Memorandum of Decision Granting Summary Judgment and Permanent Injunction — Springfield Hospital, Inc.
Summary
A Memorandum of Decision of United States Bankruptcy Judge Colleen A. Brown of the United States Bankruptcy Court for the District of Vermont, filed and entered June 22, 2020 as Doc 61 in Adversary Proceedings # 20-01003 and # 20-01004, brought by Springfield Hospital, Inc. and Springfield Medical Care Systems, Inc. against Jovita Carranza as Administrator of the U.S. Small Business Administration. It grants summary judgment and a permanent injunction to the plaintiffs on their 11 U.S.C. § 525(a) claims concerning the PPP and their status as debtors in chapter 11 cases. The decision recounts the temporary restraining orders, the June 10, 2020 oral argument and the undisputed material facts about each plaintiff. It converts the relief in the Second TROs into a permanent injunction with added safeguards for Mascoma Bank and the defendant. The decision runs 36 pages.
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“Memorandum of Decision Granting Summary Judgment and Permanent Injunction — Springfield Hospital, Inc.”
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Formatted for Electronic Distribution For Publication
UNITED STATES BANKRUPTCY COURT
DISTRICT OF VERMONT
Filed & Entered
On Docket
06/22/2020
________________________________________
In re:
Springfield Hospital, Inc., Chapter 11 Case
Debtor-in-Possession. # 19-10283
________________________________________
In re:
Springfield Hospital, Inc.,
Plaintiff,
v. Adversary Proceeding
Jovita Carranza, in her capacity as # 20-01003
Administrator for the U.S. Small
Business Administration,
Defendant.
________________________________________
In re:
Springfield Medical Care Systems, Inc., Chapter 11 Case
Debtor-in-Possession. # 19-10285
________________________________________
In re:
Springfield Medical Care Systems, Inc.,
Plaintiff,
v. Adversary Proceeding
Jovita Carranza, in her capacity as # 20-01004
Administrator for the U.S. Small
Business Administration,
Defendant.
_________________________________________
Appearances: Andrew Helman, Esq. Michael Tye, Esq.
Murray, Plumb & Murray U.S. Department of Justice
Portland, ME Washington, DC
For Springfield Hospital For the Defendant
D. Sam Anderson & Adam R. Prescott, Esq. Melissa A. D. Ranaldo, Esq.
Bernstein, Shur, Sawyer & Nelson, P.A. U.S. Attorney’s Office – Vermont
Portland, ME Burlington, Vermont
For Springfield Medical Care Systems For the Defendant
James F. Raymond, Esq.
Upton & Hatfield, LLP
Concord, NH
For Mascoma Bank
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MEMORANDUM OF DECISION
GRANTING SUMMARY JUDGMENT AND PERMANENT INJUNCTION TO PLAINTIFFS ON THE § 525 CLAIMS
The Plaintiffs, Springfield Hospital, Inc. (“SH”), and Springfield Medical Care Systems, Inc.
(“SMCS”) (collectively, the “Plaintiffs”), have each commenced an adversary proceeding against the
Defendant, Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration
(the “Defendant”). Based on the record in these adversary proceedings and bankruptcy cases, and the
arguments presented at the June 10, 2020 hearing, and for the reasons set forth below, the Court grants
summary judgment, and a permanent injunction, to the Plaintiffs on their 11 U.S.C. § 525(a) claims.
JURISDICTION
This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157 and
1334, and the Amended Order of Reference entered on June 22, 2012. This decision addresses a cause of
action under § 525 of the Bankruptcy Code and thus is a core proceeding arising under Title 11 of the
United States Code as described in 28 U.S.C. § 157(b)(2)(A), (D), and (O). The Court further finds it has
constitutional authority to enter a final judgment in this consolidated proceeding.
PROCEDURAL HISTORY
On April 27, 2020, SH filed a verified complaint to commence this adversary proceeding (AP #
20-1003, doc. # 1, amended at doc. # 3) and a motion for an emergency hearing on its request for a
temporary restraining order (“TRO”) (AP # 20-1003, doc. # 2). Two days later, SMCS filed a similar
verified complaint (AP # 20-1004, doc. # 1) and motion (AP # 20-1004, doc. # 2).1
Pursuant to the Court’s scheduling orders (AP # 20-1003, doc. # 5; AP # 20-1004, doc. # 6), the
Defendant filed a response in each proceeding (AP # 20-1003, doc. # 10; AP # 20-1004, doc. # 11). The
Plaintiffs each filed a supplemental memorandum of law (AP # 20-1003, doc. # 11; AP # 20-1004, doc. #
15).2 The Court held an emergency hearing in each proceeding and granted the requested TROs (AP #
20-1003, doc. ## 19, 20; AP # 20-1004, doc. ## 18, 22).
