Congress Considers Expanding PPP Loan Relief to Certain Debtors in Bankruptcy

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With the economic effects of the COVID-19 pandemic, the number of Chapter 11 bankruptcy filings, both large and small, has increased and more are expected. Struggling businesses that filed for bankruptcy relief could not take advantage of Paycheck Protection Program Loans (“PPP Loans”) authorized under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Debtors became creative in their efforts to obtain and retain PPP Loans, often relying on the timing of filing (or dismissing and refiling) or supplemental relief from bankruptcy courts. These efforts led to inconsistencies and uncertainty. As of the time of this publication, the latest date to apply for a PPP Loan was August 8, 2020. On July 27, 2020, Senators Marco Rubio and Susan Collins introduced the Continuing Small Business Recovery and Paycheck Protection Program Act (the “Expanded PPP Act”; Senate Bill 4321). If enacted, this bill, among other things, extends the time for eligible businesses to apply for PPP Loans through December 31, 2020, and will allow small businesses and individuals reorganizing under the Bankruptcy Code to obtain PPP Loans.

Under the Expanded PPP Act, businesses or individuals who file for reorganization under Chapter 11, Subchapter V, will have access to PPP Loans, as well as certain individuals with regular income who file for relief under Chapter 12 (Family Farmer or Fisherman) or Chapter 13 (Individual). With respect to Chapter 11 filings, this means that the relief will only be available to businesses or individuals who have aggregate debts of no more than $7,500,000. For such small business debtors, only the debtor or a trustee authorized to operate the business of the debtor may apply for a PPP Loan. The debtor in possession or the trustee must file a motion in the Bankruptcy Court for approval to obtain a PPP Loan. The court will hold a hearing within seven days after the filing and service of such motion. The debtor also must go through the application and approval process for PPP Loans, like any other applicant.

PPP Loans made to eligible debtors in bankruptcy under the Expanded PPP Act are subject to forgiveness in accordance with the CARES Act. If the small business debtors’ PPP Loan is not forgiven, the obligation will be treated as debt and will have repayment priority over several administrative expenses. The bill also addresses plan confirmation requirements, if the PPP Loan remains outstanding at the time of confirmation.

The Expanded PPP Act, if enacted, will prevent small businesses from having to choose between obtaining a PPP Loan or seeking protection under Chapter 11 of the Bankruptcy Code. At the time of this publication, Senate Bill 4321 has been read twice and referred to the Committee on Small Business and Entrepreneurship. If the Expanded PPP Act becomes law, many of the bankruptcy-related amendments will terminate two years after enactment. Miles & Stockbridge is closely monitoring current events and legislative developments, and remains ready to help clients navigate this complex and ever-changing legal landscape.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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