Like every other storefront in downtown Lincoln, Nebraska, the Coffee House – a hangout for cavernous college students that has been offering decadent espresso and pastries since 1987 – has seen its income dry up almost overnight. last spring, when the coronavirus pandemic made eating indoors a deadly risk. Unlike most, however, the company would not have access to the massive loan fund that Congress made available to small businesses at the end of March.
The reason had nothing to do with the business itself, which had seen one of its best years, according to its owner, Mark Shriner. Rather, it all boiled down to a box on the Paycheck Protection Program funding application, which asked if the business or any of its owners were “currently in bankruptcy.” Shriner had filed for Chapter 13 in 2018 after a divorce and was still making court-ordered debt payments, so he checked “yes.” It was automatically rejected and lost approximately $ 25,000 in payroll and other costs that the program would have covered.
“My money is my store’s money. When I got a divorce and she was entitled to half, it’s not like a business can raise money very quickly, ”Shriner said, highlighting how many small businesses are structured as flow-through entities. who pay taxes on profits as individual income. . “All of these businesses that have had a hard time trying to make payments at the same time are kind of down.
Thousands of people file for Chapter 13 bankruptcy every year – 282,628 did so in 2019 alone. While it is not clear how many of them own a business, all of these individuals have been excluded from the PPP program, as have the thousands of businesses that are currently working under a reorganization plan under the. chapter 11 and family farms which file their case under the lesser known chapter 12. .
In December, Congress authorized the Small Business Administration to grant exemptions to certain debtors. But so far, the SBA has stuck to its position that bankrupt debtors are not entitled to government assistance. “Currently, the SBA administers the law as it is written,” SBA spokeswoman Shannon Giles sent in response to questions.
Although Shriner received the $ 10,000 prepayment for an economic disaster loan, which does not have to be repaid, the SBA turned him down for a larger economic disaster loan due to his personal credit. Instead, he took out two loans worth $ 107,000 from Square – with a total fee of nearly $ 12,000 – to keep the lights on and the staff paid as they were operating on an extremely limited basis, still in operation. down by more than half since before the pandemic.
“The biggest consequences are that we haven’t had time to take a week and close and chart our way forward, come up with a takeout menu or new things because we’re busy working at the counter for trying to save money, ”Shriner said. “A lot of other companies that got P3s were able to hire people to help them take a different direction, build apps, fix their websites, that sort of thing.”
The ban on PPP loans to debtors started with the SBA’s initial concept for the program: it expanded its 7a) Loan program, its most common credit offering for small businesses, which already bars bankrupt businesses. New pandemic relief measures were fundamentally grafted onto these rules, which reflect a position of the agency dating back to its beginnings in the 1950s that bankrupt companies were more likely to default.
“The SBA has an institutional bias against people who file for bankruptcy,” said Ed Boltz, a North Carolina bankruptcy lawyer who sits on the board of the National Association of Consumer Bankruptcy Attorneys. “The government’s attitude in a lot of things is, ‘Bankruptcy is difficult and confusing and these people are probably bad people.’”
Almost immediately, this position was challenged in courts across the country. In Hidalgo County, Texas, for example, a bankrupt emergency medical transport company filed a lawsuit after being denied a PPP loan. A bankruptcy judge issued a temporary injunction against the SBA, saying it was in the public interest during the pandemic to ensure that the company’s trucks and helicopters could continue to transport patients to hospitals. In June, the 5th US Circuit Court of Appeals released this decision, claiming that the judge had exceeded his authority.
Meanwhile, the SBA hastily released a to reign explicitly prohibiting bankrupt companies from participating in its pandemic relief program. “The Trustee, in consultation with the Secretary, has determined that the granting of PPP loans to bankrupt debtors would present an unacceptable risk of unauthorized use of funds or non-repayment of unpaid loans,” it says in Rule. “In addition, the Bankruptcy Code does not oblige anyone to make a loan or financial accommodation to a bankrupt debtor.”
Around the same time, a Florida radiology center also serving COVID-19 patients received a PPP loan, even though it was reorganizing due to the Chapter 11 bankruptcy. seeking approval from its bankruptcy court to incur the additional debt, the SBA objected again. The bankruptcy court find in favor of radiologists in June, writing that “it is clear that Congress did not intend to exclude Chapter 11 debtors from the paycheck protection program.” In December, however, the 11th Circuit overthrew the Lower Court and beside with the government.
Maury Udell, the lawyer for the radiology company, said he plans to appeal to the Supreme Court. The P3 is more of a grant than a loan, he argues, because all companies had to do for the money to be forgiven was spend much of it on payroll. Bankrupt businesses are arguably more likely to do so, given that they are on court-ordered plans on how they should manage their spending. Additionally, the program did not require companies to demonstrate repayment ability – many companies on very insecure bases applied for and received funding, sometimes filing for bankruptcy later.
“The SBA’s argument for not allowing Chapter 11 debtors is that the risk of non-payment is high,” Udell said. “It’s not a factor in whether you’ve been approved. It’s as high as anyone else because there are no other underwriting guidelines. “
Frustration with the SBA’s position escalated throughout the fall until December, when Congress passed a new round of $ 900 billion in pandemic-related relief, along with the regular budget. . It included $ 285 billion for a second drawdown of PPP loans, and a bit of potential debtor relief: an amendment to the U.S. Bankruptcy Code that allows PPP loans to companies that have declared Chapter 12 bankruptcy, 13 and of subchapter V, a new category for small businesses created in 2019 (Chapter 11 debtors have been left out).
However, there was a catch: To trigger the exemption, the SBA would have to write a letter to the Executive Office of the US Trustee, a division of the Department of Justice that oversees US bankruptcy courts, alerting it to the change. So far, it hasn’t, even though Congress has extended the deadline for PPP applications to May 31, with $ 103 billion in funds allowed to spend.
President Joe Biden’s choice to lead the SBA, Isabella Guzman, was confirmed March 16. The SBA would give no indication of its intention to change course. Spokesmen for senators on jurisdictional committees did not comment or said they were looking into the matter.
Last week, as his hopes for a PPP loan waned, Mark Shriner set up a GoFundMe page to try to keep its doors open. Over $ 21,000 poured in. During this time, he also heard about the restaurant revitalization program established by the US $ 1.9 trillion bailout. So far, since it’s a simple grant rather than a loan, it doesn’t seem to bar applications from businesses – or business owners like him – who have declared bankruptcy. But he is counting on nothing, because the aid programs have been so disappointing.
It’s a tough contrast, he says, when he looks around town and sees all the federal money that has helped people who don’t always need it.
“I’m not a wealthy person at all, but I have a lot of millionaire friends who own businesses, insurance companies, architectural firms,” Shriner said. “These millionaires got money and money, money and money from the government, and they all drive on the golf course. It’s hard when I think about it.