2020年4月29日

Paycheck Protection Program Loans and DIP Financing

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The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020, to provide $2.2 trillion to U.S. citizens and businesses afflicted by the COVID-19 outbreak, including $349 billion for financing “small businesses” under the Paycheck Protection Program or PPP.  Under the PPP, eligible small businesses are entitled to receive loans up to $10 million (calculated based on payroll records) guaranteed by the Small Business Administration (“SBA”) at a fixed interest rate of 1% for a two-year term.  Notably, the PPP loans may be forgiven, in part or in whole, if the proceeds are used to retain and pay employees, rent, utilities and interest on mortgage obligations during the eight-week period following loan origination.  On April 24, the CARES Act was amended to increase the appropriation level for PPP loans to $670 billion. 

While neither the CARES Act nor the Small Business Act expressly prohibits companies who have filed for bankruptcy from receiving PPP loans, the SBA has required participating lenders to use an SBA-sponsored loan application that, on its face, disqualifies any small business in bankruptcy.  To that end, on April 24, 2020, in conjunction with the CARES Act amendment that increased appropriation for PPP loans to $670 billion, the SBA formalized its position by issuing an interim final rule, effective immediately, providing that businesses in bankruptcy are ineligible to participate in the PPP.  In the pertinent part, the rule provides that:

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.  If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application.  Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.1

In support of the interim final rule, the SBA, in consultation with the U.S. Department of the Treasury, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an “unauthorized use” of funds or non-repayment of unforgiven loans.  Id.

Prior to the SBA’s issuance of its interim final rule, a handful of chapter 11 debtors sought to leverage PPP loans in bankruptcy—including via requests to use PPP loans as a form of unsecured debtor-in-possession (“DIP”) financing, as well as motions seeking turnover of PPP loan proceeds relating to PPP loans that were approved, but had not yet been funded, pre-petition.  See, e.g., In re Hidalgo County Emergency Service Foundation, Case No. 19-20497, Adv. P. No. 20-2006 (Bankr. S.D. Tex.) (seeking a temporary restraining order enjoining the SBA from denying debtor a PPP loan on the basis of debtor’s status as a chapter 11 debtor); In re Blue Ice Inv., LLC, Case No. 20-2208, Adv. P. No. 20-00095 (Bankr. D. Ariz.) (same); In re Roman Catholic Church of theArchdiocese of Sante Fe, Case No. 18-13027, Adv. No. 20-1026 (Bankr. D. N.M.) (same); In re The Diocese of Rochester, Case No. 19-20905 (Bankr. W.D. N.Y.) (seeking entry of an order pursuant to section 364(b) authorizing debtor to obtain postpetition financing on an unsecured basis); In re The Diocese of Buffalo, Case No. 20-10322 (Bankr. W.D. N.Y.) (same) In re Elemental Processing, LLC, Case No. 20-50640 (Bankr. E.D. Ky.) (seeking authority to incur postpetition financing pursuant to a PPP loan that was approved pre-petition); In re Village East, Inc., Case No. 20-31144 (Bankr. W.D. Ky.) (same).  Now, however, such efforts appear futile in light of the SBA’s express prohibition against extending PPP loans to bankruptcy debtors.

Still, as evidenced by a few small businesses seeking to leave chapter 11 as soon as possible in order to become eligible for PPP loans post-exit, some small businesses continue to explore creative, value-maximizing solutions that seek to harmonize both the Bankruptcy Code and the PPP. 

We will continue to follow these issues as the Treasury and SBA continue to issue guidance on the PPP and Cares Act.  Mayer Brown’s Restructuring practice remains available and willing to answer any questions.  For more information about the topics raised in this Legal Update, please contact Brian Trust, Adam C. Paul, Thomas (Tom) S. Kiriakos, Sean T. Scott or Aaron Gavant.

Also, please visit Mayer Brown’s COVID-19 Portal for additional insights on and analysis of the virus’s impact on business worldwide.


1 See Interim Final Rule, 13 C.F.R. Parts 120-21, Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility (RIN 3245-AH37), at p. 8-9. 

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