This dispute has sparked a split in the courts over whether being bankrupt affects PPP loan eligibility.
Bankruptcy courts in Maine and Vermont have issued orders prohibiting the SBA from dismissing bankruptcy claims. In other cases, a Delaware bankruptcy court has refused. A Texas court issued an order requiring the SBA to consider a debtor’s claim, but the Fifth Circuit then heard an expedited appeal and quashed that order.
Bankruptcy cases in the Tulsa area are heard by the United States Bankruptcy Court for the Northern District of Oklahoma. To my knowledge, this issue has not been raised in a Chapter 11 case in our region.
Additionally, Oklahoma falls under the jurisdiction of the 10th Circuit Court of Appeals. Recently, a New Mexico court that also falls under the 10th Circuit ruled that the SBA’s decision to exclude debtors from the PPP violated federal law. This decision is not binding on an Oklahoma court, but a judge in our state may consider the reasoning of the New Mexico court.
Because of these factors, a company’s ability to secure a PPP loan after filing for bankruptcy is uncertain at best.
As a result, current wisdom is that businesses eligible for a PPP loan that are considering filing for a Chapter 11 should apply for and obtain the PPP loan before filing for bankruptcy. Even still, the SBA could argue that the use of funds by a debtor is not authorized and seek to deny the cancellation of the PPP loan.