Proposed Findings and Conclusions — Penobscot/Calais v. SBA

Record facts

United States District Court, District of Maine (filed as district court Document 1; Case 1:20-mc-00148-JDL) · No. 1:20-mc-00148-JDL · Doc. 1 · 2020-07-02 · Docket on CourtListener

Full text

1 
UNITED STATES BANKRUPTCY COURT 
DISTRICT OF MAINE 
 
 
In re: 
 
Penobscot Valley Hospital, 
 
Debtor 
 
 
 
Chapter 11 
Case No. 19-10034 
 
Penobscot Valley Hospital, 
 
Plaintiff 
    v. 
 
Jovita Carranza, in her capacity as Administrator for the  
United States Small Business Administration, 
 
Defendant 
 
 
 
 
 
Adv. Proc. No. 20-1005 
 
 
In re: 
 
Calais Regional Hospital, 
 
Debtor 
 
 
 
Chapter 11 
Case No. 19-10486 
 
Calais Regional Hospital, 
 
Plaintiff 
    v. 
 
Jovita Carranza, in her capacity as Administrator for the  
United States Small Business Administration, 
 
Defendant 
 
 
 
 
 
Adv. Proc. No. 20-1006 
 
PROPOSED FINDINGS AND CONCLUSIONS 
 
Boiled to its essence, the plaintiffs’ complaint is that they have been unfairly and illegally 
denied their spot in the “corporate breadline.”  These plaintiffs are not alone; many other chapter 
11 debtors have the same view.  This view is understandable and the plaintiffs here are 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 1 of 31    PageID #: 1

 
2 
particularly sympathetic.  But the Court’s task is not to sympathize; it is to interpret the law.  
Although there is room for disagreement on the law, the better view is that the defendant—armed 
with a mandate from Congress and facing an economic crisis of unprecedented magnitude—
made reasonable choices about how to allocate a large but finite amount of aid among struggling 
businesses.  Those choices may produce seemingly harsh results, but they are not illegal.   
I. 
Procedural History. 
 
Penobscot Valley Hospital (“PVH”) and Calais Regional Hospital (“CRH”) are both 
debtors in possession in chapter 11 cases.  PVH and CRH are not affiliated, and their chapter 11 
cases are separate.  About five weeks ago, PVH and CRH each started adversary proceedings 
against Jovita Carranza, in her capacity as Administrator for the United States Small Business 
Administration (the “Administrator” or the “SBA”).  Those adversary proceedings, which have 
since been consolidated under Fed. R. Civ. P. 42, feature the same legal theories and nearly 
identical pleadings.  For this reason, the Court will often refer to both entities collectively as “the 
Debtor” and employ the singular tense, differentiating between the two plaintiffs only where 
warranted by distinctions in the factual landscape. 
 
By its complaint, the Debtor seeks preliminary and permanent injunctive relief, damages, 
declaratory relief, and a writ of mandamus.  Shortly after the filing of the complaint, the Debtor 
sought a temporary restraining order (“TRO”) that would enjoin the SBA and those acting in 
concert with it from: (a) denying the Debtor’s application under the Paycheck Protection 
Program, 15 U.S.C. § 636(a)(36) (the “PPP”) or refusing to guaranty a PPP loan sought by the 
Debtor solely due to the Debtor’s present involvement in bankruptcy; and (b) authorizing, 
guarantying, or disbursing funds appropriated for loans under the PPP without reserving 
sufficient funds or guaranty authority to provide the Debtor access to PPP funds if the Debtor is 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 2 of 31    PageID #: 2

 
3 
eligible notwithstanding its present involvement in bankruptcy.  Following an expedited hearing 
on April 30, 2020, the Court granted the TRO over the SBA’s objection.  With the SBA’s 
consent, a trial on the merits of the complaint was then scheduled for May 27 and the TRO was 
extended to May 28.  The TRO was again extended with SBA’s consent, this time to 5:30 p.m. 
on June 3, 2020.  
II. 
Proposed Findings. 
 
As discussed in more detail below, the Court is issuing proposed findings in these 
proceedings.  These proposed findings are based on the evidence admitted at trial on May 27, 
including the parties’ stipulations.   
On or about March 27, 2020, Congress enacted, and the President signed, the 
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act 
included stimulus funds designed to assist businesses and ensure that American workers continue 
to be paid despite the economic impact of Covid-19 and social distancing measures.  Section 
1102 of the CARES Act established the PPP under section 7(a) of the Small Business Act.  A 
PPP loan may be forgiven—in whole or in part—under the circumstances set forth in section 
1106 of the CARES Act.   
A party may apply for a PPP loan by submitting an application to a federally insured, 
participating section 7(a) lender or any other lender approved by the SBA.  The SBA has no 
authority to make direct loans under the PPP; instead, the SBA may guarantee PPP loans.  Before 
providing a PPP loan number to a lender, the SBA does not analyze the PPP application to 
determine whether the applicant is likely to liquidate or whether a loan to the applicant would be 
of sound value.  Under the CARES Act, eligibility determinations with respect to PPP applicants 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 3 of 31    PageID #: 3

 
4 
rest with lenders, not the SBA.1  However, the SBA has established minimal underwriting 
requirements for lenders that make PPP loans, including review of the Paycheck Protection 
Application Form, SBA Form 2483.  
SBA Form 2483 provides, in relevant part, that if the applicant answers “Yes” to question 
1, the loan will not be approved.  Question 1 asks whether the applicant is “presently involved in 
any bankruptcy[.]”  This question effectively excludes applicants who are “presently involved in 
any bankruptcy” from participating in the PPP.  Eligible businesses, including hospitals that are 
not in bankruptcy, have obtained PPP funds.   
PVH and CRH submitted their initial PPP applications on April 3, 2020.  To question 1, 
PVH and CRH each answered “Yes.”  First National Bank did not accept CRH’s application 
because CRH had answered “Yes” to question 1.  As to PVH, Machias Savings Bank (“MSB”), 
sought guidance from the SBA about whether it should process the application in light of PVH’s 
answer to question 1.  The SBA indicated that the application should not be processed because 
the affirmative response to question 1 rendered PVH ineligible.  After receiving this guidance, 
MSB did not process PVH’s application.   
PPP funds are processed generally on a first come, first served basis.  Neither PVH nor 
CRH received PPP funds prior to their exhaustion under the first tranche of PPP funding.  On or 
about April 23, 2020, Congress enacted legislation making additional funds available for PPP.   
PVH has submitted a revised PPP application to MSB, consistent with the terms of the 
TRO, seeking a loan of approximately $1.5 million.  On May 4, MSB submitted that revised 
application on PVH’s behalf, and the loan was approved and funded (although the funds have not 
 
  1    The parties have stipulated to certain “facts” that more closely resemble statements of law.  Some of 
these stipulations have worked their way into this recitation of proposed findings.  To the extent that the 
parties have stipulated to conclusions of law, those stipulations are not binding on the Court. 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 4 of 31    PageID #: 4

