The nearly $350 billion loan program made available to small businesses by the Coronavirus Aid, Relief, and Economic Security (CARES) Act was tapped out in less than two weeks. In response to this overwhelming demand, on Friday, April 24, 2020, an additional $320 billion was funded into the loan program, and the second round of applications for small businesses requesting these loans will open on Monday, April 27, 2020.
Late last month, Senators Marco Rubio (R-Fla.) and Susan Collins (R-Maine) introduced Senate Bill 4321 (S-4321), titled “Continuing Small Business Recovery and Paycheck Protection Program Act” (Bankruptcy Access Bill), which, if enacted, would permit businesses in bankruptcy to qualify for Paycheck Protection Program (PPP) loans.
Bankruptcy experts are applauding a proposed change to the Paycheck Protection Program that will allow small business debtors to access loans under federal COVID-19 relief packages, correcting what they say was a mistake in early versions of the aid program that left bankrupt companies without a valuable tool for surviving the pandemic.
On June 22, U.S. Circuit Judge Judge Jerry Smith issued a short, three-page opinion in the case Hidalgo County Emergency Service Foundation v. Carranza that appeared, at first blush, to be a death blow to many debtors' ability to obtain Paycheck Protection Program, or PPP, loans under the Coronavirus Aid, Relief and Economic Security, or CARES, Act.
The COVID-19 pandemic has heavily disrupted our lives, communities, and businesses. Even with new approaches, not all businesses can overcome the substantial challenges brought by the pandemic. Lending programs like the Paycheck Protection Program have brought temporary relief, but many small businesses remain exposed to financial difficulties and face a real risk of bankruptcy.
New Small Business Provisions in Bankruptcy Code
The United States Court of Appeals for the Fifth Circuit has dealt a blow to debtors seeking Paycheck Protection Program (“PPP”) loans under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In a decision entered on Monday, June 22, Judge Jerry Smith issued a short, three-page opinion in the case Hidalgo County Emergency Service Foundation v. Jovita Carranza (In re Hidalgo County Emergency Service Foundation) that could have long-lasting ramifications for many debtors, both in and outside of the Fifth Circuit.
As discussed in earlier posts,1 substantial uncertainty exists over whether companies in bankruptcy are eligible to pursue funding pursuant to the SBA’s Paycheck Protection Program, or PPP, which was established by the CARES Act to support small businesses by offering SBA-guaranteed loans on advantageous terms.
Through the CARES Act and subsequent legislation, Congress provided up to $659 billion in potentially forgivable loans to businesses impacted by the COVID-19 pandemic.
The Fifth Circuit has waded into the debate on whether the SBA must make Paycheck Protection Program ("PPP") loans available to debtors in bankruptcy, clearly answering "No."
One Court Reverses Itself and Others Expose Eligibility Loopholes
Several recent bankruptcy court decisions reveal that a temporary restraining order prohibiting the Small Business Administration (SBA) from enforcing its rule that a debtor in bankruptcy cannot qualify for a Paycheck Protection Program (PPP) loan (the Bankruptcy Exclusion) is not necessarily a reliable predictor of ultimate success on the merits, and some courts have permitted end runs around the Bankruptcy Exclusion, empowering debtors to take advantage of those loopholes.