Order — Penobscot Valley Hospital, et al. v. Jovita Carranza (SBA) (D. Me.)

Record facts

U.S. District Court for the District of Maine · No. 1:20-mc-00148-JDL · Doc. 14 · 2020-07-31 · Docket on CourtListener

Full text

UNITED STATES DISTRICT COURT 
DISTRICT OF MAINE 
 
PENOBSCOT VALLEY HOSPITAL, 
) 
et al.,  
 
 
 
 
 
) 
 
 
 
 
 
 
 
) 
Plaintiffs,  
 
 
 
) 
 
 
 
 
 
 
 
) 
 
 
 
v. 
 
 
 
)  1:20-mc-00148-JDL 
 
 
 
 
 
 
 
)   
JOVITA CARRANZA, in her   
 
) 
Capacity as Administrator for the  
) 
United States Small Business 
 
) 
Administration,  
 
 
 
) 
 
 
 
 
 
 
 
) 
Defendant.  
 
 
 
) 
 
ORDER 
 
In this consolidated bankruptcy proceeding, Penobscot Valley Hospital and 
Calais Regional Hospital, both non-profit organizations and debtors in possession in 
chapter 11 bankruptcy cases, initiated adversary proceedings challenging the denial 
of their loan applications under the Paycheck Protection Program (“PPP”), 15 
U.S.C.A. § 636(a)(36), which was established by the Coronavirus Aid, Relief, and 
Economic Security Act (“CARES Act”), Pub. L. No. 116-136, 134 Stat. 281 (2020).  The 
PPP is subject to administration by the U.S. Small Business Administration (“SBA”) 
under Section 7(a) of the Small Business Act, 15 U.S.C.A. § 636(a).  See CARES Act 
§ 1102(a)(2) (codified at 15 U.S.C.A § 636(a)(36)(B)).  At issue here is the bankruptcy 
exclusion rule adopted by the SBA to implement the PPP.  The rule excludes from 
eligibility any loan applicant, such as the Hospitals, which answers “Yes” to the 
question of whether the applicant is “presently involved in any bankruptcy.” Ex. 
SBA308, 
Paycheck 
Protection 
Program, 
Borrower 
Application 
Form, 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 1 of 10    PageID #: 740

2 
https://go.usa.gov/xwXfs; ECF No. 1-8 ¶¶ 16–17; Business Loan Program Temporary 
Changes; 
Paycheck 
Protection 
Program—Requirements—Promissory 
Notes, 
Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23,450, 23,451 (Apr. 28, 2020) 
(to be codified at 13 C.F.R. pts. 120–21).  
 
The Hospitals filed a timely objection to the Proposed Findings of Fact and 
Conclusions of Law issued by Bankruptcy Judge Michael A. Fagone on June 3, 2020, 
following a trial held on May 27, 2020.  In  keeping with the Federal Rules of 
Bankruptcy Procedure, if a party files written objections to a bankruptcy judge’s 
proposed findings of fact and conclusions of law, “[t]he district judge shall make a de 
novo review upon the record or, after additional evidence, of any portion of the 
bankruptcy judge’s findings of fact or conclusions of law” that is objected to.  Fed. R. 
Bankr. P. 9033(d).  “The district judge may accept, reject, or modify the proposed 
findings of fact or conclusions of law, receive further evidence, or recommit the matter 
to the bankruptcy judge with instructions.”  Id.; see also In re Sheridan, 362 F.3d 96, 
100 (1st Cir. 2004). 
I.  DISCUSSION 
 
The Hospitals do not dispute any of the Bankruptcy Court’s proposed factual 
findings.  They do object to Judge Fagone’s proposed legal conclusions, which I 
summarize as follows.  First, Judge Fagone concluded that the bankruptcy exclusion 
rule does not violate section 525 of the Bankruptcy Code, which prohibits 
governmental units from denying “a license, permit, charter, franchise, or other 
similar grant” because of a party’s current or previous status as a debtor under Title 
11 or as a bankrupt or debtor under the Bankruptcy Act.  11 U.S.C.A. § 525(a).  
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 2 of 10    PageID #: 741

