Consolidated Appropriations Act, 2021 (“CAA”) and PPP Loan Eligibility

Mark Lindsay, Esq.
Partner at Bernstein-Burkley, P.C.

On December 22, 2020, Congress passed the Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law on December 27, 2020. The CAA contains specific provisions that would amend §364 of the Bankruptcy Code. Most significantly, the amendments to §364 would allow certain bankruptcy debtors to seek approval of financing under the Paycheck Protection Program (“PPP”) created under the “Coronavirus Aid, Relief, and Economic Security Act,’’ otherwise known as the ‘‘CARES Act.’’ The PPP provides loans to eligible businesses to assist with ongoing expenses, including employee payroll, interest on mortgages, rent, and utilities. One of the key benefits of these loans is that they may be fully forgiven if used appropriately according to the program. These amendments to §364 sound like good news for bankruptcy debtors, but there remains a problem.

The PPP loans are implemented and overseen by the Small Business Administration (“SBA”), and despite the clear intent of providing relief to businesses in times of financial distress, the SBA has taken the formal position that debtors in bankruptcy are not eligible for the program AND the CAA does not overrule the SBA. Rather, the CAA provisions do not become effective and cannot be utilized by bankruptcy debtors unless and until the SBA provides a written determination to the Office of the United States Trustee stating that debtors are eligible. Rather than giving such written authority, on January 6, 2021 the SBA issued an Interim Final Rule again, stating that debtors in bankruptcy are not eligible for PPP loans. Accordingly, as of the date of this article, bankruptcy debtors continue to be ineligible for PPP loans.

If the SBA does change its stance and the new provisions of the CAA do become effective, there are certain key provisions that bankruptcy debtors must be aware of. First, only businesses filing under the Small Business Reorganization Act of Chapter 11 (Subchapter V) or under chapters 12 (family farmers) or 13 (individuals) would be eligible. Parties filing under ordinary Chapter 11 would not be eligible. Eligible debtors may obtain a PPP loan notwithstanding existing cash collateral or debtor-in-possession lending arrangements that would otherwise prohibit subsequent borrowing. Unless and until a PPP loan is forgiven under the PPP, it would be treated as a super-priority administrative expense under Sections 364(c)(1) and 503(b) of the Bankruptcy Code. Furthermore, the amendments would permit confirmation of a plan that includes payment of a PPP loan in full pursuant to the loan’s terms, notwithstanding the super-priority status of the loan. Also, recognizing the frequent exigent circumstances facing a debtor, the CAA provides that a bankruptcy court must hold a hearing within seven days of a debtor’s request for permission to incur a PPP loan.

Clearly these amendments could provide much needed assistance to companies seeking relief in bankruptcy. So bankruptcy debtors, their counsel, lenders and other parties interested in furthering the goal of successful bankruptcy reorganizations remain hopeful that the SBA will change its position in the near future. Such parties remain on high alert hoping for this relief to become available. Currently though, the additional PPP lending under the CAA expires on March 31, 2021, so this potential window of opportunity is quickly closing.

Written by Bernstein- Burkley, P.C. on February 23, 2021

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