Courts grapple with access to loans from bankrupt businesses (fixed)

How the courts interpret a little-known bankruptcy code provision is likely to make a big difference to small, bankrupt businesses seeking paycheck protection program loans.

Bankrupt companies have asked the courts for help accessing stimulus funds following the Small Business Administration’s decision to block companies’ Chapter 11 claims.

Whether bankruptcy courts will require the SBA to consider a company’s loan application has been linked to how the judge reads Section 525 (a) of the Bankruptcy Code. This provision prohibits governments from denying a license, permit, charter, franchise, or other similar grant because the applicant is or was a bankrupt debtor.

“You can’t prevent bankrupt debtors from accessing programs that are unique to government, like P3,” said Andrew Helman of Murray Plumb & Murray. Helman represents bankrupt hospitals in Maine and Vermont that have sued the SBA to demand review of their P3 applications.

The small number of results so far have been mixed.

A Texas bankruptcy judge issued a temporary restraining order forcing the agency to consider a loan application from an emergency services company, and a Maine bankruptcy judge granted similar TROs for two hospitals on Friday .

But a judge in another district in Texas refused similar emergency help, as did a bankruptcy judge in Delaware.

The issue is far from settled: at least six other courts reviewing companies’ requests for TRO have yet to rule.

Corporate ‘breadline’

The CARES law, which came into effect on March 27, created the PPP to provide relief to small businesses unable to cope with payrolls and other fundamental expenses due to revenue interrupted by coronavirus shutdowns.

Qualifying businesses can borrow up to 2.5 times their average monthly payroll, with a cap of $ 10 million, at just 1% interest and with a six-month deferral on any payment.

“PPP is the bread line for American businesses, and we want to be able to stand on that line with other small businesses,” Helman told Bloomberg Law.

Businesses challenging the SBA’s policy argue the agency overstepped its authority when it ruled bankrupt businesses were not eligible for the loans. Nothing in the CARES Act has this limitation, they say.

In fact, the CARES Act made it clear that Congress intended to help troubled small businesses that go bankrupt, according to the companies. The same law increased the debt limit for small businesses to be able to participate in a new, simplified subchapter of Chapter 11.

“SBA’s exclusion of grafted bankruptcy on PPP loan program is blatant discrimination because of bankruptcy, which is prohibited under 11 USC § 525 (a)”, family entertainment center company NRP Lease Holdings LLC said in his TRO petition, filed in the Middle District of Florida bankruptcy court.

Grant for loan

At the same time, the loans are expected to eventually be canceled, said N. Chris Glenos, head of the Bankruptcy and Creditor Rights practice group at Bradley Arant Boult Cummings LLP in Birmingham, Alabama.

The Section 525 (a) prohibition against denying grants to failed firms applies if a PPP loan is more of a grant than a loan, said Jay L. Westbrook, Benno C. Schmidt Chair in Corporate Law. business at the University of Texas Law School. .

“If the money is probably never to be repaid, then the decision is really to grant it rather than loan it and bankruptcy shouldn’t matter,” he said in an email to Bloomberg Law.

It is a “terrible policy” to deny bankrupt companies help with the virus, Westbrook said. “Denying companies money in a Chapter 11 reorganization bankruptcy for that reason alone is like denying people health care benefits if they go to the hospital.” “

An SBA representative did not respond to requests for comment.

Judge David R. Jones of the United States Bankruptcy Court for the Southern District of Texas allowed a TRO on April 25 in the name of Hidalgo County Emergency Services Foundation.

PPP loans, with favorable terms and probable forgiveness, are akin to a cash grant that cannot be refused due to the bankruptcy of an applicant under Article 525 (a) of the Bankruptcy Code, Jones said.

U.S. Bankruptcy Court Judge Michael A. Fagone for the District of Maine on Friday granted TRO’s claims by Penobscot Valley Hospital and Calais Regional Hospital. He found that the SBA had likely violated Section 525 (a) by systematically denying PPP requests solely on the basis of a borrower’s bankruptcy.

But Judge Brendan L. Shannon came up with another conclusion in the Chapter 11 case of the Cosi Inc. restaurant chain in Delaware. Cosi, however, might have another chance to convince the judge later in the case.

Judge Craig A. Gargotta of the U.S. West District Bankruptcy Court denied Thursday Education Asteria Incthe request of. a provisional injunction against the ASB. Although the loan is “virtually a grant,” it is still a loan, and it must defer to the SBA, said Asteria’s attorney, E. Paul Keiffer of Rochelle McCullough LLP.

To be determined

However, several other cases are still pending.

Judge Colleen A. Brown of the United States Bankruptcy Court for the District of Vermont held a hearing on Friday on a TRO motion to Springfield Hospital.

Arizona District Bankruptcy Court is considering Starplex Corp.’s on May 21, while the U.S. Bankruptcy Court for the Middle District of Florida will consider NRP Lease Holdings’ petition on May 6.

The way these courts rule could have lasting implications for many small businesses as the economic effects of the pandemic persist.

For additional legal resources, visit Bloomberg Law Focus: Coronavirus.

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