The Court held a status hearing on SH’s request for a preliminary injunction on May 7, 2020, at
which it extended the TRO in the SH proceeding, and subsequently issued an order in both adversary
proceedings, inter alia, advancing the trial on the merits and consolidating it with the preliminary
injunction hearings, and declaring it would conduct a joint trial, to the extent a trial of fact was necessary,
1
The Defendant’s answer was originally due on May 28, 2020, in the SH proceeding (AP # 20-1003, doc. # 4) and on May 30,
2020, in the SMCS proceeding (AP # 20-1004, doc. # 5). However, the Court extended the deadline for the Defendant to file an
answer in both proceedings to a date after June 23, 2020 (AP # 20-1003, doc. # 60; AP # 20-1004, doc. # 58). Based on the
instant decision in favor of the Plaintiffs, no answer is required.
2
Although permitted to by the scheduling orders (see AP # 20-1003, doc. # 5; AP # 20-1004, doc. # 6), the Defendant did not
file a supplemental memorandum of law at that time.
2
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on the Plaintiffs’ claims under 11 U.S.C. § 525(a),3 extending the TRO in the SMCS proceeding, and
setting a schedule for trial (AP # 20-1003, doc. # 24; AP # 20-1004, doc. # 21).
On May 11, 2020, the Court entered a written order modifying and extending the TRO in the SH
proceeding through June 2, 2020 (AP # 20-1003, doc. # 27); the next day, the Court entered a similar
written order modifying and extending the TRO in the SMCS proceeding through June 4, 2020 (each, the
“Second TRO”), and canceling the status hearing set for May 12, 2020, on SMCS’s request for a
preliminary injunction (AP # 20-1004, doc. # 27), since SMCS and the Defendant addressed all open
issues in the joint status report they filed on May 11, 2020 (AP # 20-1004, doc. # 26).
On May 14, 2020, pursuant to the Court’s schedule for trial, the parties filed the following factual
declarations and exhibits: (1) SH filed a declaration of Michael Halstead, interim chief executive officer
(“CEO”) of SH, with 11 exhibits (AP # 20-1003, doc. # 36); (2) SMCS filed a declaration of Joshua
Dufresne, acting CEO of SMCS, with 10 exhibits (AP # 20-1004, doc. # 32); (3) the Plaintiffs filed a
declaration of Dawn Morse, a paralegal employed by counsel for SH, with two exhibits (AP # 20-1003,
doc. # 34; AP # 20-1004, doc. # 34); and (4) the Defendant filed a declaration of John A. Miller, Deputy
Associate Administrator for Capital Access for the U.S. Small Business Administration (“SBA”), with
two exhibits (AP # 20-1003, doc. # 30; AP # 20-1004, doc. # 28), along with a declaration of Michael S.
Tye, counsel for the Defendant, with 12 exhibits (AP # 20-1003, doc. # 32; AP # 20-1004, doc. # 30).
On May 18, 2020, the parties filed the following statements regarding material facts in dispute:
(1) SH filed responses to the declarations of John A. Miller, with three exhibits (AP # 20-1003, doc. #
39), and Michael S. Tye (AP # 20-1003, doc. # 40); (2) SMCS filed responses to the declarations of John
A. Miller, with two exhibits (AP # 20-1004, doc. # 37), and Michael S. Tye (AP # 20-1004, doc. # 38);
and; (3) the Defendant filed a statement identifying eight material facts in dispute, in the consolidated
proceedings (AP # 20-1003, doc. # 41; AP # 20-1004, doc. # 39).
The Court held a joint status conference on May 19, 2020, at which counsel for the Plaintiffs and
counsel for the Defendant each took the position there were no material facts in dispute with respect to
either the § 525(a) count in the complaints, or the Plaintiffs’ request for a remedy in the form of a
permanent injunction. The Court entered an order on the same date determining there were no material
facts in dispute, canceling the trial of fact, setting a briefing schedule, and extending the TROs in both
adversary proceedings through the earlier of June 15, 2020, or the date the Court issued its decision on the
§ 525 claims (AP # 20-1003, doc. # 43; AP # 20-1004, doc. # 41). The next day, the Court entered a
supplemental order indicating summary judgment was the appropriate procedural approach for resolution
of the Plaintiffs’ § 525 claims, instructing the parties to take this procedural posture into account in their
3
All statutory citations hereafter refer to Title 11 of the United States Code (the “Bankruptcy Code”) unless otherwise
indicated.
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memoranda of law, and scheduling oral arguments to occur on June 10, 2020, if the Court decided oral
arguments were needed, after reviewing the memoranda of law it was directing the parties to file (AP #
20-1003, doc. # 44; AP # 20-1004, doc. # 42).
