Attorney Blog: Debtors Need Not Apply? Continuing Developments on the SBA’s Authority to Deny PPP Loans to Debtor

Morgan Lewis via JD Supra

June 26, 2020

The Small Business Administration on April 24 issued an update to an interim final rule, crystalizing its view that applicants that have sought protection under the US Bankruptcy Code are not qualified borrowers under the Paycheck Protection Program. Subsequently, dozens of debtors have looked to the bankruptcy courts for relief from the SBA’s unilateral clarification. This LawFlash covers debtor eligibility under the PPP as well as recent legislation and key court decisions moving the needle in this space.

Almost simultaneously with the SBA’s release of its interim final rule stating its view that debtors are not qualified PPP borrowers, a Texas bankruptcy court temporarily enjoined the SBA’s authority to enforce that determination. The US Court of Appeals for the Fifth Circuit vacated that decision after determining that the SBA is protected by limited sovereign immunity. In the intervening period, numerous debtors have looked to the bankruptcy courts for relief, with most courts deciding the issues on the merits—including one district court—leading to a split over the SBA’s discretion to deny PPP loans solely on the basis of a borrower’s bankruptcy. Meanwhile, debtors obtaining their PPP loans prior to filing have seen few challenges to their requests to use PPP proceeds to fund operations during bankruptcy.

Subsequent PPP legislation, including the Paycheck Protection Program Flexibility Act of 2020 enacted on June 5, clarified several points and further extended the maturity and forgiveness period of the PPP, but did not address the ineligible debtor issue, which continues to be fought in the courts. The second round of funding of the PPP has not been exhausted and remains available for eligible borrowers, although the deadline to borrow will expire shortly.

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