Fri 05/01/2020 16:57 PM
Relevant Documents:
Opinion (Roman Catholic Archdiocese of Santa Fe)
Judgment (Roman Catholic Archdiocese of Santa Fe)

The landscape of a debtor’s eligibility to participate in the Paycheck Protection Program, or PPP, continues to evolve following a ruling today by U.S. Bankruptcy Judge David Thuma of the U.S. Bankruptcy Court for the District of New Mexico granting declaratory judgment in favor of the Roman Catholic Church of the Archdiocese of Santa Fe in its adversary proceeding against the Small Business Administration.

The New Mexico bankruptcy court found that the SBA unlawfully excluded the Archdiocese from eligibility to participate in the PPP on the basis that such exclusion was “arbitrary and capricious,” exceeded the SBA’s “statutory jurisdiction, authority, or limitations or short of statutory right” and was in violation of section 525(a) of the Bankruptcy Code, which prohibits discrimination against a debtor. The corresponding judgment “compels” the SBA to act on the Archdiocese’s PPP loan application “without regard to Plaintiff’s status as a chapter 11 debtor in possession.”

In other cases, following oral argument today in the Springfield Hospital Inc. adversary proceeding, Judge Colleen Brown ultimately took the debtor’s emergency motion for a temporary restraining order under advisement, indicating that the court would issue its ruling by Tuesday, May 5. On Thursday, Judge Michael Fagone indicated that he would issue rulings on the TRO requests in the Calais Regional Hospital and Penobscot Valley Hospital cases by the close of business today, Friday, May 1.

Separately, at today’s first day hearing in the TooJay’s cases, the otherwise standard proceedings before Judge Erik P. Kimball in West Palm Beach, Fla., included a brief preview of issues facing debtors and lenders with respect to PPP loans funded prepetition, as discussed below.

Roman Catholic Archdiocese of Santa Fe

In his opinion in favor of the Archdiocese, Judge Thuma concludes that the SBA’s decision to “insert underwriting criteria into the PPP, and then to use the bankruptcy debtor test as the sole underwriting criterion, is both arbitrary and capricious.” The opinion continues, “Without question, Defendant lacked the authority to change the PPP eligibility requirements and exclude Plaintiff.” In reaching its conclusion regarding the anti-discrimination provision of section 525(a) of the Bankruptcy Code, the court finds that the PPP “is not a loan program” but instead is “a grant or support program” (emphasis added). Judge Thuma says that “[o]f all the benefits a government can grant, free money might be the best of all,” and therefore, denying the Roman Catholic Church of the Archdiocese of Santa Fe access to PPP funds solely because it is a debtor violates selection 525(a).

In the opinion, the court sets forth the following as its ultimate conclusion:
“With only the flimsiest of justifications Defendant took one of many underwriting criteria from its ‘normal’ loan programs (bankruptcy status of the borrower), changed it to an eligibility condition, and then applied it to an emergency grant program where it clearly had no place. Defendant’s inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements in this way was arbitrary and capricious, beyond its statutory authority, and in violation of 11 U.S.C. § 525(a). By a separate final judgment, the Court will grant Plaintiff the relief it requests” (emphasis added).

The opinion provides that if the SBA defendants’ actions “result in Plaintiff not obtaining the $900,000 it requested, Plaintiff may file an adversary proceeding for compensatory and, if appropriate, punitive damages.”

TooJay’s First Day Hearing

At today’s first day hearing in the TooJay’s cases, the otherwise standard proceedings before Judge Erik P. Kimball in West Palm Beach saw a brief preview of issues facing debtors and lenders with respect to PPP loans funded prepetition.

Ahead of the hearing the debtors filed a revised proposed cash collateral order including a breakout of the budgeted fund for PPP authorized uses.

Separately, Mark Steiner, speaking for PPP funding bank Truist Bank, said his client's main concern is that the PPP funds will be used properly and asked the court to include language in the cash collateral order requiring that the debtor only use PPP funds for authorized uses under the CARES Act. This faced pushback from the prepetition secured lenders, who said that while the debtors have to comply with the law, crafting such language with appropriate caveats and carve-outs would take “weeks” since the CARES Act and its implementing regulations are “clear as mud.” Ultimately, Judge Kimball settled on simply relying on the cash collateral budget and the order’s requirement that the debtors adhere to the budget.

Similar concerns were raised by Truist Bank with respect to the debtors’ wages motion. Judge Kimball similarly rejected those requests.
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright 2019 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Reorg on the Record!