Judge Now Allows SBA to Block Bankrupt Companies From Virus Aid

The Small Business Administration can block bankrupt borrowers from obtaining Paycheck Protection Program loans, a Maine bankruptcy judge ruled.

The proposed ruling filed Wednesday by Judge Michael A. Fagone of the U.S. Bankruptcy Court for the District of Maine is a reversal of his earlier decisions to grant temporary restraining orders in favor of two bankrupt small hospitals in the state.

The proposed decision will go to the U.S. District Court for the District of Maine, which will determine whether to adopt it and issue a judgment.

Bankruptcy courts across the country have been wrestling with whether the SBA’s categorical exclusion of bankrupt borrowers in the emergency loan program exceeded the agency’s authority under the CARES Act.

They’ve also been considering whether a PPP loan is more properly categorized as a grant because of its highly favorable terms and likely forgiveness. Such a designation could bring the program within the purview of section 525(a) of the bankruptcy code, which prohibits the government from discriminating against bankrupt applicants for a “license, permit, charter, franchise, or other similar grant.”

The U.S. Court of Appeals for the Fifth Circuit June 1 agreed to consider the question in a Texas bankruptcy case, making it likely the first circuit court to consider the issue.

Fagone April 30 granted TROs in favor of Penobscot Valley Hospital and Calais Regional Hospital, both of which were denied consideration for PPP loans because they were in Chapter 11 proceedings. At the time, the judge said the hospitals had shown a likelihood they would prove that the PPP loans were akin to a grant and that section 525(a) applied.

But Fagone changed his mind after a May 27 trial.

“The SBA’s bankruptcy exclusion was a reasonable effort to accommodate the conflicting policies committed to the SBA’s care, and one that Congress might reasonably have sanctioned,” he wrote in proposed findings of fact and conclusions of law.

Fagone also concluded that PPP loans aren’t grants that implicate section 525(a). “These loans may function as a grant of aid during a crisis, but they are still—at least at their inception—loans.”

The hospitals aren’t suffering because the government is denying them a license to operate, the court said. “Despite its severity, that financial stress was not caused by the SBA’s decision to exclude the Debtor from the PPP.”

The hospitals’ attorneys didn’t respond to a request for comment.

The case is Penobscot Valley Hosp. v. Carranza, 2020 BL 206349, Bankr. D. Me., Adv. Proc. No. 20-1005, 6/3/20.