The parties then filed the following supplemental memoranda of law, pursuant to the Court’s
briefing schedule: (1) on May 29, 2020, SH filed a memorandum of law in support of its § 525 claim,
with six exhibits (AP # 20-1003, doc. # 48); (2) on the same date, SMCS filed a memorandum of law in
support of its § 525 claim, with six exhibits (AP # 20-1004, doc. # 45); (3) on June 8, 2020, Mascoma
Bank (“Mascoma”) filed a memorandum of law in support of its request for certain rulings in any
judgment the Court entered in favor of the Plaintiffs (AP # 20-1003, doc. # 54; AP # 20-1004, doc. # 52);
and (4) on the same date, the Defendant filed a memorandum of law in opposition to the Plaintiffs’ § 525
claims (AP # 20-1003, doc. # 56; AP # 20-1004, doc. # 54). Neither the Plaintiffs nor the Defendant
sought leave to file a response to Mascoma’s memorandum of law.
On the morning of June 9, 2020, the Court entered an order (i) confirming oral arguments would
proceed, (ii) indicating topics to be addressed at that hearing, and (iii) directing the Defendant to file a
supplement identifying certain cases she had referenced without names or citations in her memorandum
(AP # 20-1003, doc. # 57; AP # 20-1004, doc. # 55). The Defendant timely filed a supplement identifying
those five cases (AP # 20-1003, doc. # 58; AP # 20-1004, doc. # 56). The Court held oral arguments on
June 10, 2020, which lasted approximately two and a half hours, and then took the matter under
advisement.
On June 11, 2020, the Court issued an order further extending the TROs through June 22, 2020, to
provide the Court with additional time to formulate and write the instant memorandum of decision, based
on the significant developments in, and germane to, these proceedings over the prior week (AP # 20-1003,
doc. # 60; AP # 20-1004, doc. # 58).
ISSUES PRESENTED
The issues presented are whether summary judgment is proper and, if so, then (A) whether the
Defendant is in violation of § 525(a), and (B) if so, whether a permanent injunction is warranted, as a matter
of law.
SUMMARY JUDGMENT STANDARD
Summary judgment is proper “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also
Jackson v. Fed. Express, 766 F.3d 189, 193–94 (2d Cir. 2014). “A genuine issue exists – and summary
judgment is therefore improper – where the evidence is such that a reasonable jury could decide in the
non-movant’s favor.” Brandon v. Kinter, 938 F.3d 21, 31 (2d Cir. 2019) (citation and quotation marks
omitted). “[T]he substantive law will identify which facts are material. Only disputes over facts that
4
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might affect the outcome of the suit under the governing law will properly preclude the entry of summary
judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1985) (citation omitted). “The court construes all evidence in the light
most favorable to the non-moving party, drawing all inferences and resolving all ambiguities in his
favor.” Amore v. Novarro, 624 F.3d 522, 529 (2d Cir. 2010) (citing LaSalle Bank Nat’l Ass’n v. Nomura
Asset Capital Corp., 424 F.3d 195, 205 (2d Cir. 2005)); see also Burns v. Martuscello, 890 F.3d 77, 83
(2d Cir. 2018). However, “conclusory statements, conjecture, or speculation by the party resisting the
motion will not defeat summary judgment[.]” Flores v. United States, 885 F.3d 119 (2d Cir. 2018)
(quoting Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996)).
UNDISPUTED MATERIAL FACTS
As noted above, on May 20, 2020, the Court issued its order putting the parties on notice that it
would determine the Plaintiffs’ § 525(a) claims via a summary judgment procedure (AP # 20-1003, doc. #
44, p. 2; AP # 20-1004, doc. # 42, p. 2). At that time, the Court indicated it would treat the various
declarations the parties had filed as their statements of facts, and identified the documents it would treat as
the parties’ statements of disputed facts (id.).
The Plaintiffs, along with party in interest Mascoma, subsequently filed briefs that included
supplemental statements of fact, as well as redacted versions of their previously filed declarations in
response to the Defendant’s previous objection (AP # 20-1003, doc. ## 48, 48-1, 54; AP # 20-1004, doc.
## 45, 45-1, 52). Additionally, at the June 10, 2020 hearing, the Defendant withdrew, for purposes of
summary judgment, the declaration of John A. Miller (AP # 20-1003, doc. # 30; AP # 20-1004, doc. #
28), as it pertained to the Plaintiffs’ APA claims that are not currently before the Court (see AP # 20-
1003, doc. # 44, p. 3; AP # 20-1004, doc. # 42, p. 3).
The Court finds the following statements set forth undisputed facts material to this summary
judgment motion (each statement, a “UMF”):4
1. SH is a Vermont non-profit business corporation that operates a 25-bed general medical and surgical
hospital located in Springfield, Vermont, with approximately 451 employees filling more than 250
full-time equivalent positions (AP # 20-1003, doc. # 36, ¶¶ 4–5, doc. # 36-1, p. 4, ¶ 8, doc. # 41, doc.
