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The Bankruptcy Protector

Jan. 5, 2020

Debtors Still Left in Doubt as to Availability of PPP Loans

By John T. Baxter

The Comprehensive Appropriations Act, 2021 (the “CAA”), signed on Dec. 27, 2020, provides for a new round of Paycheck Protection Program (“PPP”) loans. Unfortunately for debtors in bankruptcy, the CAA is entirely unclear as to whether companies currently under bankruptcy protection may obtain PPP loans under this second round.

1. The Current PPP Miasma

This has been an ever-evolving issue with respect to the grant of PPP loans since the original Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed in March of this year. Under the original CARES Act, there was no express language that allowed for, or disallowed, debtors in bankruptcy to obtain PPP loans. As a result, many debtor entities in bankruptcy obtained PPP loan applications. However, the applications that were created by the Small Business Administration (the “SBA”) for the PPP loans included a question requiring applicants to state whether they were currently a debtor in bankruptcy. If the question was answered in the affirmative, the SBA would deny the application.

This practice led to a plethora of filings in bankruptcy and some absurd results. The initial wave of cases were granted primarily in favor of debtors, with bankruptcy courts determining that by preventing debtors from being able to obtain PPP Loans, the SBA was effectively discriminating against debtors in violation of section 525 of the Bankruptcy Code. Despite these early successes, the SBA subsequently changed the language of their rules for administration of the PPP loans to include a bar to bankruptcy debtors, despite the CARES Act not expressly including such a bar. Both the Fifth Circuit and the Eleventh Circuit issued opinions holding that the SBA’s rules banning debtors under the CARES Act were appropriate—with the latter issuing its opinion just last week on December 22, 2020, five days before the CAA was signed into law.

2. The CAA to the Rescue…Sort of…

The CAA appears to address this issue in favor of the Debtors. Specifically, embedded in the nearly 5,600 page bill is a revision to section 364 of the Bankruptcy Code that reads as follows:

(a) IN GENERAL.—Section 364 of title 11, United States Code, is amended by adding at the end the following:

‘‘(g)(1) The court, after notice and a hearing, may authorize a debtor in possession or a trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of this title to obtain a loan under paragraph (36) or (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), and such loan shall be treated as a debt to the extent the loan is not forgiven in accordance with section 7A of the Small Business Act or subparagraph (J) of such paragraph (37), as applicable, with priority equal to a claim of the kind specified in subsection (c)(1) of this section.

"(2) The trustee may incur debt described in paragraph (1) notwithstanding any provision in a contract prior order authorizing the trustee to incur debt under this section, prior order authorizing the trustee to use cash collateral under section 363, or applicable law that prohibits the debtor from incurring additional debt.

"(3) The court shall hold a hearing within 7 days after the filing and service of the motion to obtain a loan described in paragraph (1). Notwithstanding the Federal Rules of Bankruptcy Procedure, at such hearing, the court may grant relief on a final basis.’’

Clearly, this language is a win for the debtors, with Congress enacting clear and concise language that expressly allows for debtors to obtain PPP loans, right? Wrong.

Despite the inclusion of this provision, Congress added a kicker to the end of this section that may well prevent all debtors from obtaining PPP loans under the CAA. Subsection (f) of this same section of the CAA provides the sunset provision for this revision to the Bankruptcy Code, which includes an out for the SBA:

(f) EFFECTIVE DATE; SUNSET.—

(1) EFFECTIVE DATE.—The amendments made by subsections (a) through (e) shall—

(A) take effect on the date on which the [SBA] Administrator submits to the Director of the Executive Office for United States Trustees a written determination that, subject to satisfying any other eligibility requirements, any debtor in possession or trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of title 11, United States Code, would be eligible for a loan under paragraphs (36) and (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)); and (B) apply to any case pending on or commenced on or after the date described in subparagraph (A). . . .

And therein lies the rub. While the CAA appears to open the door to debtors to obtain PPP Loans, the relevant amendment to the Bankruptcy Code that would allow for such loans will only go into effect if the SBA approves. Given the SBA’s previous stance, it appears highly likely that debtors will continue to be barred from receiving PPP Loans.

3. What About the Circuits Other Than the Fifth and Eleventh?

The real question is what will happen with respect to PPP applications made by debtors outside the Fifth and Eleventh Circuits. Previously, it was somewhat of a crapshoot as to whether debtors were eligible, with only two circuit courts officially weighing in. With the inclusion of this new language, debtors may have an argument that Congress intended for them to be eligible for PPP loans and that the sunset provision does not bar them from obtaining them. Conversely, if the SBA stays on its current course, it will undoubtedly argue that the sunset provision is a clear indication that Congress granted SBA the express right to allow, or deny, PPP loans to debtors.

Unsurprisingly for 2020, there is no clear answer at this time. If I were a betting man, however, my money would be on the SBA winning any legal fights going forward. It appears to have the literal Trump card.



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