A bankrupt rugby league got court approval to use money it borrowed under a U.S. small business loan program despite the Small Business Administration’s policy against lending to bankrupt borrowers.
Judge Brendan L. Shannon of the U.S. Bankruptcy Court for the District of Delaware Wednesday approved United States of America Rugby Football Union Ltd.'s $375,000 loan under the Paycheck Protection Program created by the CARES Act. The program was designed to aid the economy in the wake of the coronavirus pandemic.
Several small businesses in Chapter 11 have challenged the SBA’s policy to exclude bankrupt borrowers, with mixed results.
The issue turns primarily on whether the SBA’s policy of categorically denying the loans to bankrupt businesses violates a bankruptcy code provision banning the government from discriminating against bankrupt companies when administering a grant program. With very favorable terms and a likelihood of forgiveness, a handful of bankruptcy judges have said PPP loans are more akin to grants.
Shannon, who authorized USA Rugby’s loan, previously declined a request by bankrupt restaurant chain Cosi Inc. to require the SBA to consider its PPP loan application. The SBA has authority to set criteria for loan eligibility, and the policy isn’t prohibited discrimination against companies in bankruptcy, he said.
But USA Rugby’s loan was different because the league had already received the funds, the company’s lawyer, Corey MacDonald of Portsmouth, N.H., said in an email provided to Bloomberg Law Thursday.
The SBA objected to USA Rugby’s loan approval if doing so would presume the agency must guaranty the funds “that appear to have been inappropriately obtained,” according to a May 12 filing.
USA Rugby “appears” to have filed the application without disclosing its bankruptcy, the SBA said. Whether that was accidental or fraudulent isn’t before the court now, it said.
USA Rugby CEO Ross Young did disclose the bankruptcy on the paper application, MacDonald told Bloomberg Law. But neither the SBA, the lending bank JP Morgan Chase, nor USA Rubgy has been able to provide a copy of the online application, he said.
The case is United States of America Rugby Football Union, Ltd., Bankr. D. Del., No. 20-10738, Hearing 5/13/20.