Bankrupt Companies Dealt Judicial Blow in Bid for Virus Aid (1)

June 23, 2020, 3:36 PM; Updated: June 23, 2020, 4:41 PM

The Small Business Administration’s rules preventing bankrupt companies from seeking Paycheck Protection Program loans can’t be judicially blocked, a federal appeals court said, narrowing a Texas ambulance operator’s chances for Covid-19 stimulus aid.

Precedent states that “all injunctive relief directed at the SBA is absolutely prohibited,” a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit said Monday. The decision, the first from a federal appeals court on the issue, reverses a Texas bankruptcy judge’s order last month that the agency consider a Chapter 11 debtor’s PPP loan application.

The SBA’s appeal was directly certified for review by the Fifth Circuit. The order was temporarily put on hold pending the outcome of the appeal.

The challenge arising from Hidalgo County Emergency Service Foundation’s Chapter 11 case is one of several against the SBA’s policy preventing bankrupt companies from accessing the $659 billion emergency loan program created under the CARES Act. Bankruptcy court rulings have been divided, with some deferring to the SBA and others ordering the agency to allow applications from bankrupt borrowers.

The Fifth Circuit’s decision, which expressly doesn’t touch on “the validity or wisdom of the PPP regulations and related statutes,” may dampen prospects for Hidalgo and other bankrupt companies to receive CARES Act relief, as a June 30 deadline for applications quickly approaches.

The two main areas of consideration have been whether the SBA’s rules overstep the agency’s authority, and whether a PPP loan is more in the nature of a grant because of its highly favorable terms and likely forgiveness. Section 525(a) of the bankruptcy code prohibits government units from discriminating against companies seeking a grant solely because the applicant was or is in bankruptcy.

The Fifth Circuit instead focused on whether courts have the power to issue an injunction against the SBA at all, an argument that hasn’t been a major player thus far.

Judge Jerry E. Smith wrote the decision, joined by Judges Stephen A. Higginson and Kurt D. Engelhardt.

Jordan, Holzer & Ortiz and the Law Office of Kay B. Walker represented Hidalgo County Emergency Service Foundation. The Justice Department represented the SBA.

The case is Hidalgo Cty. Emergency Serv. Found. v. Carranza, 2020 BL 230764, 5th Cir., No. 20-40368, 6/22/20.

(Updated to include additional information on the court's reasoning, judges issuing the decision, and counsel representing the parties.)

To contact the reporter on this story: Alex Wolf in New York at awolf@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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