After more than one year since the Paycheck Protection Program, or PPP, was established pursuant to the US Cares Act in March 2020, the Small Business Administration (“SBA”) has recently reversed its policy that prohibited companies in bankruptcy from applying for PPP funding due to their status as debtors in bankruptcy.  Specifically, on April 6, 2021, SBA released new guidance as part of its eighth version of Frequently Asked Questions for Borrowers and Lenders Participating in the Paycheck Protection Program,[1] which clarifies what it means to be “presently involved in any bankruptcy.”  As set forth in greater detail below, this newly-issued guidance removes bankruptcy as a roadblock to PPP funding and now permits companies on the road out of bankruptcy to apply for PPP loans before the program’s May 31, 2021 deadline.

Brief Recap Regarding the PPP and SBA Bankruptcy Restriction

Since late April 2020, the SBA has prohibited companies in bankruptcy from applying for PPP loans, routinely relying on self-issued administrative guidance to expressly provide that companies in bankruptcy are ineligible to participate in the PPP.[2]  As discussed in earlier posts,[3] the SBA bankruptcy restriction did not go unchallenged, as companies seeking to restructure in bankruptcy turned to bankruptcy courts across the country to try and force the PPP to rescind its rule.

Early bankruptcy court decisions on the eligibility issue yielded a mixed bag,[4] which increased uncertainty for bankrupt debtors and lenders alike.  It was not until the issue was taken up on appeal by certain circuit courts of appeals—namely, the Fifth and Eleventh Circuits—that the scales began to firmly tip in favor of the SBA.  The appeals courts overturned nearly all of the pro-debtor bankruptcy court rulings by upholding the SBA bankruptcy restriction and finding that the SBA did not exceed its authority when declining to grant PPP loans to business debtors.[5]  Accordingly, the viability of any future challenge to the SBA bankruptcy restriction seemed to be dead in the water.

Then, on December 27, 2020, then-President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which amended several provisions of the US Bankruptcy Code, including section 364, to make certain debtors in bankruptcy eligible to receive loans under the PPP—i.e., Subchapter V small business debtors, Chapter 12 family farmer debtors, and Chapter 13 self-employed debtors.[6]  Notably, however, the CAA left ultimate discretion regarding PPP eligibility to the SBA, stating only that the SBA “may” permit such debtors-in-possession to obtain PPP loans.  In response, the SBA held firm in its bankruptcy restriction and continued to prohibit bankrupt debtors from receiving PPP funding.  Again, the viability of any future challenge to the SBA bankruptcy restriction seemed to be dead in the water.

SBA’s Recent Policy Reversal

The tides turned, however, on April 6, 2021, when the SBA issued new guidance as part of its Frequently Asked Questions series,[7] clarifying what it means to be “presently involved in any bankruptcy.”  Specifically, FAQ 67 provides for three conditions in which a bankruptcy case is considered to be “terminated,” thereby leaving the debtor not presently involved in the bankruptcy case.  First, if an individual was involved in a Chapter 7 bankruptcy, then that individual is no longer “involved” in the bankruptcy once a discharge order is entered.  Second, under any bankruptcy chapter, once an order dismissing the case is entered, then the bankruptcy involvement ends.  Third, and perhaps of greatest consequence, if the applicant for a PPP loan (or 20% owner) has been a debtor in a case under Chapter 11, 12 or 13, then the applicant is no longer “presently involved in any bankruptcy” once an order confirming the debtor-applicant’s plan of reorganization has been entered.  This third condition is significant because entry of a plan confirmation order is not typically immediately followed by dismissal of a bankruptcy case—meaning that debtors in this circumstance can apply for PPP loans despite still being in bankruptcy.  In a Chapter 13 case, for example, payments under a confirmed plan are often made for a number of years before the bankruptcy case is closed.  And, in a Chapter 11 case as well, claim reconciliation and other related processes often take place after plan confirmation.  With the SBA’s latest clarification, it is now clear that debtors in these circumstance can access PPP funding despite still remaining in bankruptcy.  Indeed, it would appear that plans of reorganization could even expressly contemplate receipt of such funding which might help certain debtors obtain plan approval.

