Bloomberg Law
April 26, 2021, 9:31 AM

Bankrupt Companies to Rush Plan Approvals for Shot at PPP Loans

Alex Wolf
Alex Wolf

Bankrupt companies seeking federal pandemic relief funds now have an incentive to speed up their restructuring, following a federal policy shift that qualifies some of them for the popular loan program.

The Small Business Administration previously said bankrupt companies aren’t eligible for Paycheck Protection Program loans. But the agency earlier this month quietly updated its guidance to allow companies with certain court-approved bankruptcy plans to apply, even if their bankruptcy cases are still active.

That clarification—coupled with a May 31 deadline for loan applications—likely will encourage debtors to quickly negotiate reorganization plans that hinge on getting a PPP loan in the future, practitioners say. The funding, part of the CARES Act, can be a lifeline for small companies that have faced financial hardship during the pandemic.

Following the SBA’s change, Alpha Media Holdings LLC plans to reapply for a $10 million PPP loan. The radio broadcaster’s earlier application was denied due to its bankruptcy.

“It was a very clever and interesting fix that they came up with,” said Alpha Media’s attorney, Justin Bernbrock of Sheppard, Mullin, Richter & Hampton LLP.

Rush to Finish Line

With the PPP deadline looming, several bankruptcy companies will pursue reorganization plans that incorporate business projections and analyses based on getting a PPP loan, said Stinson LLP attorney Thomas Salerno. The deadline will push companies to negotiate with creditors and other interested parties for a consensual plan more quickly in order to be able to apply.

“If you don’t get the loan, the plan will never go effective” and the company will need to come up with a new one, he said.

The SBA’s update specifically says the agency would consider companies with a court-confirmed reorganization plan to no longer be “presently involved” in bankruptcy.

But the updated guidance still doesn’t address a core issue—whether bankrupt companies are eligible for PPP loans—said Morgan, Lewis & Bockius LLP attorney Sandra Vrejan. “At the end of the day, the thumbnail conclusion is that it hasn’t changed all that much,” she said.

And with just over a month until the application deadline, the extent of relief from the policy change can only stretch so far.

“I think it will help maybe several thousand people, but not tens of thousands of people,” said Edward Boltz, a consumer bankruptcy attorney at the Law Offices of John T. Orcutt.

Eligible recipients still should apply for and receive a PPP loan before filing for bankruptcy in the first place, he said.

Those already in bankruptcy must move quickly to take advantage of the program, said attorney Steven Waterman of Dorsey & Whitney LLP. “It puts an extra incentive on a debtor to confirm a Chapter 11 plan,” he said.

That accelerated timeline will be an easier lift for small businesses that filed for bankruptcy under Subchapter V, a streamlined process for companies with up to $7.5 million in debt, Waterman said.

Loans Before Bankruptcy

Lenders, following SBA policy, have routinely denied PPP funding to bankrupt companies since the forgivable loan program launched in April 2020.

That policy prompted numerous lawsuits accusing the SBA of creating arbitrary restrictions and violating the bankruptcy code.

That included Alpha Media. But the Portland, Ore.-based company recently agreed to drop a lawsuit against SBA Administrator Isabella Casillas Guzman in light of the policy change and assurances the company wouldn’t be denied the loan because its restructuring plan received court approval. “Perhaps we were the final push,” Bernbrock said.

Court rulings on other lawsuits have been mixed.

Meanwhile, small companies struggling to pay employees and overhead during the pandemic waited for their loans to be approved before filing for bankruptcy.

The Consolidated Appropriations Act, enacted in December, authorized courts to approve PPP borrowing by certain debtors in Chapter 11, 12, and 13.

But the measure only becomes effective if the SBA submits a written determination to the Executive Office of the U.S. Trustee—the Justice Department’s bankruptcy watchdog—that eligible debtors can apply for PPP loans.

The SBA has yet to do so. Instead, the agency just tweaked its policy to reflect that companies with a court-confirmed reorganization plan are no longer in bankruptcy.

The SBA didn’t respond to a request for comment.

‘Halfway’ Fix

“The SBA is trying to meet people a little bit halfway” with its new policy on what’s considered “presently involved” in bankruptcy, Salerno said. “It’s a legal fiction they created, but I’m willing to live with it because at least they’re opening up the purse strings a little bit.”

The SBA had already signaled that it didn’t view debtors as eligible. But if the purpose of the CARES Act was to help distressed businesses, then a Chapter 11 debtor “seems like a very good candidate for this type of relief,” Vrejan said.

With little time before the application deadline, the SBA update also may leave debtors wondering what to do, said attorney Zev Shechtman of Danning, Gill, Israel & Krasnoff LLP.

“Can you actually count on that money when proposing a plan? I think that would be challenging,” he said. “This clarifies a few points but it doesn’t change the overall landscape.”

To contact the reporter on this story: Alex Wolf in New York at

To contact the editors responsible for this story: Laura D. Francis at; Roger Yu at