Last week, the debtors won twice and the government prevailed on two occasions when businesses in chapter 11 demanded “loans” under the Paycheck Protection Program, or PPP.
Notably, Bankruptcy Judge Whitman Holt of Spokane, Wash., authorized a direct appeal to the Ninth Circuit from his opinion and order granting a preliminary injunction based on a finding that the Small Business Administration, or SBA, violated the Administrative Procedures Act, or APA, by denying a PPP “loan” solely because the applicant was in bankruptcy.
‘Loans’ Under the Cares Act
The $2.2 trillion Coronavirus Aid, Relief and Economic Security Act became law on March 27 and provided for the SBA to make PPP “loans.” Although denominated as loans, the SBA says on its website that PPP loans will be “fully forgiven” if at least 75% was spent for payroll. The remainder may be used for interest on mortgages, rent and utilities. Section 1102 of the legislation, known as the CARES Act, contains the provisions regarding the PPP “loans.”
The SBA issued 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.” However, the legislation itself said nothing about excluding companies in bankruptcy from the PPP “loan” program.
Pursuant to statutory rulemaking authority, 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 Debtors’ Two Victories
Bankruptcy Judge Michael G. Williamson of Tampa, Fla., wrote a comprehensive, 46-page decision in favor of the debtor on June 8. He concluded that the SBA violated the APA by exceeding its authority and was arbitrary and capricious in excluding debtors from the program.
Underpinning his decision, Judge Williamson concluded that PPP “loans” function like grants. He also ruled that the anti-injunction provisions in 15 U.S.C. § 634(b)(1) did not preclude him “from enjoining the SBA Administrator from exceeding her statutory authority . . . .”
Bankruptcy Judge Whitman L. Holt of Yakima, Wash., was likewise in the debtor’s camp with his June 10 decision handed down from the bench.
Judge Holt concluded that the debtor had no claim for discrimination under Section 525(a). Unlike Judge Williamson, he decided that the PPP “loans” were properly classified as loans.
On the other hand, Judge Holt ruled that the SBA had violated the APA. In that regard, Judge Holt adopted the analysis 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.
Like Judge Williamson, Judge Holt ruled that the bankruptcy court had power to enter a preliminary injunction despite 15 U.S.C. § 634(b)(1).
Judge Holt denied the government’s motion for a stay pending appeal but authorized a direct appeal to the Ninth Circuit.
The Government’s Champions
District Judge Elizabeth A. Wolford of Rochester, N.Y., granted the SBA’s motion for summary judgment in a case with an interesting procedural twist.
The chapter 11 debtor sued the SBA in district court. Sua sponte, Judge Wolford examined whether the suit was automatically referred to the bankruptcy court and, if it were, whether she should withdraw the reference.
Judge Wolford decided in her June 10 decision that the suit should have been referred automatically to the bankruptcy court since there was bankruptcy jurisdiction and some of the claims were “core.” If the debtor had wanted to be in district court, she said the debtor should have filed a motion to withdraw the reference.
Nevertheless, Judge Wolford said that the debtor’s failure to employ the correct procedure “does not prevent the Court from determining sua sponte that withdrawal is appropriate.”
Judge Wolford said it was “not clear” whether the bankruptcy court would have had power to enter a final order on all claims. For the sake of “judicial efficiency” and to “avoid unnecessary delay,” she withdrew the reference.
On the merits, Judge Wolford invoked the so-called Chevron deference in concluding that the SBA had not violated the APA. She also found no improper discrimination under Section 525(a).
Finally, Chief Bankruptcy Judge Thomas J. Catliota of Greenbelt, Md., ruled in favor of the government but employed a procedural dipsy-do to resurrect the debtor’s ability to both draw a PPP “loan” and reorganize in bankruptcy court.
In his June 8 opinion, Judge Catliota decided that Fourth Circuit precedent under Section 634(b)(1) of the Small Business Act precluded him from enjoining the SBA. He therefore did not reach the question of whether the SBA had violated the APA.
On the debtor’s claim of discrimination under Section 525(a), Judge Catliota decided that a PPP “loan” was not “a ‘license, permit, charter, [or] franchise’ to be protected from discrimination under § 525(a).”
At the debtor’s behest, Judge Catliota dismissed the chapter 11 case, finding “cause” given that “the PPP funds will provide a substantial benefit to the estate that is not available to debtor while it remains in bankruptcy.”
Once out of bankruptcy, the debtor intended to apply for and banked on receiving a PPP loan. If necessary, the debtor will refile in chapter 11, this time under the newly enacted small business provisions of subchapter V of chapter 11.
According to Judge Catliota, the debtor believed that proceeding under subchapter V, coupled with a PPP “loan,” would substantially enhance the debtor’s probability of a successful reorganization.
Please find each opinion linked below:
- Gateway Radiology Consultants PA v. Carranza (In re Gateway Radiology Consultants PA), 20-00330 (Bankr. M.D. Fla. June 8, 2020)
- Astria Health v. S.B.A. (In re Astria Health), 20-20016 (Bankr. E.D. Wash. June 10, 2020)
- Diocese of Rochester v. S.B.A, 20-06243 (W.D.N.Y. June 10, 2020)
- iThrive Health LLC v. Carranza (In re iThrive Health LLC), 20-00151 (Bankr. D. Md. June 8, 2020).
Last week, the debtors won twice and the government prevailed on two occasions when businesses in chapter 11 demanded “loans” under the Paycheck Protection Program, or PPP.
Notably, Bankruptcy Judge Whitman Holt of Spokane, Wash., authorized a direct appeal to the Ninth Circuit from his opinion and order granting a preliminary injunction based on a finding that the Small Business Administration, or SBA, violated the Administrative Procedures Act, or APA, by denying a PPP “loan” solely because the applicant was in bankruptcy.
‘Loans’ Under the Cares Act
The $2.2 trillion Coronavirus Aid, Relief and Economic Security Act became law on March 27 and provided for the SBA to make PPP “loans.” Although denominated as loans, the SBA says on its website that PPP loans will be “fully forgiven” if at least 75% was spent for payroll. The remainder may be used for interest on mortgages, rent and utilities. Section 1102 of the legislation, known as the CARES Act, contains the provisions regarding the PPP “loans.”
The SBA issued 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.” However, the legislation itself said nothing about excluding companies in bankruptcy from the PPP “loan” program.