On December 22, 2020, in In re Gateway Radiology Consultants, P.A., _ F.3d _ (11th Cir. 2020) the Eleventh Circuit Court of Appeals vacated a Florida Bankruptcy Court’s orders approving a Chapter 11 debtor’s motion for approval of a Paycheck Protection Program (“PPP”) loan and injunction order requiring the Small Business Administration (“SBA”) to guarantee the loan and treat the debtor as eligible for loan forgiveness under the PPP.
The debtor, a small business in a Chapter 11 case pending in the Middle District of Florida Bankruptcy Court, applied for a PPP loan from a participating lender. In its application, it did not disclose that it was in bankruptcy as required on the loan application. When the lender approved the loan (on apparently false pretenses), the debtor filed a loan approval motion with the bankruptcy court, and the SBA objected on the basis that bankruptcy debtors were not eligible to receive PPP loans. The debtor filed a separate adversary proceeding seeking declaratory and injunctive relief requiring the SBA to grant the loan. The Bankruptcy Court approved the loan and issued an injunction directing the SBA to not deny the PPP loan. The SBA, the debtor, and the lender appealed directly to the Eleventh Circuit, bypassing the District Court.
The Eleventh Circuit based its decision on several grounds, all of which compelled the denial of PPP loan eligibility to bankruptcy debtors and the reversal of the Bankruptcy Court’s orders. As a threshold matter, the Court based its appellate jurisdiction on the loan approval motion and the order entered by the Bankruptcy Court because the motion was a “core” matter under 28 U.S.C. s. 157(b)(2)(A), and the order was certified for direct appeal to the Court. The Court treated the Bankruptcy Court’s injunction order entered in the separate adversary proceeding brought by the debtor against the SBA and the PPP Loan lender as a “non-core” matter. In distinguishing the facts before it to the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462, 499 (2011), the Court held that the injunction order was “subsumed in the approval order” and, therefore, “inseparably related to the core matter.” Stated simply, the Court characterized the two orders as “joined at the hip.” On that basis, under a discreet Stern exception that allows bankruptcy courts to enter final binding orders, the non-core injunction order was treated as a “final order” subject to the Court’s appellate jurisdiction.
On the merits, the Court rejected all the proffered bases for affirming the Bankruptcy Court’s Orders. First, applying the Chevron[1] deference framework for determining whether an administrative agency’s action exceeds its statutory authority granted by Congress under the Administrative Procedures Act, the Court considered whether Congress specifically addressed the question before the Court based upon the text of the subject statute, the CARES Act. If there is ambiguity in the statute, then delegation to the administrative agency to promulgate the regulation is presumed. Secondly, under Chevron, the Court must determine if the agency’s, here the SBA, interpretation of the statute is reasonable. On the first Chevron step, the Court reasoned and concluded that Congress, in enacting the CARES Act that provided for the PPP “intended to delegate authority to the SBA” to decide ‘whether bankruptcy debtors are eligible for PPP loans.” Given the addition of the PPP loan program into the SBA’s existing Section 7(a) loan program, which maintains a “sound value requirement” for loan eligibility, changing certain 7(a) requirements but not others and granting the SBA emergency rulemaking authority to issue regulations to effectuate the PPP, led the Court to conclude that Congress intended to delegate to the SBA the authority to specific PPP loan eligibility requirements. The Court rejected all the debtor’s contrary arguments, including that the SBA’s certification requirements, which do not require borrower non-bankruptcy status, should be treated as eligibility criteria. In the main, the Court refused to expand and conflate the CARES Act’s limited set of statutory eligibility requirements (employee size, borrower and operating “considerations”) with an alleged blanket enumeration of all requirements and non-delegation of eligibility determination to the SBA. The Court also refused to read the CARES Act’s provisions relating to an alternate lending program into the PPP loan program. Turning to the question of whether the SBA’s action was reasonable versus “arbitrary and capricious,” the Court reasoned that the SBA’s use of a bankruptcy test to replace its usual lending criteria in the 7(a) program, which has a “sound value” requirement for all 7(a) loans, including PPP loans, particularly in an urgent, expedited rulemaking window, was reasonable. On that point, the Court wrote: “Bankruptcy debtors are financially distressed and have competing creditors, which it is not implausible to believe will increase the risk of unauthorized use of funds and non-repayment.”
The Eleventh Circuit’s ruling on the SBA’s exclusion of bankruptcy debtors from the PPP program is the first Circuit level case on the issue and is sure to be cited by Bankruptcy, District, and other Circuit courts faced with the issue. Perhaps Congress will cure the problem of denying PPP loans to those businesses which were most impacted by the Coronavirus, as evidenced by their insolvency.
[1] Chevron, U.S.A., Inc. v. Nat. res. Def. Council, Inc., 467 U.S. 837 (1984).