity “currently involved” in bankruptcy is not eligible for PPP funds.

PPP and exclusion from bankruptcy

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created the PPP under Section 7 (a) of the Small Business Act, which authorizes the SBA to guarantee loans to qualified small businesses, with the aim of help them keep their employees. work during the pandemic. While the CARES Act eliminated the traditional Section 7 (a) loan requirement for PPP that a business demonstrated that it was unable to obtain credit from commercial sources, in favor of ‘A good faith portrayal that “the current economic uncertainty makes the PPP loan request necessary to support its ongoing operations” In the absence of contrary statutory instructions, the SBA has treated the PPP like any other loan 7 ( a) by requiring that an applicant not be “presently involved in any bankruptcy” (bankruptcy exclusion). Many lenders have adhered to the bankruptcy exclusion and have refused PPP loans to bankrupt debtors.

Debtors across the country have challenged the bankruptcy exclusion and sued the SBA to prevent the bankruptcy exclusion from being enforced. In response to these actions, the SBA has vigorously defended its authority to issue the bankruptcy exclusion and touted the alleged public policy virtues of preventing bankrupt debtors from the benefits of PPP financing. The results of the lawsuits have varied widely: some courts have refused to apply the bankruptcy exclusion because they found that the SBA had exceeded its regulatory authority or that the exclusion violated the anti-discrimination provisions of 11 USC § 525; other courts have sided with the SBA; and a number of courts have allowed debtors to take advantage of certain loopholes affecting the exclusion from bankruptcy, for example by allowing debtors to voluntarily dismiss their cases in order to apply for PPP financing and then reopen the previously dismissed case. (See our related alert here.)

Debtors initially believed they had achieved a victory when the Consolidated Appropriations Act of 2021 (CAA) was enacted on December 27, 2020. The CAA sought (1) to amend the Bankruptcy Code to allow certain debtors – those who file under the Subchapter V, Chapter 12 and Chapter 13 – to obtain PPP funds and (2) to protect lenders by treating unsettled PPP loans as super-priority administrative expense claims under Sections 364 (c) (1) ) and 503 (b) of the Bankruptcy Code. However, these arrangements were contingent on the SBA providing a written determination to the Office of the US Trustee that bankrupt debtors are eligible for PPP loans. The SBA has never made such a decision.

The updated SBA guidelines

While the SBA still maintains that debtors “currently involved” in bankruptcy proceedings are not eligible for PPP loans, the SBA has now reduced the scope of the bankruptcy exclusion. Specifically, on April 6, 2021, the SBA published question 67 of its “Frequently Asked Questions”, which asks when an entity is “no longer considered” currently involved in bankruptcy “for the purposes of PPP loan eligibility. “. The SBA’s response to this question, in the relevant part, is as follows:

Reply: [. . .] If an applicant or owner has filed a Chapter 11, 12 or 13 bankruptcy petition, the plaintiff or owner is considered “currently involved in bankruptcy” for the purposes of PPP eligibility until the bankruptcy court issued an order confirming the plan in the case. [. . .] The . . . order confirming the plan. . . must be entered before the date of the PPP loan request.

So, if a Chapter 11 debtor can get confirmation of the plan, they can apply for a PPP loan. While Chapter 11 debtors have reason to welcome the new SBA guidelines, they have a relatively short time frame to complete confirmation and request PPP funds. The application deadline is May 31, 2021, and this window may close even earlier if the program is low on funds.

Key takeaway: Chapter 11 debtors will be racing

Given the approaching deadline for PPP applications, current Chapter 11 debtors in need of PPP funds may seek to expedite early consensual confirmation of their Chapter 11 plans. Chapter 11 debtors who have already filed their plans and have looming confirmation hearing dates can pacify any opposing potential lender to quickly confirm their plan and submit a PPP loan application in a timely manner. For many Chapter 11 debtors, however, SBA advice comes too late. Chapter 11 debtors who have not yet filed a plan, have confirmation hearings scheduled after May 31, 2021 (the date the PPP application window closes, assuming it is not short of funds before May 31), or expect extended confirmation hearings not able to avail of expanded eligibility for PPP loans.

[View source.]

Comments are closed.