# 48-1, ¶¶ 4–5).
2. SMCS is a Vermont non-profit business corporation that provides medical services to communities in
southeastern Vermont and southwestern New Hampshire through its operation of thirteen federally
qualified health centers (“FQHC”) and two non-FQHC daycare sites. SMCS has approximately 220
employees and is one of the largest employers in the Springfield, Vermont area (AP # 20-1004, doc. #
32, ¶ 4, doc. # 39, doc. # 45-1, ¶ 4).
3. The SBA is an agency and unit of the United States government (AP # 20-1004, doc. # 32, ¶ 22, doc.
# 39, doc. # 45-1, ¶ 22).
4
Pursuant to Vt. LBR 7056-1(a)(3), a respondent is deemed to have admitted all facts in the movant’s statement of undisputed
material facts which they do not controvert in their statement of disputed material facts.
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4. On June 26, 2019, SH and SMCS each filed a voluntary petition under chapter 11 of the Bankruptcy
Code. No trustee has been appointed in either case and SH and SMCS continue to operate their
businesses as debtors-in-possession (AP # 20-1003, doc. # 36, ¶¶ 5–7, doc. # 41, doc. # 48-1, ¶¶ 5–7;
AP # 20-1004, doc. # 32, ¶¶ 6–8, doc. # 39, doc. # 45-1, ¶¶ 6–8).
5. 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 includes 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 establishes the Paycheck
Protection Program (“PPP”) as a convertible loan program under § 7(a) of the Small Business Act,
codified in 15 U.S.C. § 636. There are no repayment obligations for PPP disbursements if, among
other things, PPP funds are used for payroll and wage expenses. Section 1102 of the CARES Act does
not prohibit extending funds under PPP to a chapter 11 debtor (AP # 20-1003, doc. # 36, ¶¶ 17–19,
26doc. # 41, ¶ 1, doc. # 48-1, ¶¶ 17–19, 26; AP # 20-1004, doc. # 32, ¶¶ 16–18, 25, doc. # 39, ¶ 1,
doc. # 45-1, ¶¶ 16–18, 25).
6. A party can obtain funds under the PPP by applying with any federally insured participating lender
using an application form created by the SBA. If the application is approved by the SBA, the SBA
guarantees 100% of the funds advanced to the applicant, and pays the lender all amounts forgiven
under the CARES Act and PPP (AP # 20-1003, doc. # 36, ¶ 23, doc. # 41, ¶ 3, doc. # 48-1, ¶ 23; AP #
20-1004, doc. # 32, ¶ 21, doc. # 39, ¶ 3, doc. # 45-1, ¶ 21).5
7. On or about April 2, 2020, the SBA released its form of application for the PPP. The first question on
the PPP application form asks whether “the Applicant ... [is] presently involved in any bankruptcy[.]”
The second question on the official PPP application form is whether “the Applicant, any owner of the
Applicant, or any business owned or controlled by any of them, ever obtained a direct or guaranteed
loan from SBA or any other Federal agency that is currently delinquent or has defaulted in the last 7
years and caused a loss to the government[.]” The official form of application also states: “If questions
(1) or (2) below are answered ‘Yes,’ the loan will not be approved” (AP # 20-1003, doc. # 36, ¶¶ 24,
26–28, doc. # 41, doc. # 48-1, ¶¶ 24, 26–28; AP # 20-1004, doc. # 32, ¶¶ 23, 25–27; doc. # 39, doc. #
45-1, ¶¶ 23, 25–27).
8. On or about April 8, 2020, SH submitted an application for PPP funds to its commercial lender,
Berkshire Bank. SH answered “yes” to question 1 because it is a debtor. SH answered “yes” to
question 2 based on the understanding at that time that its federally guaranteed loans with Berkshire
Bank were “delinquent” within the meaning of applicable SBA regulations (AP # 20-1003, doc. # 36,
¶¶ 29–31, doc. # 41, doc. # 48-1, ¶¶ 29–31).
9. SBA’s SOP 50 10 5(F), p. 98, states that a debt is not “delinquent” if “[t]he obligor is subject to, or
has been discharged in, a bankruptcy proceeding” (AP # 20-1003, doc. # 36, ¶ 32, doc. # 41, doc. #
48-1, ¶ 32).
10. By e-mail dated April 13, 2020, Berkshire Bank advised SH that it denied the application based on
SH’s status as a chapter 11 debtor and the “yes” answer to question 2 (AP # 20-1003, doc. # 36, ¶ 40,
doc. # 41, doc. # 48-1, ¶ 40).
