PPP Loans and Bankrupt Small Enterprise Debtors Foley Hoag LLP
Following the implementation of the Paycheck Safety Program (the “PPP”) within the Coronavirus Assist, Aid, and Financial Safety Act (the “CARES Act”), enacted on March 27, 2020, bankrupt debtors requested PPP loans. The Small Enterprise Administration (the “SBA”) has opposed PPP loans for debtors, and courts have been divided over whether or not the SBA can stop debtors from qualifying for and receiving PPP loans. Subsequent, Congress handed the Consolidated Appropriations Act, 2021 (Act) (Pub. L. No. 116-260), which was enacted on December 27, 2020 (the “CAA”). CAA amends the USA Chapter Code to permit PPP loans to sure debtors, particularly Small Enterprise Debtors of Subchapter V, Chapter 12: Household Farmers, Debtors and Self-Employed, Chapter 13, Debtors. Nonetheless, there was an issue. The CAA additional anticipates that PPP loans will solely be out there if the SBA administrator, at its discretion, sends a letter to the director of the manager workplace for United States Trustee acquiescing to PPP loans in chapter. Thus far, the SBA has not acquiesced.
On March 3, 2021, the SBA revealed steerage in its FAQ relating to debtors who’ve obtained PPP loans beneath the Cares Act and who subsequently turn out to be debtors in a chapter case.
If a borrower who was eligible for a first-draw PPP mortgage requests chapter safety after the disbursement of the first-draw PPP mortgage, that borrower is eligible for the mortgage forgiveness, supplied that they meet all of the situations for the forgiveness. mortgage set out within the Interim Closing PPP Guidelines, together with, however not restricted to, mortgage proceeds are used just for eligible bills and at the very least 60% of mortgage proceeds are used for eligible labor prices. “
FAQ # 59. That is in step with what debtors in relevant chapter circumstances have carried out – request cancellation of their mortgage. The SBA additional mentioned whether or not a borrower who was eligible for a first-draw PPP mortgage and who utilized for chapter safety after the disbursement of the first-draw PPP mortgage was eligible to use for a second-draw PPP mortgage. draw. In accordance with FAQ n ° 60:
No. Every applicant for a second-draw PPP mortgage should certify on the second-draw borrower software kind (SBA kind 2483-SD) that the applicant and any proprietor of 20% or extra of the applicant aren’t presently concerned in a chapter proceedings. Thus, a borrower who has obtained a first-draw PPP mortgage and requests chapter safety after the disbursement of the first-draw PPP mortgage shouldn’t be eligible to use for a second-draw PPP mortgage.
This doesn’t resolve the state of affairs the place the second draw borrower has since exited chapter and “is subsequently not presently concerned in chapter proceedings”. Small companies which have confirmed their chapter plan and need to obtain a second draw ought to be capable to apply so long as the primary draw PPP mortgage may be forgiven and the SBA doesn’t undergo a loss. The applying for a second draw mortgage asks, partly, whether or not the SBA has suffered a loss reasonably than whether or not a default has occurred. Failure to pay the mortgage by submitting for chapter doesn’t essentially imply that there was a loss suffered by the SBA.
In the meantime, Chapter 11 debtors nonetheless don’t have any approach of receiving PPP loans throughout chapter proceedings.