 
5 
been disbursed to PVH).  CRH has also prepared a revised PPP application consistent with the 
terms of the TRO seeking a loan for approximately $1.7 million but it has been unable to identify 
a lender that will process the application.  June 30, 2020 is the current deadline for submissions 
of PPP applications.    
PVH operates a 25-bed general medical and surgical hospital located in Lincoln, Maine, 
with approximately 174 employees.  CRH also operates a 25-bed general medical and surgical 
hospital, located in Calais, Maine, with approximately 203 employees.  The objective of both 
PVH and CRH, in their respective chapter 11 cases, is to preserve hospital operations and 
continuity of patient care in their service areas.  To this end, both PVH and CRH have been 
actively engaged in efforts to reorganize and preserve their businesses since their chapter 11 
petitions were filed; these are not liquidation cases.   
PVH’s and CRH’s business operations and exit from chapter 11 have been negatively 
affected by economic consequences stemming from Covid-19.  A significant portion of the cash 
receipts and revenue derived by PVH and CRH flow from outpatient procedures and office visits 
or medical procedures.  In the wake of Covid-19, many procedures and office visits have been 
postponed, rescheduled, or canceled.  These cancellations and deferrals have had—and are 
expected to continue to have—a negative impact on PVH’s and CRH’s cash receipts and 
revenue.  PVH’s net patient revenue is about $1.2 million less than budgeted for the period from 
March through mid-May of 2020.  At CRH, net patient revenue is nearly $1.8 million less than 
budgeted for that same period.  These revenue shortfalls will likely continue to increase into the 
future until business operations and patient volume normalize.     
Although patient volume at PVH and CRH may vary for many reasons—including stay-
at-home orders—PVH’s and CRH’s costs are generally fixed.  In addition, PVH and CRH 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 5 of 31    PageID #: 5

 
6 
regularly receive payments from certain payors that are made prospectively each week in fixed 
amounts.  When patient volume is low, overpayments from these payors are more likely.  As 
such, both PVH and CRH are likely accruing overpayment liabilities to Medicaid and Anthem, 
and perhaps Medicare, in amounts that are not yet known.     
Since the initiation of these proceedings, PVH has received approximately $3.5 million, 
and CRH has received more than $3.7 million, in federal stimulus funds for rural hospitals.  Use 
of these funds is restricted; they are to be used only to prevent, prepare for, and respond to 
coronavirus, or for health care expenses or lost revenue attributable to coronavirus.  Although 
these stimulus funds have staved off the immediate risk of closure, they do not guarantee or 
ensure a successful future outcome for either PVH or CRH, and both hospitals will need the 
funds to prepare for and respond to future impacts of Covid-19.  The futures of PVH and CRH 
are still highly uncertain and closure is still possible—although the risk is less immediate than 
when these proceedings were initiated—because the hospitals do not know when business 
operations will normalize, what their revenue will be like at that time, or whether they will have 
unrestricted funds that they can use to pay mounting liabilities.  
Due to declining cash receipts in the aftermath of Covid-19, PVH was forced to use funds 
in its operating account that had been informally budgeted to satisfy overpayment liabilities from 
2019 and contract cure payments.  PVH will need to resolve this issue in order to successfully 
reorganize and avoid liquidation.  CRH has experienced a period of extreme financial hardship 
due to Covid-19, while likely accruing overpayment liabilities that will need to be resolved in 
order to successfully reorganize and avoid liquidation.  If PVH and CRH were able to obtain PPP 
funds, those funds would provide needed liquidity and would facilitate their efforts to reorganize.  
PPP funds would not be the sole determinant of a successful exit from chapter 11, but the funds 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 6 of 31    PageID #: 6

 
7 
would enhance those prospects.  Due to the forgivable nature of PPP loans, participation in the 
PPP would assist PVH and CRH sustain their respective business operations and exit from 
chapter 11.    
III. 
Jurisdiction & Judicial Power. 
 
Although the complaint lists four separate counts, there are only two substantive claims 
here:  a claim under 11 U.S.C. § 525 (“section 525”) and a claim under the Administrative 
Procedure Act (the “APA”).  Beyond these two claims, the complaint identifies and requests 
various types of remedies.  The substantive claims either arise under the Bankruptcy Code or are 
related to a case under the Bankruptcy Code.  Gupta v. Quincy Med. Ctr., 858 F.3d 657, 663 (1st 
Cir. 2017) (observing that “related to” jurisdiction is “quite broad”); see also Pacor, Inc. v. 
Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (“The usual articulation of the test for determining 
whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding 
could conceivably have any effect on the estate being administered in bankruptcy.”).  As such, 
the District Court has subject matter jurisdiction over the parties’ disputes under 28 U.S.C. § 
1334(b). 
On the question of personal jurisdiction over the SBA generally, sovereign immunity 
presents little difficulty.  The federal government and its agencies are immune from suit in the 
absence of a waiver.  Dep’t of the Army v. Blue Fox, Inc., 525 U.S. 255, 260 (1999).  However, 
Congress has expressly waived and abrogated sovereign immunity “as to a governmental unit . . . 
with respect to” section 525, 11 U.S.C. § 106(a)(1), permitting the court to “hear and determine 
any issue arising with respect to the application” of section 525 to a governmental unit, id. § 
106(a)(2).  In light of section 106, and because the SBA qualifies as a governmental unit under 
11 U.S.C. § 101(27), sovereign immunity does not preclude the exercise of jurisdiction over the 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 7 of 31    PageID #: 7

 
8 
SBA as to the Debtor’s claim under section 525.  The District Court also has personal 
jurisdiction over the SBA as to the Debtor’s claim under the APA.  See 5 U.S.C. § 702 
(providing that, in general, a person wronged, aggrieved, or adversely affected by agency action 
may obtain judicial review in federal court and secure a judgment against the United States).2 
These proceedings also raise a question about the exercise of judicial power, a question 
that goes beyond subject matter and personal jurisdiction.  As authorized by 28 U.S.C. § 157(a), 
the District Court has referred these proceedings to this Court.  See D. Me. LR 83.6(a).  But the 
existence of a reference from the District Court does not end the analysis.  By statute, this Court 
may hear and determine “core proceedings arising under title 11” and may enter “appropriate 
orders and judgments, subject to review under [28 U.S.C. § 158].”  28 U.S.C. § 157(b)(1).  This 
Court may also “hear a proceeding that is not a core proceeding but that is otherwise related to a 
case under title 11.”  Id. § 157(c)(1).  In such a proceeding (namely, a proceeding related to a 
case under Title 11), the Court “shall submit proposed findings of fact and conclusions of law to 
the district court,” unless the District Court has referred the matter to this Court with the consent 
of all parties.  Id. § 157(c)(1)-(2).  
 
  2    The sovereign immunity questions are a bit thornier when it comes to the remedies that might be 
available to a plaintiff wronged by the conduct of the United States or its agencies.  For example, the SBA 
contends that 15 U.S.C. § 634(b) renders the Court powerless to enjoin it from conduct that violates 
section 525.  Although there is no need to reach this question or any of the other difficult questions 
relating to remedies, the Court does not believe that section 634(b) functions as the SBA contends.  See 
Ulstein Mar., Ltd. v. United States, 833 F.2d 1052, 1057 (1st Cir. 1987) (“The no-injunction language [of 
section 634(b)] protects the agency from interference with its internal workings by judicial orders 
attaching agency funds, etc., but does not provide blanket immunity from every type of injunction.”).  The 
Court is similarly unpersuaded by the SBA’s contention that money damages are not available for a 
violation of section 525.  There is little reason to believe that Congress intended to create such a toothless 
tiger.  Why should any governmental unit be licensed to engage in illegal bankruptcy discrimination, with 
the only remedies being declaratory or injunctive relief?  That crabbed view has two apparent flaws: it 
ignores the text of 11 U.S.C. § 105(a) and it would stymie the fresh start policy of bankruptcy.  Moreover, 
courts have not construed other sections of the Bankruptcy Code in a similarly effete manner.  See, e.g., 
Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 445 (1st Cir. 2000) (“[I]t is clear . . . that a bankruptcy 
court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and order 
damages . . . if the merits so require.”). 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 8 of 31    PageID #: 8

