The recently enacted Consolidated Appropriations Act, 2021 (“CAA”) includes the Coronavirus Economic Relief for Transportation Services Act and Coronavirus Response and Relief and Relief Supplemental Appropriations Act (the “CARES Act II”), which modifies the Paycheck Protection Program (“PPP”) and provides for $284.45 billion in “PPP Second Draw Loans.” You will likely recall that the prior PPP, enacted in March 2020 as part of the original CARES Act, did not expressly exclude companies in bankruptcy (“Debtors”), but was silent on the issue. The U.S. Small Business Administration (“SBA”), however, took the position that debtors were not eligible to receive PPP loans in numerous cases. Debtor eligibility was the subject of extensive litigation with inconsistent results, culminating in two Circuit Court opinions that came out decidedly in the SBA’s favor. Congress had the opportunity to fix the problem in CARES Act II, but instead punted back to the SBA, providing only the suggestion that certain Debtors could be eligible for PPP loans (notably excluding chapter 11 Debtors). Recently, the SBA provided a good indication that it is rejecting the “suggestion” of Congress and remaining steadfast in its position, issuing an Interim Final Rule which states that Debtors in bankruptcy proceedings are ineligible for PPP loans. Since Congress effectively deferred to the SBA on the issue and the SBA has stated its (initial) position, it seems unlikely that current or future Debtors will have much of an argument for PPP eligibility.
Limitations on Debtor Eligibility for PPP Second Draw Loans
On its face, the CARES Act II makes subchapter V, chapter 12, and chapter 13 Debtors eligible to receive PPP Second Draw Loans.1 After further examination, however, it is evident that CARES Act II effectively left the decision to the SBA. Under the Act, for the specified Debtors to be eligible for PPP loans, the SBA must first send a written determination to the Executive Office of the U.S. Trustee stating that Debtors are eligible for original PPP loans and PPP Second Draw Loans.2 Funds would then be available to the specified Debtors only in bankruptcy cases filed after such a determination is made.3
The SBA quickly threw cold water on this possibility. On January 19, 2021, the SBA reiterated in an Interim Final Rule that “[i]f 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.”4 While this may not be the final say on the issue from the SBA, it seems unlikely that the SBA will ultimately change course.
Effectively Precludes Debtor Eligibility Until Further Notice
Under the original CARES Act, Debtors had argued that the SBA had exceeded its authority by denying Debtors access to PPP funds (since the original CARES Act was silent on the matter). This position was significantly weakened by two Circuit Court decisions from the Eleventh and Fifth Circuits. The Eleventh Circuit, for example, found that the SBA “did not exceed its authority in adopting the non-bankruptcy rule for PPP eligibility.”5 This finding rested on the court’s conclusion that Congress delegated rulemaking authority regarding the PPP, including eligibility requirements, to the SBA.6
Given that Congress effectively delegated the ultimate right to determine PPP eligibility to the SBA under CARES Act II, any arguments that the SBA has exceeded its authority are likely to be losers. This leaves Debtors, who for the time being must assume that they cannot access PPP funds, with little to hang their hat on. Seward & Kissel’s Corporate Restructuring & Bankruptcy Group will continue to closely monitor the situation and remains accessible to clients dealing with this crisis.
