Attorney Blog: Confusion in Bankruptcy Courts Regarding Debtor Eligibility for PPP Loans

Varnum Law via JD Supra

June 25, 2020

The Small Business Administration’s (SBA) rules and regulations concerning the eligibility of businesses for Paycheck Protection Program (PPP) loans when the business is involved in bankruptcy have recently been a source of substantial uncertainty, with the nationwide split of authority in bankruptcy courts. While these cases deal with a very small minority of PPP recipients and are a relative novelty in that regard, these decisions could foretell future issues for companies who have received PPP loans but are later forced to file Chapter 11, specifically regarding their eligibility for loan forgiveness.

The SBA is enabled with emergency rulemaking authority to adopt rules and regulations to manage application and qualifications for PPP loans under the CARES Act. Pursuant to this authority, the SBA publishes Interim Final Rules (IFR). The SBA’s April 28, 2020 IFR expressly disqualified applicants who are debtors in a bankruptcy proceeding at any time between the date of application and when the loan is disbursed.[1] Several companies in bankruptcy proceedings, whose loans have been denied, have challenged the SBA’s rulemaking authority in this regard, leading to a nationwide split on this issue in bankruptcy courts.

Specifically, these courts have rendered opinions to decide whether the SBA can impose a policy disqualifying a business in bankruptcy proceedings from participating in the PPP and whether the SBA violates other laws for doing so.[2] More than a dozen cases have been decided in the last two months, with the recent decisions highlighting the confusion that bankruptcy courts face in discerning the intent of Congress and the purpose of the CARES Act.

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