Ryan Turner Investments, LLC v. Jackson Durham: District Court, Tennessee Terminates Bankruptcy Proceeding to Allow Debtor to Avail PPP Loan
It is an established fact that a debtor, undergoing bankruptcy proceeding cannot avail a Paycheck Protection Program (PPP loan). Through the program a loan is provided to enable business to keep their workforce employed during the global pandemic. However, this raises an issue of whether a debtor can be allowed to opt out of bankruptcy to seek a PPP loan.
The issue was resolved by the United States District Court for the Middle District of Tennessee, Nashville Division in the matter of Ryan Turner Investments, LLC v. Jackson Durham Floral-Event Design, LLC. The debtor is an event design company, which filed for bankruptcy in January 2020. During that time, the debtor was a party to an arbitration proceeding brought by the Ryan Turner Investments, LLC (“RT”). However, as the bankruptcy petition was filed, the arbitration against the debtor was stayed. As per the bankruptcy petition, the debtor was in “deep financial hole.” However, on April 1, 2020, the debtor filed a motion to dismiss the bankruptcy proceedings. It stated that since COVID 19’s business had sustained a negative impact, which had hindered its ability to reorganize. The only possible way for it to stay afloat was by availing the paycheck protection loan backed by the Small Business Administration. Further, the debtor claimed that the debtors undergoing the bankruptcy proceedings were not eligible to obtain loans.
RT however, objected to the motion to dismiss filed by the debtor. It argued that, firstly dismissing the bankruptcy proceeding would be an unfair burden to bear the cost of restarting the arbitration proceeding against the debtor, and secondly, dismissal of the bankruptcy case would result into default of the debtor’s DIP loan and permit secured creditors to foreclose on the debtor’s assets, thereby harming the interests of the creditors. In reply, the debtor states the RT would in any scenario, be it arbitration or bankruptcy, incur litigation expenses. And with regards to the DIP loan, RT, as an unsecured creditor enjoyed the same position as he would have enjoyed if the debtor had a secured loan outside of bankruptcy.
Under the Bankruptcy Code, Section 1112(b) provides discretion to the courts to dismiss a bankruptcy case “for cause”. A ground for the same would be, “ substantial or continuing loss or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” For the same, the court must consider a “fact specific” factual inquiry that “focuses on the circumstances of each debtor”. Further, when debtor demonstrates a cause, then the objector has the burden of identifying “unusual circumstances establishing that converting or dismissing the case is not in the best interests of the creditors or the estate . . . .”
In the present case when RT objected during the court hearing, Bankruptcy Judge Charles M. Walker said, “Slow down one second. We’re in a pandemic. Remember that. How much proof does the Court need about the suspension of operations and the impact that COVID-19 is having on not this business, but every business?” He therefore rejected the opposition of RT and admitted that the pandemic has negatively impacted debtor’s business. Further, the court allowed the debtor to terminate the bankruptcy and avail the PPL loan, saying that it was the “most viable option”. The court also noted that this would keep all the parties at an equal setting and would give a chance to the debtor to keep its business afloat.
The judgment holds great importance as the court invoked Section 1112 to terminate the bankruptcy proceeding, in order to allow the debtor to avail a loan. This would provide relief to the businesses facing a similar situation and would help them to continue to have an ongoing concern in such difficult times.