Bankruptcy Judge David R. Jones of Houston temporarily enjoined the Small Business Administration from barring a company in chapter 11 from receiving loans under the Paycheck Protection Program, or PPP.
Although denominated as loans, the Small Business Administration says on its website that a PPP loan will be “fully forgiven” if at least 75% was spent for payroll. The remainder may be used for interest on mortgages, rent, and utilities. The PPP was signed into law on March 27 as part of the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act.
The debtor was the Hidalgo County Emergency Services Foundation, the primary provider of emergency medical transportation in a significant portion of South Texas. It filed a chapter 11 petition in October 2019 and has been operating as a debtor in possession. The debtor lost about 30% of its business as a result of the coronavirus.
In his temporary restraining order issued on April 25, Judge Jones said the debtor might have insufficient cash to cover payroll on May 7, given the decline in revenue.
Although the CARES Act says nothing about excluding companies in bankruptcy from receiving PPP loans, the SBA promulgated an application form requiring the applicant to state whether it is “presently involved in any bankruptcy.” If the answer is “yes,” the form goes on to say that “the loan will not be approved.”
The debtor filed a verified complaint on April 22 together with an application for a temporary restraining order. Judge Jones held a hearing on April 24 and issued his issued his findings and conclusions of law from the bench at the conclusion of the hearing.
In the TRO he signed the next day, Judge Jones authorized the debtor to file an application while striking the inquiry about being involved in bankruptcy. He directed the SBA and the bank administering the program to review the application “without any consideration of the involvement of [the debtor] . . . in any bankruptcy.”
However, Judge Jones said he made no ruling on whether the debtor “otherwise qualifies for a PPP loan.” He did find constitutional authority to issue a final order.
At the hearing, Judge Jones said that some of the government’s arguments were “frivolous.” With regard to excluding bankrupt companies in view of their creditworthiness, he said, “This isn’t a loan program. This is a support program.” He went on to say that “there’s no need to pay [the loan] back,” so long as it was “used for the right purposes.”
Finding that the debtor had established the traditional grounds for issuance of a temporary restraining order, Judge Jones said the government had provided no “legitimate authority for including language in the form” excluding bankrupt companies from the program.
The government argued that the bankruptcy court had no authority to issue an injunction. Although Judge Jones said he could not direct the SBA to grant a loan, he said, “I simply do not accept that when I have evidence of bankruptcy discrimination that I can do nothing about it.”
Judges Jones has scheduled a hearing on May 8 to consider the debtor’s motion for a preliminary injunction.
The debtor was represented by Nathaniel P. Holzer from Jordan Holzer & Ortiz PC in Corpus Christi, Texas.
The TRO and the transcript of the hearing are in Hidalgo County Emergency Service Foundation v. Carranza (In re Hidalgo County Emergency Service Foundation), 20-02006 (Bankr. S.D. Tex. April 25, 2020).
(Please note: There is no opinion associated with this column. Both the TRO and Transcript are linked above.)
Bankruptcy Judge David R. Jones of Houston temporarily enjoined the Small Business Administration from barring a company in chapter 11 from receiving loans under the Paycheck Protection Program, or PPP.
Although denominated as loans, the Small Business Administration says on its website that a PPP loan will be “fully forgiven” if at least 75% was spent for payroll. The remainder may be used for interest on mortgages, rent, and utilities. The PPP was signed into law on March 27 as part of the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act.
The debtor was the Hidalgo County Emergency Services Foundation, the primary provider of emergency medical transportation in a significant portion of South Texas. It filed a chapter 11 petition in October 2019 and has been operating as a debtor in possession. The debtor lost about 30% of its business as a result of the coronavirus.
In his temporary restraining order issued on April 25, Judge Jones said the debtor might have insufficient cash to cover payroll on May 7, given the decline in revenue.
Although the CARES Act says nothing about excluding companies in bankruptcy from receiving PPP loans, the SBA promulgated an application form requiring the applicant to state whether it is “presently involved in any bankruptcy.” If the answer is “yes,” the form goes on to say that “the loan will not be approved.”