If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.1
In support of the interim final rule, the SBA, in consultation with the U.S. Department of the Treasury, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an “unauthorized use” of funds or non-repayment of unforgiven loans. Id.
Prior to the SBA’s issuance of its interim final rule, a handful of chapter 11 debtors sought to leverage PPP loans in bankruptcy—including via requests to use PPP loans as a form of unsecured debtor-in-possession (“DIP”) financing, as well as motions seeking turnover of PPP loan proceeds relating to PPP loans that were approved, but had not yet been funded, pre-petition. See, e.g., In re Hidalgo County Emergency Service Foundation, Case No. 19-20497, Adv. P. No. 20-2006 (Bankr. S.D. Tex.) (seeking a temporary restraining order enjoining the SBA from denying debtor a PPP loan on the basis of debtor’s status as a chapter 11 debtor); In re Blue Ice Inv., LLC, Case No. 20-2208, Adv. P. No. 20-00095 (Bankr. D. Ariz.) (same); In re Roman Catholic Church of theArchdiocese of Sante Fe, Case No. 18-13027, Adv. No. 20-1026 (Bankr. D. N.M.) (same); In re The Diocese of Rochester, Case No. 19-20905 (Bankr. W.D. N.Y.) (seeking entry of an order pursuant to section 364(b) authorizing debtor to obtain postpetition financing on an unsecured basis); In re The Diocese of Buffalo, Case No. 20-10322 (Bankr. W.D. N.Y.) (same) In re Elemental Processing, LLC, Case No. 20-50640 (Bankr. E.D. Ky.) (seeking authority to incur postpetition financing pursuant to a PPP loan that was approved pre-petition); In re Village East, Inc., Case No. 20-31144 (Bankr. W.D. Ky.) (same). Now, however, such efforts appear futile in light of the SBA’s express prohibition against extending PPP loans to bankruptcy debtors.
Still, as evidenced by a few small businesses seeking to leave chapter 11 as soon as possible in order to become eligible for PPP loans post-exit, some small businesses continue to explore creative, value-maximizing solutions that seek to harmonize both the Bankruptcy Code and the PPP.
We will continue to follow these issues as the Treasury and SBA continue to issue guidance on the PPP and Cares Act. Mayer Brown’s Restructuring practice remains available and willing to answer any questions. For more information about the topics raised in this Legal Update, please contact Brian Trust, Adam C. Paul, Thomas (Tom) S. Kiriakos, Sean T. Scott or Aaron Gavant.
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