Allen Guon authored an article published in the American Bankruptcy Institute Journal examining the personal liability of anyone in control of an insolvent debtor’s assets making distributions to unsecured creditors prior to satisfying Paycheck Protection Program (PPP) loans under the federal priority statue. In order to avoid personal liability, fiduciaries must understand the applicability of the priority statue to loans guaranteed by the federal government.
The PPP was established by Congress through the CARES Act by expanding the traditional SBA 7(a) loan program to provide forgivable loans in order to retain employees during the pandemic. Eligibility is approved if: (1) the employee and compensation levels are maintained; (2) proceeds are used on eligible expenses; (3) at least 60 percent of the loan is used om payroll. If these expectations are not fulfilled and the loan is not forgiven due to the borrower’s defaults, the SBA will then “purchase” the loan and pay the lender. After which the SBA becomes a creditor of the borrower and the priority statue comes into play.
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