Court Dismisses Bankruptcy Case To Allow Debtor To Apply For Paycheck Protection Loan Patterson Belknap Webb & Tyler LLP


It is well known in the restructuring world that a bankrupt debtor cannot get a PPP loan. But what if you are in debt and decide that a PPP loan could save your business? Will a court dismiss the case so you can apply for a loan?

The problem recently arose when a Chapter 11 debtor already had DIP funding in place. The debtor’s motion to dismiss drew opposition from creditors. But the court concluded that it made sense to allow the debtor out of bankruptcy to apply for a PPP loan. Ryan Turner Investments, LLC v Jackson Durham Floral-Event Design, LLC, n ° 3: 20-cv-00400, 2021 US Dist. LEXIS 28455 (MD Tenn. February 16, 2021).

The debtor is an event design company. He filed for bankruptcy in January 2020, the month COVID-19 was first reported in the United States. At the time, the debtor was a party to arbitration proceedings brought by Ryan Turner Investments, LLC (“RT”). The bankruptcy suspended arbitration against the debtor.

The debtor’s bankruptcy filing indicated that he was in a “deep financial hole”. On April 1, 2020, the debtor requested the dismissal. He said the negative impact of COVID-19 on his business threatened his ability to reorganize. He had no idea what his business “on the other side of the pandemic” would look like. One possible way for him to stay afloat during the pandemic was to obtain a paycheck protection loan backed by the Small Business Administration. But, as has been widely reported, debtors who avail themselves of bankruptcy proceedings are not eligible to get the loans during bankruptcy.

RT opposed the motion to dismiss. He argued (i) that it would be unfair to bear the cost of restarting the arbitration proceedings against the debtor, and (ii) dismissing the bankruptcy case would result in default on the DIP loan. debtor and would allow secured creditors to foreclose on the debtor’s property, thereby harming other creditors. The debtor replied that RT would incur legal costs either in the arbitration or in asserting its claim in the bankruptcy case. Regarding the DIP loan, the debtor noted that as an unsecured creditor, RT was in the same situation as if the debtor had a secured loan outside of bankruptcy.

Section 1112 (b) of the Bankruptcy Code gives courts discretion to dismiss cases “for cause”. One of the grounds is “the loss or substantial or continuing decrease in the estate and the absence of a reasonable probability of rehabilitation”. 11 USC § 1112 (b) (4). Courts should undertake a “fact-specific” factual inquiry that “focuses on the situation of each debtor”. In re Creekside Sr. Apts., LP, 489 BR 51, 60 (BAP 6th Cir. 2013 (citing United Savs. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Forest Assocs., Ltd.), 808 F.2d 363, 371-72 (5th Cir. 1987)).

If a debtor demonstrates good cause, then the onus is on the opponent to identify “unusual circumstances which establish that the conversion or rejection of the case is not in the best interest of the creditors or the estate. . . . “11 USC § 1112 (b) (2).

When RT objected to the court hearing, bankruptcy judge Charles M. Walker said, “Slow down for a second. We are in a pandemic. Remember this. How much evidence does the Court need regarding the suspension of operations and the impact COVID-19 is having not on this business, but on all businesses? (Audition Trans. RTI Appx. At 295).

He ruled that allowing the debtor to end his bankruptcy to obtain a PPP loan “was the most viable option” because it “keeps all parties on an equal footing” and gives the debtor “a chance”. . . to obtain funds to continue operations. (Identifier. to 301). So, a debtor who filed for bankruptcy to save his business was allowed out of bankruptcy several months later to go in a different direction to save his business. The bankruptcy court’s decision was upheld on appeal by the district court.

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