Conclusion & Takeaways

Under the SBA’s newly-issued guidance, a reorganized Chapter 11 debtor may now be able to apply for and, barring any other applicable exclusion, access PPP loans not only post-bankruptcy but following plan confirmation as well.  In addition, the new guidance seemingly opens the door for debtors that were originally prevented from accessing PPP loans due to the SBA’s earlier bankruptcy restrictions to access the vital PPP loans (assuming such debtors meet one of the three conditions noted above).

That said, access to PPP loans is still restricted—debtors who have filed for bankruptcy but have not had plans confirmed, for example, are still not eligible for PPP loans.  And the deadline to apply for PPP loans is in any case quickly approaching (May 31, 2021).  Any companies still looking to access the remaining funds in the program, whether in bankruptcy or not, will therefore need to act quickly.

[1] See Paycheck Protection Program Loans Frequently Asked Questions (FAQs) (Apr. 6, 2021).

[2] See Interim Final Rule, 13 C.F.R. Parts 120-21, Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility (RIN 3245-AH37), effective April 24, 2020.

[3] See Paycheck Protection Program Loans and DIP Financing (Apr. 30, 2020); see also Are Companies in Bankruptcy Eligible for PPP Loans Under the US Cares Act? (May 15, 2020); Continued Uncertainty Regarding Whether Companies in Bankruptcy Are Eligible for PPP Loans Under the US Cares Act (June 26, 2020).

[4] Compare Hidalgo Cnty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cnty. Emergency Serv. Found.), Case No. 19-20497, Adv. P. No. 20-2006 (Bankr. S.D. Tex. 2020) (enjoining the SBA from denying the debtor’s PPP application after ruling that the SBA cannot deny access to PPP loans on the sole basis of the debtor’s status in bankruptcy), and In re Calais Reg’l Hosp., Case No. 19-10486, Adv. P. No. 20-1006 (Bankr. D. Me. May 1, 2020) (similar); In re Penobscot Valley Hosp., Case No. 19-10034, Adv. P. No. 20-1005 (Bankr. D. Me. May 1, 2020) (similar); In re Springfield Hosp., Inc., Case No. 19-10283, Adv. P. No. 20-01003 (Bankr. D. Vt. May 4, 2020) (similar); In re Roman Catholic Church of the Archdiocese of Santa Fe, Case No. 18-13027, Adv. P. No. 20-01026 (Bankr. D. N.M. May 1, 2020) (similar), with In re Cosi, Inc., et al., Case No. 20-10417, Adv. P. No. 20-50591 (Bankr. D. Del. Apr. 30, 2020) (denying debtors’ request to enjoin the SBA because, among other things, the plain meaning of the Interim Final Rule prohibited bankrupt debtors from accessing PPP funding and the Bankruptcy Court did “not have the statutory power to enjoin” the SBA), and In re Asteria Educ., Inc., Case No. 20-50169, Adv. P. No. 20-05024 (Bankr. W.D. Tex. Apr. 21, 2020) (similar), and In re Schuessler, et al., Case No. 20-02065-BHL, 2020 WL 2621186 (Bankr. E.D. Wis. May 22, 2020) (similar).

[5] See, e.g., In re Hidalgo Cnty. Emergency Serv. Found., Case No. 20-40368, 2020 WL 3411190 (5th Cir. June  22, 2020); see also Gateway Radiology Consultants, P.A. , No. 20-13462 (11th Cir. Dec. 22, 2020)

[6] For a more-detailed discussion of the CAA, please view one of our prior posts, December 2020 Appropriations Act Amends Several Provisions of the Bankruptcy Code (Jan. 19, 2021).

[7] See Paycheck Protection Program Loans Frequently Asked Questions (FAQs) (Apr. 6, 2021).