Texas Judge Allows Chapter 11 Debtor To Submit PPP Loan Application

April 28, 2020

Last week, the bankruptcy court in the Southern District of Texas issued a temporary restraining order (TRO) enjoining the SBA and a Paycheck Protection Program (“PPP”) participating lender from rejecting a loan application due to a debtor’s bankruptcy status.

The PPP, a part of the CARES Act, extends the loan program under the Small Business Act to businesses with less than 500 employees. Neither the CARES Act nor the Small Business Act contain language prohibiting the grant of PPP loans to entities operating under the Bankruptcy Code.

In Hidalgo County Emergency Service Foundation v. Carranza, the Debtor applied for a PPP loan from Plains Capital Bank. The application process included an SBA form which asks if an applicant is “presently involved in any bankruptcy”. Because the Debtor is presently in a Chapter 11 proceeding, its application was denied. The debtor sought a TRO in response, asking the SBA to remove references to a PPP loan applicant’s bankruptcy status from its forms, policies, procedures, and agreements; the Debtor also requested an order for the SBA to instruct lending institutions that there can be no exclusion from the PPP due to an applicant’s bankruptcy status. The Debtor argued that the SBA exceeded its authority to administer the PPP by requiring applicants to not be “presently involved in any bankruptcy,” a condition which doesn’t exist in the PPP, the Small Business Act, or the SBA’s rules. Furthermore, it alleged that the SBA violated 11 U.S.C. §525(a) which prohibits discriminatory acts against debtors.

Judge Jones granted the TRO after finding that the Debtor has a substantial likelihood of succeeding on both of its claims and that public interest would be served (the Debtor is a 911 patient transfer provider). The Judge allowed the Debtor to submit PPP loan applications to lenders with “presently involved in any bankruptcy” stricken from the SBA form and ordered lenders to disregard the involvement of the Debtor in any bankruptcy.

If a recent lawsuit or bank default has made you consider bankruptcy, or if your forbearance has expired, or if you are facing litigation that puts your business in jeopardy, consider contacting Carmody MacDonald’s Financial Restructuring & Bankruptcy legal team for an initial consultation.

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