Cosi sues the SBA over PPP funds

The fast-casual concept is taking issue with the agency’s requirement that a company can’t be in bankruptcy to receive funds, even though other companies filed for protection after receiving approval.
Photograph: Shutterstock

Saying that the coronavirus has reduced its sales to a “trickle” and put its future in doubt, bakery-cafe chain Cosi has filed a lawsuit against the U.S. Small Business Administration over its requirement that companies in bankruptcy can’t receive federal stimulus loans.

The Boston-based company filed for federal bankruptcy protection in February. It filed its lawsuit in a U.S. bankruptcy court in Delaware on Tuesday, arguing that the federal Paycheck Protection Program (PPP) was a “lifeline” that Cosi needed “to maintain their business and employees.”

The company said its sales have fallen more than 80% since the pandemic began. It has since worked to reduce costs and received concessions from landlords to “stave off liquidation,” but was then denied a PPP loan solely because it was in bankruptcy.

Cosi, which wants to borrow up to $3.7 million to help cover payroll, argued that several companies received loan approval just days before they filed for bankruptcy.

“The SBA’s discrimination based solely on an applicant’s status as a debtor is legally unsupported, arbitrary and capricious, and runs completely counter to the stated purposes” of the federal act that created the PPP fund in the first place, Cosi said in its filing.

The fast-casual chain, which has had financial problems for several years, sought federal debt relief and closed 30 locations, hoping to reemerge from the process as a catering-focused company.

At the time of the filing, Cosi operated 13 locations and franchised another 16 after closing 30 locations in December. At the end of 2008, it operated 151 locations.

The company’s business “has virtually ground to a standstill due to government-mandated closures and stay-at-home directives” in the locations where Cosi largely does business, in urban areas in the Northeast.

Cosi argued that the “PPP is exactly the sort of intervention” it needs to sustain its operations and preserve jobs.

The application says that loans will not be approved if the borrower is in bankruptcy. Cosi said it meets the program criteria outside of that issue. Cosi said both Bank of America and JP Morgan Chase said they would reject the company’s request for a loan.

Cosi isn’t the only company in bankruptcy that is suing the SBA over the PPP fund. The company noted that several other debtors have taken similar actions, and that a court in Texas granted a temporary restraining order allowing a company there to submit an application.

It also said a company called Longview Power filed for a prepackaged bankruptcy two days after receiving a PPP loan earlier this month. Cosi mentioned several other companies that received approval for such funds just days before a filing.

“No possible justification exists for a scheme that permits a debtor to obtain a PPP loan on the very eve of its bankruptcy case, while denying that same loan to a debtor subsequent to its petition date,” Cosi said in its filing.

It added that the agency would be better off loaning to companies that have already filed for bankruptcy, as it would get better status in court and be under strict controls to ensure the funds are used as intended.

The PPP fund has come under fire over the way the funds have been dispersed, with several large companies, including many publicly traded restaurant chains, receiving funds. Most of the publicly traded chains that received approval have since said they will return their loans.

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