Congress Allows SBA to Grant P3 Loans to Bankrupt Debtors, SBA Says ‘No’ | Miller Canfield

In June and December of 2020, Miller Canfield reported that the Fifth and Eleventh Circuits found that the Small Business Administration (“SBA”) could exclude bankrupt debtors from consideration for Paycheck Protection Program (“PPP”) loans, albeit for different reasons. The recent 2021 consolidated finance law (“LCA”), promulgated on December 27, 2020, could have changed the situation. It contains provisions that allow certain debtors to access the program, but with a catch: these provisions only take effect when the SBA gives its blessing in writing. The SBA did not give its written blessing. On the contrary, it expressly stated in its interim final rule regarding temporary modifications to the business loan program; Paycheck Protection Program as amended by the Economic Aid Act whereby bankrupt debtors are not eligible for PPP loans. IFR, Section B.2 (c) (pages 26-27). Additional PPP loans under the CAA will expire on March 31.

The PPP was a central element of the CARES law. Until August 2020, the PPP allowed eligible small businesses to obtain secured loans to pay for certain expenses, such as labor costs, rent, and utilities. Although the CARES Act did not specify whether companies that have filed for bankruptcy are eligible to participate in the PPP, the SBA has taken the position that they are not. A number of bankrupt debtors have sued the SBA for this bankruptcy exclusion. Although a few have been successful, the two appellate courts that weighed in on the matter determined that the SBA can properly exclude debtors from the PPP program.

The CAA contains provisions that could change that. These provisions would allow certain bankrupt debtors to apply for PPP loans. If not canceled, a PPP loan would be treated as senior debt in the event of debtor bankruptcy, coming after senior secured debt, but before all unsecured non-priority debt. Debtors would be allowed to include in their plans that their PPP loan must be repaid in full according to the terms of the loan, which is a slight change from how senior unsecured debt is normally handled in bankruptcy. Finally, the CAA provides that a bankruptcy court must hold a hearing within one week of a debtor’s request for authorization to take out a PPP loan.

The trap ? CAA does do not override the SBA. These provisions only take effect when the SBA submits a written decision to the United States Office of the Trustee (aka the government’s bankruptcy watchdog), stating that debtors are eligible to participate in the PPP program if they also meet the eligibility conditions. Even then, not all commercial debtors would qualify – only businesses filing under the Small Business Reorganization Act of Chapter 11 or Chapter 12 (farmers) or 13 (self-employed) would qualify. Ordinary Chapter 11 debtors do not apply.

What does this mean for lenders? For now, the SBA’s position that bankrupt debtors are excluded from consideration of PPP loans remains. Rather than undermining the SBA, the CAA appears to strengthen the positions of the Court of Appeal, as it gives the SBA the power to determine the debtor’s eligibility for PPP loans. But, under the CAA, the SBA could change its position simply by writing a letter to the United States Office of the Trustee. Thus, lenders should remain vigilant and closely monitor the evolution of the SBA, even if the SBA is unlikely to do so, given the most recent IFR.

What does this mean for debtors? Under the most recent IFR and the most recent PPP application, the existence of an ongoing bankruptcy renders a debtor ineligible for a PPP loan. Given the wording of the CAA, it is highly unlikely that a bankruptcy court will order a PPP loan under the CAA (either as part of the new round of PPP loans or as a second loan). PPP) must be agreed. Debtors should avoid trying to “play” with the system, as the SBA is vigilantly pursuing debtors who did, with more than 65 criminal investigations currently underway.

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