11. On April 21, 2020, SMCS contacted Mascoma, a commercial banking institution, regarding SMCS’s
PPP application. Mascoma informed SMCS by e-mail the same day that Mascoma was “informed [by]
the SBA that business customers currently in bankruptcy are ineligible.” On or around April 30, 2020,
SMCS received a letter from Mascoma stating that SMCS “does not qualify for a PPP loan because of
5
The Defendant objects to the characterization of the funds as a “forgivable grant” in the Plaintiffs’ statements of fact.
Although SMCS redacts the entire paragraph in response (see AP # 20-1004, doc. # 45, ¶ 21), the Court finds this unnecessary
as the remainder of the paragraph is undisputed.
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[its] affirmative answer to Question #1 on the PPP Application” (AP # 20-1004, doc. # 32, ¶¶ 28–29,
doc. # 39, doc. # 45-1, ¶¶ 28–29).
12. SMCS was prohibited from having a PPP application processed or approved based solely on its status
as a debtor (AP # 20-1004, doc. # 32, ¶ 28, doc. # 39, doc. # 45-1, ¶ 28).
13. On or about April 23, 2020, Congress enacted legislation making additional funds available for the
PPP (AP # 20-1003, doc. # 36, ¶ 43, doc. # 41, doc. # 48-1, ¶ 43; AP # 20-1004, doc. # 32, ¶ 36, doc.
# 39, doc. # 45-1, ¶ 36).
14. On April 24, 2020, the SBA promulgated an interim final rule (the “April 24 Rule”) with respect to
PPP. The April 24 Rule states that “[i]f 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.” The stated basis for this rule is that the
Defendant “determined 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” (AP #
20-1003, doc. # 36, ¶ 45, doc. # 41, doc. # 48-1, ¶ 45; AP # 20-1004, doc. # 32, ¶ 39, doc. # 39, doc. #
45-1, ¶ 39).
15. On May 4, 2020, the Court issued its TRO in the SH adversary proceeding. Subsequently, SH
submitted an application for PPP to Berkshire Bank indicating “no” on Question 1 and correcting its
response to indicate “no” on Question 2, based on its review of the SBA’s official guidance, but SH
subsequently learned that Berkshire Bank was no longer processing PPP applications, so it submitted
an application with the same changes to Mascoma (AP # 20-1003, doc. # 36, ¶¶ 34, 51–52, doc. # 41,
doc. # 48-1, ¶¶ 34, 51–52).
16. On May 7, 2020, the Court issued its TRO in the SMCS adversary proceeding. On May 12, 2020,
SMCS submitted a new application for PPP funds to Mascoma. In the application, SMCS answered
“no” on Question 1 in accordance with the TRO (AP # 20-1004, doc. # 32, ¶¶ 40–41, doc. # 39, doc. #
45-1, ¶¶ 40–41).
17. On May 15, 2020, Mascoma submitted both SH and SMCS’s PPP applications to SBA’s E-tran
system and obtained electronic approval of SH and SMCS’s participation in the PPP. This confirms
that once bankruptcy status was removed from consideration (and SH’s response to question 2 was
corrected), SH and SMCS were and are eligible for PPP (AP # 20-1003, doc. # 48, ¶ 16, doc. # 54, p.
5, doc. # 56; AP # 20-1004, doc. # 45, ¶ 16, doc. # 52, p. 5, doc. # 54).
18. Subsequent to May 15, 2020, SBA adopted a rule governing forgiveness under § 1106 of the CARES
Act (the “Forgiveness Rule.”) The Forgiveness Rule states: “If SBA determines in the course of its
review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act,
SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the
borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the
certifications that it made in its PPP loan application), the loan will not be eligible for loan
forgiveness” (AP # 20-1003, doc. # 48, ¶ 17, doc. # 56; AP # 20-1004, doc. # 45, ¶ 17, doc. # 54).
19. SMCS’s reorganization efforts, and both Plaintiffs’ exits from chapter 11, have been negatively
impacted by the economic consequences stemming from the novel coronavirus that causes the disease
Covid-19 (AP # 20-1003, doc. # 36, ¶ 11, doc. # 41, doc. # 48-1, ¶ 11; AP # 20-1004, doc. # 32, ¶ 12,
doc. # 39, doc. # 45, ¶ 12).
20. A significant portion of SH’s revenue, and nearly all of SMCS’s revenue, is derived from outpatient
procedures and non-essential office visits or medical procedures. Following recommendations and/or
orders from the federal Centers for Disease Control and the State of Vermont, non-essential medical
procedures and office visits have been postponed, rescheduled, or canceled. These cancelations and
deferrals have had, and are expected to continue to have, a negative impact on the Plaintiffs’ cash
7
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receipts (AP # 20-1003, doc. # 36, ¶ 12, doc. # 41, doc. # 48-1, ¶ 12; AP # 20-1004, doc. # 32, ¶ 13,
doc. # 39, doc. # 45, ¶ 13).
