Decisions continue coming down both ways when debtors demand “loans” under the Paycheck Protection Program, or PPP.
In three written decisions last week, the government won twice while the debtor prevailed once. Of note, Bankruptcy Judge Michael A. Fagone of Bangor, Maine, changed his mind. On May 1, he granted a temporary restraining order requiring the Small Business Administration to hold back funds if the debtor was later found eligible for a PPP “loan.”
Reaching the merits in an opinion on June 3, Judge Fagone reversed course and dismissed the debtor’s complaint aimed at forcing the government to make a PPP “loan.”
The Cares Act
The PPP “loans” were 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 Debtor’s Victory
The debtor came out on top in a June 2 opinion by Bankruptcy Judge Jennie D. Latta of Memphis, Tenn. The circumstances were easier for the debtor, because the business pursuing a PPP loan wasn’t really a debtor.
Rather, the chapter 11 debtor was an individual who owned a child-care business that was not in bankruptcy. The business was denied a loan because the owner was in bankruptcy.
Regarding jurisdiction, Judge Latta decided that the suit was a core proceeding in which the debtor was seeking relief under Section 525(a) of the Bankruptcy Code and the Administrative Procedures Act. With respect to jurisdiction and power, she followed the decision by Bankruptcy Judge David T. Thuma of Albuquerque, N.M., in 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). To read ABI’s report on the decision by Judge Thuma, click here.
Finding a lack of compliance with the APA, Judge Latta decided that the SBA “was not authorized to exclude American workers on the basis that they happened to be employed by a debtor in bankruptcy or even more remotely, as in this case, by an entity whose owner is a debtor in bankruptcy.” Relying on Santa Fe Archdiocese, she also found that the regulations were arbitrary and capricious, because they imposed a creditworthiness test were none belonged.
Following Santa Fe Archdiocese and a bench decision on April 25 by Bankruptcy Judge David R. Jones of Houston (Hidalgo County Emergency Service Foundation v. Carranza (In re Hidalgo County Emergency Service Foundation), 20-02006 (Bankr. S.D. Tex. April 25, 2020)), Judge Latta ruled that the exclusion of bankrupts offended 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. To read the ABI report on Hidalgo County, click here.
Judge Latta granted a permanent injunction barring the SBA from denying a PPP “loan” just because the owner was in chapter 11.
The Government’s Two ‘Wins’
Dealing with two hospitals in chapter 11, the decision by Judge Fagone shows that the winner on a TRO sometimes doesn’t prevail ultimately.
The debtors alleged that denial of “loans” violated Section 525(a) and the APA. Judge Fagone took a restrictive view of his constitutional power.
Judge Fagone concluded that the claim under Section 525(a) was “core,” but the claim under the APA, he said, was not “core” because the requested relief went beyond the power supplied by Section 525(a). To avoid “unnecessary procedural complexity,” he decided to issue proposed findings and conclusions as to both claims.
On the merits, Judge Fagone decided that Section 525(a) gave the debtor no relief because a PPP “loan” is a loan, even though it has favorable repayment terms. He also ruled that a PPP “loan” was not a “grant” as that term is used in Section 525(a), because it was not “similar to a license, permit, charter, or franchise.”
Judge Fagone dismissed the complaint.
By denying a motion for a preliminary injunction, Bankruptcy Judge Lisa Ritchey Craig of Atlanta also ruled in favor of the government in her June 4 opinion. In significant part, she followed the decision by Bankruptcy Judge Brett H. Ludwig of Milwaukee in Schuessler v. S.B.A., 20-02065 (Bankr. E.D. Wis. May 22, 2020). To read ABI’s report on Schuessler, click here.
Judge Craig’s debtor was a medical practice that otherwise would have qualified for a “loan” of almost $1 million. She adopted a narrow interpretation of Section 525(a), leading to the conclusion that a PPP “loan” did not fit within the statutory language of “other similar grants.”
Recognizing that the SBA was discriminating against debtors, she nonetheless concluded “that this form of discrimination is not one of those prohibited by § 525(a).”
In deciding that the debtor was not likely to succeed on the merits, Judge Craig likewise ruled that the SBA had not exceeded its statutory authority and had not acted arbitrarily or capriciously.
The opinions are:
- Alpha Visions Learning Academy Inc. v. Carranza (In re Skefos), 20-00071 (Bankr. W.D. Tenn. June 2, 20209). (Link to opinion.)
- Penobscot Valley Hospital v. Carranza (In re Penobscot Valley Hospital), 20-1005 (Bankr. D. Me. June 3, 2020). (Link to opinion.)
- Henry Anesthesia Associates v. Carranza (In re Henry Anesthesia Associates), 20-06084 (Bankr. N.D. Ga. June 4, 2020). (Link to opinion.)
Penobscot Valley Hospital v. Carranza (In re Penobscot Valley Hospital), 20-1005 (Bankr. D. Me. June 3, 2020).
Henry Anesthesia Associates v. Carranza (In re Henry Anesthesia Associates), 20-06084 (Bankr. N.D. Ga. June 4, 2020).