By Vince Sullivan

Law360 (May 13, 2020, 8:30 PM EDT) -- A Delaware bankruptcy judge approved a request Wednesday from USA Rugby Football Union Ltd. to take out $375,000 in government-backed small business loans under the Paycheck Protection Program, despite concerns raised by the federal government over whether the debtor complied with the rules of the program when it applied for the funds.

During a hearing conducted via teleconference, U.S. Bankruptcy Judge Brendan L. Shannon acknowledged that the implementation of the PPP in the context of companies applying for the funds and later filing for bankruptcy has resulted in varying decisions across the country, but said the USA Rugby case is different because the funds have already been disbursed.

He allowed USA Rugby to keep and use the money, but made no decision on whether the Small Business Administration, which is running the PPP, had any recourse if it is determined the funds were improperly obtained by the debtor. The SBA, through a U.S. Department of Justice attorney, objected to the debtor's motion, saying it seeks to require the SBA to guarantee the funds provided by the lender regardless of the legitimacy of how the funds were obtained.

"You're not asking me to enjoin the United States," Judge Shannon said in reference to other cases involving this issue. "That's a big ask. … What I have here is a debtor before me which has borrowed money and has asked authority from this court to do so."

The implementation of the PPP as part of the Coronavirus Aid Relief and Economic Security, or CARES, Act has faced confusion since the program began in early April. Designed to provide a stopgap amount of funding for employee payroll and health care expenses for companies struggling in the midst of the COVID-19 pandemic, the program will forgive loans if the money is used for approved purposes.

In the Cosi Inc. Chapter 11 case, Judge Shannon on April 30 denied the debtor's request for a temporary restraining order that sought to enjoin the SBA from denying Cosi's PPP application on the basis of its status as a debtor. In that case, Judge Shannon said he said he didn't have the authority to enjoin the government.

The USA Rugby case is different, Judge Shannon said, because the debtor has already received the disbursement of funds from lender J.P. Morgan Chase Bank as part of the PPP. According to court filings, the debtor filed its PPP application before its bankruptcy filing on March 31, but there was some dispute about that claim, with the SBA asserting the application wasn't made until April. USA Rugby said it asked JP Morgan for information about its application status to confirm the date but received no communications from the lender until the money was disbursed May 1.

While he approved the debtor's motion to borrow the money and use it, he denied the request to include language that would have absolved USA Rugby of any consequences for using the funds in a manner not authorized by the terms of the PPP.

The SBA had also asked for additional provisions in the order that would give the lender an administrative expense claim against the debtor in the amount of the loan disbursement, acknowledge the SBA's right to be subordinated to that claim and to segregate the funds and not use them until the government can determine if USA Rugby is an eligible receiver of the PPP funds. Judge Shannon denied those requests as well.

The Paycheck Protection Program was first funded with $349 billion under the CARES Act legislation and has since been replenished with another $310 billion after the first tranche of money was quickly exhausted. Qualifying small businesses can receive up to $10 million in loans, but some larger companies were approved for the program and later returned the money under intense public pressure to do so.

One facet of the application process requires a company seeking funding to certify that it is not a debtor in a bankruptcy proceeding, but initially no interpretation was provided by the SBA on whether a company could receive the funding if it filed for bankruptcy after applying.

In late April, an interim rule interpretation was published by the government saying that a debtor could not receive the funds in bankruptcy and would have to cancel the loan if it received it post-petition.

The initial confusion about bankrupt companies' eligibility for the loan program led to numerous disputes over the funds in bankruptcy cases across the country in recent weeks, with different courts issuing different rulings.

Since the rule clarification was published, at least five debtors have successfully obtained injunctions to bar the SBA from applying the bankruptcy restrictions on the loans while two courts have denied the injunction requests.

USA Rugby filed for bankruptcy protection March 31 listing about $6 million in debt and blaming the COVID-19 outbreak for its financial woes after being forced to cancel its competition slate.

The company, which oversees the national rugby team and competitions throughout the country, obtained $550,000 in debtor-in-possession financing from creditor World Rugby Limited. Debtor attorney Mark M. Billion of Billion Law told the court Wednesday that USA Rugby had reached a settlement resolving a potential $40 million claim against the debtor over the rights to host a rugby sevens national tournament. The dispute was settled for $200,000.

USA Rugby Football Union Ltd. is represented by Mark M. Billion and Peter K. Schaeffer of Billion Law.

The case is In re: United States of America Rugby Football Union Ltd., case number 20-10736, in the U.S. Bankruptcy Court for the District of Delaware.

--Additional reporting by Jeff Montgomery. Editing by Alanna Weissman.

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