 
9 
A proceeding to determine whether a governmental unit has violated section 525 arises 
under the Bankruptcy Code and fits within the statutory definition of “core proceedings.”  See 28 
U.S.C. § 157(b)(2).  However, the Constitution imposes limits on the exercise of judicial power 
and those limits cannot be altered by statute.  See generally Stern v. Marshall, 564 U.S. 462 
(2011) (concluding that bankruptcy court had statutory authority to enter judgment on a common 
law tort claim but lacked constitutional authority to do so).  As a general matter, whether the 
Constitution presents an impediment to this Court’s exercise of judicial power with respect to 
certain proceedings is an exceedingly complex question with no clear answer.  With respect to 
the Debtor’s section 525 claim, the Court need not grapple with the question for one simple 
reason:  the SBA has knowingly and voluntarily consented to the entry of judgment on the 
Debtor’s claim under section 525.  See Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665 
(2015) (holding that Article III is not violated when the parties knowingly and voluntarily 
consent to the bankruptcy court’s adjudication of claims for which the parties are constitutionally 
entitled to an Article III adjudication).   
That said, the Debtor’s complaint ventures far beyond the confines of the Bankruptcy 
Code, asserting a claim under the APA.  In that sense, this proceeding is not one arising in or 
arising under the Bankruptcy Code, but rather is one related to a case under the Bankruptcy 
Code.  It is not a core proceeding and the SBA has not provided consent beyond that relating to 
section 525.  As a result, the Court is constrained to issue proposed findings of fact and 
conclusions of law.  See 28 U.S.C. § 157(c).3   
 
  3    Although one of the Debtor’s claims is core and the SBA has consented to entry of judgments and 
orders on that claim, the Court is nevertheless making proposed findings and conclusions with respect to 
the complaint in its entirety.  Any attempt to issue proposed findings and conclusions on one aspect of the 
complaint, along with a final judgment subject to appeal under 28 U.S.C. § 158 on other aspects, would 
create unnecessary procedural complexity. 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 9 of 31    PageID #: 9

 
10 
IV. 
Proposed Conclusions. 
a. Administrative Procedure Act.  
The Debtor seeks a declaratory judgment that: (i) the CARES Act does not prohibit, and 
in fact requires, the SBA to consider its PPP application on the same terms as other entities that 
are not presently debtors in bankruptcy; and (ii) the Administrator exceeded her statutory 
authority in promulgating a rule and an application form that exclude those who are presently 
debtors in bankruptcy from the pool of applicants eligible for PPP loans.  Although the pleading 
does not invoke any particular statute, the request for a determination that the Administrator 
exceeded her authority falls within the umbrella of the APA, which provides for judicial review 
of whether an agency’s action is contrary to law in either procedure or substance.  See Union of 
Concerned Scientists v. Wheeler, 954 F.3d 11, 19 (1st Cir. 2020) (citing 5 U.S.C. § 706(2)).   
Specifically, the APA provides that a reviewing court shall interpret statutory provisions 
and “set aside agency action . . . found to be . . . arbitrary, capricious, an abuse of discretion, or 
otherwise not in accordance with law [or] . . . in excess of statutory . . . authority[.]”  5 U.S.C. § 
706(2)(A) & (C).  In Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the 
Supreme Court articulated the following two-part framework for a court called upon to review an 
agency’s interpretation of a statute: 
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.   
 
The power of an administrative agency to administer a congressionally created . . . 
program necessarily requires the formulation of policy and the making of rules to 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 10 of 31    PageID #: 10

 
11 
fill any gap left, implicitly or explicitly, by Congress.  If Congress has explicitly 
left a gap for the agency to fill, there is an express delegation of authority to the 
agency to elucidate a specific provision of the statute by regulation.  Such 
legislative regulations are given controlling weight unless they are arbitrary, 
capricious, or manifestly contrary to the statute.  Sometimes the legislative 
delegation to an agency on a particular question is implicit rather than explicit.  In 
such a case, a court may not substitute its own construction of a statutory 
provision for a reasonable interpretation made by the administrator of an agency. 
 
Id. at 842-44 (footnotes omitted) (quotation marks omitted).  When a court detects a clear and 
unambiguous answer from Congress, the court should not proceed to the second part of the 
analytical framework.  See Pereira v. Sessions, 138 S. Ct. 2105, 2113 (2018).   
However, if Congress’ intentions are unclear, the Court proceeds to the second step of the 
analysis, characterized by some amount of deference to the agency’s interpretations.  See 
Chevron, 467 U.S. at 844.  “The fair measure of deference to an agency administering its own 
statute has been understood to vary with circumstances, and courts have looked to the degree of 
the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness of 
the agency’s position[.]”  United States v. Mead Corp., 533 U.S. 218, 228 (2001) (footnotes 
omitted).  “The approach has produced a spectrum of judicial responses, from great respect at 
one end, to near indifference at the other[.]”  Id. (citations omitted).  In the second step of the 
analysis, if an administrative interpretation “represents a reasonable accommodation of 
conflicting policies that were committed to the agency’s care by the statute, [the court] should 
not disturb it unless it appears from the statute or its legislative history that the accommodation is 
not one that Congress would have sanctioned.”  Chevron, 467 U.S. at 845 (quotation marks 
omitted).   
With this framework in place, the questions raised by the Debtor’s APA claim come into 
sharper relief.  First, did Congress directly address whether debtors in bankruptcy are eligible to 
participate in the PPP?  Stated differently, did Congress explicitly or implicitly leave a gap for 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 11 of 31    PageID #: 11

 
12 
the SBA to fill in determining whether debtors in bankruptcy are eligible?  If there is a gap in the 
statute, does the SBA’s exclusion of debtors in bankruptcy from the PPP reflect a “reasonable 
accommodation of conflicting policies” committed to the SBA’s care?  If yes, is this an 
accommodation that Congress would have sanctioned?  To answer these questions, consideration 
of the text of the CARES Act and the powers and duties expressly conferred on the 
Administrator with respect to the PPP is necessary. 
i. The CARES Act.  
The CARES Act was enacted in late March 2020 in response to a global pandemic that 
had, at that time, begun tightening its grip on almost every aspect of American life.  The CARES 
Act contains six titles, but the parties’ dispute finds its footing in Title I, the Keeping American 
Workers Paid and Employed Act.  One way that Congress sought to keep American workers paid 
and employed is the PPP, a program designed to help small businesses meet the challenges 
caused by the various responses, both governmental and individual, to the pandemic.4  The PPP 
is, in a manner of speaking, a lifeline for small business in this country.  
At its core, the PPP provides that:   
Except as otherwise provided in this paragraph, the Administrator may guarantee 
covered loans under the same terms, conditions, and processes as a loan made 
under this subsection. 
 
15 U.S.C. § 636(a)(36)(B).  The term “covered loan” is a critical term that permeates the statute.  
An “eligible recipient” is “an individual or entity that is eligible to receive a covered loan[.]”  Id. 
§ 636(a)(36)(A)(iv).  In a section titled “Increased eligibility for certain small businesses and 
organizations,” the PPP expands the universe of eligible recipients beyond “small business 
 
  4    The PPP has been codified at 15 U.S.C. § 636(a)(36).  Other parts of the CARES Act have also been 
codified. See, e.g., 15 U.S.C. § 9005.  In these proposed conclusions, the Court cites the codification of 
the CARES Act rather than the public law.   
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 12 of 31    PageID #: 12

 
13 
concerns” in at least two respects.  Id. § 636(a)(36)(D)(i)-(ii).  In pertinent part, subparagraph 
(D) explains that “[d]uring the covered period. . . any business concern . . . shall be eligible to 
receive a covered loan” if it employs no more than the greater of 500 employees or, “if 
applicable, the size standard in number of employees established by the Administration for the 
industry” in which the business operates.  Id. § 636(a)(36)(D)(i).   
Subparagraph (F), entitled “Allowable uses of covered loans[,]” begins by identifying, in 
general, the allowable uses of the proceeds of a covered loan.  Id. § 636(a)(36)(F)(i).  It 
continues with an express delegation of authority from the SBA to lenders:  “For purposes of 
making covered loans . . ., a lender approved to make loans under [section 636(a)] shall be 
deemed to have been delegated authority by the Administrator to make and approve covered 
loans, subject to [section 636(a)(36)].”  Id. § 636(a)(36)(F)(ii)(I).  When evaluating the eligibility 
of a borrower for a covered loan, lenders must consider whether the borrower was in operation 
on February 15, 2020 and had employees for whom the borrower paid salaries or paid 
independent contractors.  Id. § 636(a)(36)(F)(ii)(II).  This consideration is logically tied to the 
eligibility criteria in section 636(a)(36)(D)(i).   
 
