Abstract:
The 2019 Coronavirus Pandemic (COVID-19) led to widespread government-mandated lockdowns, causing numerous businesses to close their doors permanently. To assist financially distressed businesses and individuals during the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Small Business Administration (SBA)—the agency tasked with implementing the CARES Act—distributed funds to individuals and businesses through the Paycheck Protection Program (PPP). Part of the SBA’s eligibility requirements to receive funding through the PPP included an exclusion provision that barred debtors presently involved in any bankruptcy proceeding from receiving any PPP funding. Many debtors in bankruptcy filed suits in federal bankruptcy courts across the United States to enjoin the SBA from excluding applicants solely based on their bankruptcy status. Courts, such as the Second Circuit and the United States Bankruptcy Court for the District of Maine, were split on whether the SBA violated Section 525(a) of the Bankruptcy Code or was within its right to deny PPP funding to debtors in bankruptcy. This Note explores the SBA’s rationale for excluding debtors in bankruptcy from PPP funding solely based on their bankruptcy status. This Note further analyzes the split court decisions regarding whether the PPP functioned more as a typical loan program or more as a grant. This Note then argues that the SBA’s decision to exclude debtors in bankruptcy from receiving PPP funding violated the anti-discrimination provision of the Bankruptcy Code. This Note further asserts that the courts siding in favor of the SBA incorrectly classified the PPP as a typical loan program. Lastly, this Note proposes solutions for the United States government to adopt more inclusive measures for business owners of all backgrounds and financial statuses in a future crisis like the COVID-19 pandemic.
Commentary:
The preclusion of PPP funds for businesses and individuals in bankruptcy case and the hostility by the SBA through its appeals of cases requiring it not to discriminate is unfortunately just one in a long chain of examples of government prejudice against bankruptcy. This includes the original ineligibility of debtors in bankruptcy from mortgage modification assistance under the HAMP program during the Housing Crisis and also the opposition by the Department of Education until 2018 to allow student borrowers in bankruptcy to participate in Income Driven Repayment plans. Fortunately, the federal government eventually relented and allowed homeowners in bankruptcy to participate in HAMP (but only after thousands unnecessarily lost their homes.) With the Buchanan provisions, I personally caused the Department of Education to give student loan borrowers the same access to IDR plans, which has led to the even more equitable relief starting July 1st of giving all Chapter 13 debtors IDR credit.
While bankruptcy can certainly be a complicating factor in the administration of government relief programs, those difficulties can be managed and navigated by the bankruptcy courts (which are also parts of the government.)
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