Today the Bankruptcy Court in New Mexico (In re Roman Catholic Church of the Archdiocese of Santa Fe, 18-13027 (Bankr. D. N.M.) ordered the SBA to make PPP funds available to a chapter 11 debtor and stated that if the debtor does not get the funds, the court will entertain an adversary proceeding against the SBA for compensatory and punitive damages.
The decision from the New Mexico court comes on the heels of a contrary decision in the Cosi bankruptcy case earlier this week, when the Delaware bankruptcy court ruled that it could not force the SBA to make PPP funds available to a chapter 11 debtor.
Some of the specific findings of the New Mexico Court include:
“The Court finds that Defendant’s decision to exclude bankruptcy debtors from the PPP is arbitrary and capricious. While a borrower’s bankruptcy status clearly is relevant for a normal loan program, the PPP is the opposite of that. It is not a loan program at all. It is a grant or support program. The statute’s eligibility requirements do not include creditworthiness. Quite the contrary, the CARES Act makes PPP money available regardless of financial distress. Financial distress is presumed. Given the effect of the lockdown, many, perhaps most, applicants would not be able to repay their PPP loans. They don’t have to, because the “loans” are really grants. Repayment is not a significant part of the program. That is why Congress did not include creditworthiness as a requirement.
Defendant’s inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements in this way was arbitrary and capricious, beyond its statutory authority, and in violation of 11 U.S.C. § 525(a). By a separate final judgment, the Court will grant Plaintiff the relief it requests. If Defendant’s actions result in Plaintiff not obtaining the $900,000 it requested, Plaintiff may file an adversary proceeding for compensatory and, if appropriate, punitive damages.
One would think that a chapter 11 debtor has a strong need for a PPP loan, but the SBA believes otherwise. Guidance issued on 4/24 by the SBA rejects the use of such financing for companies in chapter 11, which is not surprising since bankruptcy was a disqualifying event on the PPP application. Further, if a company enters bankruptcy after applying for a loan but before the funds are disbursed, it is the company’s responsibility to contact the lender and cancel the loan. Late last week, at least one court in Texas issued a TRO in favor of the debtor with respect to a PPP loan.
The SBA’s new guidance, which is embodied in a new Interim Final Rule issued just after the new funding was approved, is in the following Question and Answer format.
Will I be approved for a PPP loan if my business is in bankruptcy?
No. 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.
The Administrator, in consultation with the Secretary, 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. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy. The Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement. Lenders may rely on an applicant’s representation concerning the applicant’s or an owner of the applicant’s involvement in a bankruptcy proceeding.
FactorLaw previously reported on the trials and tribulations of small businesses trying to stay afloat by accessing (or not being able to access) funds from the Payroll Protection Program (PPP). We are pleased to note that this afternoon, President Trump signed a bill that provides an additional $484 billion for coronavirus relief, including $321 billion in additional funding to replenish the PPP, and $60 billion for small business disaster loans and grants (see https://www.npr.org/2020/04/22/838870536/read-whats-in-the-latest-coronavirus-relief-bill). The PPP was initially introduced with $349 billion in funding, which was disbursed quickly. For more information about the PPP, click here: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program. And for more information about small business disaster loans and grants, click here: https://www.sba.gov/disaster-assistance/coronavirus-covid-19.
An article in the New York Times today reported that funding for the Paycheck Protection Program could be exhausted within the next day or two. “As of Wednesday evening, more than 1.4 million loans had been approved at a value of more than $315 billion, according to the Small Business Administration.” Congress originally allocated $350 Billion to this program, although there are serious talks about infusing an additional $250 Billion. There are approximately 30 million small businesses in the U.S.
UPDATE: The SBA announced that as of 9 p.m. Wednesday, there were more than 1.5 million small-business loan applications approved totaling more than $324 billion with more than 4,900 lending institutions participating in the program.
Additionally, Republicans and Democrats are working on more funding, but those efforts seem to be stalled over disputes about Democrat provisions that call for at least $60 billion in small-business lending for women, minority and veteran-owned businesses in underserved urban, rural and tribal areas, $100 billion for hospitals and $150 billion for state governments.
