As Chapter 11 Bankruptcy Filings Surge, Here’s What Creditors Need to Know to Protect and Enforce Their Rights

The National Bureau of Economic Research recently announced that the U.S. economy officially entered a recession in February, 2020, one month before COVID-19 shut down much of the economy. It should come as no surprise, therefore, that the economic downturn has led to a surge in corporate bankruptcy filings. According to data from Epiq Global, 722 companies sought bankruptcy protection around the U.S. last month, a 48-percent increase from the year-ago period. From Hertz to J.C. Penny, more businesses are seeking refuge to restructure their debts.

As chapter 11 bankruptcies continue to increase (many analysts are forecasting the “wave” of filings to grow), more businesses and individuals will be impacted by the fallout. Creditors of a bankrupt company must be aware of the various deadlines and procedures that govern the chapter 11 process in order to protect and enforce their rights. For creditors to maximize their recoveries, they must stay informed and take action during a bankruptcy proceeding.

Whenever a business or individual receives a notice from a United States Bankruptcy Court indicating that a business they have had dealings with has filed a chapter 11 bankruptcy petition, the clock starts ticking, and they should be aware of the following timeline, and key events and milestones that may affect their rights.

The Petition Date

The petition date is the date on which a debtor files a chapter 11 bankruptcy proceeding. The debtor is required to serve all known creditors with notice of the commencement of the chapter 11 case. An “automatic stay” is imposed as of the petition date, which prevents creditors from taking any further action, such as pursuing collection activity, related to a pre-petition debt.

To remain informed throughout a bankruptcy proceeding, a creditor may request to receive notice of all pleadings filed in a case pursuant to Federal Rule of Bankruptcy Procedure 2002. In addition, creditors have an opportunity to obtain information about a case and the debtor’s finances by attending the “Section 341” meeting of creditors that takes place shortly after a case is filed.

“First Day” Motions

In most chapter 11 cases, the debtor files a series of “first day” motions with the bankruptcy court seeking relief that it may not otherwise be automatically entitled to receive under the Bankruptcy Code. Such relief may include a request to pay some unsecured creditors (such as employees or “critical vendors”) ahead of others. Because debtors require sufficient cash to operate their businesses and pay for the administrative expenses of the chapter 11 process, many seek interim court approval for financing (called “debor-in-possession” or “DIP” financing) and/or the use cash collateral that is subject to a secured creditor’s lien. In some cases, the debtor’s pre-petition lender becomes the DIP lender, and in other cases a new lender, or syndicate of lenders, steps in and tries to “prime,” or supersede, an existing lender’s lien to the extent of DIP financing extended to the debtor.

It is important for creditors and their advisors to carefully review “first day” motions in order to know how their rights may be affected, and take action as appropriate. For example, while the Bankruptcy Code allows for a DIP loan to prime the lien of an existing secured creditor, the secured creditor must receive “adequate protection” that its position will not be diminished as a result of the use of cash collateral or new financing. A creditor may need to file an objection to requested first-day relief to protect its rights.

Proof-of-Claim Bar Date

In order to participate in the distribution of the debtor’s assets to satisfy pre-petition claims, a creditor must have a valid claim. After filing for bankruptcy, a debtor is required to file a schedule of assets and liabilities, which is supposed to include all claims against the debtor. If a creditor agrees with the debtor as to the amount listed for its claim in the debtor’s schedules, and the claim is not listed as contingent, unliquidated or disputed, then the creditor does not need to file a proof of claim. However, if a creditor disagrees with how its claim is scheduled, then it must file a proof of claim in order to preserve its rights.

The bankruptcy court will enter a bar date setting a deadline by which claims must be filed, and the debtor will mail notice of the bar date, as well as other details of the claims filing process, to creditors. To the extent a creditor fails to file its claim by the bar date, it may be objected to and disallowed as untimely. Your attorney can help you through the process of understanding the deadlines associated with filing your claim, as well as supporting your claim with sufficient evidence to prove what you are owed.

Debtor’s Post-Petition Obligations

In chapter 11, a business keeps running with the goal of reorganizing, which means that expenses continue to accrue after it files for bankruptcy. A debtor is required to pay all post-petition expenses in the normal course of business. Unlike pre-petition debts, post-petition debts are not subject to the automatic stay—the debtor is required to pay such debts and creditors can and should take action with the bankruptcy court to ensure they get paid.