3 
Second, Judge Fagone determined that under the first step of the two-step framework 
for judicial review of administrative rules established by Chevron, U.S.A., Inc. v. 
Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Administrator of 
the SBA, Jovita Carranza, is authorized by the CARES Act to engage in rulemaking 
regarding the PPP.  Third, Judge Fagone concluded that under Chevron’s second step, 
the bankruptcy exclusion rule is within the bounds of a reasonable interpretation of 
the CARES Act.  
Before I assess the bankruptcy judge’s Proposed Findings of Fact and 
Conclusions of Law, however, I must resolve the parties’ dispute over whether a 
declaration not made part of the record before the bankruptcy judge should be 
considered.  The Administrator first provided the declaration of John A. Miller as 
part of her response to the Hospitals’ objections to Judge Fagone’s Proposed Findings 
of Fact and Conclusions of Law.   The Miller Declaration identifies Miller as an SBA 
administrator who is the highest-ranking career official in the office responsible for 
the operation of the SBA’s business loan programs.  The Miller Declaration addresses, 
among other things, the SBA’s loan program requirements and rules, forms, and 
guidance issued by the SBA in connection with the PPP.  Most relevant here, the 
Miller Declaration contains a more fulsome explanation than that contained in the 
original administrative record of the reasons for the Administrator’s adoption of the 
bankruptcy exclusion rule.   
For reasons I will explain, I deny the Hospitals’ Motion in Limine or to Strike 
Matters Outside the Record (ECF No. 3) regarding the Miller Declaration and 
conclude that the legal issue to which it relates, the third issue noted above—the 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 3 of 10    PageID #: 742

4 
second step of the Chevron analysis—should be recommitted to the Bankruptcy Court 
for further consideration; and I accept and adopt the Bankruptcy Court’s 
Recommended Findings and Conclusions as to the first and second legal conclusions 
noted above.   
A.   
The Hospitals’ Motion in Limine or to Strike Matters Outside the 
Record; the Bankruptcy Court’s Chevron Step Two Analysis 
 
The Hospitals seek to exclude or strike the Miller Declaration for several 
reasons.  First, the Hospitals assert that the Administrator, without good reason, 
failed to present Miller as a witness or offer his declaration as evidence in the 
proceedings before the Bankruptcy Court.  Second, the Hospitals assert that the 
Administrator failed to disclose that “Miller filed declarations in other PPP-related 
litigation and that those declarations differ materially from the one filed here.”  ECF 
No. 3 ¶ 12.  Finally, the Hospitals assert that they have been deprived of the 
opportunity to depose or otherwise question Miller.  In response, the Administrator 
contends that there is generally no right to discovery in actions under the 
Administrative Procedure Act.  She further argues that a declaration stating the 
reasons for agency action is appropriately considered as part of the administrative 
record, and that, in any event, Fed. R. Bankr. P. 9033(d) permits the District Court 
to receive additional evidence as part of its de novo review.  
Although the Administrator could have produced a declaration from Miller 
before the Bankruptcy Court, I deny the Hospitals’ Motion in Limine or to Strike 
Matters Outside the Record (ECF No. 3), given the authority vested in district courts 
to “receive further evidence” when reviewing a bankruptcy judge’s findings of facts 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 4 of 10    PageID #: 743

5 
and conclusions of law.  Fed. R. Bankr. P. 9033(d).  The Miller Affidavit elaborates on 
and helps to explain the Administrator’s earlier stated reason for adopting the 
bankruptcy exclusion. “When an agency’s initial explanation ‘indicate[s] the 
determinative reason for the final action taken,’ the agency may elaborate later on 
that reason (or reasons) but may not provide new ones.”  Dep’t of Homeland Sec. v. 
Regents of the Univ. of Cal., 140 S. Ct. 1891, 1908 (2020) (alteration in original) 
(quoting Camp v. Pitts, 411 U.S. 138, 143 (1973)).  Accordingly, courts have 
considered later-submitted declarations when they are “merely explanatory of the 
original record” and do not contain any “new rationalizations.”  Olivares v. Transp. 
Sec. Admin., 819 F.3d 454, 464 (D.C. Cir. 2016) (quoting Envtl. Def. Fund, Inc. v. 
Costle, 657 F.2d 275, 285 (1981)).   
Here, the reason provided by the Administrator for enacting the bankruptcy 
exclusion rule was the need to establish a streamlined, expedited loan process reliant 
on certifications by applicants, and her determination that “providing PPP loans to 
debtors in bankruptcy would present an unacceptably high risk of an unauthorized 
use of funds or non-repayment of unforgiven loans.”1  Business Loan Program 
Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. at 23,451.  The 
Miller Declaration is consistent with this view, explaining that “[c]ertain creditors, 
including administrative creditors, could assert claims to the PPP loan funds that 
would interfere with its authorized uses and the requirements for PPP loan 
forgiveness.”  ECF No. 1-14 at 44.   
                                              
