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Volume XI, Number 259

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Eleventh Circuit Joins Fifth in Holding that the SBA May Deny Paycheck Protection Program Loans to Debtors in Bankruptcy

In June of 2020, Miller Canfield reported that the Fifth Circuit held that a Texas bankruptcy court had exceeded its authority when it ordered the SBA Administrator to make a Paycheck Protection Program (PPP) loan available to a debtor in bankruptcy. We added at the time that "whether other circuits follow the Fifth's lead remains to be seen."  Now, the Eleventh Circuit has agreed with the Fifth, issuing a comprehensive opinion to explain its reasoning.

The PPP was a central component of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Through August 2020, the PPP allowed eligible small businesses to obtain guaranteed loans to pay certain expenses, such as payroll costs, rent, and utilities. Although the CARES Act does not discuss whether companies who have filed for bankruptcy protection are eligible to participate in the PPP, the Small Business Administration's form to apply for PPP funds stated that applicants involved in bankruptcy are ineligible. The question remains important, as the federal government is considering another wave of funding for the PPP program.

A number of bankrupt debtors have sued the SBA over the bankruptcy exclusion, with mixed results. Until now, the Fifth Circuit was the only circuit court to weigh in, and it determined that bankruptcy courts do not have the authority to issue a preliminary injunction against the SBA Administrator to require it to make PPP loans available to bankrupt debtors. On December 22, 2020, the Eleventh Circuit agreed, though on different grounds. Unlike the Fifth, the Eleventh Circuit did not reach the question of whether bankruptcy courts can enjoin the SBA. Instead, it analyzed the merits of the issue and found that the SBA acted reasonably and did not exceed its authority in determining that bankrupt debtors are to be excluded from the PPP program.

What does this mean for lenders? Two federal appellate courts have now held that the SBA may exclude bankrupt debtors from consideration for PPP loans. Although these holdings are limited to the states within those circuits, even if a bankruptcy court elsewhere should issue an injunction against the SBA, the injunction would not necessarily translate into a requirement that a specific lender make a PPP loan to a bankrupt debtor.

© 2021 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume X, Number 358
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About this Author

Ronald Spinner Bankruptcy Lawyer Miller Canfield
Principal

Ron Spinner brings extensive business experience to his bankruptcy practice, developing results-oriented strategies and breaking new legal ground where necessary to do so.

Indeed, Ron's ability to deal with novel situations helped tremendously in the City of Detroit bankruptcy case, where questions of first impression arose regularly. His ability to navigate the unique aspects of chapter 9 aided (and continues to aid) the City in its recovery.

As another example, Ron represented a creditor who "factored" the debtors' invoices. Courts typically characterize factoring as a "...

313.496.7829
Marc N. Swanson Bankruptcy Attorney Miller, Canfield, Paddock and Stone Detroit, MI
Principal

Marc Swanson is the deputy group leader of the Bankruptcy Group at Miller Canfield. He specializes in representing debtors, lenders, creditors, equity holders and unsecured creditors' committees in bankruptcy cases and related litigation in Michigan and throughout the country. Marc has extensive experience in the municipal, energy, automotive, banking and building supply industries.

Marc is currently the lead attorney for the City of Detroit in its bankruptcy case. In this role, Marc argued and won two bankruptcy appeals at the U.S. 6th Circuit Court of Appeals for the City. One of...

313-496-7591
Steven A. Roach Litigation Attorney Miller Canfield
Principal

Steven A. Roach brings more than 30 years of commercial transaction and litigation experience in restructuring lending relationships and enforcing loan transactions. He applies this experience to provide a unique perspective as both a trial and transactional lawyer when representing and counselling the firm's financial institution clients. 

Steve has represented lenders in a variety of lending structures, including syndications, financing leases, structured debt and equity financings, multi-jurisdictional and international transactions. He has...

313.496.7933
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