The SBA reported on 4/13 that approximately 65% of the $350 Billion allocated to the Payroll Protection Program (there is talk of an additional $250 Billion in funding) was already committed. Similarly, Crain’s reported on 4/13, that locally CIBC and Wintrust approved 9,000 PPP applications. Consistent with those announcements, we have heard from several businesses that their PPP applications have been approved and funding has started.
The SBA has provided the following answers to frequently asked questions about the Paycheck Protection Program (“PPP”). The full guidance is available at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf and should be consulted.
According to the SBA, borrowers and lenders may rely on the guidance as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rule (“PPP Interim Final Rule”) (link). The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time.
Question: Paragraph 3.b.iii of the PPP Interim Final Rule states that lenders must “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” Does that require the lender to replicate every borrower’s calculations?
Answer: No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.
If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.
Question: Are small business concerns (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) required to have 500 or fewer employees to be eligible borrowers in the PPP?
Answer: No. Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards.
1 This document does not carry the force and effect of law independent of the statute and regulations on which it is based.
Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible.
Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?
Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate.
Question: Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers?
Answer: No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.
Question: Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)?
Answer: Yes. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affil…
The Federal Reserve appears to be taking action designed to bolster the Payroll Protection Program by allowing banks to sell the low-interest loans (which are capped at $10 million) to the U.S. central bank for cash. This move is designed to ease previously reported concerns among banks, particularly Chase and Bank of America, about getting stuck holding the low interest loans and administering them. Details on this action are expected to be announced later this week. The American Bankruptcy Institute reports that this move could make the program more attractive to lenders, given the fees of up to 5 percent banks can earn for what now amounts to processing the paperwork.
Businesses that have obtained financing through Merchant Cash Advances, and that have been shuttered by the Covid-19 pandemic, may be hit with a double-whammy — reduced cash flow to pay critical expenses (e.g., payroll) and aggressive collection efforts from cash hungry merchant cash lenders. This phenomenon is discussed in a recent article from NBC News: https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346?cid=eml_nbn_20200403
Businesses struggling with Merchant Cash Advances may be able to benefit from the expedited Chapter 11 processes available under the recently enacted Small Business Restructuring Act (a “Subchapter 5” filing). FactorLaw has previously reported how a Subchapter 5 filing can be used by small businesses dealing with financial distress.
FactorLaw attorneys are available to discuss how the SBRA can help businesses deal with Merchant Cash Advance issues.
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On April 2, 2020, the Small Business Administration issued guidance on the Paycheck Protection Program contained in the recently enacted Coronavirus Aid, Relief, and Economic Security Act (a/k/a the CARES Act). The Paycheck Protection Program will provide up to $349 billion in loans to eligible small businesses (generally a business with fewer than 500 employees), independent contractors, and self-employed individuals to cover payroll and other costs. Key highlights of the Paycheck Protection Program include:
-100% of the loan’s principal may be forgiven if borrowers satisfy certain conditions.
– The loans will have a two-year term with payments deferred for six months.
– The loans will carry an interest rate of 1%.
– The loans will be in the amount of the lesser of $10 million or an amount calculated on a specified payroll-based formula.
More information, including eligibility criteria, can be found in the guidance issued by the Small Business Administration. [INSERT LINK https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf]
The application process for the Paycheck Protection Program opened officially on April 3, 2020 but several banks are still in the process of developing procedures to accept applications. The funds are available on a first come first serve basis.
The attorneys at FactorLaw will continue to monitor legal and regulatory developments to assist clients during the current crisis.
On Monday, March 30, 2020, the Illinois Department of Financial and Professional Regulation announced a series of actions to ensure the protection of Illinoisans in many areas of small business and consumer borrowing, servicing, and collections. The link to the guidance put forth by the IDFPR can be found at https://www.idfpr.com/News/2020/2020%2003%2030%20IDFPR%20financial%20guidance.pdf