Post-petition debts are given priority as “administrative claims,” which are actual, necessary costs and expenses of preserving the estate. Accordingly, a creditor that is, for example, supplying goods (post-bankruptcy) to a debtor under a supply agreement is entitled to be paid for those goods as an administrative claim, and can petition the bankruptcy court to order payment to the extent it is being wrongfully withheld. Those who deliver goods to the debtor within 20 days of the petition date are also entitled to an administrative expense claim. While neither the Bankruptcy Code nor Bankruptcy Rules establish a specific date by which a party must file a motion for allowance of an administrative expense claim, such deadlines are typically set by local rule and/or in a scheduling order entered by the bankruptcy court.

Conversely, a creditor must also perform its post-petition obligations to a debtor. A creditor who refuses to perform its obligations under a valid contract due to a debtor’s failure to pay for goods or services pre-petition can be compelled to perform post-petition.

Executory Contracts

Debtors are authorized to assume or reject executory contracts in chapter 11. An executory contract, while not defined under the Bankruptcy Code, generally is one in which both parties have performance obligations remaining under the contract. Unlike in chapter 7 bankruptcy, there is no specific deadline for chapter 11 debtor to assume or reject an executory contract. If a debtor decides to reject a contract, the contract is treated as breached and a creditor has an unsecured claim for damages. If a contract is assumed, meaning the debtor wants to keep the contract in place, any defaults under the contract, including pre-petition defaults, must be cured. A debtor must obtain bankruptcy court approval to assume or reject an executory contract, either by motion or through the plan confirmation process.

Unexpired Leases

While non-residential real property leases are executory contracts, they are treated a bit differently than other contracts. A debtor must take action to assume or reject a lease within 120 days of the petition, with an option to seek one 90-day extension for cause. In addition, to the extent a lease is rejected, damages, which constitute an unsecured claim, are capped at the greater of (1) one year’s rent or (2) the rent for 15 percent, not to exceed three years, of the remaining term of the lease.

Plan Confirmation Issues

Most unsecured creditors won’t have their pre-petition claims paid until after a debtor’s plan of reorganization is submitted to and approved by the bankruptcy court. A debtor has a 120-day period during which it has an exclusive right to file a plan. The exclusivity period may be extended or reduced by the court, but in no case can the exclusivity period be longer than 18 months. After the exclusivity period has expired, a creditor may file a competing plan.

A plan must be proposed alongside a disclosure statement, which is meant to flesh out all of the important details that interested parties should know to make an informed decision regarding the plan. Unsecured creditors whose rights are “impaired” are entitled to vote on a plan, as well as object to it. Deadlines for (i) requesting the debtor include certain information in a disclosure statement, (ii) filing a combined plan of reorganization and disclosure statement, (iii) returning voting ballots on the plan, (iv) filing objections to the approval of the disclosure statement, and (v) objections to confirmation of the plan of reorganization are set by the bankruptcy court in accordance with the Bankruptcy Code, Bankruptcy Rules, and local rules.

Know Your Obligations, Rights, and Remedies

Chapter 11 bankruptcy is a complex process. Unfortunately, due to the economic downturn, more creditors are going to be mired in the complexity of monitoring cases moving forward. In most cases, especially those when significant sums of money are at stake, it’s important to consult with legal counsel in order to understand your obligations, rights, and remedies with respect to a chapter 11 debtor. Keep in mind that there are steps creditors can take to protect themselves in advance in the event of a customer’s bankruptcy.

If you have questions about the process, or require the assistance of legal counsel to help protect your rights, please contact an attorney at Fraser Trebilcock.


Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.

Fraser Trebilcock Attorney Amanda S. Marinkovski specializes her practice in business and tax law, bankruptcy, family law, estate planning, litigation, and real estate law. You can reach her at (517) 377-0897, or at amarinkovski@fraserlawfirm.com.

Client Alert: PCORI Fees Are Back! Payment Due July 31st

PCORI PAYMENTS ARE BACK!

Plan Sponsors of Applicable Self-Funded Health Plans Must Make PCORI Fee Payment By July 31, 2020


The Internal Revenue Service recently released Notice 2020-44 which sets forth the PCORI amount imposed on insured and self-funded health plans for policy and plan years that end on or after October 1, 2019 and before October 1, 2020. The Notice also provides transition relief for calculating the applicable fee for this same period.

