Relevant Documents:SBA (Interim Final Rule) (Docket No. SBA-2020-0021)SBA (Interim Final Rule) (Docket No. SBA-2020-0015)Complaint (Hidalgo County)Complaint (Dioceses of Rochester and Buffalo)
On Friday, Judge David Jones in Houston granted chapter 11 debtor Hidalgo County Emergency Service Foundation’s request for a temporary restraining order against the U.S. Small Business Administration, or SBA. HCESF sought the injunction after applying for a Paycheck Protection Program, or PPP, loan from its regular lender, PlainsCapital Bank, and having the application rejected on the basis of HCESF’s bankruptcy. Earlier this month, the Diocese of Rochester and the Diocese of Buffalo, N.Y., both of which are also debtors in chapter 11 cases, also filed an amended complaint against various federal defendants on the same issue.
Judge Jones’ grant of the TRO comes as the Department of the Treasury has issued its interim final rule on requirements for promissory notes, authorizations, affiliation and eligibility that addresses, among other things, the eligibility of businesses presently involved in bankruptcy proceedings, providing that if a PPP loan applicant or the owner of a PPP loan applicant is
the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, “the applicant is ineligible to receive a PPP loan” (emphasis added).
A text entry on the court’s docket states that “for the reasons stated on the record, the Court will grant the Temporary Restraining Order. Mr. Holzer to prepare and upload an amended TRO. The Defendants oral motion for stay pending appeal has been denied.” The court has not yet entered the TRO on the docket. A preliminary injunction hearing is scheduled for May 8 at 10:30 a.m. ET.
In seeking injunctive relief, HCESF argued that there is “no statutory provision in either the CARES Act or the Small Business Act that prohibits extending a PPP loan to a debtor and debtor in possession under chapter 11 of the Bankruptcy Code.” HCESF also argued in its complaint that the SBA’s “own interim final rule says nothing about a bankruptcy exclusion on PPP loans.” However, since the filing of the complaint, which cited
an earlier interim final rule, the Treasury Department issued its interim final rule addressing eligibility of a debtor. The latest interim final rule provides, in relevant part:
“Will I be approved for a PPP loan if my business is in bankruptcy?
“No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.
“The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy. The Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement. Lenders may rely on an applicant’s representation concerning the applicant’s or an owner of the applicant’s involvement in a bankruptcy proceeding.”
According to the complaint, HCESF seeks to enjoin SBA from exceeding its statutory authority to administer the PPP, arguing that the SBA made the approval of any PPP loan expressly contingent on the borrower not being “presently involved in any bankruptcy,” even though that condition is not found in the CARES Act or Small Business Act.
HCESF is seeking an order requiring the SBA to remove all references to a PPP loan applicant’s status as being involved in any bankruptcy from its PPP loan applications, PPP loan policies and procedures, and PPP loan agreements as well as an order requiring SBA to instruct all lending institutions administering PPP loans that there is no exclusion from the PPP loan program on account of involvement in bankruptcy, according to the complaint.
HCESF asserts it should receive injunctive relief and a declaration that the SBA’s insertion of a bankruptcy-related exclusion to eligibility for a PPP loan is unlawful discrimination and seeks an award of its costs and attorneys’ fees against the United States generally or against the SBA specifically pursuant to the Equal Access to Justice Act.
The dioceses’ amended complaint, filed on April 20, seeks a declaratory judgment that the SBA’s implementation of the PPP is “unlawful, discriminatory against prospective borrowers who are debtors in bankruptcy, and beyond its statutory authority.” The dioceses also seek “a writ of mandamus under 28 U.S.C. § 1361 to compel the SBA the remove from all PPP applications, including the PPP Official SBA Form 2483[], its disqualification of bankruptcy debtors as viable applicants” and “an order enjoining the SBA from denying the Plaintiffs a loan under the PPP based on the Plaintiffs’ status as a chapter 11 debtors.” Oral argument on the dioceses’
motion for preliminary injunction is scheduled for Wednesday, April 29, at 10 a.m. ET.