PPPs for DIPs?

The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act (“CARES Act”) was signed into law on March 27, 2020. It provided a $2.2 trillion stimulus package to address the economic downturn caused by the Coronavirus pandemic. A major component of this legislation was the allocation of $349 billion to the Paycheck Protection Program (“PPP”). Under the PPP, eligible borrowers are entitled to loans 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. On April 24, 2020, the CARES Act was amended to increase the appropriation level for PPP loans to $670 billion. 

Another component of the CARES Act expanded limits of the recently enacted Small Business Reorganization Act of 2019 (“SBRA”). Under the SBRA, a business that owes less than $2,725,625, can take advantage of a more streamlined, faster and less costly chapter 11 bankruptcy process. The CARES Act increased the debt limits under the SBRA for one year to $7.5 million, making it possible for a larger number of businesses to restructure their business under the favorable provisions of the SBRA. 

These two different components of the CARES Act both indicate a Congressional intent to provide a lifeline to small businesses that are detrimentally impacted by the effects of the pandemic. However, the CARES Act itself did not address the question of whether a debtor in possession in a chapter 11 bankruptcy proceeding (“DIP”) under the SBRA or a normal chapter 11 case, is eligible for a PPP loan. Likewise, the SBA’s first Interim Final Rule, issued on April 1, 2020 was silent on the issue. However, the SBA issued an Interim Final Rule on April 24, 2020 that provides: “If 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.”

Several companies that are currently DIPs in pending chapter 11 cases are challenging the SBA’s Interim Final Rule. One of those, Hidalgo County EMS, a DIP in a case pending in the Southern District of Texas, received good news over the weekend. On April 25, 2020, Bankruptcy Judge David R. Jones issued a temporary restraining order authorizing Hidalgo County EMS to submit an application for a PPP loan and ordering the SBA to receive and consider the loan application “without any consideration of the involvement of Hidalgo County EMS or any owner of Hidalgo EMS in any bankruptcy.”

Other DIPs are pursuing similar litigation strategies in federal courts in the Western District of New York and the District of Arizona, but time is short. Judge Jones’ TRO does not compel the SBA to approve Hidalgo County EMS’s application, nor does it require any lender to make that loan if it is approved. It simply requires the SBA and any lender to process the loan application without regard to Hidalgo County EMS’s pending bankruptcy case. A preliminary injunction hearing is scheduled for May 8, 2020. Experts are expecting even the increased funding of the PPP program to be quickly exhausted. Unfortunately, the PPP well may run dry before any DIP can successfully litigate this issue to a favorable conclusion.

The Workouts & Restructuring Group at KMK Law is here to provide you with advice and guidance in connection with these and other issues. Please contact a KMK attorney for assistance, including those listed below.

Robert G. Sanker
513.579.6587
rsanker@kmklaw.com 

Jason V. Stitt
513.639.3964
jstitt@kmklaw.com 

Joseph E. Lehnert
513.639.3929
jlehnert@kmklaw.com