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The Bankruptcy StrategistFeaturesBankruptcyLegislationLitigation

Unforeseen Consequences for Bankruptcy Practice In CARES Act

By Sourav Chaudhuri and Gregory Plotko
October 01, 2020

In the wake of the global COVID-19 pandemic, Congress hurriedly passed a host of economic relief bills to provide "American workers, families, and small businesses fast and direct economic assistance and to preserve jobs." The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in March 2020 to provide over $2 trillion in economic relief. The CARES Act included the Paycheck Protection Program (PPP) and certain follow-on acts that injected over $650 billion for small business and their employees. Additionally, small businesses were granted the right to apply for Economic Injury Disaster Loans (EIDL) offered by the U.S. Small Business Administration (SBA).

While we assume lawmakers had the best intentions, the hasty implementation of such an unprecedented stimulus package has resulted in unforeseen consequences and marked inconsistencies in its application. This article highlights several of these outcomes and discrepancies, including how accepting crisis funding could lead to a company becoming more distressed, how bankruptcy courts are inconsistently ruling on the ability for Chapter 11 debtors to receive PPP loans and how changes to the Bankruptcy Code altered the rights of equity holders and debtholders.

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Loan Forgiveness Out of Reach

The PPP was intended to expeditiously deliver loans to businesses affected by the pandemic, with funds becoming fully or partially forgiven if a substantial majority of the loan proceeds were utilized to fund payroll costs. On June 5, 2020, Congress passed the Paycheck Protection Flexibility Act (the Flexibility Act) in order to ease conditions for small businesses and other PPP borrowers to qualify for full loan forgiveness by reducing the percentage required to fund payroll. Initially, businesses were required to utilize 75% of the loan in eight weeks for payroll costs at pre-pandemic staffing levels. The Flexibility Act reduced the requirement to 60% and extended the time to spend the funds to 24 weeks.

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