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Bankrupt Companies Can’t Be Kept From Virus Aid, Judge Reaffirms

May 11, 2020, 6:07 PM

The Small Business Administration can’t disqualify a company from a Paycheck Protection Program loan just because it’s in bankruptcy, a Texas bankruptcy judge reaffirmed.

Bankrupt Hidalgo County EMS showed it’s likely to succeed on the merits of the case, Judge David R. Jones of the U.S. Bankruptcy Court for the Southern District of Texas held May 8.

The SBA, which appealed the order Monday, is asking the court to put its ruling on hold pending the outcome of the appeal.

Jones’ May 8 ruling appears to be the first preliminary injunction against the agency, which is facing several challenges to its policy of categorically rejecting PPP loan applications from businesses in bankruptcy. The injunction extends a temporary restraining order he issued April 25.

Bankruptcy courts are split on whether they can order the SBA to consider the loan applications of bankrupt prospective borrowers, but so far any rulings have been limited to temporary restraining orders, an emergency, short-term form of relief.

The issue is whether a PPP loan, with its favorable terms and possible forgiveness, is more akin to a “grant” under bankruptcy code section 525(a). The section prohibits governmental units from discriminating against companies for having filed a bankruptcy case.

The SBA argued that Congress gave it authority to set guidelines for granting PPP loans. It also said it’s protected from suit by sovereign immunity, and the bankruptcy court lacks jurisdiction over the issue.

The case is In re Hidalgo Cnty. Emerg. Servc. Found., Bankr. S.D. Tex., Adv. No. 20-2006, Preliminary Injunction issued 5/8/20.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editors responsible for this story: Seth Stern at sstern@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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