On an issue where the lower courts are divided, the Second Circuit became the first court of appeals to rule that a “loan” under the Paycheck Protection Program, “as a matter of law, . . . is a loan guaranty program and not an ‘other similar grant,’ and thus is not covered by [the antidiscrimination provision in] Section 525(a)” of the Bankruptcy Code.
In other words, the Small Business Administration properly barred companies in chapter 11 from receiving PPP “loans,” according to a March 16 opinion by Circuit Judge Joseph F. Bianco.
The Debtor Wins in Bankruptcy Court
The Paycheck Protection Program, or PPP, was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act), which became law in March 2020. Although denominated as a loan, it will be forgiven if the proceeds are spent on eligible expenses like payroll and rent.
A hospital in Vermont was in chapter 11 and applied for a PPP loan. The Small Business Administration denied the loan solely because the debtor answered “yes” to a question on the loan application asking whether the borrower was in bankruptcy.
The debtor sued the SBA in bankruptcy court, where the judge decided that a PPP “loan” was a “grant” protected by the antidiscrimination provision in Section 525(a). The bankruptcy court granted summary judgment in favor of the debtor and entered a permanent injunction requiring the SBA to make the loan. Springfield Hospital Inc. v. Carranza (In re Springfield Hospital Inc.), 618 B.R. 70 (Bankr. D. Vt. June 22, 2020). To read ABI’s report, click here.
The bankruptcy court authorized a direct appeal, which the Second Circuit accepted.
The Circuit Sides with the Majority
In his 53-page opinion, Judge Bianco said that 18 courts to date have ruled that the PPP is not protected by Section 525(a), while six courts have decided that the section requires the SBA to grant loans to businesses in chapter 11.
Principally, Judge Bianco found the answer in the plain language of Section 525(a), which provides:
[A] governmental unit may not deny . . . a license, permit, charter, franchise, or other similar grant to . . . a person that is or has been a debtor under this title . . . .
A PPP loan was not a license, permit, charter or franchise. Judge Bianco therefore focused on whether it was a “grant,” a word not defined in the statute.
Two Second Circuit decisions were controlling: In re Goldrich, 771 F.2d 28 (2d Cir. 1985), and Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002). In Goldrich, the circuit held that Section 525, as it was then written, did not cover a guaranteed student-loan program.
Almost a decade after Goldrich, Judge Bianco said that “Congress amended Section 525 to include a subsection prohibiting discrimination against debtor-borrowers by any ‘governmental unit that operates a student grant or loan program.’ 11 U.S.C. § 525(c).”
In Stoltz, the Second Circuit held that a lease for a public housing unit was a “grant” protected by Section 525(a).
Taken together, Judge Bianco said that the two opinions mean that a “grant” is something that is “‘unobtainable from the private sector’ [and] ‘essential to a debtor’s fresh start.’ Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002).”
Judge Bianco said that Goldrich, which precluded loans from coverage in Section 525(a), remained good law after Stoltz. He said that the amendment to Section 525 “narrowly abrogated Goldrich’s specific holding as to student loans but had not abrogated its broader holding that Section 525(a) did not cover loans in general.” [Emphasis in original.]
“[W]e reaffirm here,” Judge Bianco said, “that the plain text of Section 525(a) does not cover loan programs.”
PPP ‘Loans’ Aren’t Grants
Even if loans are not protected by Section 525(a), the debtor contended that PPP loans are actually grants.
Judge Bianco disagreed. He said that the CARES Act refers to PPP loans as “loans” 75 times. Furthermore, he said, the forgiveness of PPP loans is “neither automatic nor guaranteed.”
Judge Bianco again referred to the dual standards in Goldrich/Stoltz. Unlike the refusal to grant a license that would put a company out of business, he said that the refusal of the SBA to grant a loan does not exclude a debtor “from receiving capital from other sources,” nor is an SBA loan “essential to a debtor’s fresh start.”
Subsequent Legislation
Although Judge Bianco found the answer in the plain language of the statute, he said that “the additional PPP legislation enacted after the Cares Act provides further support for our interpretation of Section 525(a).”
In the Consolidated Appropriations Act of 2021, he said,
Congress amended Section 525 to expressly bar discrimination based on bankruptcy status in the provisioning of certain Cares Act benefits — such as foreclosure moratoriums, 15 U.S.C. § 9056, forbearance of certain residential mortgages, id. § 9057, and eviction moratoriums, id. § 9058 — but notably did not include PPP loans in this amendment. [Emphasis in original.]
Judge Bianco drew a “clear negative inference from this amendment . . . that other provisions of the Cares Act are not covered by Section 525(a).” [Emphasis in original.]
Judge Bianco vacated the permanent injunction and remanded with instructions that the SBA was entitled to summary judgment in its favor. However, he did not rule on whether the SBA was “immune from injunctive relief” under Section 634(b)(1) of the Small Business Act.
On an issue where the lower courts are divided, the Second Circuit became the first court of appeals to rule that a “loan” under the Paycheck Protection Program, “as a matter of law, . . . is a loan guaranty program and not an ‘other similar grant,’ and thus is not covered by [the antidiscrimination provision in] Section 525(a)” of the Bankruptcy Code.
In other words, the Small Business Administration properly barred companies in chapter 11 from receiving PPP “loans,” according to a March 16 opinion by Circuit Judge Joseph F. Bianco.
The Paycheck Protection Program, or PPP, was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act), which became law in March 2020. Although denominated as a loan, it will be forgiven if the proceeds are spent on eligible expenses like payroll and rent.
A hospital in Vermont was in chapter 11 and applied for a PPP loan. The Small Business Administration denied the loan solely because the debtor answered “yes” to a question on the loan application asking whether the borrower was in bankruptcy.