Second Circuit Says: SBA Can Deny PPP Funds To Bankruptcy Debtors (Springfield v. SBA)

The setting of the sun (photo by Marilyn Swanson)

By Donald L. Swanson

Here’s a vindication for the Small Business Administration’s discrimination against bankruptcy debtors:

  • On March 16, 2022, the Second Circuit Court of Appeals reverses a Bankruptcy Court Order that prohibited the SBA from denying PPP funds to bankruptcy debtors.

The opinion is Springfield Hospital, Inc. v. Administrator for the U.S. Small Business Administration, Case No. 20-3902 & 20-3903 (2nd Cir., 3/16/2022).

This opinion is probably the setting of the sun on any hope of PPP funds for bankruptcy debtors.

Background

A couple years ago, Congress creates the Paycheck Protection Program (“PPP”) to help businesses weather the Covid pandemic

However, the SBA decides that businesses in bankruptcy are not eligible for PPP funds.

In response, business bankruptcy debtors ask various bankruptcy courts to overturn the SBA’s discrimination against them.  One debtor succeeds in that effort—in Vermont’s Bankruptcy Court.

Vermont Case

The Vermont case begins as an adversary proceeding filed by bankruptcy debtors against the SBA, captioned as, Springfield Hospital, Inc. v Administrator for the SBA, Case No. 20-01003 & 20-01004 (Bankr., Vermont).

In their Complaint, debtors request, “an order enjoining SBA or any commercial lender . . . from denying an application under PPP on the basis that the applicant is a debtor in bankruptcy.”

In response, the Bankruptcy Court addresses two issues:

  1. “whether the Defendant is in violation of § 525(a)”; and   
  2. “if so, whether a permanent injunction is warranted.”

Here’s how the Bankruptcy Court Rules.

–§ 525(a) Issue

11 U.S.C. § 525(a) provides (emphasis added):

a governmental unit may not deny … a license, permit, charter, franchise, or other similar grant to … a person that is or has been a debtor under this title … solely because such … debtor is or has been a debtor under this title”.

The Bankruptcy Court’s conclusion is this:

“based on the undisputed material facts and the Second Circuit’s reasoning in Stoltz, the Court finds, as a matter of law, the PPP is an ‘other similar grant’ within the meaning of § 525(a).”

–Injunction Issue

In the early stages of the adversary, the Bankruptcy Court issues a Temporary Restraining Order (“TRO”), preventing the SBA from denying a PPP application based on the applicant’s status as bankruptcy Debtor.

Then, the Bankruptcy Court converts the TRO into a permanent injunction on summary judgment.

Direct Appeal to Second Circuit

The Vermont Bankruptcy opinion goes on direct appeal to the Second Circuit Court of Appeals.

Here’s how the Second Circuit decides the case:

  • The Bankruptcy Court held that PPP funds qualify as an “other similar grant” under Section 525(a), so the SBA cannot deny PPP funds to a business based on its bankruptcy status;
  • “We hold, based upon the plain language of Section 525(a), that the PPP is a loan guaranty program and not an ‘other similar grant,’” so that “Section 525(a) does not apply to PPP loans”;
  • “Therefore, the bankruptcy court incorrectly ruled that Springfield was entitled to summary judgment and a permanent injunction”: and
  • “Accordingly, we REVERSE the judgment, VACATE the permanent injunction.”

Conclusion

If bankruptcy debtors had any hope of relief from the SBA’s discrimination against them under the PPP program, this Second Circuit reversal is a heavy—if not fatal—blow.

The Second Circuit’s rationale appears solid

It will be interesting to see if anything further comes of it all.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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