Bankruptcy and the Payroll Protection Program

In the cases of In re Calais Regional Hospital, (Bankr. D. Me. 6/3/20) Case No. 19-10486, Adv. Proc. No 20-1006, and Penobscot Valley Hospital, (Bankr. D Me. 6/3/20), Case No. 19-10034, Adv. Proc. No. 20-1005, Judge Fagone held that the Small Business Administration’s prohibition of bankruptcy debtors participating in the Payroll Protection Program loan program did not violate Section 525 of the Bankruptcy Code, nor the Administrative Procedures Act.
Fagone previously granted a Temporary Restraining Order to the hospitals against the SBA, requiring that the SBA permit the processing of PPP loan applications. After a trial at the preliminary injunction stage of the proceedings, Fagone ruled in favor of the SBA.

The Debtors asserted at trial that the PPP program was a grant and that Section 525 prevents a governmental unit from discriminating against debtors applying for grants. Further the Debtors claims that the SBA exceeded its authority under the APA by creating regulations which eliminated bankruptcy debtors from participating in the PPP program.

The SBA countered those arguments by asserting that the PPP was a loan program, not a grant, and that not even the government is required to lend money to a debtor in bankruptcy. Further, since Congress did not explicitly include bankruptcy debtors as eligible recipients of PPP money, it was reasonable for the SBA to create minimal standards for eligibility that would minimize the chance of nonpayment of unforgiven loans.

The Court concluded that the unprecedented nature of the financial harm caused by the pandemic and the speed by which Congress enacted the statute to get forgivable loans in the hands of small businesses, supported the SBA’s interpretation of the flexibility Congress gave the SBA in creating regulations for eligible borrowers under the PPP program. Further, the Court determined that Section 525 did not apply to loans – since loans were not “licenses, permits, charters, franchises or similar grants” as defined in Section 525.

The procedural process of this matter is that the Court issued a recommended decision to the U.S. District Court for entry of a judgment. It is unclear whether the District Court will agree with Judge Fagone, but his logic and thorough analysis will be difficult to overcome.

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Case is In re Calais Regional Hospital, (Bankr. D. Me. 6/3/20) Case No. 19-10486