Best Practices: Additional PPP Guidance on Applicants and Owners “Presently” in Bankruptcy

Since the rollout of the PPP loan program in March 2020, the first question on the PPP Application asks: “Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?” (See Paycheck Protection Program Borrower Application Form, revised March 18, 2021).  If an applicant answers “yes,” the Applicant is not eligible for a PPP loan.

This exclusion to eligibility has been the subject of numerous bankruptcy court filings across the United States over the past year, with mixed results.  Those cases will likely drag on past the current end date for the PPP Loan Program on May 31, 2021.  However, on April 6, 2021, the SBA published PPP FAQ 67, which provided further clarification on what it means for an applicant or an owner of an applicant to be “presently involved in any bankruptcy” for purposes of eligibility for the PPP loan program.

PPP FAQ 67 sets forth three ways in which an applicant or owner will not be considered to be “presently involved in a bankruptcy,” and therefore eligible for a PPP loan.  First, regardless of the chapter of bankruptcy, is if the bankruptcy case has been dismissed.  Second, with respect to applicants or owners who have filed a Chapter 7 bankruptcy case, if the Bankruptcy Court has entered a discharge order in the case, even if the case is still pending, they will no longer be deemed to be presently involved in a bankruptcy case.  Third, and perhaps most important, with respect to Chapter 11, 12 or 13 bankruptcy cases, the applicant or owner will be deemed to be presently involved in a bankruptcy until the Bankruptcy court has entered an order confirming the plan in the case.  Upon plan confirmation, the applicant, or its owner, will no longer be deemed to be presently involved in a bankruptcy. Notwithstanding the foregoing, PPP lenders should be mindful that a business that has permanently closed is still ineligible for a PPP loan, regardless of the status of their bankruptcy case.  

PPP FAQ 67 specifically states that the dismissal, discharge or plan confirmation order must have been entered before the date of the PPP application. There are lenders who are receiving hold codes for second round PPP applications for applicants, or owners, that are in bankruptcy.  In some cases, it is only when these second round application hold codes come up, that lenders are being made aware that an applicant or owner has filed bankruptcy.  For some of those applicants, this new FAQ clarification may assist with clearing these hold codes.  However, for those applicants who may have completed their application incorrectly, this clarification likely will not assist them and they will still be deemed ineligible for a PPP loan.

If a lender is receiving bankruptcy hold codes for a second round PPP application, they should be sure to ask the applicant about the status of the bankruptcy case and review the bankruptcy docket.  If a lender is aware of an applicant who may have previously been deemed ineligible because of a bankruptcy case, they may want to revisit this issue with the applicant if the applicant is operating under a confirmed bankruptcy plan, or has since had their bankruptcy dismissed or discharged.  There may still be some time to get qualifying debtors a PPP loan.  

For more information on bankruptcy treatment of PPP Loans and PPP Loan applications, contact Lyndsay at: lrowland@starfieldsmith.com or 267-470-1154.