By enacting the CARES Act, Congress granted the Department of the Treasury authority 
to include in the PPP lenders that do not already participate in other SBA lending programs.  15 
U.S.C. § 9008(b).  The CARES Act further provides that the Secretary of the Treasury “may 
issue regulations and guidance as necessary . . . to”: “(A) allow additional lenders to originate 
loans under this section; and (B) establish terms and conditions for loans under this section, 
including terms and conditions concerning compensation, underwriting standards, interest rates, 
and maturity.”  15 U.S.C. § 9008(d)(1).  Such terms and conditions are, “to the maximum extent 
practicable,” to be “consistent with the terms and conditions required” by, among other things, 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 13 of 31    PageID #: 13

 
14 
15 U.S.C. § 636(a)(36)(D), the eligibility provision discussed above.  With guidance from the 
Secretary, the Administrator is tasked with administering the program established by 15 U.S.C. § 
9008, a statute that refers specifically to the PPP.  Id. § 9008(h).  The Administrator is also given 
authority to issue regulations to carry out Title I of the CARES Act without regard to the notice 
requirements that might otherwise apply.  15 U.S.C. § 9012. 
The CARES Act nestled the PPP into 15 U.S.C. § 636(a), which contains the terms 
generally applicable to lending under section 7(a) of the Small Business Act.  Certain provisions 
of section 636(a) were expressly modified as to PPP loans, including the SBA’s “participation” 
(i.e., the extent of the SBA’s guarantee).  Compare 15 U.S.C. § 636(a)(2)(A) (providing for SBA 
participation of 75 percent on a loan in excess of $150,000 and 85 percent on a loan less than or 
equal to $150,000), with id. § 636(a)(2)(F) (providing for SBA participation in PPP loans of 100 
percent).  Other parts of section 636(a) were left unaltered as to PPP loans; subparagraph (B) of 
the PPP provides that except as otherwise provided in paragraph (36), “the Administrator may 
guarantee covered loans under the same terms, conditions, and processes as a loan made under 
this subsection.”  Id. § 636(a)(36)(B).  Paragraph (36) did not “provide otherwise” or expressly 
modify section 636(a)(6), which requires (subject to certain qualifications not relevant here), that 
all loans made under subsection (a) “shall be of such sound value or so secured as to reasonably 
assure repayment[.]”  Id. § 636(a)(6). 
ii.    The SBA’s PPP Eligibility Rules. 
As described above, the CARES Act itself established certain eligibility parameters for 
participation in the PPP.  15 U.S.C. § 636(a)(36)(D).  The Administrator, through regulations, 
added to those parameters, explaining that an applicant would be ineligible if: 
i. You are engaged in any activity that is illegal under Federal, state, or local law; 
ii. You are a household employer . . .; 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 14 of 31    PageID #: 14

 
15 
iii. An owner of 20 percent or more of the equity of the applicant is incarcerated, 
on probation, on parole; presently subject to an indictment, criminal information, 
arraignment, or other means by which formal criminal charges are brought in any 
jurisdiction; or has been convicted of a felony within the last five years; or 
iv. You, or any business owned or controlled by you or any of your owners, has 
ever obtained a direct or guaranteed loan from SBA or any other Federal agency 
that is currently delinquent or has defaulted within the last seven years and caused 
a loss to the government. 
 
See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 
20811 § III(2)(b) (April 15, 2020) (to be codified at 13 C.F.R. pt. 120).  The Administrator also 
altered, as to PPP applicants, some of its preexisting eligibility rules for participation in SBA 
loan programs which are codified at 13 C.F.R. 120.110.  For example, the SBA waived a rule 
that would otherwise prohibit a business owned by a director or shareholder of a PPP lender from 
applying for a PPP loan through that lender based on a recognition that, “unlike other SBA loan 
programs, the financial terms for PPP Loans are uniform for all borrowers, and the standard 
underwriting process does not apply because no creditworthiness assessment is required for PPP 
Loans.”  Business Loan Program Temporary Changes; Paycheck Protection Program—
Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, 85 Fed. Reg. 
21747 § III(2)(a) (April 20, 2020) (to be codified at 13 C.F.R. pt. 120).  Instead of the standard 
underwriting process, the SBA implemented a “streamlin[ed]” process to “provide relief to 
America’s small businesses expeditiously.”  See 85 Fed. Reg. 20811 § III(1)   
 
The rule specifically challenged by the Debtor here provides as follows: 
 
4. Eligibility of Businesses Presently Involved in Bankruptcy Proceedings 
 
Will I be approved for a PPP loan if my business is in bankruptcy? 
 
No.  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.  If the applicant 
or the owner of the applicant becomes the debtor in a bankruptcy proceeding after 
submitting a PPP application but before the loan is disbursed, it is the applicant’s 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 15 of 31    PageID #: 15

 
16 
obligation to notify the lender and request cancellation of the application.  Failure 
by the applicant to do so will be regarded as a use of PPP funds for unauthorized 
purposes.   
 
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 nonrepayment of unforgiven loans.  In 
addition, the Bankruptcy Code does not require any person to make a loan or a 
financial accommodation to a debtor in bankruptcy.  The Borrower Application 
Form for PPP loans (SBA Form 2483), which reflects this restriction in the form 
of a borrower certification, is a loan program requirement.  Lenders may rely on 
an applicant’s representation concerning the applicant’s or an owner of the 
applicant’s involvement in a bankruptcy proceeding. 
 
Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—
Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450 § III(4) (April 
28, 2020) (to be codified at 13 C.F.R. pts. 120-121).   
 
 
iii. 
Legality of the Bankruptcy Exclusion Under the APA. 
 
The Debtor contends that Congress, by statutory fiat, eliminated the SBA’s discretion in 
administering the PPP.  Specifically, the Debtor posits that the eligibility provisions of 15 U.S.C. 
§ 636(a)(36)(D) override any discretion inherent in the word “may” as featured in 15 U.S.C. § 
636(a)(36)(B), and preclude any action by the Administrator that shrinks the pool of eligible 
applicants specified in the statute.  There is support for the Debtor’s perspective.  See, e.g., DV 
Diamond Club of Flint, LLC v. U.S. Small Bus. Admin., --- F. Supp. 3d ---, 2020 WL 2315880, 
at *10 (E.D. Mich. May 11, 2020) (discussing section 636(a)(36)(D) and concluding that “the 
text of the PPP makes clear that every business concern meeting the statutory criteria is eligible 
for a PPP loan during the covered period”).  Although this interpretive theory has some appeal, it 
puts too much emphasis on certain words in isolation (“shall” and “may”) while ignoring the 
critical concept of “eligibility.”  In common parlance, the word “eligible” carries a connotation 
of choice.  See Webster’s II New University Riverside Dictionary 425 (Anne H. Soukhanov & 
Kaethe Ellis eds., 1984).  The Court does not believe that Congress would have infused the PPP 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 16 of 31    PageID #: 16

