Recent bankruptcy court decisions in In re Hidalgo and In re Cosi Inc. indicate that courts are split on whether the U.S. Small Business Administration and participating lenders can deny Paycheck Protection Program loans to businesses that are debtors in a pending bankruptcy proceeding.
The SBA’s Bankruptcy Exclusion
To assist individuals and businesses struggling due to the COVID-19 pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which enacted the PPP, a loan program aimed at helping businesses pay their employees during the pandemic. The PPP is guaranteed under Section 7(a) of the Small Business Act, which authorizes the SBA to provide loans to small businesses. Unlike other SBA 7(a) loans for which the SBA guarantees up to 85% of the loan, PPP loans are 100% guaranteed by the SBA and, most importantly, may be fully forgiven if the loan is used for certain payroll and related expenses during the eight-week period beginning on the date the loan is disbursed.