The Small Business Administration (SBA) was within its rights to deny pandemic relief to a non-profit hospital based on the fact it was in bankruptcy, a federal appeals court ruled, Reuters reported. The Second U.S. Circuit Court of Appeals said in a decision that while bankruptcy law does prohibit government entities from denying a debtor a permit, license, or “other similar grant” due to its bankrupt status, the SBA’s Paycheck Protection Program (PPP). Though many courts have weighed in on whether PPP funding qualifies as a grant, the Second Circuit is the first appeals court to rule on the issue. The three-judge panel vacated a June 2020 ruling from U.S. Bankruptcy Judge Colleen Brown in Vermont that held the SBA could not reject Springfield Hospital Inc’s application for PPP funding. Springfield Hospital and Springfield Medical Care Systems Inc., a Vermont-based critical access hospital and medical services provider, filed for chapter 11 protection in June 2019 but continued operations during the bankruptcy. It applied for $3.6 million in PPP funds while in bankruptcy. Springfield sued the SBA in April 2020 after it rejected the hospital's request for funding. In response, the SBA argued that the funds it distributed through the PPP were loans, not grants protected by bankruptcy law. The hospital was approved to exit chapter 11 in December 2020. In Wednesday’s decision, the panel concluded that just because the SBA forgives many of the loans, that does not automatically qualify them as grants. Rather, businesses must meet certain financial criteria to obtain loan forgiveness. The case is Springfield Hospital Inc v. Guzman, U.S. Circuit Court of Appeals, No. 20-3902.
