Bankruptcy Update Blog

Court Dismisses Bankruptcy Case to Enable Debtor to Seek a Paycheck Protection Loan

It is well known in the restructuring world that a debtor in bankruptcy can’t get a PPP loan.  But what if you’re a debtor and decide a PPP loan could save your business?  Will a court dismiss the case so you can seek a loan?

The issue arose recently where a chapter 11 debtor already had DIP financing in place.  The debtor’s motion to dismiss drew creditor opposition.  But the court concluded that allowing the debtor out of bankruptcy to seek a PPP loan made sense.  Ryan Turner Investments, LLC v. Jackson Durham Floral-Event Design, LLC, No. 3:20-cv-00400, 2021 U.S. Dist. LEXIS 28455 (M.D. Tenn. Feb. 16, 2021).

The debtor is an event design company.  It filed for bankruptcy in January 2020, the month when COVID-19 was first reported in the United States.  At the time, the debtor was a party to an arbitration proceeding brought by Ryan Turner Investments, LLC (“RT”).  The bankruptcy stayed the arbitration against the debtor.

The debtor’s bankruptcy filing said it was in a “deep financial hole.”  On April 1, 2020, the debtor moved to dismiss the bankruptcy case.  It said COVID-19’s negative impact on its business threatened its ability to reorganize.  It had no idea what its business would look like “on the other side of the pandemic.”  One possible way for it to stay afloat through the pandemic was with a paycheck protection loan backed by the Small Business Administration.  But, as has been widely reported, debtors who avail themselves of the bankruptcy process are not eligible to obtain the loans during the bankruptcy.

RT objected to the motion to dismiss.  It argued (i) it would be an unfair burden to bear the cost of restarting the arbitration proceeding against the debtor, and (ii) dismissal of the bankruptcy case would cause a default of the debtor’s DIP loan and permit secured creditors to foreclose on the debtor’s assets, thus harming other creditors.  The debtor countered that RT would incur litigation expenses either in arbitration or in pressing its claim in the bankruptcy case.  With respect to the DIP loan, the debtor noted that as an unsecured creditor, RT was in the same position as if the debtor had a secured loan outside of bankruptcy.

Bankruptcy Code section 1112(b) provides discretion to courts to dismiss cases “for cause.”  One ground is “substantial or continuing loss or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”  11 U.S.C. § 1112(b)(4).  Courts must undertake a “fact-specific” factual inquiry that “focuses on the circumstances of each debtor.”  In re Creekside Sr. Apts., L.P., 489 B.R. 51, 60 (B.A.P. 6th Cir. 2013 (quoting United Savs. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Forest Assocs., Ltd.), 808 F.2d 363, 371-72 (5th Cir. 1987)).

If a debtor demonstrates cause, then an objector has the burden of identifying “unusual circumstances establishing that converting or dismissing the case is not in the best interests of the creditors or the estate . . . .”  11 U.S.C. § 1112(b)(2).

When RT objected at the court hearing, Bankruptcy Judge Charles M. Walker said, “Slow down one second.  We’re in a pandemic.  Remember that.  How much proof does the Court need about the suspension of operations and the impact that COVID-19 is having on not this business, but every business?”  (Hearing Trans. RTI Appx. at 295).

He ruled that allowing the debtor to terminate its bankruptcy to obtain a PPP loan “was the most viable option” because it “keeps all of the parties in an equal setting” and gives the debtor “a shot . . . of obtaining funds to continue operations.”  (Id. at 301). Thus, a debtor that had filed for bankruptcy to salvage its business was allowed to exit bankruptcy several months later to go in a different direction to salvage its business.  The Bankruptcy Court’s decision was upheld on appeal by the District Court.