Dive Brief:

• Cosi filed a lawsuit against the U.S. Small Business Administration for barring bankrupt companies from receiving federal stimulus loans, reports Restaurant Business. Cosi filed for federal bankruptcy protection in February.
• The company argues that the federal Paycheck Protection Program, part of the CARES Act, was a "lifeline" needed to maintain its business. It was looking to borrow up to $3.7 million to help support payroll.
• Cosi's sales have fallen more than 80% since the beginning of the coronavirus pandemic in March.

Dive Insight:

Cosi says it was denied a PPP loan specifically because its bankrupt, but claims other companies received loan approval days before they filed for bankruptcy. In its filing, reported by Restaurant Business, Cosi writes: "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 CARES Act. 

A significant number of restaurants have closed or are expected to close specifically because of coronavirus crisis. Others are struggling and will continue to do so for quite some time as they recover from months of dining room closures and double-digit sales declines. 

As Cosi argues, the PPP loan was structured to help these businesses sustain operations and preserve jobs, but businesses upended specifically by the pandemic, not those struggling to stay afloat prior to it.

When Cosi filed for bankruptcy in February, it was its second time doing so since 2016. The company began restructuring its operations and increasing its emphasis on catering to "better align with current customer dining trends, further improve guest experiences and enhance its financial performance." It also hired a chief restructuring officer to develop a turnaround plan. But those efforts had yet to take hold before dining room closures began, so there has been no turnaround. 

Further, the SBA’s requirements do note that companies in bankruptcy are not eligible for PPP, writing: "If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan."

This requirement is crystal clear, unlike some of the other issues that have befallen the PPP loan and its confusing language that caused companies like Shake Shack, Potbelly and Ruth’s Chris to apply for and then return their loans. Those companies, like most, are struggling during this unprecedented crisis and are looking for loans to help them stay afloat until they’re able to stand on their own again. For Cosi, however, it’s not certain the company was standing on its own prior to the crisis, and funding a lawsuit to fight for a loan through bankruptcy doesnt look promising.