Expansion of PPP Loans in Covid-19 Relief Package—Will Help Come Soon Enough?

Congress appropriated only an additional $284 billion towards the redesigned Paycheck Protection Program. Comparatively, the $349 billion appropriated in April 2020 for the initial PPP was consumed by borrowers within just two weeks.

With a changing administration and a reconstituted Small Business Administration and U.S. Trustee Program (a branch of the Justice Department that oversees the bankruptcy process), it is possible that these agencies will act quickly to provide the necessary relief to debtors.

Amidst the transition, however, these already-overwhelmed agencies likely will be unable to promptly effectuate and implement a joint policy that would provide any meaningful relief for bankruptcy debtors. By the time that a program is implemented, the PPP funds will have already been earmarked for other worthy small business borrowers, and these struggling debtors’ hopes of catching even the smallest break during this pandemic will have been dashed.

Debtors in bankruptcy have been expressly excluded from participating in the PPP since the program’s earliest guidelines instituted by the SBA, and any renewed hopes of getting their fresh start have been significantly delayed under the Consolidated Appropriations Act (CAA or new stimulus package) passed by Congress. This latest statute includes measures to help bankruptcy debtors, but the administrative prerequisites to their implementation are cumbersome.

Given the limited funds allocated to the re-opened PPP, those funds could run out before programs can be implemented that provide any benefits to debtors.

The Initial Application for PPP Participation

The SBA’s initial application for participation in the PPP made very clear that a small business bankruptcy debtor would not be considered for loans if it (or a 20% owner) was a debtor in bankruptcy. Throughout the term of the first PPP eligibility period, the SBA adamantly defended this position; it implemented additional, more explicit guidelines that barred bankruptcy debtors, partially in response to several legal challenges to the SBA’s outright prohibition.

The SBA’s most recent guidelines, released in response to the new stimulus package, expressly reaffirm that bankruptcy debtors remain ineligible for PPP loans. Two circuit courts —the Fifth Circuit based in New Orleans and the Eleventh Circuit based in Atlanta—have supported the SBA in denying debtors access to PPP funds, but some debtors remain hopeful that contrary decisions coming of out of courts in Vermont and Indiana will be upheld against the SBA to permit debtors to access PPP funding.

Congress Reopens Application Period

The CAA renewed the PPP by re-opening the application period for initial borrowers and implementing a second draw of up to $2 million for borrowers that have already exhausted their initial loan and continue to struggle through the pandemic.

The CAA contains several pointed changes to the bankruptcy code that would allow for the distribution of PPP funds to certain small business bankruptcy debtors. Those eligible bankruptcy debtors would include small businesses having less than $7.5 million in debt that take advantage of the new sub-chapter V provisions of chapter 11 implemented under the Small Business Reorganization Act of 2019, together with individual farmers and fisherman filing bankruptcy under chapter 12, and other sole proprietors filing bankruptcy under chapter 13 of the Bankruptcy Code.

In addition to the other size restrictions applicable to PPP borrowers, Congress carefully tailored this relief to further limit it to only the smallest of debtors, likely in attempt to ameliorate some of harshest criticisms of the PPP—namely, that big businesses were taking advantage of a program intended to help small business owners. By limiting eligibility to just these specific types of bankruptcy debtors, Congress’s targeting could not have been more narrow or precise.

The Statute’s ‘Unlikely Twist’

Despite Congress’s precision in dedicating pages of statutory text to the exact measures necessary to institute PPP borrowing for debtors, the statute takes an unlikely twist when it indicates that the actual implementation for these measures to aid debtors in bankruptcy may not come anytime soon. Instead, the core of those measures is made subject to a cohort of government regulators reaching agreement on how (and seemingly, whether) to implement them.

The statutory language provides that these new provisions that would enable bankruptcy debtors to borrow under the PPP will only take effect upon the collective “written determination” of the SBA and the U.S. Trustee Program “that, subject to satisfying any other eligibility requirements, … [those] debtor[s] in possession or trustee[s] would be eligible for a [PPP] loan.”

While the CAA makes clear that debtors in bankruptcy should be afforded the opportunity to participate in the PPP, Congress conditions the implementation of this relief by authorizing, rather than directing, the SBA and the USTP to implement these measures.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Tal Unrad is a partner in the Corporate & Securities and Bankruptcy & Financial Restructuring practice groups at Arent Fox LLP based in the firm’s Boston office. His practice focuses on corporate transactions, including distressed sales, debt and equity financing, and mergers and acquisitions.

James Britton is an associate in the Bankruptcy & Financial Restructuring practice group at Arent Fox LLP based in the firm’s Boston office. He focuses his practice on corporate restructuring and insolvency matters, helping creditors navigate the bankruptcy process and ensure that their claims are paid.