After several initial victories, the tide is now turning against debtors who seek “loans” under the Paycheck Protection Program, or PPP.
In an opinion on May 22, Bankruptcy Judge Brett H. Ludwig of Milwaukee decided that the government did not violate Section 525(a) in denying a PPP “loan” simply because the business was in bankruptcy reorganization. He also ruled that the Small Business Administration did not violate the Administrative Procedures Act (APA) by excluding debtors from the PPP. In February, Judge Brett was nominated by President Trump for a seat on the district court.
The Identical Complaints
Three dairy farmers in chapter 12 filed almost identical complaints after being denied PPP loans because they are in bankruptcy reorganization. Judge Ludwig dismissed the complaints at the conclusion of a hearing on May 21 and filed his decision the next day.
Judge Ludwig first dealt with limits on his constitutional power. He ruled that the claims under Section 525(a) were “core,” thus allowing him to enter a final judgment, but he decided that the claims under the APA were not core. On the APA claims, Judge Ludwig made a report and recommendation.
The Cares Act
The PPP was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, which became 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.
Although the text of 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 revised regulations on April 28, 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 Section 525(a) and APA Claims
The farmers relied primarily 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 Ludwig said that three circuits interpret Section 525(a) narrowly, while the Second Circuit adopted a broader meaning. He cited Hidalgo County Emergency Service Foundation v. Carranza (In re Hidalgo County Emergency Service Foundation), 20-02006 (Bankr. S.D. Tex. April 25, 2020), where Bankruptcy Judge David R. Jones of Houston temporarily enjoined the SBA from barring a company in chapter 11 from receiving loans under the PPP. For ABI’s report on Hidalgo, click here.
To read ABI’s report on two other opinions coming down in favor of the debtor, click here.
Going the other way, Judge Ludwig cited decisions from Delaware and Austin, Texas, where the courts found no violation of Section 525(a). Cosi, Inc. v. SBA, Adv. No. 20-50591 (Bankr. D. Del. Apr. 30, 2020), and Trudy’s Texas Star Inc. v. Carranza, 20-1026 (Bankr. W.D. Tex. May 7, 2020). Those courts, he said, decided that the funds were distributed through loans, putting them outside Section 525(a).
Agreeing with Cosi and Trudy’s, Judge Ludwig dismissed the claims under Section 525(a).
Under the Administrative Procedures Act, Judge Ludwig recommended that the district court rule that issuance of regulations excluding bankrupts from the PPP was not beyond the SBA’s delegated authority.
Similarly, he recommended that the district court find that the regulation barring bankrupts from the program was not arbitrary and capricious.
After several initial victories, the tide is now turning against debtors who seek “loans” under the Paycheck Protection Program, or PPP.
In an opinion on May 22, Bankruptcy Judge Brett H. Ludwig of Milwaukee decided that the government did not violate Section 525(a) in denying a PPP “loan” simply because the business was in bankruptcy reorganization. He also ruled that the Small Business Administration did not violate the Administrative Procedures Act (APA) by excluding debtors from the PPP. In February, Judge Brett was nominated by President Trump for a seat on the district court.
The Identical Complaints
Three dairy farmers in chapter 12 filed almost identical complaints after being denied PPP loans because they are in bankruptcy reorganization. Judge Ludwig dismissed the complaints at the conclusion of a hearing on May 21 and filed his decision the next day.
Judge Ludwig first dealt with limits on his constitutional power. He ruled that the claims under Section 525(a) were “core,” thus allowing him to enter a final judgment, but he decided that the claims under the APA were not core. On the APA claims, Judge Ludwig made a report and recommendation.