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Law360 (April 24, 2020, 6:47 PM EDT) -- The federal Small Business Administration has released an interim rule saying companies in bankruptcy are not eligible for loans under a federal coronavirus relief program for small businesses.
Companies in bankruptcy cannot apply for loans under the Paycheck Protection Program, and companies who enter bankruptcy before they receive their PPP funds must cancel their application, the agency said in the rule published April 15.
"The administrator, in consultation with the secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans," the rule said.
The SBA-administered program offers loans of up to $10 million from third-party lenders to firms with 500 or fewer employees to cover their costs while they are shuttered by local COVID-19 shutdown orders.
A portion of the loan equal to eight weeks of business expenses will be forgiven if 75% or more of the funds are spent on paying or rehiring workers. Any other funds — which may be spent on rent, insurance premiums, utility bills or interest in loans taken out before February 2020 — would be repaid on a two-year term at a 1% fixed rate.
In an interim final rule published April 15, the SBA said companies currently in bankruptcy are ineligible for the program, saying the Bankruptcy Code "does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy."
If a company enters bankruptcy after applying for a loan but before the funds are disbursed, it is the company's responsibility to contact the lender and cancel the loan, the rule said.
"Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes," it said.
While broadly popular, the Paycheck Protection Program has faced scrutiny over who has and has not gotten the forgivable loans. On Thursday, the Treasury Department said publicly traded companies probably can't justify receiving the money. A few hours later the parent company of Ruth's Chris Steakhouse announced it would start repaying the $20 million it received.
Small businesses have filed class actions alleging Wells Fargo Bank NA and JPMorgan Chase gave preference to larger small businesses. Businesses seeking access to the forgivable loans include tribal casinos, lobbyists, cannabis retailers and a strip club.
The interim rule stated that hedge funds and private equity firms are not eligible for the loans but that companies owned by private equity firms can be, as can gambling businesses and publicly owned hospitals that receive less than half of their funding from state or local governments.
--Additional reporting by Andrew Kragie. Editing by Haylee Pearl.
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