PPP Loans and Small Business Debtors in Bankruptcy | Foley Hoag LLP
After the creation of the paycheck protection program (the “PPP”) in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, debtors bankrupt have applied for PPP loans. The Small Business Administration (the “SBA”) opposed PPP loans for debtors, and the courts were divided over whether the SBA could prevent debtors from qualifying and receiving PPP loans. Next, Congress passed the Consolidated Appropriations Act, 2021 (Act) (Pub. L. No. 116-260), which was enacted on December 27, 2020 (the “CAA”). CAA amends the United States Bankruptcy Code to allow PPP loans to certain debtors, namely Small Business Subchapter V Debtors, Family Farmer Debtors in Chapter 12 and Independent Debtors in Chapter 13. However, it there was a catch. The CAA further anticipates that PPP loans will only be available if the SBA administrator, at its discretion, sends a letter to the Director of the Executive Office for United States Trustee acquitting PPP loans in bankruptcy. To date, the SBA has not acquiesced.
On March 3, 2021, the SBA published guidance in its FAQ regarding borrowers who received PPP loans under the Cares Act and subsequently became debtors in a bankruptcy case.
If a borrower who was eligible for a first-draw PPP loan files for bankruptcy after the disbursement of the first-draw PPP loan, that borrower is eligible for a loan forgiveness, provided that they meet all the conditions for the loan. Loan remission set out in the Interim Final PPP Rules, including, but not limited to, loan proceeds are used only for qualifying expenses and at least 60% of loan proceeds are used for qualifying labor costs. “
FAQ # 59. This is consistent with what debtors in applicable bankruptcy cases have done – request a loan forgiveness. The SBA also examined whether a borrower who was eligible for a first-draw PPP loan and files for bankruptcy after the disbursement of the first-draw PPP loan is eligible to apply for a second-draw PPP loan. According to FAQ n ° 60:
No. Each second-draw PPP loan applicant must certify on the second-draw borrower application form (SBA form 2483-SD) that the applicant and any owner of 20% or more of the applicant are not currently involved in a bankruptcy proceedings. Thus, a borrower who has received a first-draw PPP loan and files for bankruptcy after the disbursement of the first-draw PPP loan is not eligible to apply for a second-draw PPP loan.
This does not resolve the situation where the second draw borrower has since gone out of bankruptcy and “is therefore not currently involved in bankruptcy proceedings”. Small businesses that have confirmed bankruptcy plans and are looking to receive a second drawdown should be able to apply as long as the first draw PPP loan can be canceled and the SBA does not suffer a loss. The second draw loan application asks, in part, whether the SBA has suffered a loss rather than whether a default has occurred. Having a default on the loan by filing for bankruptcy does not necessarily mean that there has been a loss suffered by the SBA.
Meanwhile, there is no way left for Chapter 11 debtors to receive PPP loans during the bankruptcy case.