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PPP Loans and Small Business Debtors In Bankruptcy
A number of legislative modifications were made to the Bankruptcy Code to reduce the economic impact of the COVID-19 pandemic on distressed debtors, particularly small business and individual debtors. While a few of these changes expanded protections previously granted to small business debtors pre-pandemic, a major pandemic relief program, the Paycheck Protection Program (PPP) was not made available to debtors in bankruptcy proceedings. After Congress established the PPP in The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), enacted on March 27, 2020, a number of debtors in pending bankruptcy cases applied for PPP loans. The Small Business Administration (SBA) opposed PPP loans for debtors, and courts were split as to whether the SBA could block debtors from qualifying for and receiving PPP loans. Two circuit courts, the Eleventh and the Fifth Circuits, ultimately ruled against the debtors. USF Federal Credit Union v. Gateway Radiology Consultants, P.A., No. 20-13462 at 43 (11th Cir. 2020) (holding that the SBA did not exceed its authority in adopting the non-bankruptcy rule for PPP eligibility).
Then Congress passed the Consolidated Appropriations Act, 2021 (Act) (Pub. L. No. 116-260) (CAA), which was signed into law on Dec. 27, 2020. The CAA includes the Coronavirus Economic Relief for Transportation Services Act and Coronavirus Response and Relief and Relief Supplemental Appropriations Act (the CARES Act II). The Cares Act II amends the United States Bankruptcy Code to permit Second Draw PPP loans to certain debtors, namely Subchapter V small business debtors, Chapter 12 family farmer debtors, and self-employed Chapter 13 debtors on the condition that the SBA Administrator in its discretion sends a letter to the Director of the Executive Office for United States Trustee, an office of the Department of Justice which serves an administrative function for U.S. Bankruptcy Courts, acquiescing to Second Draw PPP loans to entities in active bankruptcy cases. The SBA has not acquiesced and has reiterated its opposition to extending PPP loans to entities in bankruptcy proceedings.
On March 3, 2021, the SBA released guidance in its FAQs with respect to borrowers who received PPP loans under the Cares Act II and later became debtors in a bankruptcy case:
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