Hundreds of companies that got stimulus aid have failed

SBA administrator praises success of PPP

The Paycheck Protection Program ‘contributed significantly’ to U.S. job growth in May, June and July, Small Business Administration Administrator Jovita Carranza tells FBN’s Edward Lawrence.

About 300 companies that received as much as half a billion dollars in pandemic-related government loans have filed for bankruptcy, according to a Wall Street Journal analysis of government data and court filings.

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Many of the companies, which employ a total of about 23,400 workers, say the funds from the Paycheck Protection Program weren’t enough to keep them going as the coronavirus and lack of additional stimulus payments weighed on their businesses.

The total number of companies that failed despite getting PPP loans is likely far higher. The Journal only analyzed the big borrowers from the program, which accounted for about half of the overall loans though only about 13.5% of the total participants. And many small businesses simply liquidate when they run out of cash rather than file for bankruptcy.

The government awarded a total $525 billion in PPP loans to 5.2 million companies since April, according to the Small Business Administration. The SBA has only released data on the largest borrowers, which the Journal linked to bankruptcy filings.

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The total amount lent to companies that went bankrupt is between $228 million and $509 million—the government publishes a range for the loan amounts. Half of the 285 firms identified by the Journal have filed for bankruptcy since August. Dozens of recipients, which come from nearly every state, cited the pandemic as a primary reason for entering bankruptcy.

Keith Clark ran Waterford Receptions, a popular wedding and events venue operator with two locations in Northern Virginia, for 20 years. He is closing for good, losing his business as well as his house because of the pandemic.

“It hit, we had to shut down, and cash-wise it couldn’t have been worse timing,” Mr. Clark said. “Not only could we not keep employing people, we couldn’t pay utilities, and it takes a pretty decent amount of money to keep two buildings going.”

Mr. Clark used a $500,000 PPP loan awarded in April to pay 45 salaried employees over the summer while Waterford’s two buildings remained largely unused because of a statewide ban on large gatherings, he said. Waterford hosted a handful of small outdoor events for 20 or fewer masked individuals while waiting for a chance to fully reopen, he said.

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Revenue this year fell to $567,000, down 90% from $6 million in 2019, according to court documents. Mr. Clark considered filing for chapter 11 bankruptcy under the Small Business Reorganization Act, which makes it more advantageous for firms to quickly restructure operations and shed debt, but as Covid-19 cases continued to climb over the summer, it became harder to envision a reopening.

“In order to reorganize and keep going, you have to say when we’re going to be open,” he said. “We had plenty of bookings but no foreseeable date where we could get going again. It just wasn’t practical.”

Instead, Mr. Clark put Waterford into chapter 7 bankruptcy to repay creditors by selling the company’s assets. Because he personally guaranteed a $1.5 million loan from the Small Business Administration last year, Mr. Clark, 68, expects to file for personal bankruptcy and auction off his home to pay creditors.

“We all blame President Trump for his dereliction of duty; we would have been able to stay in business if he had done his job,” Mr. Clark said. “I hope that Congress and [President-elect Joe] Biden will work together in a sane manner to help Americans in these situations.”

The hospitality industry was the hardest hit among companies getting PPP loans. Restaurants and hotels that filed for bankruptcy employed nearly 6,600 workers, the most of any industry.

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There is growing evidence that the government’s policy of lending money with few questions asked has allowed fraud and abuse among borrowers, according to the SBA’s inspector general.

The government also didn’t focus on the risk of bankruptcy for the companies getting loans as it sought to quickly get cash to workers hit by coronavirus shutdowns. The loans were guaranteed by the SBA as long as the money was spent on qualifying expenses such as payroll, so the government will likely suffer significant losses.

Most small businesses in bankruptcy don’t have enough cash to fully repay creditors, according to Thomas J. Salerno, a partner with Stinson LLP in Phoenix. “That loan is going to be a general unsecured claim,” he said. “If [unsecured creditors] get 5 cents on the dollar, that’s what the SBA gets.”

Companies that received PPP funds before filing for bankruptcy should generally be protected against any attempt to claw back those funds, said Howard Berkower, a partner at law firm McCarter & English LLP. The exception is where there is clear evidence of fraud. “If you took the money and bought a Lamborghini, they’re going to find you,” he said.

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Bankruptcies occurred in a wide range of industries, and the companies frequently filed for chapter 11 to reorganize their operations. The operator of the 121-year-old Martinique New York hotel on Broadway closed its doors and furloughed staff on March 18 because of the pandemic, according to court records. The company received a $3.9 million PPP loan in April to pay most employees and is in court attempting to renegotiate its lease, modify a mortgage and seek relief from a collective bargaining agreement with union employees to account for the decline in business.

“When you have a hotel that is normally operating at 90% occupancy and is now operating at 20% occupancy, it is devastating,” said Scott Markowitz, a partner at law firm Tarter Krinsky & Drogin LLP representing the hotel operator.

With $420,000 of the government loan remaining, the hotel operator filed for bankruptcy at the end of September. “The PPP money has helped, but the PPP loan is not enough to get it through the pandemic,” Mr. Markowitz said.

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