Paycheck Protection Program Fraud and Bankruptcy
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What is the Paycheck Protection Program?
The Paycheck Protection Program (or PPP) is a feature of the CARES Act meant to provide financial support to small businesses who are suffering as a result of the coronavirus pandemic. Under the PPP, eligible businesses can receive a forgivable loan from the Small Business Administration in order to cover payroll, mortgage, rent and utility expenses for a period of up to eight weeks. All businesses with under 500 employees are eligible to apply for a PPP loan. Of course, the business applying for the loan must also certify in good faith that they are financially struggling and without the PPP funds, they would be forced to lay off employees, or forced to close their doors altogether.
Receiving a PPP Loan and Then Filing for Bankruptcy – Is this Fraud?
As the coronavirus pandemic continues to shutter the economy, some businesses are realizing that continuing operations are just not feasible, even with the injection of liquidity from a PPP loan. What happens if a business received a Paycheck Protection Program loan and then files for bankruptcy – is this fraud? It depends. The language of the PPP legislation specifically prohibits a business from applying for a PPP loan that is planning to engage in or is in active bankruptcy proceedings. The language of this legislation also requires businesses to cancel their PPP applications retroactively if they engage in bankruptcy proceedings after the application is submitted. Based on the language of the PPP, business owners might be hesitant to apply for severely needed funds from the PPP out of fear of being accused of misappropriating the funds. It is clear from the PPP language that a business cannot be in active bankruptcy proceedings before filing for a PPP loan, but what about businesses who need to file for bankruptcy who have already received a PPP loan? This situation creates more of a grey area. The government likely will scrutinize your business operations and your PPP loan application to see if your business was aware of potential bankruptcy proceedings when the PPP loan application was submitted. It is not illegal to receive a PPP loan and then to subsequently file for bankruptcy. It is illegal, however, to receive a PPP loan knowing that your business is subsequently going to file for bankruptcy.
As soon as you realize bankruptcy filing is inevitable for your business, even after the receipt of a PPP loan, you need to contact an experienced attorney. You should consult with an attorney the moment you realize the potential conflict of interest between keeping the PPP loan money and filing for bankruptcy. Any business owner or executive in this position needs to have sound legal advice and proper documentation showing that obtaining the Paycheck Protection Program loan money did not occur when the decision was made to file bankruptcy. At what point your business may have an obligation to repay the received loan money and what happens if you do not satisfy this obligation should it arise is another reason why you need to consult with an attorney. The timing of requesting the PPP loan and the intent of the requester are two things government will look at when determining whether to open an investigation for federal bankruptcy fraud.
What is Bankruptcy Fraud?
Bankruptcy fraud is a federal offense and codified under 18 U.S.C. § 157. The bankruptcy fraud statute,
“prohibits devising or intending to devise a scheme or artifice to defraud and, for purposes of executing or concealing the scheme either (1) filing a bankruptcy petition; (2) filing a document in a bankruptcy proceeding; or (3) making a false statement, claim, or promise (a) in relationship to a bankruptcy proceeding either before or after the filing of the petition; or (b) in relation to a proceeding falsely asserted to be pending under the Bankruptcy Code.”
Anytime an individual or entity lies or misstates anything relating to its financial condition during a bankruptcy proceeding could be inferred as fraud under the statue. Regarding businesses receiving Paycheck Protection Program loans and then filing for bankruptcy, the government may investigate this scenario as potential fraud because not only is it disallowed (in most cases) under the language of the PPP legislation, but it also could amount to a scheme to use misappropriated money in a bankruptcy proceeding. Although bankruptcy fraud cases are not prosecuted as often as some other federal crimes, they still are filed under the right circumstances and can have potentially damaging effects for those who are charged. Examples of recent bankruptcy fraud cases are listed below:
- A woman in Illinois was charged and convicted for federal bankruptcy fraud. After filing for bankruptcy, the woman concealed from the bankruptcy court over $200,000 she had in offshore liquid assets. As a result of her conviction, the woman was sentenced to spend three years in federal prison.
- A former reality TV star and her husband pleaded guilty to numerous federal charges, including several counts of bankruptcy fraud for concealing over $100,000 of earned income and other owned assets from the court during the couple’s bankruptcy proceedings. Both husband and wife were sentenced to prison time and ordered to pay over $200,000 in restitution.
- A man in New York pleaded guilty to bankruptcy fraud after it was discovered that he received a windfall of cash prior to filing for bankruptcy and the man did not disclose the existence of the windfall in his bankruptcy filings. Although he avoided prison time, the man did not have to spend a year under home confinement and two additional years serving a probationary sentence.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.