Bankruptcy Debtors are Ineligible for PPP Loans

(Excerpt) During the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which established the Paycheck Protection Program (“PPP”). Under the PPP, the United States Small Business Administration (“SBA”) declared small businesses—including nonprofits, veterans’ organizations, and tribal enterprises that employ 500 people or less—as potential eligible borrowers. A borrower can use a PPP loan for a variety of purposes, such as general business costs like payroll and rent, or payments toward preexisting debts. However, there has been some debate as to whether a debtor in a case under title 11 of the United States Code (the “Bankruptcy Code”) is eligible for PPP loans. Until the SBA declares that bankruptcy status is not an automatic disqualification for a PPP loan, it appears that a debtor under the Bankruptcy Code is not eligible. Part I of this memorandum explores a recent amendment to the CARES Act, which addresses debtor eligibility for PPP loans. Part II is divided into two sections describing the case law on PPP loan eligibility. First, Part II explains the analysis known as the Chevron doctrine, on which some courts have relied when assessing the SBA’s determination of PPP loan eligibility. Next, it examines the conflicting case law where courts have come to different conclusions about debtor eligibility