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Earlier this week, fast-casual chain Cosi filed a lawsuit against the U.S. Small Business Administration over its inability to get a Paycheck Protection Program (PPP) loan. Cosi wanted $3.7 million but was kept from applying because it had filed for bankruptcy and had yet to emerge.

In its lawsuit, Cosi pointed out that several other companies received such funding, only to file for bankruptcy immediately afterward.

Like clockwork, a restaurant chain did just that. The Florida-based TooJays filed for bankruptcy this week, shortly after receiving $6.4 million.

The question of bankruptcy has become yet another thorn in the side of a fund that thousands of restaurant companies had hoped would become their saving grace.

The agency has been taking steps to correct some of these issues. It is now reviewing loans of $2 million or moreafter small businesses complained that too many loans were going to large companies that can more easily find alternative sources of financing.

It has also indicated that public companies would not normally be able to receive such loans because they, too, have other sources of financing. The rule change led many publicly traded restaurant companies, including Pollo Tropical owner Fiesta Restaurant Group, J. Alexanders and Potbelly Sandwich Shop, to return their funds.

Bankruptcy is a more difficult scenario. For a chain such asCosi, which filed for debt protection in February, PPP funds could be a critical lifeline that ensures it can make it through the process.

At the same time, however, such companies were already at risk.

The administration, in consultation with Treasury Secretary Steve Mnuchin, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans.

Yet why allow companies to get funds and then file for federal bankruptcy protection afterwards?

Cosi argued in its lawsuit that the PPP loans would actually have more protection if they were made to companies already in bankruptcy. No possible justification exists for a scheme that permits a debtor to obtain a PPP loan on the very eve of its bankruptcy case, while denying that same loan to a debtor subsequent to its petition date, the company said.

Indeed, some law firms have noted that the SBAs stand is strange.

Some judges have taken a similar view. So did Cosis, reportedly, but not enough to keep the judge from denying the chains request to enable it to apply for such funds. Several companies have sued the SBA over its position.

The SBA appeared to clarify its rule somewhat this week, saying in the federal register that companies that file for bankruptcy after submitting an application, but before receiving the funds, have an obligation to notify the lender and request cancellation of the application.

Failure by the applicant to do so will be regarded as a use of PPP funds for an unauthorized purpose, the agency said.

As weve said before, Congress provided relatively little in the fund originally, at least for the number of companies that could potentially apply. That has led to numerous fights over who should or should not apply.

Congress put the package together in a hurry and designed it to cover as many people as possible. Much of what is happening now is the result of companies and agencies figuring out what doesnt work.

Yet that process has put a number of companies in an even worse bind than the one they were already in.

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Bankruptcy proves to be another problem for the PPP fund - Restaurant Business Online