The first appeals court to decide the question, the Eleventh Circuit reversed the bankruptcy court by holding that the Small Business Administration did not violate the CARES Act, nor did it act arbitrarily, in prohibiting chapter 11 debtors from obtaining “loans” under the Paycheck Protection Program, or PPP.
Bankruptcy courts have been split in deciding whether chapter 11 debtors are entitled to receive PPP loans.
‘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” that would 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 program.
Pursuant to statutory rulemaking authority, the SBA issued revised regulations on April 28, specifically 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 Statutory Background
In June, a bankruptcy judge in Florida decided that the SBA violated the Administrative Procedures Act by exceeding its authority and was arbitrary and capricious in excluding debtors from the PPP program. He certified a direct appeal to the Eleventh Circuit. To read ABI’s report on the bankruptcy court’s opinion, click here.
The 44-page opinion for the Eleventh Circuit on December 22 by Circuit Judge Edward E. Carnes was a straightforward application of the Chevron deference doctrine in deciding whether the SBA exceeded its statutory rulemaking authority. Chevron USA Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837 (1984).
Judge Carnes explained that Congress established the PPP loan program part of the SBA’s existing authority to make so-called Section 7(a) loans. By statute, Section 7(a) loans must have “sound value.” Creditworthiness is part of the lending criteria.
Even before the PPP, Section 7(a) loan applications inquired as to whether the applicant had ever filed bankruptcy. A prior bankruptcy, however, does not automatically preclude an applicant from receiving a Section 7(a) loan.
Judge Carnes noted that the CARES Act did not exempt applicants from the “sound value requirement” for Section 7(a) loans. However, the CARES Act did give rulemaking authority to the SBA on top of the agency’s power to make regulations under 15 U.S.C. § 634(b).
Applying Chevron to the PPP Loan Program
The first question in a Chevron analysis asks whether the agency exceeded its statutory authority. Judge Carnes found no “unambiguous answer to the question of whether bankruptcy debtors are eligible for PPP loans.”
“Instead,” Judge Carnes said that the “text of the Cares Act shows Congress placing the PPP within § 7(a), leaving intact the sound value requirement, and delegating rulemaking authority to the SBA.”
Judge Carnes therefore concluded that “Congress did delegate to the SBA the question of whether bankruptcy debtors are eligible for PPP loans.” He then moved to the second question: Were the SBA’s regulations reasonable?
Under Chevron, the court does not substitute its judgment for the agency’s. Rather, “we consider only whether the SBA’s interpretation is rational,” Judge Carnes said. He found that the regulations were a “reasonable accommodation” of competing interests.
Finally, Judge Carnes decided that the regulations were neither arbitrary nor capricious, because the standard is “exceedingly deferential.”
Judge Carnes summarized his ruling as follows:
The SBA did not exceed its authority in adopting the non-bankruptcy rule for PPP eligibility. That rule does not violate the Cares Act, is based on a reasonable interpretation of the Act, and the SBA did not act arbitrarily and capriciously in adopting the rule.
Judge Carnes vacated the bankruptcy court’s injunction directed at the SBA and remanded with instructions.
The first appeals court to decide the question, the Eleventh Circuit reversed the bankruptcy court by holding that the Small Business Administration did not violate the CARES Act, nor did it act arbitrarily, in prohibiting chapter 11 debtors from obtaining “loans” under the Paycheck Protection Program, or PPP.
Bankruptcy courts have been split in deciding whether chapter 11 debtors are entitled to receive PPP loans.
‘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” that would 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 program.
Pursuant to statutory rulemaking authority, the SBA issued revised regulations on April 28, specifically 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.”