See IRS Notice 2020-44

Background

The Patient-Centered Outcomes Research Institute (PCORI) fee is used to partially fund the Patient-Centered Outcomes Research Institute which was implemented as part of the Patient Protection and Affordable Care Act.

The PCORI fees were originally set to expire for plan years ending before October 1, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was enacted and extended the fee to plan years ending before October 1, 2029.

The fee is calculated by using the average number of lives covered under a plan and the applicable dollar amount for that plan year. Code section 4375 imposes the fee on issuers of specified health insurance policies. Code section 4376 imposed the fee on plan sponsors of applicable self-insured health plans.  This Client Alert focuses on the latter.

Transition Relief for Counting Covered Lives

For self-funded plans, the average number of covered lives is calculated by one of three methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method.

However, due to the anticipated end to the PCORI fee, plan sponsors did not anticipate the need to calculate the number of covered lives. Therefore, transition relief is allowed for plan years ending on or after October 1, 2019 and before October 1, 2020, and a plan sponsor may use any reasonable method for calculating the average number of lives, as long as it is applied consistently for the plan year. Specifically, Notice 2020-44 provides as follows:

Plan sponsors may continue to use one of the following three methods specified in the regulations under § 4376 to calculate the average number of covered lives for purposes of the fee imposed by § 4376: the actual count method, the snapshot method, and the Form 5500 method. See Treas. Reg. § 46.43761(c)(2)(i). In addition, for plan years ending on or after October 1, 2019, and before October 1, 2020, plan sponsors may use any reasonable method for calculating the average number of covered lives. If a plan sponsor uses a reasonable method to calculate the average number of covered lives for plan years ending on or after October 1, 2019, and before October 1, 2020, then that reasonable method must be applied consistently for the duration of the plan year.

Adjusted Applicable Dollar Amount

Moreover, Notice 2020-44 sets the adjusted applicable dollar amount used to calculate the fee at $2.54.  Specifically, this fee is imposed per average number of covered lives for plan years that end on or after October 1, 2019 and before October 1, 2020.

Deadline and How to Report

The PCORI fee is due by July 31, 2020 and must be reported on Form 720.

Instructions are found here (see Part II, pages 8-9): http://www.irs.gov/pub/irs-pdf/i720.pdf

The Form 720 itself is found here (see Part II, page 2): http://www.irs.gov/pub/irs-pdf/f720.pdf

Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year.

As previously advised, plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. Insurers of specified health insurance policies are also responsible for this fee.

  • For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life.
  • For plan years ending on or after October 1, 2018 and before October 1, 2019, the fee is $2.45 per covered life.
  • For plan years ending on or after October 1, 2019 and before October 1, 2020, the fee is $2.54 per covered life.

Again, the fee is due no later than July 31 of the year following the last day of the plan year.

There are specific calculation methods used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. While generally all covered lives are counted, that is not the case for all plans. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participants and not the spouses and dependents. The Form 720 instructions do not outline all of these rules.

More information about calculating and reporting the fees can be found here: https://www.irs.gov/newsroom/patient-centered-outcomes-research-institute-fee

Questions and answers about the PCORI fee and the extension may be found here; however, please note that this site does not include the most recent fee of $2.54 for plan years ending on or after October 1, 2019 and before October 1, 2020: https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers

As you are well aware, the law and guidance are continually evolving. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.


Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Michigan COVID-19 Guidelines for Safely Running a Day Camp in the Summer of 2020

According to the American Camp Association, more than 14 million children attend summer camps across the country every year. Michigan has a long summer-camp tradition, with kids flocking to camp destinations throughout the state to swim, hike, and roast marshmallows around the campfire. Until recently, summer camp in Michigan was in doubt, another potential casualty of the COVID-19 crisis. However, with the case curve continuing to flatten, and more businesses across the state reopening, Governor Whitmer announced that summer day camps in Michigan would be allowed to open — subject to a number of health and safety guidelines.

