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SBA Need Not Consider Bankrupt Companies for Virus Aid, for Now

May 12, 2020, 9:32 PM

The Small Business Administration doesn’t have to comply yet with a court order to consider a bankruptcy Texas company’s application for a stimulus loan, a federal judge said.

A bankruptcy court’s preliminary injunction issued last week in favor of Hidalgo County EMS is on hold pending the SBA’s appeal, Judge David S. Morales of the U.S. District Court for the Southern District of Texas ordered Monday.

The SBA “has shown cause” to pause the bankruptcy court’s order, Morales said without elaborating further.

Hidalgo County EMS, an emergency services transport company, is one of several small businesses challenging the SBA’s policy of categorically denying Paycheck Protection Program loans to companies that are in bankruptcy proceedings. The loans were created by the CARES Act, a measure aimed at helping the economy in the wake of the coronavirus pandemic.

Judge David R. Jones of the U.S. Bankruptcy Court for the Southern District of Texas has been one of the first to weigh in on the issue, granting a temporary restraining order against the practice April 25 and broadening it to a preliminary injunction May 8.

Several other bankruptcy judges have issued similar TROs against the SBA, including in Maine and Vermont, while a Delaware bankruptcy judge denied the relief to bankrupt restaurant chain Cosi Inc.

The SBA exceeded its authority by adopting the policy, Jones said last week.

In addition, 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 judge said. Because of their favorable terms and likely forgiveness, PPP loans are more like grants than loans, and so are covered by the section, he said.

The case is Carranza v. Hidalgo Cnty. Emergency Serv. Found., S.D. Tex., No. 2:20-cv-00108, Order 5/11/20.

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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