 
17 
with concept of “eligibility” if the intention was for the SBA to have no ability to choose which 
individuals and businesses would benefit from loan guarantees.  Congress did not explicitly say 
whether debtors in bankruptcy are categorically excluded from the PPP.  Congress did exclude 
debtors from another form of economic aid described in the CARES Act.  See 15 U.S.C. § 
9042(c)(3)(D)(i)(V).  This exclusion does not tip the scales one way or the other when it comes 
to the PPP.  See United States v. Granderson, 511 U.S. 39, 63 (1994) (Kennedy, J., concurring) 
(explaining that presumption that Congress acts intentionally when it includes particular 
language in one part of a statute but omits it in another “loses some of its force when the sections 
in question are dissimilar and scattered at distant points of a lengthy and complex enactment”).  
It does, however, suggest that Congress intended the SBA to fill a statutory gap and determine 
whether debtors in bankruptcy would be eligible for the PPP.  As a result, in evaluating the APA 
claim, the Court proceeds to the second step of the Chevron framework.   
The SBA defends the bankruptcy exclusion as a proper exercise of its rulemaking 
function.  In the SBA’s view, Congress defined the universe of “eligible recipients” but left the 
SBA free to choose among those recipients when utilizing the guaranty authority appropriated 
for the PPP.  That act of choosing, says the SBA, is a prototypical exercise of discretion that 
should not be set aside by the Court based on its own policy judgments.  The Court agrees.   
The SBA’s bankruptcy exclusion was a reasonable effort to accommodate the conflicting 
policies committed to the SBA’s care, and one that Congress might reasonably have sanctioned.  
Many approaches could have been taken when determining whether and under what 
circumstances a debtor in bankruptcy might be approved for a PPP loan.  The SBA could have 
determined that any debtor could participate in the PPP if authorized by the bankruptcy court.  
The SBA could have excluded chapter 7 debtors, but not debtors in other chapters; or some 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 17 of 31    PageID #: 17

 
18 
chapter 11 debtors, but not others.  None of these approaches alter the reality that the SBA had 
very little time to implement this program and that standard underwriting would have been 
impractical.  Under the circumstances, in light of Congress’ intent to see the PPP funds 
distributed quickly, the SBA relaxed its underwriting standards.  The SBA did not, however, 
eliminate all underwriting; viewed together, the questions on SBA Form 2483 represent at least a 
minimal effort to learn something about whether a covered loan will be repaid if not forgiven. 
Despite the Debtor’s assertions and notwithstanding some of the preliminary 
determinations made in the TRO, the PPP is a loan program; it is not merely a grant of aid.  
Certain features of PPP loans make them highly desirable from a borrower’s perspective—most 
notably the prospect of debt forgiveness.  And there are many other features that distinguish PPP 
loans from section 7(a) loans.5  But, a distribution of PPP funds initially assumes the form of a 
loan.  Congress knows how to distribute aid without strings attached and, in fact, did so recently.  
See, e.g., 26 U.S.C. § 6428(a) (amending the IRC to provide so-called “recovery rebates” as tax 
credits for certain individuals in the wake of Covid-19).  With the PPP, however, Congress 
elected to establish a loan program, albeit one that does not look like any other loan program 
available from the government or the capital markets.  These loans may function as a grant of aid 
during a crisis, but they are still—at least at their inception—loans. 
Given the nature of the PPP, the reasonableness of the SBA’s underwriting efforts, 
however truncated—or, to use the SBA’s term, “streamlined”—becomes clear.  Until a debt 
 
  5    For example, compare 15 U.S.C. § 636(a)(18), addressing guarantee fees for section 7(a) loans, and 
15 U.S.C. § 636(a)(36)(H), waiving the guarantee fees.  There are other differences as well, including 
interest rate, loan term, prepayment penalties and deferment of principal payments.  These distinctions in 
the financial terms are likely what Congress had in mind when, in 28 U.S.C. § 636(a)(36)(B), it wrote 
“Except as otherwise provided in [28 U.S.C. § 636(a)(36)] . . . .”  To this extent, this Court parts ways 
with DV Diamond Club of Flint, LLC v. U.S. Small Bus. Admin., --- F. Supp. 3d ---, 2020 WL 2315880, 
(E.D. Mich. May 11, 2020). 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 18 of 31    PageID #: 18

 
19 
evidenced by a PPP note is forgiven in accordance with the law, the holder of the note and a 
guarantor are rightfully concerned about the maker’s ability to satisfy the debt.  This is true 
whether or not the note bears a low, fixed rate of interest, and it is even more true where, as here, 
there is no collateral for the debt and no personal guarantee supporting the obligation.  See 15 
U.S.C. § 636(a)(36)(J), (L).  Perhaps a person’s status as a debtor presently involved in 
bankruptcy is a crude measure of creditworthiness, but it is still a measure.6 
The Debtor may counter all of this by observing that Congress expressly delegated 
eligibility consideration to lenders, see 15 U.S.C. § 636(a)(36)(F)(ii), and that lenders, not the 
SBA, are imbued with the discretion to make covered loans.  Wrapping it all together, the Debtor 
might say that Congress expanded the universe of eligible recipients and then instructed lenders, 
not the SBA, to make decisions about how to choose among those recipients.  The difficulty with 
that line of attack is that it only looks at the loan, and not the guaranty which, as noted above, is a 
full guaranty of an unsecured loan without any supporting obligation and with minimal 
underwriting on the front end.  The PPP was constructed on the strength of the public fisc, and it 
would be counterintuitive to assume that the lenders—who one can assume are taking very little 
risk—were given all of the discretion that Congress contemplated when it said that the SBA 
“may” guarantee a covered loan.   
 
 
 
  6    Characterizing the PPP as a loan program is reconcilable with the SBA rule that states that “no 
creditworthiness assessment is required” when that particular language is taken in context.  See 85 Fed. 
Reg. 21747 § III(2)(a).  The rule permits the director or shareholder of a PPP lender to obtain a PPP loan 
from that lender for an unrelated business concern in which that director or shareholder is involved, 
despite a regulation that would prohibit such a transaction as to other section 7(a) loans.  Id.  The rule 
reflects the reality that the underwriting process is so streamlined that a PPP lender has little ability to 
play favorites or to relax standards when it comes to an application submitted by a director or shareholder 
of the lender.  In any event, the “no creditworthiness assessment” language is too slender a reed to support 
the full weight of the Debtor’s argument when the entire program is considered.   
 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 19 of 31    PageID #: 19

 
20 
b. Section 525. 
 
The Debtor, like many others, believes that the SBA’s bankruptcy exclusion conflicts 
with the Bankruptcy Code’s prohibition on discrimination.  Invoking due process concepts and 
anti-discrimination laws for protected classes of persons, the Debtor sees a clear case of “ad hoc, 
unwarranted” discrimination prohibited by section 11 U.S.C. § 525(a).  Before examining the 
language of the statute, there is one overriding point that bears initial emphasis:  the federal 
government may discriminate against bankruptcy debtors, as long as the discrimination does not 
run afoul of 11 U.S.C. § 525(a) or (c).  Bankruptcy debtors simply do not enjoy the same level of 
protection from discrimination as constitutionally protected classes of persons.  With that in 
mind, the Court turns to the place where the analysis must begin, the text of the statute.   
In relevant part, section 525(a) provides: 
 
[A] governmental unit may not deny, revoke, suspend, or refuse to renew a 
license, permit, charter, franchise, or other similar grant to, condition such a grant 
to, discriminate with respect to such a grant against, deny employment to, 
terminate the employment of, or discriminate with respect to employment against, 
a person that is or has been a debtor under this title or a bankrupt or a debtor 
under the Bankruptcy Act, or another person with whom such bankrupt or debtor 
has been associated, solely because such bankrupt or debtor is or has been a 
debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been 
insolvent before the commencement of the case under this title, or during the case 
but before the debtor is granted or denied a discharge, or has not paid a debt that 
is dischargeable in the case under this title or that was discharged under the 
Bankruptcy Act.   
 
