Best Practices: Handling PPP Bankruptcies

As we near the first anniversary of the Paycheck Protection Program (“PPP”), it has become clear that this program was essential in helping millions of small businesses weather the storm of the COVID-19 pandemic.  Unfortunately, it has also become clear that, despite the best efforts and intentions of Congress, the SBA, and the lending community, many businesses were unable to survive the economic injuries sustained over the last year.  For many of these small businesses, bankruptcy has become the only remaining viable option for them.  Those businesses that obtained PPP loans and filed bankruptcy before their PPP loans were forgiven present a unique challenge for their PPP lenders.

SBA has indicated that guidance related to servicing, liquidation and guaranty purchase for PPP loans is forthcoming, but many lenders whose PPP borrowers have already filed for protection under the bankruptcy code cannot wait for this guidance to be issued before they have to act.  Until PPP specific guidance is issued, lenders should look to SBA’s guidance for handling bankruptcies in the standard 7(a) program.  Chapter 21., Section J. of SOP 50 57(2) (“SOP”) provides guidance that should be followed by PPP lenders until such time as SBA issues specific guidance for PPP loans.  The SOP requires lenders to take the following actions, as may be applicable to PPP loans, when a bankruptcy petition is filed, including, but not limited to:

• File a proof of claim;
• Review the debtor’s Statement of Financial Affairs and schedules and compare them with the financial documents the debtor provided to the Lender and SBA to determine if there are any material discrepancies with regard to the debtor’s PPP application;
• Report suspected fraud to the Office of the Inspector General and the appropriate Office of the U.S. Trustee;
• Monitor the bankruptcy proceedings;
• Represent the Lender and SBA’s interests at all hearings where the outcome may adversely affect the ability to collect the SBA loan balance;
• File an objection to discharge of the debt owed on the SBA loan if there is reason to believe that the debtor obtained the loan through fraud, misrepresentation or omission of a material fact, or fraudulently transferred or converted collateral;
• File a motion to revoke the debtor’s discharge if there is reason to believe that it was obtained through fraud or other acts of impropriety;
• Review proposed plans and disclosure statements and file an objection when necessary; and
• Cast a vote to accept or reject proposed plans based on an analysis of the relevant facts.

This list is non-exhaustive and there may be other actions that a PPP lender should consider under the specific circumstances of their case.  PPP Lenders should be aware that any action in the bankruptcy court that will result in a compromise of the principal balance of the PPP loan requires prior SBA consent.  Accordingly, a PPP lender should not vote in favor of a PPP debtor’s plan of reorganization if part, or all, of the PPP loan will be discharged as part of the plan.  Often, it may be advantageous to all parties to the bankruptcy, for the PPP borrower to file its forgiveness application as part of, or in conjunction with, the bankruptcy proceedings.  Of course, as factual scenarios can vary widely, the specific actions a PPP lender should take in any given case should only be done after consultation with experienced bankruptcy and SBA counsel.  PPP Lenders should be cognizant of the fact that until specific guidance is issued, failure to adhere to SBA’s requirements in bankruptcy court could potentially jeopardize the SBA guarantee for the PPP loan.

For more information on handling PPP borrowers in bankruptcy, contact Ethan at esmith@starfieldsmith.com.