Executive Order 2020-110, issued on June, 1, 2020, provides that day camps for children are allowed to operate as of June 8, 2020, subject to guidance issued by the Department of Licensing and Regulatory Affairs (“LARA”). On June 2, 2020, LARA issued its “Guidelines for Safe Day Camp Operations During COVID-19 (“LARA Guidance”),” which offers considerations and actions that camp operators must take before opening for the season. The various recommendations and requirements of the LARA Guidance are extensive and should be closely reviewed with legal counsel. What is clear is that it will not be carefree “camp-as-usual” in Michigan, but at least camps now have the guidance they need to get up and running for summer.

COVID-19 Preparedness and Response Plan

Like other businesses conducting in-person work in Michigan, camps must establish a COVID-19 preparedness and response plan. According to the LARA Guidance, a response plan must be available at your camp or camp headquarters, be made available to families and staff, and be part of a camp’s health service policy and meet applicable camp licensing rules.

A plan should include:

  • How a camp will monitor for symptoms of COVID-19
  • How a camp’s programs practice social distancing, as developmentally appropriate
  • How a camp will ensure hygiene (including regular cleaning and disinfecting)
  • How a camp will obtain and use safety equipment
  • Communication and training for staff, parents, and campers related to new
    expectations
  • Isolation procedures in the event of symptoms or confirmed cases onsite
  • How a camp will maintain required staff-to-camper ratios in the event of staff illness

While preparedness and response plans may be subject to review by a LARA licensing consultant, they do not need to be submitted to LARA for approval. LARA strongly recommends that camps (i) discuss plans with staff from the local health department so that all roles and responsibilities are clarified and updated contact information is included, and (ii) that the local health department be provided with a final version of a response plan.

Communication and Training

The LARA Guidance urges camps to engage in proactive communication and training of employees, including discussing any concerns staff members have about returning to work, and sharing steps being taken, including those outlined in a preparedness and response plan, to make camp as safe as possible.

Camps should establish a staffing plan based on a camp’s projected enrollment, the need (based on “strongly recommended” guidance”) to maintain groups of fewer than 10 campers, and the importance of maintaining physical distancing. Staff members should also be trained on the various protocols and procedures of a camp’s preparedness and response plan.

The LARA Guidance also acknowledges that campers and staff, alike, may be impacted emotionally by the return to a social, structured environment like camp, and that plans should be put in place to support their emotional needs. Camps should also proactively communicate with families in order to address concerns, explain health and safety procedures, and help prepare kids for what, for some, may be a difficult transition to the camp environment after months of isolation.

Health Screening for COVID-19

One of the most important and challenging aspects of running a camp this summer will be adhering to health screening protocols. Pursuant to the LARA Guidance, camps are required to check for COVID-19 symptoms when campers and staff arrive daily. While there is no mandated health screening process, the LARA Guidance suggests that camps adopt screening practices including:

  • Daily temperature checks for campers
  • Visual checks for signs of illness
  • Asking campers and parents about contact with COVID-19-positive individuals and general health questions
  • Continuing to monitor campers for symptoms throughout the day and monitor
    temperatures when campers appear ill or “not themselves”
  • Conducting similar daily health screening for staff members

For additional guidance, the CDC offers tips on how to practically conduct health screening checks.

Response to Possible or Confirmed Cases of COVID-19

Beyond screening for illness, camps must respond in accordance with LARA Guidance to the extent a COVID-19 case is suspected or confirmed, including:

  • Identifying a point of contact adult onsite during the camp operation to manage health-related concerns, and ensure that camp staff and families know who this person is and how to contact them
  • Monitoring the health of staff and campers throughout the day
  • Immediately sending home someone who becomes ill
  • To the extent someone becomes sick with COVID-19 symptoms, calling the local health department to report exposure and determine whether those who have been in close contact need to leave camp
  • Reporting exposure that occurs outside of camp to the local health department
  • Determining whether to close the camp based on guidance from the local health department

Camps Must be Vigilant this Summer

Running a day camp in Michigan is never easy, and this summer it will be even harder. This article has addressed a few of the key provisions in the LARA Guidance, but camp operators should carefully review the full extent of the guidance, as well as Governor Whitmer’s various executive orders that impact camp operations. From additional legal and regulatory to compliance requirements, to mandated health screening and safety protocols, there is a great deal of complexity that camps need to review and understand in order to run their operations safely and compliantly. To the extent that you have any questions or concerns, or require assistance in the creation of a preparedness and response plan, please contact Mark Kellogg.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

Flexibility Act Loosens Restrictions in PPP Loan Program

On Friday morning the President signed into law the Flexibility Act (the “Act”) making significant changes to the forgiveness portion of the Paycheck Protection Program (PPP). These changes will triple the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.