11 U.S.C. § 525(a).  Because the SBA is a governmental unit, 11 U.S.C. § 101(27), the Debtor is 
a person, 11 U.S.C. § 101(41), and the Debtor’s status as debtor in a case under Title 11 was the 
proximate cause of its exclusion from the PPP, see F.C.C. v. NextWave Personal 
Communications Inc., 537 U.S. 293, 301 (2003), the only question is whether this case involves 
a “license, permit, charter, franchise, or other similar grant” within the meaning of section 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 20 of 31    PageID #: 20

 
21 
525(a).  The question is formulated with relative ease, but finding the answer is more 
challenging.   
i. License, Permit, Charter, or Franchise.  
 
The words “license,” “permit,” “charter,” and “franchise” are not defined in the 
Bankruptcy Code, leaving the Court to search elsewhere for their meanings.  While some of 
these terms have different meanings in the commercial context, section 525(a) is only concerned 
with action by governmental units.  Accordingly, the critical terms must be evaluated in light of 
their meanings when used in the governmental context.  A “license” is a “revocable permission 
to commit some act that would otherwise be unlawful” or an “agreement . . . that it will be lawful 
for the licensee to . . . do some act that would otherwise be illegal, such as hunting game.”  
Black’s Law Dictionary 931 (7th ed. 1999).  A “permit” is a “certificate evidencing permission” 
or “a license.”  Id. at 1160.  A “charter” is an “instrument by which a governmental entity . . . 
grants rights, liberties, or powers to its citizens.”  Id. at 228.  And finally, the term “franchise” is 
defined as “[t]he right conferred by the government to engage in a specific business or to 
exercise corporate powers.”  Id. at 668.  Each of the enumerated items is a type of grant from a 
governmental actor that involves some permission for the holder of the grant to act in a particular 
way.  See Watts v. Pa. Hous. Fin. Co., 876 F.2d 1090, 1093 (3d Cir. 1989); see also Toth v. 
Mich. State Hous. Dev. Auth., 136 F.3d 477, 480 (6th Cir. 1998) (quoting Watts).  For example, 
a driver’s license is a permission to operate a motor vehicle on public roads.  That a “permit” 
necessarily involves a permission is axiomatic.  The terms “charter” and “franchise” have less 
obvious connections to permissions, but the concept is there nevertheless. 
The “permission” view of section 525(a) is sensible:  the government should not be able 
to erect barriers to the realization of a debtor’s fresh start solely because the debtor has availed 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 21 of 31    PageID #: 21

 
22 
itself of the right to a financial fresh start under federal law.  There would be little sense in any 
contrary view.  Withholding permission for a debtor to operate a motor vehicle solely because 
the debtor received a discharge would seriously undermine the debtor’s ability to earn a living.  
See Perez v. Campbell, 402 U.S. 637 (1971) (invalidating, under the Supremacy Clause, an 
Arizona law allowing the state to withhold a driver’s license from a person who received a 
discharge solely because that person did not pay a discharged debt).  But withholding a 
permission to engage in activity that is essential to the enjoyment of the benefits of a fresh start a 
la Perez is different from declining to provide assistance in the form of a loan on favorable terms 
(or even a grant of aid) that might be useful to obtaining a fresh start.   
The parties do not cite controlling authority applying section 525(a) to a loan.  That is 
understandable because, in general, a party cannot be forced to make a loan to a debtor.  See 11 
U.S.C. § 365(c)(2).  Although section 365(c)(2) is not directly applicable here because there is 
no prepetition contract to make a loan, the policy behind section 365(c)(2) supports an 
interpretation of section 525(a) that does not extend to loans.  As one court recently put it, the 
point may be attenuated, but it is nevertheless a valid consideration.  See Transcript of Hearing, 
Cosi, Inc. v. U.S. Small Bus. Admin. (In re Cosi, Inc.), Adv. Proc. 20-50591 (Bankr. D. Del. 
April 30, 2020), Dkt. No. 17.  
Perhaps recognizing that section 525(a) is not sufficiently elastic to be stretched to cover 
a loan, the Debtor argues that the PPP does not involve the provision of a loan.7  For the reasons 
explained above, the Court is unpersuaded:  the PPP creates a loan program.  The existence of 
favorable terms and a unique feature (namely, forgiveness under specified circumstances) does 
 
  7    The Debtor has consistently urged the Court to afford the Debtor the right to participate in the PPP.  
The request is couched in terms of a “right” and, less explicitly, a “permission” to participate.  Fair 
enough, but it is apparent that the Debtor’s ultimate goal is the money.  
 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 22 of 31    PageID #: 22

 
23 
not change the character of what the Debtor wants to obtain:  a loan that might be forgiven by the 
lender.  The Debtor makes much of the SBA’s concession that it does consider whether an 
applicant is likely to liquidate before providing a loan number for an application.  That does not, 
in the Court’s view, establish that the PPP is a “grant program” instead of a “loan program.”  
Instead, the SBA has recognized that, in these circumstances, there was insufficient time for 
traditional underwriting processes to be utilized.  The funds had to be deployed quickly, both 
because of the immediate needs of the recipients and their employees and because of the 
statutory deadlines.  
 But even if the Court were to conclude that the PPP establishes a grant program, the 
benefits of this particular program would not constitute a license or a franchise.8  There is no 
suggestion that the PPP would authorize the Debtor to undertake a particular act—an essential 
feature of a license—and the PPP would not confer a special privilege on the Debtor to engage in 
a specific business or exercise corporate power—an essential feature of a franchise.9   
ii. Other Similar Grant.  
 
The phrase “other similar grant” remains as the last arrow in the Debtor’s section 525 
quiver.  This arrow comes closer to the target, but, like the others, sails wide.  “Although the 
term ‘grant’ is not defined in the statute, the use of the word ‘similar’ limits the universe of 
‘grants’ to which § 525(a) applies, ensuring that only grants bearing a family resemblance to 
 
  8    The Debtor does not appear to contend that the PPP qualifies as a permit or a charter.   
 
  9    Some decisions take a broader view of the meaning of the term “franchise.”  For example, in 
Exquisito Services Inc. v. United States (In re Exquisito Services, Inc.), 823 F.2d 151 (5th Cir. 1987), the 
court concluded that the Air Force had violated section 525(a) by declining to exercise an option contract 
with a company to provide services solely because that company had filed for bankruptcy.  In so doing, 
the court reasoned that the contract was “essentially a franchise” because it fell under the umbrella of the 
SBA’s section 8(a) program, and the SBA would assist the company during the life of the contract.  Id. at 
154.  Because the court did explain how any governmental program that assists people amounts to a 
franchise, its decision carries limited persuasive force.   
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 23 of 31    PageID #: 23

