As several readers of our emails and blogs know, Congress has passed a new form of Chapter 11 bankruptcy for small business debtors. Details about this kind of bankruptcy filing can be located at our blog at https://shenwick.blogspot.com/search?q=subchapter+v
When a company files for bankruptcy, frequently they will need debtor in possession financing to remain in business and reorganize. While the Bankruptcy Code provides for a debtor in possession financing, our experience and the experience of many of our clients have been that debtor in possession financing is very difficult for small businesses to obtain after they file for Chapter 11 bankruptcy. This circumstance should be contrasted with large publicly traded companies that file for Chapter 11 bankruptcy, in which a market exists to provide those companies with a debtor in possession financing.
After the Paycheck Protection Program (the "PPP") was established in The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, many bankruptcy attorneys, financial advisors and accountants believed that PPP money may be a source of debtor in possession financing for Chapter 11 debtors and Subchapter V debtors.
The CARES Act extended PPP loans to Subchapter V small business debtors, but unfortunately not to Chapter 11 debtors.
The CARES ACT further allows that PPP loans will be offered only if the SBA Administrator in its discretion sends a letter to the Director of the Executive Office for United States Trustee allowing PPP loans in bankruptcy-unfortunately to date, the SBA has not sent that letter.
Due to the SBA administrator not sending that letter, it is unclear as to whether small business subchapter fee debtors will qualify for PPP loans.
Qualification may be based upon whether the Subchapter V Debtor received a 1st PPP loan, whether the loan was repaid or forgiven, or whether the SBA suffered a loss as a result of the 1st PPP loan.
Alison Bauer at Foley Hoag LLP wrote a great article on March 10, 2021 on this topic: “PPP Loans and Small Business Debtors in Bankruptcy”, which can be found at
https://www.jdsupra.com/legalnews/ppp-loans-and-small-business-debtors-in-5140892/
As a result, Chapter 11 debtors are not eligible for PP pay loans.
Subchapter V debtors may qualify for PPP loans, but they must proceed with caution and they may want to contact their bank or other banks that are processing PPP loans to determine whether they would qualify for a loan if they file for Subchapter V bankruptcy.
Individuals with questions about subchapter V Bankruptcy should contact Jim Shenwick at 212-541-6224 or jshenwick@gmail.com
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