21. The Plaintiffs do not yet know when business operations will normalize or what the Plaintiffs’
revenues will be at that time. Even if all limitations, recommendations, or restrictions on the provision
of services are lifted, the Plaintiffs have experienced an unforeseen, drastic and material drop in cash
receipts due to Covid-19 and may continue to experience negative impacts to revenue. Further, it
seems probable to the Plaintiffs’ interim/acting CEOs that some patients will be less likely to seek
services until more is known about Covid-19, its transmission, and the potential for a vaccine. As a
result, the Plaintiffs face financial challenges that have been materially and significantly exacerbated
by Covid-19 (AP # 20-1003, doc. # 36, ¶¶ 13–14, doc. # 41, doc. # 48-1, ¶¶ 13–14; AP # 20-1004,
doc. # 32, ¶ 14, doc. # 39, doc. # 45, ¶ 14).
22. PPP funds are available on a first come, first served basis. Neither Plaintiff received PPP funds prior
to the funds being exhausted under the first tranche of PPP funding. The Plaintiffs’ interim/acting
CEOs are concerned about the impact it will have on the Plaintiffs if SH and SMCS are unable to
obtain PPP funds in the second tranche of funding or prior to the program end date of June 30, 2020
(AP # 20-1003, doc. # 36, ¶ 35, doc. # 41, doc. # 48-1, ¶ 35; AP # 20-1004, doc. # 32, ¶ 30, doc. # 39,
doc. # 45, ¶ 30).
23. Between the date SH filed its Complaint and May 14, 2020, SH received approximately $4.3 million
in federal stimulus funds for rural hospitals. There are restrictions as to how SH can use those funds
(AP # 20-1003, doc. # 36, ¶¶ 54–55, doc. # 41, doc. # 48-1, ¶¶ 54–55).
24. Between the date SMCS filed its Complaint and May 14, 2020, SMCS received approximately $1.3
million in federal stimulus funds for rural healthcare providers. In addition, on or around April 23,
2020, SMCS borrowed approximately $498,800 in the form of a prospective Medicaid payment (the
“Retainer Funds”) pursuant to the State of Vermont's Medicaid retainer program implemented in
response to the Covid-19 pandemic. SMCS understands that it may be required to repay the Retainer
Funds through the State of Vermont exercising recoupment rights against future Medicaid payments.
SMCS has also received additional funding from the Health Resources & Services Administration.
SMCS continues to explore other potential sources of emergency funding to help it manage the impact
of Covid-19. For example, it was informed on or around May 7, 2020, that it would receive a grant
from the federal government in the approximate amount of $531,000 to be used toward expanding
testing capabilities at its facilities for Covid-19 (AP # 20-1004, doc. # 32, ¶ 45, doc. # 39, doc. # 45, ¶
45).
25. The additional funds have staved off the immediate risk of closure as raised the Complaints, but do
not guaranty or ensure a successful future outcome for the Plaintiffs. The Plaintiffs’ futures are still
highly uncertain and closure is still possible, though less immediate, because it is unknown when the
Plaintiffs’ business operations will normalize or what the Plaintiffs’ revenues will be like at that time
(AP # 20-1003, doc. # 36, ¶ 55, doc. # 41, doc. # 48-1, ¶ 55; AP # 20-1004, doc. # 32, ¶ 30, doc. # 39,
doc. # 45, ¶ 30).
26. Obtaining the PPP funds would provide additional, needed liquidity to the Plaintiffs and, in the views
of their interim/acting CEOs, would likely help facilitate the Plaintiffs’ successful reorganizations. For
SH, PPP funds would not be the sole determining factor of a successful exit from chapter 11, but cash
availability remains a significant problem and additional liquidity is needed and would help. Due to
Covid-19 and the unavailability of PPP funds thus far, the Plaintiffs have been required to spend their
limited existing cash – including, for SH, funds borrowed from the State of Vermont – on immediate
business operations, including payroll (AP # 20-1003, doc. # 36, ¶ 56, doc. # 41, doc. # 48-1, ¶ 56; AP
# 20-1004, doc. # 32, ¶ 47, doc. # 39, doc. # 45, ¶ 47).
27. As healthcare professionals, the Plaintiffs’ interim/acting CEOs expect Covid-19 will continue to be
prevalent for at least the next 12–18 months, i.e., through June–December 2021, and until such time as
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there is widespread treatment and a vaccine. Cold and flu season in the fall and winter of 2020 could
very likely now be cold, flu, and Covid-19 season, with commensurate negative impacts to the
Plaintiffs’ businesses to the extent that non-essential services are paused again or patients do not feel
safe seeking medical treatment (AP # 20-1003, doc. # 36, ¶ 57, doc. # 41, doc. # 48-1, ¶ 57; AP # 20-
1004, doc. # 32, ¶ 48, doc. # 39, doc. # 45, ¶ 48).
