The Restructuring Report

Through the CARES Act and subsequent legislation, Congress provided up to $659 billion in potentially forgivable loans to businesses impacted by the COVID-19 pandemic. The rules and regulations relating to the Paycheck Protection Program (PPP) loans have evolved, but one controversial aspect has remained unchanged: in administering the PPP loans, the Small Business Administration (SBA) has determined that companies that are debtors in bankruptcy are not eligible to receive a PPP loan. This has spawned lawsuits across the country against the SBA by Chapter 11 debtors seeking to force the SBA to allow them to apply for a PPP loan. Among other theories, these lawsuits challenge the SBA’s actions as arbitrary and capricious and claim the SBA is violating the anti-discrimination provision of 11 U.S.C. § 525(a). The results have been mixed, even within jurisdictions. (For example, Judge Daniel Collins from the U.S. Bankruptcy Court for the District of Arizona ruled in favor of the SBA in the Starplex Corp. decision discussed in this article, while his colleague Judge Paul Sala later ruled against the SBA in PCT Int’l, Inc. v. Carranza.) And only recently has a Court of Appeals ruled on the issue, siding in favor of the SBA (Hidalgo Cty. Emergency Serv. Found. v. Carranza, 2020 WL 3411190 No. 20-40368, (5th Cir., June 22, 2020)). But that isn’t the end of the story. This article highlights a creative solution that has been employed by several debtors who were unsuccessful in obtaining a court order declaring that the SBA and lending institutions administering PPP loans may not deny them a PPP loan based on their status as a debtor in bankruptcy.

In the jointly administered case of Blue Ice Investments, LLC, an affiliated Chapter 11 debtor brought an adversary proceeding against SBA, seeking declaratory relief and injunctive relief that the SBA permit the debtor to apply for a PPP loan. The debtor followed its complaint with a motion for a preliminary injunction. After substantial briefing and a telephonic hearing, the bankruptcy court denied the motion for a preliminary injunction. After the court announced its ruling, but even before entry of the order denying the preliminary injunction, the debtor filed a motion to dismiss the case, arguing that it was in the best interests of all creditors that the case be dismissed so that the debtor could have access to a PPP loan. The motion was granted and the case was dismissed. The debtor then applied for and obtained a PPP loan, and then filed a motion to “reinstate” its Chapter 11 case. As of the date of this article, the motion remains pending.

In a similar move, a healthcare system based in Jacksboro, Texas, recently re-entered Chapter 9. Jack County Hospital District d/b/a Faith Community Health System filed a Chapter 9 bankruptcy case in February 2020. Then COVID-19 hit. When it was denied a PPP loan, the hospital system brought an adversary proceeding against the SBA and a motion for a temporary restraining order and preliminary injunction, seeking to invalidate the SBA’s ban on debtors receiving PPP loans. The motion was denied by an otherwise-sympathetic Judge Mark Mullin. The debtor brought an emergency motion to dismiss the case to allow it to apply for a PPP loan. The bankruptcy court granted the motion to dismiss. After receiving a PPP loan, the debtor filed a new Chapter 9 case, paid a new filing fee and appears to be set to continue where its prior case left off.

In both instances, the debtors first sought to overcome the SBA’s application process in court. The tactic cost the debtors time and money to brief and argue a complicated motion. That may have been the right choice in those cases, as neither case arose in a jurisdiction that had already reached an unfavorable result, there are good arguments in the debtors’ favor, and it is wasteful and cumbersome to dismiss a case with the expectation of re-filing. But the considerations may be different in other cases, especially as we reach the end of the application period for PPP loans. According to the SBA, there are still significant PPP loans available (as of June 17, 2020, the SBA had approved $513 billion in PPP loans). If a debtor determines that a PPP loan makes business sense, this option–dismiss, obtain a PPP loan and refile–may provide a cheaper and faster route to liquidity than fighting the SBA directly.

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