 
24 
licenses, permits, charters, and franchises enjoy the anti-discrimination protections of the 
Bankruptcy Code.”  Ayes v. U.S. Dep’t of Veterans Affairs, 473 F.3d 104, 108 (4th Cir. 2006); 
see also Goldrich v. N.Y. Higher Educ. Servs. Corp. (In re Goldrich), 771 F.2d 28, 31 (2d Cir. 
1985) (noting that “Congress rejected a flat prohibition on any form of discrimination” and 
inferring that “Congress chose its words carefully”).  The question then becomes: how strongly 
must an item not specifically enumerated in the statute resemble the items enumerated in order to 
fall within the anti-discrimination ambit?  
Other courts have struggled to define the scope of section 525 based on its text.  See 
Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 88 (2d Cir. 2002) (“Despite more 
than twenty years of judicial consideration, . . . the scope of Section 525(a)’s protection in the 
context of public housing is still unsettled.”); Saunders v. Reeher (In re Saunders), 105 B.R. 781, 
787 (Bankr. E.D. Pa. 1989) (observing that “there has been understandable difficulty in defining 
the exact scope of this subsection given its language and legislative history”).  Some courts 
conclude that the common thread connecting licenses, permits, charters, and franchises is that all 
are “governmental authorizations that typically permit an individual to pursue some occupation 
or endeavor aimed at economic betterment.”  Ayes, 473 F.3d at 108.  Other courts observe that 
these enumerated items are all unrelated to credit, Goldrich, 771 F.2d at 30, and do not give rise 
to mutual obligations between the governmental unit and the individual, United States v. Cleasby 
(In re Cleasby), 139 B.R. 897, 900 (W.D. Wis. 1992).  Still others emphasize that licenses, 
permits, charters, franchises, and other similar grants are items “unobtainable from the private  
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 24 of 31    PageID #: 24

 
25 
sector and essential to a debtor’s fresh start.”  In re Soltz, 315 F.3d at 90; see also In re Saunders, 
105 B.R. at 787.10 
The varied interpretations of section 525(a), combined with the elasticity inherent in the 
word “similar,” might lead to the conclusion that section 525(a) is ambiguous.  In that case, 
resort to the legislative history, as a means of ascertaining the meaning of the words that 
Congress used, would be appropriate.  The House and Senate reports contain the following 
explanation:  
[Section 525] is an additional debtor protection.  It codifies the result of 
Perez v. Campbell, 402 U.S. 637 (1971), which held that a state would frustrate 
the congressional policy of a fresh start for a debtor if it were permitted to refuse 
to renew a drivers license because a tort judgment resulting from an automobile 
accident had been unpaid as a result of a discharge in bankruptcy.  
 
Notwithstanding any other laws, section 525 prohibits a governmental unit 
from denying, revoking, suspending, or refusing to renew a license, permit, 
charter, franchise, or other similar grant to, from conditioning such a grant to, 
from discrimination with respect to such a grant against, deny[ing] employment 
to, terminat[ing] the employment of, or discriminat[ing] with respect to 
employment against, a person that is or has been a debtor or that is or has been 
associated with a debtor.  The prohibition extends only to discrimination or other 
action based solely on the basis of the bankruptcy, on the basis of insolvency 
before or during bankruptcy prior to a determination of discharge, or on the basis 
of nonpayment of a debt discharged in the bankruptcy case (the Perez situation).  
It does not prohibit consideration of other factors, such as future financial 
responsibility or ability, and does not prohibit imposition of requirements such as 
net capital rules, if applied nondiscriminatorily. 
 
In addition, the section is not exhaustive.  The enumeration of various 
forms of discrimination against former bankrupts is not intended to permit other 
forms of discrimination.  The courts have been developing the Perez rule.  This 
section permits further development to prohibit actions by governmental or quasi-
governmental organizations that perform licensing functions, such as a state bar 
association or a medical society, or by other organizations that can seriously 
 
  10    The Saunders court characterized section 525(a) as covering certain “property interests not 
obtainable through the private sector.”  105 B.R. 781, 787 (Bankr. E.D. Pa. 1989).  This Court is skeptical 
of the notion that the items enumerated in section 525(a) amount to “property interests” in all 
circumstances.  The Saunders court also concluded that, even if section 525(a) had been violated, no 
award of money damages was authorized.  Id. at 788.  In these two respects, Saunders is not convincing.   
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 25 of 31    PageID #: 25

 
26 
affect the debtors’ livelihood or fresh start, such as exclusion from a union on the 
basis of discharge of a debt to the union’s credit union. 
 
The effect of the section, and of further interpretations of the Perez rule, is 
to strengthen the anti-reaffirmation policy found in section 524(b).  
Discrimination based solely on nonpayment could encourage reaffirmations, 
contrary to the expressed policy. 
 
The section is not so broad as a comparable section proposed by the 
bankruptcy commission . . . which would have extended the prohibition to any 
discrimination, even by private parties.  Nevertheless, it is not limiting either, as 
noted.  The courts will continue to mark the contours of the anti-discrimination 
provision in pursuit of sound bankruptcy policy. 
 
H.R. Rep. 95-595, at 366-67 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6322-23; S. Rep. 95-
989, at 81 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5867.  The House report also contains 
further explanation of the genesis of section 525:  
 The bill [that became section 525(a)] codifies [an] important debtor 
protection, first enunciated by the Supreme Court in 1971 in the case of Perez v. 
Campbell.  In that case, Arizona refused to renew a drivers license because the 
driver had been in an automobile accident, had been sued as a result, and lost.  
The driver was uninsured.  He filed bankruptcy and the tort judgment was 
discharged.  Arizona had a general policy forbidding a drivers license to any 
motorist that failed to pay a tort judgment arising out of an automobile accident.  
The Supreme Court held that if such policy were applied to include nonpayment 
by reason of a discharge in bankruptcy, the policy would run afoul of the federal 
bankruptcy policy of ensuring the debtor in a bankruptcy case a fresh start.  The 
court ordered the license issued. 
 
Similar discrimination has occurred in other areas as well.  Municipalities 
have occasionally dismissed employees such as foremen or policemen because of 
a bankruptcy.  Nonpayment of a debt to a credit union has occasionally resulted in 
loss of a job.  Various state and federal laws automatically deny certain licenses to 
an individual solely on the basis of a bankruptcy. 
 
These practices are seriously detrimental to a debtor’s fresh start, and are 
contrary to bankruptcy policy.  The courts have followed the Perez doctrine in 
some of these instances, and have restored bankruptcy to positions from which 
they were excluded because of the bankruptcy.  The doctrine is a developing 
doctrine, and its precise ultimate contours are not yet clear.  More case law will 
undoubtedly develop the extent of the discrimination that is contrary to 
bankruptcy policy. 
 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 26 of 31    PageID #: 26

 
27 
Nevertheless, the bill [that became section 525(a)] codifies one important 
aspect of the protection against discriminatory treatment . . . prohibit[ing] action 
by a governmental agency, that is based solely on the basis of a filing under . . . 
the Bankruptcy Code.  The prohibition does not extend so far as to prohibit 
examination of the factors surrounding the bankruptcy, the imposition of financial 
responsibility rules if they are not imposed only on former bankrupts, or the 
examination of prospective financial condition or managerial ability.  The purpose 
of the section is to prevent an automatic reaction against an individual for availing 
himself of the protection of the bankruptcy laws.  Most bankruptcies are caused 
by circumstances beyond the debtor’s control.  To penalize a debtor by 
discriminatory treatment as a result is unfair and undoes the beneficial effects of 
the bankruptcy laws.  However, in those cases where the causes of a bankruptcy 
are intimately connected with the license, grant, or employment in question, an 
examination into the circumstances surrounding the bankruptcy will permit 
governmental units to pursue appropriate regulatory policies and take appropriate 
action without running afoul of bankruptcy policy. 
 
