Circuit Eleventh joins Fifth in arguing that SBA can deny Paycheck Protection Program loans to bankrupt debtors

In June 2020, Miller Canfield reported that the Fifth Circuit ruled that a Texas bankruptcy court had exceeded its powers by ordering the SBA administrator to make a paycheck protection program (PPP) loan available to a debtor in bankruptcy. We added at the time that “it remains to be seen whether other circuits follow the example of the fifth”. Now the Eleventh Circuit agrees with the Fifth, giving full notice to explain its reasoning.

The PPP was a central element of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Until August 2020, the PPP allowed eligible small businesses to obtain secured loans to pay for certain expenses, such as labor costs, rent, and utilities. Although the CARES Act does not specify whether companies that have filed for bankruptcy are eligible to participate in PPP, the Small Business Administration’s form for requesting PPP funds indicated that applicants involved in bankruptcy are not. eligible. The issue remains important as the federal government considers another round of funding for the P3 program.

A number of bankrupt debtors have sued the SBA for bankruptcy exclusion, with mixed results. Until now, the Fifth Circuit has been the only circuit court to intervene and it has determined that bankruptcy courts do not have the power to issue a preliminary injunction against the SBA administrator to force him to put PPP loans available to bankrupt debtors. On December 22, 2020, the Eleventh Circuit accepted, but for different reasons. Unlike the Fifth, the Eleventh Circuit did not address the question of whether bankruptcy courts can ban the SBA. Instead, he analyzed the merits of the issue and concluded that the SBA acted reasonably and did not overstep its authority in determining that bankrupt debtors should be excluded from the P3 program.

What does this mean for lenders? Two federal appeals courts have now ruled that the SBA can exclude bankrupt debtors from consideration for PPP loans. While these holdings are limited to states within these circuits, even if a bankruptcy court elsewhere were to issue an injunction against the SBA, the injunction would not necessarily result in a requirement that a specific lender make a PPP loan. to a bankrupt debtor.

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