Court Dismisses Bankruptcy Case To Enable Debtor To Seek A Paycheck Protection Loan – Insolvency/Bankruptcy/Re-structuring – United States – Mondaq…

10 March 2021

Patterson Belknap Webb & Tyler LLP

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It is well known in the restructuring world that a debtor inbankruptcy can't get a PPP loan. But what if you're adebtor and decide a PPP loan could save your business? Will acourt dismiss the case so you can seek a loan?

The issue arose recently where a chapter 11 debtor already hadDIP financing in place. The debtor's motion to dismissdrew creditor opposition. But the court concluded thatallowing the debtor out of bankruptcy to seek a PPP loan madesense. Ryan Turner Investments, LLC v. Jackson Durham Floral-Event Design,LLC, No. 3:20-cv-00400, 2021 U.S. Dist. LEXIS 28455 (M.D.Tenn. Feb. 16, 2021).

The debtor is an event design company. It filed forbankruptcy in January 2020, the month when COVID-19 was firstreported in the United States. At the time, the debtor was aparty to an arbitration proceeding brought by Ryan TurnerInvestments, LLC ("RT"). The bankruptcy stayed thearbitration against the debtor.

The debtor's bankruptcy filing said it was in a "deepfinancial hole." On April 1, 2020, the debtor moved todismiss the bankruptcy case. It said COVID-19's negativeimpact on its business threatened its ability to reorganize.It had no idea what its business would look like "on theother side of the pandemic." One possible way for it tostay afloat through the pandemic was with a paycheck protectionloan backed by the Small Business Administration. But, as hasbeen widely reported, debtors who avail themselves of thebankruptcy process are not eligible to obtain the loans during thebankruptcy.

RT objected to the motion to dismiss. It argued (i) itwould be an unfair burden to bear the cost of restarting thearbitration proceeding against the debtor, and (ii) dismissal ofthe bankruptcy case would cause a default of the debtor's DIPloan and permit secured creditors to foreclose on the debtor'sassets, thus harming other creditors. The debtor counteredthat RT would incur litigation expenses either in arbitration or inpressing its claim in the bankruptcy case. With respect tothe DIP loan, the debtor noted that as an unsecured creditor, RTwas in the same position as if the debtor had a secured loanoutside of bankruptcy.

Bankruptcy Code section 1112(b) provides discretion to courts todismiss cases "for cause." One ground is"substantial or continuing loss or diminution of the estateand the absence of a reasonable likelihood of rehabilitation."11 U.S.C. 1112(b)(4). Courts must undertake a"fact-specific" factual inquiry that "focuses on thecircumstances of each debtor." In re Creekside Sr.Apts., L.P., 489 B.R. 51, 60 (B.A.P. 6th Cir. 2013(quotingUnited Savs. Ass'n of Tex. v. Timbers ofInwood Forest Assocs., Ltd. (In re Timbers of Forest Assocs.,Ltd.), 808 F.2d 363, 371-72 (5th Cir. 1987)).

If a debtor demonstrates cause, then an objector has the burdenof identifying "unusual circumstances establishing thatconverting or dismissing the case is not in the best interests ofthe creditors or the estate . . . ." 11 U.S.C. 1112(b)(2).

When RT objected at the court hearing, Bankruptcy Judge CharlesM. Walker said, "Slow down one second. We're in apandemic. Remember that. How much proof does the Courtneed about the suspension of operations and the impact thatCOVID-19 is having on not this business, but every business?"(Hearing Trans. RTI Appx. at 295).

He ruled that allowing the debtor to terminate its bankruptcy toobtain a PPP loan "was the most viable option" because it"keeps all of the parties in an equal setting" and givesthe debtor "a shot . . . of obtaining funds to continueoperations." (Id.at 301). Thus, a debtorthat had filed for bankruptcy to salvage its business was allowedto exit bankruptcy several months later to go in a differentdirection to salvage its business. The Bankruptcy Court'sdecision was upheld on appeal by the District Court.

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