In decisions reported last week, chapter 11 debtors only batted 200 in attempts to force the government to make “loans” under the Paycheck Protection Program, or PPP. (For those of you who may have forgotten since the coronavirus shut down major league baseball, a batting average of 200 often means the hitter will be demoted to the minor leagues.)
As we previously reported, the week began when the Fifth Circuit handed down a three-page opinion reversing the bankruptcy court and ruling that the Small Business Act bars the bankruptcy court from entering an injunction effectively requiring the Small Business Administration to grant a so-called PPP loan to a company in bankruptcy. For ABI’s report on Carranza v. Hidalgo County Emergency Service Foundation (In re Hidalgo Emergency Service Foundation), 20-40368 (5th Cir. June 22, 2020), click here.
The same day, Chief Bankruptcy Judge Colleen A. Brown of Burlington, Vt., went the other way by granting summary judgment and a permanent injunction in favor of the debtor. Her order requires the SBA to consider the debtor’s application for a PPP loan without reliance on the fact that the applicant is a chapter 11 debtor.
All five decisions last week turned on the same issues arising under the Coronavirus Aid, Relief and Economic Security Act, which includes the PPP. Although denominated as loans under the statute enacted on March 27, the loans look more like grants because the recipient is not required to repay the loan if at least 60% is used for payroll.
Debtors typically make two arguments: (1) denial of a loan violates Section 525(a), which prohibits the government from discriminating against someone solely because that person is or has been in bankruptcy; and (2) the SBA’s regulations excluding debtors from the PPP program violate the Administrative Procedures Act because they were arbitrary and capricious or without foundation under the statute.
The SBA has several arguments. The government often prevails under Section 634(b)(1) of the SBA, which arguably prohibits courts from enjoining the SBA.
In her 36-page opinion, Judge Brown interpreted the Second Circuit as broadly reading Section 525(a). She concluded that a PPP loan is a “grant,” similar to the right to inhabit public housing, which the Second Circuit found to be protected by Section 525(a). She also concluded that the SBA has no sovereign immunity.
In an equally prodigious, 37-page opinion on June 24, District Judge Ellen Lipton Hollander of Baltimore ruled in favor of the government, in a lawsuit filed in district court.
Denying a motion for a preliminary injunction, Judge Hollander concluded that the debtor had not established the requisite likelihood of success on the merits. She found that Section 525(a) did not apply. Invoking Chevron deference to evaluate the SBA’s regulations, she ruled that the agency was neither arbitrary nor capricious nor unreasonable in interpretating the statute.
Judge Hollander was not required to decide whether Section 634(b)(1) of the SBA precluded her from enjoining the SBA.
Also in district court, District Judge William C. Griesbach of Greenbay, Wis., had withdrawn the reference. On June 16, he denied the debtor’s motion for a preliminary injunction based on Section 634(b)(1).
In a decision that came as no surprise, Bankruptcy Judge Michael A. Fagone of Bangor, Maine, followed his June 3 opinion in Penobscot Valley Hospital v. Carranza (In re Penobscot Valley Hospital), 20-1005 (Bankr. D. Me. June 3, 2020), by issuing proposed findings and conclusions. He recommended granting the government’s motion to dismiss.
To read ABI’s report on Penobscot, click here.
The opinions are linked below:
- Carranza v. Hidalgo County Emergency Service Foundation (In re Hidalgo Emergency Service Foundation), 20-40368 (5th Cir. June 22, 2020)
- Springfield Hospital Inc. v. Carranza (In re Springfield Hospital Inc.), 20-01003 (Bankr. D. Vt. June 22, 2020);
- Tradeways Ltd v. Dept. of the Treasury, 20-1324 (D. Md. June 24, 2020) (electronic copy not available)
- Fox Valley Pro Basketball Inc. v. S.B.A., (E.D. Wis. June 16, 2020)
- Breda LLC v. Carranza (In re Breda LLC), 20-1008 (Bankr. D. Me. June 22, 2020).
In decisions reported last week, chapter 11 debtors only batted 200 in attempts to force the government to make “loans” under the Paycheck Protection Program, or PPP. (For those of you who may have forgotten since the coronavirus shut down major league baseball, a batting average of 200 often means the hitter will be demoted to the minor leagues.)
As we previously reported, the week began when the Fifth Circuit handed down a three-page opinion reversing the bankruptcy court and ruling that the Small Business Act bars the bankruptcy court from entering an injunction effectively requiring the Small Business Administration to grant a so-called PPP loan to a company in bankruptcy. For ABI’s report on Carranza v. Hidalgo County Emergency Service Foundation (In re Hidalgo Emergency Service Foundation), 20-40368 (5th Cir. June 22, 2020), click here.
The same day, Chief Bankruptcy Judge Colleen A. Brown of Burlington, Vt., went the other way by granting summary judgment and a permanent injunction in favor of the debtor. Her order requires the SBA to consider the debtor’s application for a PPP loan without reliance on the fact that the applicant is a chapter 11 debtor.
All five decisions last week turned on the same issues arising under the Coronavirus Aid, Relief and Economic Security Act, which includes the PPP. Although denominated as loans under the statute enacted on March 27, the loans look more like grants because the recipient is not required to repay the loan if at least 60% is used for payroll.
Debtors typically make two arguments: (1) denial of a loan violates Section 525(a), which prohibits the government from discriminating against someone solely because that person is or has been in bankruptcy; and (2) the SBA’s regulations excluding debtors from the PPP program violate the Administrative Procedures Act because they were arbitrary and capricious or without foundation under the statute.
The SBA has several arguments. The government often prevails under Section 634(b)(1) of the SBA, which arguably prohibits courts from enjoining the SBA.