  1  For this reason, the Hospitals’ argument, made in their Motion in Limine or to Strike Matters 
Outside the Record, that the record “contains no agency record or evidence of reasoned decision-
making regarding exclusion of debtors from PPP” is unpersuasive.  ECF No. 3 at 4.    
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 5 of 10    PageID #: 744

6 
But the Hospitals also argue that the Miller Declaration filed in this case is 
inconsistent with at least one declaration Miller prepared in a separate case.  The 
Miller Declaration states that the “SBA decided that [a PPP loan’s] purpose would 
not be served by including all bankruptcies.”  ECF No. 1-14 at 44 ¶ 17 (emphasis 
added).  In a separate case in the District of Vermont, Miller’s declaration dated May 
14, 2020, states that “[t]he purpose of a PPP loan . . . would not be served in a chapter 
11 liquidation or in a chapter 7 case.”  ECF No. 3, Ex. B. ¶ 21 (emphasis added).  The 
Hospitals’ bankruptcies are neither chapter 11 liquidation nor chapter 7 cases.  The 
resolution of this possible discrepancy must be resolved to determine whether the 
Administrator has provided an adequate reason for the bankruptcy exclusion rule 
and thus whether the rule is arbitrary and capricious.  Regents, 140 S.Ct. at 1908; 
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).   
In addition, the Proposed Findings of Fact and Conclusions of Law include a 
Chevron analysis, which looks at whether an agency acted within its authority, but 
“[w]hen the question is not one of the agency’s authority but of the reasonableness of 
its actions, the ‘arbitrary and capricious’ standard of the APA governs.”  River St. 
Donuts, LLC v. Napolitano, 558 F.3d 111, 117 (1st Cir. 2009) (quoting N.Y. Pub. Int. 
Rsch. Grp. v. Whitman, 321 F.3d 316, 324 (2d Cir. 2003)).  That inquiry may “overlap[] 
somewhat with [the] Chevron step-two analysis,” but “a permissible statutory 
construction under Chevron is not always reasonable” under the ‘arbitrary and 
capricious’ standard set forth by the Supreme Court in State Farm.  Republican Nat’l 
Comm. v. Fed. Election Comm’n, 76 F.3d 400, 407 (D.C. Cir. 1996); see also River St. 
Donuts, 558 F.3d at 117 n.13.  Here, the Bankruptcy Court’s Proposed Findings of 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 6 of 10    PageID #: 745

7 
Fact and Conclusions of Law focused on whether the Administrator acted within her 
statutory authority, but they only make brief mention of the administrative record in 
relation to the State Farm ‘arbitrary and capricious’ standard.  
 
I conclude that the most expeditious course of action is for the case to be 
recommitted to the Bankruptcy Court for it to consider the significance of the Miller 
Declaration in relation to the previously established administrative record and the 
other recent declaration or declarations prepared by Miller.  The Bankruptcy Court 
may, but is not required to, receive other additional evidence if it deems it necessary 
to resolve the discrepancy.  The Bankruptcy Court should then issue revised and/or 
additional findings of fact regarding the reason or reasons for the adoption of the 
bankruptcy exclusion rule, and consider those facts in reaching its conclusions of law 
as to both the second step of the Chevron analysis and the ‘arbitrary and capricious’ 
analysis under State Farm. 
B.   
The Bankruptcy Court’s First and Second Legal Conclusions 
Because my discussion of the Miller Declaration, the Bankruptcy Court’s third 
legal conclusion, and the ‘arbitrary and capricious’ analysis does not bear on the 
Bankruptcy Court’s first and second legal conclusions, I turn to those now.  As 
explained above, the Bankruptcy Court’s first legal conclusion was that the 
bankruptcy exclusion rule does not violate section 525 of the Bankruptcy Code, and 
the second was that, under Chevron step one, the Administrator of the SBA is 
authorized by the CARES Act to engage in rulemaking. 
Having conducted a de novo review of the record and the proposed findings, 
and after carefully considering the Hospitals’ objections and the Administrator’s 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 7 of 10    PageID #: 746

