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Proposed Amendments to the CARES Act Would Expand Access to PPP Loans to Small Businesses in Chapter 11

The paycheck protection program (“PPP”) has been one of the most popular aspects of the CARES Act (i.e., the initial legislation responding to the COVID-19 pandemic). Yet, as has been widely reported, debtors in chapter 11 cases are not allowed to receive PPP loans.[1] But Congress might remedy that if it agrees on another round of COVID-19 related stimulus.

Senators Marco Rubio and Susan Collins have proposed an amendment to the CARES Act called the Continuing Small Business Recovery and Paycheck Protection Program Act.  It is a section of a larger set of amendments known collectively as the Health, Economic Assistance, Liability Protection and Schools Act (“HEALS Act”). If enacted, bankruptcy judges could permit debtors to obtain PPP loans. These loans would be granted superpriority status, receiving the highest priority as administrative expense claims against a debtor's estate. Some small and medium-sized debtors that were previously denied PPP loans based solely on their bankrupt status could reapply and receive PPP funding to assuage payroll, lease, and similar obligations.  

The HEALS Act’s modifications would not only benefit many small and medium-sized business debtors, but also correct prior, and also avoid future, unfortunate results stemming from the current restrictions imposed by the CARES Act. For example, some companies were approved for PPP loans and then filed for bankruptcy days after loan funding to skirt the CARES Act’s prohibition. Other debtors have voluntarily dismissed their bankruptcy cases, only to later apply for a PPP loan, obtain the loan proceeds, and then refile for bankruptcy.
From April 24, 2020 through mid-May, at least five bankruptcy courts granted temporary restraining orders or injunctions prohibiting the SBA and approved lending institutions from applying the bankruptcy exclusion to a debtor's PPP loan application,[2] while two bankruptcy courts declined to provide such relief.[3] In one case, a Texas bankruptcy judge ordered an injunction against the SBA, preventing it from denying a PPP loan to debtor Hidalgo County Emergency Service Foundation. The Court held that the SBA exceeded its authority by denying debtors access to PPP loans when no such prohibition was included in the CARES Act. On appeal, the Fifth Circuit overturned the injunction based on federal law that forbids the issuance of any injunctions against the SBA.

In light of the conflicting, corresponding rulings in various bankruptcy courts, increased access to PPP loans as provided by the HEALS Act (or any similar legislation that is ultimately signed into law) would be welcomed relief for many businesses.

[1] This prohibition is due, in large part, to the historical nature of chapter 11 debtors’ exclusion from obtaining loans funded through the 7(a) and 504 small business administration (“SBA”) loan programs. The SBA has been charged with overseeing the processing and oversight of PPP loans.

[2] Hidalgo Cnty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cnty. Emergency Serv. Found.), No. 20-2006 (DRJ) [Dkt. 16] (Bankr. S.D. Tex. April 24, 2020); Penobscot Valley Hosp. v. Carranza (In re Penobscot Valley Hosp.), No. 20-1005 (MAF) [Dkt. 18] (Bankr. D. Me. May 1, 2020); Calais Reg'l Hosp. v. Carranza (In re Calais Reg'l Hosp.), No. 20-1006 (MAF) [Dkt. 21] (Bankr. D. Me. May 1, 2020); Roman Catholic Church of the Archdiocese of Santa Fe v. United States of Am. Small Bus. Admin. (In re Roman Catholic Church of the Archdiocese of Santa Fe) [Dkt. 15] (Bankr. D. N.M. May 1, 2020) (converting the preliminary injunction hearing into a trial on the merits pursuant to FRCP 65(a)); Springfield Hosp., Inc. v. Carranza (In re Springfield Hosp., Inc.), No. 20-01003 (CAB) [Dkt. 20] (Bankr. D. Vt. May 4, 2020).

[3] Cosi, Inc. v. U.S. Small Bus. Admin. (In re Cosi, Inc.), No. 20-50591 (BLS) [minute entry] (Bankr. D. Del. April 30, 2020); Asteria Educ., Inc. v. Carranza (In re Asteria Educ., Inc.), No. 20-05024 (CAG) [minute entry] (Bankr. W.D. Tex. April 30, 2020).