On May 1, 2020, the Roman Catholic Church of the Archdiocese of Santa Fe (“Archdiocese”) persuaded a federal judge to overrule the Small Business Association’s (SBA) denial of a Paycheck Protection Program (PPP) loan. The PPP is a small business loan program established under Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act authorized the SBA to issue PPP loans with very few applicant requirements in order to encourage employers to retain their employees and maintain operations. Under the CARES Act, a PPP loan was available regardless of the applicant’s creditworthiness and did not require a credit check.
Since the passage of the CARES Act, the SBA has issued interim final rules interrupting the language of the CARES Act and providing additional guidance. In addition to setting a limit of how loan proceeds can be used in order to qualify for forgiveness, the SBA also set forth guidance that prohibited companies in bankruptcy from being eligible for PPP loans. At least one company has challenged the SBA’s authority to make such a rule and a federal judge has found that it did exceed its authority in adding additional requirements to the loan program.
The Archdiocese, a debtor in a New Mexico bankruptcy proceeding, applied for a PPP loan after the SBA published its initial guidance and loan criteria but before the SBA specifically disqualified debtors through a formal rule. The lender through which the Archdiocese applied refused to process the application citing the SBA application language making companies in bankruptcy ineligible. The Archdiocese made a direct appeal to the SBA to approve their application but the application was denied citing the bankruptcy status.
The Archdiocese challenged this decision, using the Administrative Procedure Act, as being “arbitrary and capricious.” A federal judge agreed and required the SBA to approve the Archdiocese PPP loan application. The court found that the PPP loan program is clearly the opposite of a regular loan program where creditworthiness is relevant and Congress made PPP funds available to all small businesses meeting the requirements, even those in financial distress. The court went on to state that given economic impacts of the COVID-19 pandemic, “[f]inancial distress is presumed.” Therefore, if a company otherwise meets the requirements under the statute, then the SBA has no authority to “change the eligibility requirements.”
The SBA had argued that under the standard SBA 7(a) loan program, an applicant that is presently involved in a bankruptcy proceeding is not eligible for 7(a) loans, which the PPP loan program falls within, and therefore, such a rule should apply to the PPP 7(a) loan. In addition, the SBA argued that companies in bankruptcy “present an unacceptably high risk for an unauthorized use of funds or nonrepayment of unforgiven loans.” The bankruptcy court judge expressly rejected this argument and found the SBA added additional restrictions that were against the primary intent of Congress in creating the PPP loan program – to use the PPP funds to maintain payroll and pay mortgage interest, rent or utilities.
Using the arbitrary and capricious argument as a springboard, the court also found that the SBA exceeded its statutory authority under the CARES Act for PPP loans. The court reasoned that the SBA changed the eligibility requirements articulated by Congress in the CARES Act. The court determined that PPP loans are more akin to grants or support programs given that the funding comes from the public sector with easily met forgiveness provisions. The full opinion is available at In re Roman Catholic Church of the Archdiocese of Santa Fe, No. 18-13027 T11, 2020 Bankr. LEXIS 1211 (N.M. Bankr. May 1, 2020).
The PPP loan program has been a massive endeavor undertaken by the Small Business Administration. However, this case provides a cautious tale of a governmental agency exceeding its statutory authority in implementing the intent of Congress. It is likely that this case will be the first of many challenges to the rules that the SBA has established under the PPP loan program.
As you navigate the complexities caused by COVID-19, the knowledgeable attorneys at KJK stand ready to support you. For more information about the CARES Act or related issues, contact our Managing Partner, Jon Pinney at email@example.com or 216.736.7260, litigation partner Justine Konicki at firstname.lastname@example.org or 216.736.7211, Kyle Stroup at email@example.com or 216.736.7231 or any of our other Litigation professionals.
Photo: Catholic News Agency