DISCUSSION
A. The Defendant is in Violation of § 525(a)
The Plaintiffs argue the Defendant is violating § 525(a) by excluding bankruptcy debtors from
participating in the PPP (AP # 20-1003, doc. # 48, p. 2; AP # 20-1004, doc. # 45, p. 2). The Defendant
argues § 525 does not apply to the PPP (AP # 20-1003, doc. # 56, p. 3; AP # 20-1004, doc. # 54, p. 3).
Section 525(a) provides, in relevant part, that
a governmental unit may not deny … a license, permit, charter, franchise, or other
similar grant to … a person that is or has been a debtor under this title … solely
because such … debtor is or has been a debtor under this title[.]
11 U.S.C. § 525(a).
There is no question the SBA, as an agency of the United States, is a governmental unit as defined
in § 101(27), and the Plaintiffs, as Vermont non-profit business corporations, are persons as defined in
§ 101(41) (UMF ¶¶ 1–3). Further, the parties do not dispute the Plaintiffs’ status as debtors in a case
under Title 11 was the basis for their exclusion from PPP (UMF ¶¶ 8–12, 15–17). Thus, the salient
question before the Court is whether, as a matter of law, the PPP is “a license, permit, charter, franchise,
or other similar grant” within the meaning of § 525(a).
1. Other Pending or Recently Decided PPP-Related Proceedings
The Defendant asserts in her memorandum that “the tide has taken a significant and dramatic turn”
on PPP cases, citing 18 recent decisions in which courts have refused to grant injunctive relief to debtors,
and asserting that four of the five recent cases she identified granting injunctive relief either found the
debtors were unlikely to succeed under § 525(a) or did not base their decision on that provision (AP # 20-
1003, doc. # 56, pp. 2–3; AP # 20-1004, doc. # 54, pp. 2–3). At the oral arguments held on June 10, 2020,
SH contested the characterization of these cases as a tidal wave against the Plaintiffs, and argued many of
the 18 decisions the Defendant referenced were in a different procedural posture, did not articulate a
rationale, or were mandated by binding Circuit law that differed from the pertinent Second Circuit
jurisprudence. SH also pointed out there had been several recent decisions that were favorable to the
Plaintiffs, which the Defendant had not identified.
Given the widespread and ongoing litigation of the instant issues in courts nationwide, as well as
the parties’ differing characterizations of the trends they indicate, the Court begins its analysis of the
Plaintiffs’ § 525(a) claims with a survey of those recent decisions.
The Court is aware of 34 other pending or recently decided PPP-related proceedings that address
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§ 525(a). Within the Second Circuit, the Court has identified only two other such proceedings. In Eastern
Niagara Hosp., Inc., 20-ap-01020 (Bankr. W.D.N.Y.), the court has scheduled a hearing for June 30, 2020
on the plaintiff’s motion for a preliminary injunction based on its § 525(a) and APA claims, so no
decision has yet issued. In The Diocese of Rochester, et al., 20-cv-06243 (W.D.N.Y. June 10, 2020), the
plaintiffs commenced a proceeding in district court, which withdrew the reference to the bankruptcy
court, denied the plaintiffs’ motion for a preliminary injunction, and granted summary judgment in favor
of the defendant on the plaintiffs’ APA and § 525(a) claims. The remaining 32 decisions reflect a variety
of perspectives and outcomes, driven largely by binding circuit precedent, which cannot be accurately
described as clearly favoring or defeating the SBA’s position on whether the PPP discriminates against
debtors in violation of § 525. The Court therefore analyzes these PPP-related § 525 cases by circuit.
The Court is aware of three recent decisions adjudicating this issue within the First Circuit. In
Organic Power LLC, 20-ap-00055 (Bankr. D.P.R. May 8, 2020), the bankruptcy court granted the
plaintiff’s request for a TRO based on both its § 525(a) and APA claims. By contrast, in Breda, LLC, 20-
ap-01008 (Bankr. D. Me. May 11, 2020), the bankruptcy court denied the plaintiff’s TRO, finding the
plaintiff had failed to show irreparable harm. Finally, while it had originally granting TROs in the
consolidated proceedings in Penobscot Valley Hosp., 20-ap-01005 and Calais Reg’l Hosp., 20-ap-01006
(Bankr. D. Me.), on June 3, 2020, the bankruptcy court issued joint proposed findings of fact and
conclusions of law in favor of the Defendant on both the plaintiffs’ APA and § 525(a) claims. In sum, the
cases in the First Circuit are split on this issue.