Flexibility Act

Key changes to the PPP program brought by the Flexibility Act include:

  • Covered Period: PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • Payroll Cost Percentage: The payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven (although there is talk of a possible technical correction to this).
  • Employee Rehiring Date: Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30. 
  • Exemptions Based on Employee Availability: The Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. The Flexibility Act allows borrowers to adjust their calculations because (1) they could not find qualified employees or (2) were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • Loan Maturity Period: Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
  • Extended Deferral Period: Payment of principal, interest and fees are deferred until forgiveness is remitted to the lender, only if the borrower applies for forgiveness within 10 months after the last day of the covered period.
  • Payroll Tax Deferral: The Act allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

Loan Forgiveness Guidance

Earlier, the SBA released new guidance addressing loan forgiveness under the PPP, as well as the SBA’s loan review procedures. Some of this earlier issued guidance has now been overtaken by the passage of the Act.

Noteworthy aspects of the loan forgiveness guidance that remain intact include the following:

Payroll Costs

  • Reaffirms that, in general, payroll costs paid or incurred during the 8 weeks following disbursement of the loan (i.e., the “covered period”) are eligible for forgiveness, but that borrowers may also use an “alternative payroll covered period” as set forth in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle;
  • Confirms that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked) and clarifies that where employees are not performing work and are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work);
  • Confirms that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed the $100,000 annualized cap;
  • Wages paid to furloughed employees during the covered period are eligible for forgiveness;
  • Clarifies that owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual, and owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. And general partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

  • Reaffirms that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period, but clarifies that if a borrower’s nonpayroll expenses straddle the covered and noncovered period and are paid after the covered period (e.g., a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10), the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date (e.g., electricity expenses for July 1-26 are forgivable);
  • Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Forgiveness Reductions

  • Confirms that EIDL advances will be deducted from loan forgiveness amounts.

Head Count Reduction – Computations

  • Borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations;
  • Aa “full-time employee” is an employee who works 40 hours or more, on average, each week, and is given a full-time equivalent (FTE) weighted of 1.0;
  • In calculating the FTE of part-time employees, borrowers may either add the hours of all part-time employees and divide by 40, or elect, “for administrative convenience . . . to use a full-time equivalency of 0.5 for each part-time employee,” as long as the borrower applies the chosen method consistently.

Salary/Wage Reductions

  • Confirming that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis and not in the aggregate.
  • Clarifying that borrowers will not be doubly penalized for reductions, such that the salary/wage reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction.

Lenders

  • The SBA guidance also confirms that lenders have 60 days from receipt of a complete forgiveness application to issue a decision to the SBA, and that the lender must request payment from the SBA at the time it issues its decision to the SBA.  Further the SBA is required to remit the appropriate forgiveness amount to the lender, plus any interest that accrued during that period, subject to “any SBA review of the loan or loan application.”

Loan Review Guidance – Rules for Borrowers

The SBA provided guidance clarifying various components of its loan review process including:

  • Clarifying that the SBA may review “any PPP loans,” at any time in its discretion, and that the SBA may consider in that review whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought (this presumably includes loans smaller than $2 million, notwithstanding the SBA’s previous suggestion in FAQ 46 that audits will be focused on loans of $2 million or more).
  • Requiring Borrowers to retain PPP documentation for at least 6 years after the date the loan is forgiven or paid in full, and the SBA must be granted these files upon request.
  • If the SBA believes a borrower may be ineligible for the loan or for some forgiveness amount, it will require that the lender make a written request for additional information from the borrower, and it may also request information directly from the borrower. All information provided by the borrower in response (either directly to the SBA or through the lender) will be considered in the SBA’s review.
  • Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.
  • Emphasizing that the shareholders, members, or partners of a borrower that is deemed ineligible to have received a PPP loan will not be protected by “the CARES Act’s nonrecourse provision … which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only’ if the borrower is an eligible recipient of the loan” (emphasis added).
  • Borrowers have the opportunity to seek reconsideration and appeal of review decisions. Procedural rules covering this process are expected from the SBA.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.