PPP Loans and Bankruptcy — Update
Last month, we reported on continuing developments with the interim final rule issued by the Small Business Administration (SBA) regarding the Paycheck Protection Program (PPP) loans authorized under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other things, the rule provides that businesses that are debtors in bankruptcy proceedings are not eligible to receive PPP loan funds even if those businesses would otherwise be eligible to receive a PPP loan.
Recently, the U.S. Court of Appeals for the Fifth Circuit overruled a Texas bankruptcy court ruling that granted a preliminary injunction against the SBA and directed the SBA to process the debtor’s PPP loan application without reference to its status as a bankruptcy debtor. Much of the litigation over this rule has centered on Section 525 of the Bankruptcy Code, which prohibits the government from denying “a license, permit, charter, franchise, or other similar grant” solely because someone is or has been bankrupt. The Fifth Circuit, however, sidestepped this issue and held that the SBA is not subject to an injunction order in the first place.
In Maryland, recent decisions from the District Court and the Bankruptcy Court addressed the Section 525 argument directly, but both courts ruled in favor of the SBA. In these cases, the debtors sought injunctions to prevent the SBA from enforcing its interim rule because, among other arguments, a PPP loan is in the nature of a grant and the rule therefore runs afoul of Section 525. The courts disagreed, reasoning that a PPP loan is not akin to a “license, permit, charter, franchise” and, thus, Section 525 does not apply.
Practice Point: While the application window for new PPP loans has been extended through August 8, 2020, some commentators have suggested that debtors may begin to bring damages claims (as opposed to claims for injunctive relief) against the SBA for their losses associated with the SBA’s rule. Locally, however, the recent decisions suggest that such an approach may be an uphill battle for debtors.
Please contact Bryan M. Mull with any questions concerning this topic.