Should Chapter 11 Small Businesses Be Eligible for PPP Loans?
By: Helen Park, RBFL Student Editor
In the wake of the COVID-19 pandemic crisis, the U.S. government established the Paycheck Protection Program (PPP), a $669-million business loan program, to help small businesses pay for urgent expenses, namely payroll, rent, interest, and utilities. These “loans” would be forgiven so long as they are used towards qualifying expenses (payroll, rent, interest, and utilities). Congress appointed and authorized the Small Business Administration (SBA) to administer the PPP loans, and the SBA used this congressional authority to exclude bankrupt businesses from being eligible to apply for PPP loans.
This spurred lawsuits across the country. Bankrupt businesses are suing the SBA and alleging that the SBA overstepped its authority by ignoring congressional intent, unlawfully implemented arbitrary and capricious rules, and/or unlawfully discriminated bankrupt businesses. The court holdings have been mixed across jurisdictions because different courts have different interpretations of relevant statutes, such as the CARES Act. It would be up to Congress to provide clearer legislative intent–either to give broad authority to the SBA or to require the SBA to accept applications from bankrupt small businesses.
Should bankrupt businesses be entitled to apply for PPP loans in the first place? The SBA says no for two reasons. Allegedly, bankrupt businesses are more likely to use the PPP loans for noncovered expenses. Loan amounts used for noncovered expenses cannot be forgiven and must be repaid, which leads to the SBA’s second reason for disqualifying debtors: bankrupt businesses also have high risk of not repaying any unforgiven amounts. Contrary to the SBA’s claim, bankruptcy experts say the PPP loans should be extended to Chapter 11 small businesses, because these businesses need the loans and can be relied upon to use the proceeds properly. To be in Chapter 11 proceedings means that a business declared bankruptcy and then placed itself under the bankruptcy court’s supervision to reorganize its operations, assets, and debts so that the business is better positioned to keep its operations alive and pay back the debts. The key is that the Chapter 11 businesses are under the supervision of the courts. Contrary to the SBA’s concerns, such oversight can ensure that the PPP loan proceeds are used properly–that is, toward the qualifying expense–and be forgiven.
What if a bankrupt business fails to meet the loan forgiveness requirements? A newly proposed bill seems to address the SBA’s second concern. On July 27, Senators Marco Rubio and Suzanne Collins proposed Continuing Small Business Recovery and Paycheck Protection Program Act, which, among other things, addressed this question of whether the PPP loans should be extended to bankrupt businesses. This bill has been welcomed by bankruptcy experts. Under this bill, any unforgiven loan amounts would be granted super-priority status in the Chapter 11 proceedings, meaning these loans will be paid back with the highest priority.
If passed, this bill could not only address the SBA’s concerns over bankrupt businesses’ fitness for PPP loans but also provide a little more clarification on the congressional intent behind the PPP. The language of this bill could be more explicit (for example, actually requiring the SBA to accept PPP loan applications from Chapter 11 businesses), but experts seem to be happy for now that this issue is being addressed by Congress. But it remains to be seen which solutions Congress may ultimately adopt in order to maximize the value of the PPP.