New COVID-19 Relief Law Includes Limited Bankruptcy Protections Regarding PPP Loans | Perkins Coie

The latest COVID-19 relief legislation has brought additional help and clarity to a select group of debtors and left many other questions unanswered. The requirements of the next cycle of the Payroll Protection Program (P3) and related changes to the bankruptcy code are only a small part of the massive appropriations bill signed by President Trump on December 27, 2020. Several Key sections of bankruptcy relief exclude all Chapter 11. Debtors who are not considered small business debtors under these provisions.

Section 364 of the Bankruptcy Code was amended specifically to allow the filing of post-bankruptcy PPP loans for small business debtors filing under subchapter V of chapter 11, family farmers under chapter 12 and individuals who file under Chapter 13 of the Bankruptcy Code. The unsecured debt created by postpetition PPP loans is given the priority status of administrative expenditure under the Bankruptcy Code, rather than just general unsecured status. This change in the availability of PPP loans for these debtors does not take effect until after the administrator of the Small Business Administration (SBA) sends a letter to the executive office of the administrator in the United States indicating that a such relief is permitted provided that the debtors meet the other eligibility conditions.

The new law does not say whether (1) general debtors in Chapter 11 are not allowed to receive a PPP loan in bankruptcy, and (2) the debt not forgiven under PPP prepetition loans is entitled to the priority or can be treated as general unsecured debt. In the absence of contrary legal guidance, it seems likely that the courts will restrict post-bankruptcy PPP loans to the types of debtors explicitly listed in the law and that pre-petition PPP loans will not be entitled to special priority status. in the event of bankruptcy. Courts can infer that Congress intended to exclude debtors general from Chapter 11 post-petition PPP loans and that Congress removed the SBA’s regulatory discretion regarding debtor eligibility.

One of the drawbacks of these guidelines is changing what generally constitutes ownership of the bankruptcy assets, as listed in Section 541 of the Bankruptcy Code. The new legislation excludes federal COVID-19 relief payments from the ownership of bankruptcy assets. There is no legislative history to help discern congressional intent. If the relief payments are not the property of the estate, it is possible that these funds will not be available to serve as collateral for post-petition loans and that the transfers of relief payments prior to the petition (i.e. (i.e. vendor payments made from relief payments) are not subject to cancellation.

The new law also protects owners and suppliers from the clawback of payments under preferential actions. If an owner or supplier has entered into a deferred payment agreement with a debtor after March 13, 2020, deferred payments (excluding fees, penalties or interest) are exempt from preferential cancellation under the Bankruptcy Code § 547 .

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