8 
responses, I conclude that the Proposed Findings of Fact and Conclusions of Law are 
fully supported and legally correct and, therefore, I accept them in their entirety.  I 
do address, however, the supplemental authorities not considered by the Bankruptcy 
Court which the Hospitals cite to in support of their objections.2 
Section 525(a) of the Bankruptcy Code provides in part that “a governmental 
unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, 
franchise, or other similar grant to . . . a person . . . solely because [such person] is or 
has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act.”  
11 U.S.C. § 525(a).  In its Proposed Findings of Fact and Conclusions of Law, the 
Bankruptcy Court recognized that there are different approaches as to the meaning 
of “other similar grant” and, more recently, whether the PPP should be treated as a 
“grant program” rather than a “loan program.”  ECF No. 1 at 22–30.  The Bankruptcy 
Court undertook a textual analysis of the provision and, in accordance with other 
courts, noted the importance of the provision’s use of the phrase “other similar 
grants” as a restriction on the scope of the meaning of “grant” for purposes of the anti-
discrimination protection.  Id. at 23–24 (emphasis added).  Recognizing that “[o]ther 
courts have struggled to define the scope of section 525 based on its text,” id. at 24, 
the Bankruptcy Court examined section 525(a)’s legislative history, which reveals 
that section 525(a) was intended to prohibit discrimination based on “a debtor’s 
affiliations or activities that would render it very difficult if not impossible for a 
debtor to pursue his or her own chosen livelihood,” id. at 27.  The Bankruptcy Court 
                                              
 2 As part of their response to the Bankruptcy Court’s Recommended Findings and Conclusions, the 
Hospitals submitted a Notice of Supplemental Authorities on June 23, 2020 (ECF No. 1-13), and a 
second Notice of Supplemental Authority on July 27, 2020 (ECF No. 13). 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 8 of 10    PageID #: 747

9 
then canvassed the relevant caselaw and determined that the most cogent 
interpretation of section 525(a) is one that “stick[s] to the words of the statute.”  Id. 
at 29.  Thus, the Bankruptcy Court concluded that a loan is not a grant subject to 
section 525(a).  
 
In two supplemental authorities cited by the Hospitals, other bankruptcy 
courts concluded that the bankruptcy exclusion rule violates section 525(a), viewing 
a PPP loan as akin to a “public housing lease,” Springfield Hosp., Inc. v. Carranza, 
Adv. Proc. No. 20-01003, ECF No. 63 at 19 (Bankr. D. Vt. June 22, 2020), or to a 
“governmental authorization” necessary to participate in the “free-market economy,” 
Organic Power LLC v. Small Bus. Admin., Adv. Proc. No. 20-00055, ECF No. 80 at 
16 (Bankr. D.P.R. July 24, 2020).  Nevertheless, a PPP loan, which recipients must, 
under some circumstances, pay back, is by definition not a “grant” similar to a 
“license, permit, charter, [or] franchise” under section 525(a). Because the 
Bankruptcy Court’s evaluation of section 525(a)’s text and legislative history is highly 
persuasive, I fully adopt it. 
II.  CONCLUSION 
For the foregoing reasons, it is ORDERED that except for the portions of Part 
IV(a)(ii) and (iii) pertaining to the Chevron step two analysis, the Bankruptcy Court’s 
Proposed Findings of Fact and Conclusions of Law (ECF No. 1) are ACCEPTED and 
ADOPTED.  It is further ORDERED that, consistent with this opinion, the matter 
is recommitted to the Bankruptcy Court to conduct further proceedings and issue 
supplemental and/or revised findings of fact and conclusions of law.  The Bankruptcy 
Court shall: 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 9 of 10    PageID #: 748

10 
A. Reconsider the administrative record as directed in this Order; and  
B. Evaluate the bankruptcy exclusion rule under step two of the Chevron 
analysis and under the ‘arbitrary and capricious’ analysis.  
 
SO ORDERED.  
 
 
  
 
Dated:  July 31, 2020 
 
 
 
   
 
 
      /s/ JON D. LEVY  
    CHIEF U.S. DISTRICT JUDGE 
Case 1:20-mc-00148-JDL   Document 14   Filed 07/31/20   Page 10 of 10    PageID #: 749

File and source

File

penobscot_calais_consolidated__docket-17321437__doc-14__id-141060723__Order_on_Motion_for_Miscellaneous_Relief_1_AND_Ord.pdf

Size

156,404 bytes

SHA-256

e29da05c33e7c0ec009b8f0f74ed9267e6bad1575a5098049965f8327bfd13da

Our copy

penobscot_calais_consolidated__docket-17321437__doc-14__id-141060723__Order_on_Motion_for_Miscellaneous_Relief_1_AND_Ord.pdf

Original

storage.courtlistener.com