Debtors in bankruptcy, including hospitals and skilled nursing facilities, left out under the CARES Act PPP
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the $2.2 trillion stimulus package was signed into law. As we all know by now, one major component of this legislation was the allocation of $349 billion to the Paycheck Protection Program, or as it has come to be known, the PPP. Under the PPP, eligible lenders — those employers having been in operation since February 15, 2020 with fewer than 500 employees (per location if a hotel, restaurant, franchisor or other qualifying business such as hospitals and skilled nursing facilities) — are entitled to loans fully guaranteed by the SBA at 1% interest over a two-year term, and subject to possible loan forgiveness depending on a borrower’s workforce and salary/wage levels. Borrowers may borrow an amount based on 2.5 times the previous year’s monthly payroll up to $10 million.
Hospitals and Skilled Nursing Facilities (SNFs) have long been suffering from market economics and ever-evolving healthcare legislation. This phenomenon has been particularly acute for critical access and rural hospitals and those hospitals and SNF’s serving our lower economic populations. These economic conditions have caused an unprecedented number of hospitals and SNFs seeking to restructure their balance sheets and keep their lights on through the bankruptcy process. And along comes Covid-19, which has caused normal hospital and nursing home activity to all but cease in favor of attending to patients who have contracted the virus and those with immediate, and often, life threatening ailments. Hence, causing further downward pressure on these healthcare providers’ revenue. So one would think that the PPP through the CARES Act would be the ultimate lifeline for these types of healthcare entities.
While the CARES Act did provide certain year-long concessions under the Bankruptcy Code, such as increasing the debt limit for small business bankruptcies under the new Subchapter V from $2,725,625 to $7,500,000 and minor revisions to chapters 7 and 13, it appears to have slammed the doors on PPP loans for any otherwise qualifying employer if it is a debtor in bankruptcy.
Although nowhere in the CARES Act itself, or the SBA issued interim final rules is there a referenced bankruptcy exclusion, the form borrower application’s first question asks:
- Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy (emphasis added)?
It should come as no surprise, that in an environment where banks vetting PPP loans since April 3 are particularly attuned to their obligation to police a prospective borrower’s qualification criteria, this application question has served as the death knell for any chapter 11 debtor looking for a PPP loan.
This is exactly where we find ourselves, as Nelson Mullins is currently serving as counsel for the Official Committee of Unsecured Creditors in a multi-hospital chapter 11 case, as well as representing a Patient Care Ombudsman in a multi-state SNF case. As to the hospital case, two of the operating hospitals need the exact relief for which the PPP loan program was intended. Without PPP loans, two more hospitals may be forced to close their doors amid the Covid-19 pandemic. As to the SNF case, after disclosure of the Covid-19 pandemic and with no other sources available, the exit financing was reduced by at least 50% of the original committed amount, leaving several facilities facing closure and professionals deferring payment just to exit bankruptcy.
Was this really the legislators’ intent when contemplating the job-saving initiative through the PPP? Or more importantly, did the legislators even contemplate the absolute life-line that the PPP could provide hospitals and nursing homes desperate for cash during the pandemic? Think about it, while healthcare providers are putting their lives on the line providing Covid-19 care at hospitals and SNFs in bankruptcy, those very entities have no access to PPP loans that would assure these healthcare providers continued pay or even a place to work once the virus passes.
Adding further confusion, while the PPP is not available to otherwise eligible debtors in bankruptcy, we can find nothing in the CARES Act or the SBA rules that protect the PPP loan proceeds from creditor collection efforts. While PPP loan proceeds provided to a debtor in bankruptcy would be protected from creditors by the automatic stay provision of the bankruptcy code (11 U.S.C. § 362), these is no similar provision in the CARES Act. Meaning that an aggressive creditor could seek to garnish a borrower’s account and grab the exact PPP loan proceeds that were meant to pay employees and keep a borrower in business. We suggest that this is again an oversight that needs immediate attention.
While we applaud the promulgation of the CARES Act as a prompt reaction to the economic plight of our mid-size businesses facing unprecedented economic pressures caused by the global Covid-19 pandemic, we seek immediate action on the following two points:
- Make PPP loans available to chapter 11 debtors who are considered health care businesses under the Bankruptcy Code if they otherwise meet the balance of the eligibility requirements.
- Make all PPP loan proceeds protected from creditor collection efforts, especially those providing much-needed healthcare services.