H.R. Rep. 95-595, at 165 (footnotes omitted).   
To the extent that the text of section 525(a) provides some wiggle room, and to the extent 
that the legislative history encourages courts to continue to develop the Perez rule, the PPP 
nevertheless fails to qualify as an item protected by the anti-discrimination provision.  The 
exclusion of persons involved in bankruptcy from the PPP does not conflict with the fresh start 
or otherwise frustrate the operation of the Bankruptcy Code.  See generally Perez, 402 U.S. at 
649-51 (analyzing whether a state statute was in conflict with the Bankruptcy Code’s fresh start 
policy or otherwise frustrated the operation of the Code).  The examples of prohibited 
discrimination that might fall within the expanded ambit of section 525(a) identified in the 
legislative history relate to restrictions on a debtor’s affiliations or activities that would render it 
very difficult if not impossible for a debtor to pursue his or her chosen livelihood.  In these 
proceedings, the exclusion of the Debtor from the PPP is not similar to denying a debtor a license 
to operate in his chosen field and thereby denying the debtor the opportunity to pursue economic 
betterment.  There is no question that the Debtor is experiencing serious financial hardship in the 
current circumstances and some of that may be attributable to the Debtor’s decision to follow 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 27 of 31    PageID #: 27

 
28 
governmental recommendations designed to protect the public health.  Despite its severity, that 
financial stress was not caused by the SBA’s decision to exclude the Debtor from the PPP.  It 
may be harder for the Debtor to confirm a plan of reorganization without the PPP funds, but that 
difficulty itself does not render the Administrator’s decision to exclude debtors from the PPP a 
violation of section 525.  See Jasper v. Bowdoinham Fed. Credit Union (In re Jasper), 325 B.R 
50, 54 (Bankr. D. Me. 2005) (holding that denial of “check cashing privileges, ATM 
transactions, online banking, minimum account balances and the like” did not violate section 
525(a) even though the debtors would likely pay more for these services in the commercial 
marketplace).   
The PPP is not a grant that is similar to a license, permit, charter, or franchise.  The PPP 
is not a permission granted by the government to allow persons to engage in economic activity; it 
is a government-guaranteed program of credit extension on generous terms with forgiveness 
features intended to aid small businesses and incentivize them to retain employees during an 
unprecedented economic downturn.  Whether this program is properly characterized as a loan or 
a grant, it is ultimately a form of “financial assistance [that] does not constitute a ‘similar grant’ 
within the scope of § 525.”  See In re Cleasby, 139 B.R. at 900.  
iii. The Broader View of Section 525.  
 
Armed with both textual argument and policy-based arguments, the Debtor has advanced 
its view that SBA’s bankruptcy exclusion violates section 525.  Despite the appeal of that theory, 
the caselaw that adopts a broader view of section 525 is either distinguishable or unpersuasive.  
For example, Rose v. Connecticut Housing Authority (In re Rose), 23 B.R. 662 (Bankr. D. Conn. 
1982) contains a cogent discussion of section 525 and the Congressional purpose animating that 
section, as well as a survey of cases in this subject.  However, Rose does not offer a persuasive 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 28 of 31    PageID #: 28

 
29 
explanation of how mortgage financing fits within the actual text of the statute adopted by 
Congress.  Hillcrest Foods, Inc. v. Briggs (In re Hillcrest Foods, Inc.), 10 B.R. 579 (Bankr. D. 
Me. 1981) is similarly unhelpful to the Debtor.  Hillcrest concluded preliminarily, and without 
discussion, that a debtor’s ability to self-insure for worker’s compensation fell within the 
protection of section 525(a).  Id. at 579-80.  There was, in Hillcrest, a “permission” (namely, 
permission to self-insure) that is not present with a loan program.   
Stinson v. BB & T Investment Services, Inc. (In re Stinson), 285 B.R. 239 (Bankr. W.D. 
Va. 2002), relied on by the Debtor, is consistent with the interpretive approach employed here.  
In Stinson, the court held that section 525(b) does not extend to a private employer’s refusal to 
hire a person solely because that person had been a debtor or received a discharge.  Id. at 250.  
That conclusion was based on the words used in section 525(a)—which extends to a denial of 
employment by a governmental unit—in comparison to the words used in section 525(b)—which 
does not expressly extend to a denial of employment by a private employer.  See id. at 247-48.  
Stinson is a useful illustration of a court sticking to the words of the statute, even though the 
purpose of the statute might have been promoted by the debtor’s preferred interpretation of 
section 525(b).  See id. at 247. 
The Debtor fares better with its citation to In re The Bible Speaks, 69 B.R. 368 (Bankr. 
D. Mass. 1987), where the court concluded that a school’s ability, under a federal statute, to offer 
unaccredited courses and to have students receive tuition subsidies was analogous to a license or 
franchise and constituted an “other similar grant.”  The problem, however, with The Bible 
Speaks and other similar cases is that they stretch the key terms in the statute too far.  Congress 
did not impose a flat prohibition on bankruptcy discrimination by governmental units (although 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 29 of 31    PageID #: 29

 
30 
doing so would have been entirely consistent with sound bankruptcy policy).11  The very words 
on the page indicate a limitation.  In its supplemental memorandum in support of its motion for a 
TRO, the Debtor protests that “the government cannot bar a debtor from applying for a 
government program solely because of the person’s status as a bankruptcy debtor.”  But that is 
not what section 525(a) says.  It does not bar discrimination with respect to all “government 
programs,” but instead uses more limited terms. 
A final note about the caselaw cited by the Court in the TRO:  although the Court cited 
Stoltz, that decision is not binding.  Further, even if the Court were to find Stoltz persuasive and 
follow it here, the PPP would not qualify as an “other similar grant” under the reasoning 
employed by the Second Circuit.  In Stoltz, the court concluded that public housing leases are 
items protected by section 525(a) because: (a) a lease is a type of grant and (b) public housing 
leases are similar to the items enumerated in the statute because they are items conferred only by 
the government and are essential to a debtor’s fresh start.  315 F.3d at 89-90.  By contrast, a PPP 
loan is not a grant and even if it were, the Court cannot conclude on this record that it is essential 
to the Debtor’s fresh start; it might be helpful but there has been no showing that it is necessary.  
In fact, the dissenting opinion in Stoltz contains what this Court believes is the better view of 
section 525, both in terms of a textual analysis and in terms of making sense of section 525 in 
light of the other parts of the Bankruptcy Code.  See generally Stoltz, 315 F.3d at 95-97.  
 
  11    In fact, when the Commission on the Bankruptcy Law of the United States published its 
recommendations to Congress in 1973, it proposed the enactment of a law providing that “[a] person shall 
not be subjected to discriminatory treatment because he, or any person with whom he is or has been 
associated, is or has been a debtor or has failed to pay a debt discharged in a case under the Act.”  H. R. 
Doc. No. 93-137, pt. 2, at 143-44 (1973).  A reform bill drafted by the National Conference of 
Bankruptcy Judges was nearly identical.  In response to a hue and cry about the breadth of the proposals, 
Congress altered the language, ultimately settling on the text of section 525(a) that is currently in effect.   
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 30 of 31    PageID #: 30

 
31 
V. 
Conclusion. 
Based on these proposed findings and conclusions, judgment should enter in favor of the 
SBA and against the Debtor on all counts of the Debtor’s complaint.   
 
 
Date: June 3, 2020 
 
 
 
 
 
_______________________ 
 
 
 
 
 
 
 
 
Michael A. Fagone 
 
 
 
 
 
 
 
 
United States Bankruptcy Judge 
 
 
 
 
 
 
 
 
District of Maine 
Case 1:20-mc-00148-JDL   Document 1   Filed 07/02/20   Page 31 of 31    PageID #: 31

File and source

File

penobscot_calais_consolidated__docket-17321437__doc-1__id-138355175__document.pdf

Size

404,809 bytes

SHA-256

cd2237c599d074a58286a9d3809db86b68cfa691340f25f9f22a70dca235f53f

Our copy

penobscot_calais_consolidated__docket-17321437__doc-1__id-138355175__document.pdf

Original

storage.courtlistener.com