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Law360 (July 9, 2020, 2:42 PM EDT) --
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| Richard Corbi |
The PPP is implemented pursuant to Section 7(a) of the Small Business Act,[2] which is administered by the Small Business Administration. The SBA has implemented a rule that expressly excludes borrowers that have sought protection under the Bankruptcy Code from receiving PPP loans. Section III(1) of the fourth interim rule issued on April 24 that governs the receipt of a PPP loan provides:
if the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan ... . The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans.
The SBA's position has been challenged in bankruptcy courts across the country. Debtors have challenged the SBA's position on the grounds that such position violates the anti-discrimination provision of Section 525(a) of the Bankruptcy Code as well as the Administrative Procedure Act. Naturally, this has led to different results among different courts. Although some bankruptcy courts have ruled in favored of the debtor,[3] the majority of bankruptcy courts have sided with the SBA by deferring to the agency's decision to exclude bankrupt borrowers.[4] Such deference to the SBA is commonly referred to as the Chevron doctrine.
The Chevron doctrine is a concept usually discussed in the context of the appointment of federal appellate judges and U.S. Supreme Court justices that takes the tone of an academic debate without a discussion of the impact of the Chevron doctrine on everyday commercial litigants. The Chevron doctrine arose from the 1984 Supreme Court decision Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc.,[5] in which the Supreme Court promulgated a two-step inquiry governing judicial review of agency interpretations of statutes that are intended by Congress to be applied by that agency.
The Chevron doctrine states as follows:
When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.[6]
Litigants seeking to overturn an agency decision rely on the Administrative Procedure Act, which states that courts shall "hold unlawful and set aside agency action, finding, and conclusions found to be ... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law."[7]
Since the enactment of the CARES Act and the continuing cratering of the U.S. economy, many companies have sought Chapter 11 bankruptcy protection and attempted to obtain access to PPP funds have had mixed results, as discussed earlier in this article. Even debtors that have sought Chapter 11 protection prior to the enactment of the CARES Act have litigated the ability to use and obtain PPP funds with the SBA prevailing in the majority of the litigation.
The courts ruling in favor of the SBA in denying the Chapter 11 debtor's ability to use PPP funds appear to be begrudgingly deferring to the SBA by acknowledging that the "issue at hand is not the validity or wisdom of the PPP regulations and related statutes."[8] Moreover, as one Court reasoned: "[t]here can be little doubt that the bankruptcy exclusion is hardly an example of delicate or precise policymaking. The SBA could certainly have adopted other, alternative approaches in balancing the need for a quick disbursement of emergency economic relief against the 'reasonably assure repayment' requirement."[9]
While courts have deferred to the SBA, the SBA's rules and regulations appear to be shortsighted and misguided. While the SBA has stated in various bankruptcy litigations that it does not want PPP funds subject to claims of administrative creditors in bankruptcy or the added expense and inquiry of participating in a bankruptcy case, debtor-in-possession financing provisions of the Bankruptcy Code and the oversight of the debtors by the bankruptcy court easily alleviate those fears.
For example, Section 364 of the Bankruptcy Code provides, among other things, that the loan is a super-priority and must be paid before the claims of other creditors. Second, the bankruptcy court can require that the PPP funds be placed in a segregated account away from other lenders and creditors and to provide weekly reports to the SBA like any other debtor-in-possession lender to make the monitoring of such loan less burdensome. Yet, the SBA does not seem to understand or embrace the protections provided by the Bankruptcy Code, which was created by Congress, that governs how debtor's obtain financing for their bankruptcy proceedings and the oversight that the bankruptcy court provides.
The conflict between the Bankruptcy Code and the SBA is precisely the type of agency action that is having disastrous effects on borrowers that desperately need PPP loans to survive and reorganize under the Bankruptcy Code. Supreme Court Justice Neil Gorsuch envisioned such conflict while a judge on the U.S. Court of Appeals for the Tenth Circuit. In Gutierrez-Brizuela v. Lynch,[10] in a concurrence to the majority opinion he authored, then-Judge Gorsuch explained that:
For whatever the agency may be doing under Chevron, the problem remains that courts are not fulfilling their duty to interpret the law and declare invalid agency actions inconsistent with those interpretations in the cases and controversies that come before them ... For if an agency can enact a new rule of general applicability affecting huge swaths of the national economy one day and reverse itself the next (and that is exactly what Chevron permits),[11] you might be forgiven for asking: where's the "substantial guidance" in that? And if an agency can interpret the scope of its statutory jurisdiction one way one day and reverse itself the next, ... you might well wonder: where are the promised "clearly delineated boundaries" of agency authority?[12]
Although Justice Gorsuch's concurrence in Lynch reads like a law review article, the Chevron doctrine and court's deference to the SBA is "affecting huge swaths of the national economy" that may not recover from this COVID-19 pandemic. The litigation will continue, and it remains to be seen if this issue makes it to the Supreme Court.
Richard J. Corbi is founder of The Law Offices of Richard J. Corbi PLLC.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Pub. L. No. 116-136, 134 Stat. 281 (2020).
[2] 15 U.S.C. § 636.
[3] See, e.g., In re Organic Power LLC
, Case No. 19-01789 (Bankr. D.P.R.) (court issued a TRO that permitted the debtor to apply for a PPP loan, which was approved and funded); In re Andes Industries, Inc., Case No. 19-14585 (Bankr. D. Az.) (approving debtors' motion to use PPP funds by finding that the SBA exceeded its authority in promulgating the rules that disqualified bankrupt borrowers); Roman Catholic Church of the Archdiocese of Santa Fe v. SBA , Case No. 18-13027, Adv. Pro. No. 20-1026, 2020 Bankr. LEXIS 1211 (Bankr. D.N.M. May 1, 2020) (court held that SBA exceeded its authority by excluding debtors from access to PPP funds and was discriminatory under section 525(a) of the Bankruptcy Code).[4] See, e.g., In re Hidalgo Cty., Emrgency Serv. Found.
, Case No. 40368, 2020 U.S. App. LEXIS 19400 (5th Cir. Jun. 22, 2020) (Fifth Circuit held that the Bankruptcy Court exceeded its authority in enjoining the SBA administrator); In re Henry Anesthesia Associs., LLC , Case No. 19-64159, Adv. Pro. No. 20-06084, 2020 Bankr. LEXIS 1471 (Bankr. N.D. Ga. Jun. 4, 2020) (court denied debtors request for a TRO because SBA's exclusion of bankruptcy debtors was supported by rational considerations).[5] Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.
, 467 U.S. 837, 840 (1984).[6] Chevron, 467 U.S. at 843-44.
[7] 5 U.S.C. § 706(2)(A).
[8] In re Hidalgo Cty., Emrgency Serv. Found., 2020 U.S. App. LEXIS 19400 at *3.
[9] Schuessler v. United States SBA
, Adv. Pro. No. 20-02065, Adv. Pro. No. 20-02068, Adv. Pro. No. 20-02069, 2020 Bankr. LEXIS 1347, at *36 (Bankr. E.D. Wisc. May 22, 2020).[10] Gutierrez-Brizuela v. Lynch
, 834 F.3d 1142, 1152-53 (10th Cir. 2016).[11] See 467 U.S. at 857-59
[12] Lynch, 834 F.3d at 1154.
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