Two more bankruptcy judges have enjoined the Small Business Administration from barring small companies in chapter 11 from receiving “loans” under the Paycheck Protection Program, or PPP.
Procedurally speaking, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., has gone the furthest by entering a final judgment compelling the SBA to act on the “loan” application without regard for the debtor’s “status as a chapter 11 debtor in possession.” He went on to say that the debtor could file another adversary proceeding against the SBA “for compensatory and, if appropriate, punitive damages” if the SBA’s actions in the past or future “are the proximate cause of [the debtor’s] losing its requested $900,000 in PPP funds.”
Judge Thuma said that the SBA made an “inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements in a way that was arbitrary and capricious, beyond its statutory authority, and in violation of 11 U.S.C. §525(a).”
The PPP “Loan” Program
The PPP was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, signed into law on March 27. The PPP is contained in Section 1102 of the legislation, known as the Cares Act.
Although denominated as loans, the SBA 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.
While 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.”
Pursuant to rulemaking authority contained in the statute, the SBA issued its first regulations on April 15, with nothing to say that chapter 11 debtors were ineligible. The SBA issued revised regulations on April 28, this time saying that debtors are excluded because they “would present an unacceptably high risk for an unauthorized use of funds or non-repayment of unforgiven loans.”
The First PPP Decision
The first out of the starting gate was Bankruptcy Judge David R. Jones of Houston. The debtor had filed a verified complaint on April 22. Judge Jones held a hearing on April 24, issued his findings and conclusions from the bench after the close of evidence, and signed a temporary restraining order on April 25.
Among other things, Judge Jones directed the SBA and the bank administering the program to review the loan application “without any consideration of the involvement of [the debtor] . . . in any bankruptcy.” To read ABI’s report on the TRO by Judge Jones, click here.
Decisions by Judges Fagone and Thuma
A small hospital in Maine filed a motion for a temporary restraining order on April 27. According to Bankruptcy Judge Michael A. Fagone of Bangor, Maine, the “significant” decline in income from the loss of revenue from elective and nonessential visits meant the hospital might be forced to close by early June.
Judge Fagone held a hearing on April 30 and entered a TRO on May 1. Like Judge Jones, he barred the SBA from denying an application because the applicant is a chapter 11 debtor. He went on to require the SBA to hold back funds to make a “loan” if the debtor is later found eligible.
Judge Fagone decided that the government had no claim of sovereign immunity to preclude him from entering a “carefully tailored temporary restraining order.” He then focused on Section 525(a), which bars the government from denying “a license, permit, charter, franchise, or other similar grant” solely because someone is or has been bankrupt.
Judge Fagone said the debtor had shown a “likelihood of success on the merits” because the SBA violated Section 525(a) by having precluded participation in the PPP program “solely because” the debtor is in chapter 11. While Section 525(a) does not apply to loans, he said that the “Cares Act is a grant of aid necessitated by a public health crisis.”
Judge Fagone’s TRO will remain in effect until May 14. He scheduled a status conference for May 5 on the debtor’s motion for a preliminary injunction.
Judge Thuma held a hearing on April 30 to consider a motion for a preliminary injunction filed by the Roman Catholic Church of the Archdiocese of Santa Fe. He went further than granting a preliminary injunction: He entered a “final judgment” in favor of the debtor in the adversary proceeding brought by the archdiocese.
Judge Thuma parsed the PPP legislation and found it had “very few eligibility requirements” and that the archdiocese “clearly met” all of them. The debtor, he said, was losing $300,000 a month in revenue compared to normal operations. Still, the SBA made a final determination denying the application, leaving the debtor with no administrative remedies, Judge Thuma said.
Taking a new tack regarding the PPP, Judge Thuma held that the SBA’s denial of the loan application was “arbitrary and capricious,” in violation of 5 U.S.C. § 706(2)(A).
The PPP program, he said, “is not a loan program at all. It is a grant or support program. The statute’s eligibility requirements do not include creditworthiness . . . . Financial distress is presumed.” The loans, he said, “are really grants.”
Judge Thuma said “it was arbitrary and capricious for [the SBA] to engraft a creditworthiness test where none belonged.” He went on to find that the Cares Act “directly addresses” eligibility requirements and ruled that the SBA had no authority “to change eligibility requirements.”
Like Judge Fagone, Judge Thuma also found a violation of Section 525(a) because “the PPP is not a loan program. It is a grant or support program.” He added teeth to his judgment by declaring that the archdiocese could seek compensatory and, “if appropriate,” punitive damages if the SBA’s action results in the debtor’s not receiving the $900,000 it requested.
The opinions are Calais Regional Hospital v. Carranza (In re Calais Regional Hospital), 20-1006 (Bankr. D. Maine May 1, 2020); and Roman Catholic Church of the Archdiocese of Santa Fe v. U.S. (In re Roman Catholic Church of the Archdiocese of Santa Fe), 20-1026 (Bankr. D.N.M. May 1, 2020).
(Note: Opinions to both cases are linked above.)
Two more bankruptcy judges have enjoined the Small Business Administration from barring small companies in chapter 11 from receiving “loans” under the Paycheck Protection Program, or PPP.
Procedurally speaking, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., has gone the furthest by entering a final judgment compelling the SBA to act on the “loan” application without regard for the debtor’s “status as a chapter 11 debtor in possession.” He went on to say that the debtor could file another adversary proceeding against the SBA “for compensatory and, if appropriate, punitive damages” if the SBA’s actions in the past or future “are the proximate cause of [the debtor’s] losing its requested $900,000 in PPP funds.”
Judge Thuma said that the SBA made an “inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements in a way that was arbitrary and capricious, beyond its statutory authority, and in violation of 11 U.S.C. §525(a).”
The PPP “Loan” Program
The PPP was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, signed into law on March 27. The PPP is contained in Section 1102 of the legislation, known as the Cares Act.
Although denominated as loans, the SBA 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.
While 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.”
Pursuant to rulemaking authority contained in the statute, the SBA issued its first regulations on April 15, with nothing to say that chapter 11 debtors were ineligible. The SBA issued revised regulations on April 28, this time saying that debtors are excluded because they “would present an unacceptably high risk for an unauthorized use of funds or non-repayment of unforgiven loans.”