In the Third Circuit, the court in Cosi Inc., 20-ap-50591 (Bankr. D. Del. May 14, 2020) denied the
plaintiff’s request for a TRO under § 525, with the bankruptcy court pointing to the nature of the debtor’s
business being other than a frontline Covid-19 responder as a significant factor in its denial of relief:
The life-and-death considerations that were before Judge Jones [in Hidalgo] are not
present in this case. Were I faced with similar facts, to be candid, I would likely
grant the temporary restraining order on the grounds that the public policy prong
[swamps] the other prongs and drives the injunction analysis[.]
Cosi, 20-ap-50591 (transcript of April 30, 2020 hearing at p. 62, lines 3–9). In Aspen Landscaping
Contracting, Inc., 20-ap-01277 (Bankr. D.N.J.), the court issued an order to show cause on the plaintiff’s
request for a TRO and preliminary injunction, but the parties agreed to voluntarily dismiss the proceeding
prior to any decision on the merits of the plaintiff’s claims. Hence, these cases do not give any weight to
either party’s position in the instant proceedings.
There appears to be just one decision within the Fourth Circuit, iThrive Health, LLC, 20-ap-00151
(Bankr. D. Md. June 8, 2020). In that proceeding, the court denied the plaintiff’s request for a preliminary
injunction, finding the plaintiff was unlikely to succeed on the merits of its § 525(a) claim based on
Fourth Circuit precedent in Ayes v. U.S. Dep’t of Veterans Affairs, 473 F.3d 104 (4th Cir. 2006).
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In the Fifth Circuit, there are a total of nine cases, at several different procedural stages. In the first
case in the country, Hidalgo Cty. Emergency Svc. Foundation, 20-ap-02006 (Bankr. S.D. Tex.), Judge
David R. Jones granted the plaintiff’s request for a TRO at a hearing held on April 24, 2020, and
subsequently issued a preliminary injunction on May 8, 2020, based on the plaintiff’s § 525(a) and APA
claims.6 Ten days later, Judge Jones also granted the plaintiff’s request for a TRO in In KP Engineering,
LP, 20-ap-03120 (Bankr. S.D. Tex. May 18, 2020), and subsequently, on consent of the parties, granted
the plaintiff’s request for a preliminary injunction in that case. The remaining proceedings within the Fifth
Circuit have been decided in favor of the Defendant: Trudy’s Texas Star, Inc., 20-ap-01026 (Bankr. W.D.
Tex. May 7, 2020) (narrowly construing § 525(a) based on Fifth Circuit precedent in In re Exquisito
Services, Inc., 823 F.2d 151 (5th Cir. 1987), and denying TRO); Asteria Educ., Inc., 20-ap-05024 (Bankr.
W.D. Tex.) (narrowly construing § 525(a) based on Fifth Circuit precedent and denying TRO); Okorie,
20-ap-06015, and Inland Family Practice Ctr., LLC, 20-ap-06016 (Bankr. S.D. Miss. May 18, 2020)
(denying TRO in summary order); Abe’s Boat Rentals, Inc., 20-ap-01029 (Bankr. E.D. La. May 19, 2020)
(adopting Trudy’s and Asteria reasoning); J-H-J, Inc., et al., 20-ap-05014 (Bankr. W.D. La. May 20,
2020) (same); Jack Cty. Hosp. District, 20-ap-04035 (Bankr. N.D. Tex. May 21, 2020) (denying TRO in
summary order). This Court finds it significant that each of these rulings in favor of the Defendant that
articulated a rationale appears to be premised on the trial court’s determination that it was bound by Fifth
Circuit precedent in Exquisito.
The Court has identified five PPP-related proceedings within the Sixth Circuit. Two of them were
decided in favor of the SBA: In Areway Acquisition, Inc., et al., 20-ap-01037 (Bankr. N.D. Ohio May 20,
2020), the court denied the plaintiffs’ request for a TRO and preliminary injunction in a summary order.
In Hartshorne Holdings, LLC, et al., 20-ap-04012 (Bankr. W.D. Ky. June 1, 2020), the court had
originally granted the plaintiffs’ TRO request, but subsequently denied their request for a preliminary
injunction based on a finding the plaintiff had failed to show a likelihood of irreparable harm. The three
other proceedings within the Sixth Circuit were decided in favor of the plaintiffs. While the court in
Weather King Heating & Air, Inc., 20-ap-05023 (Bankr. N.D. Ohio May 22, 2020) granted a preliminary
injunction based only on the plaintiffs’ APA claim, and found the plaintiff was unlikely to succeed on
merits of § 525(a) claim based on binding Sixth Circuit precedent in Toth v. Mich. State Housing Dev.
Auth., 136 F.3d 477 (6th Cir. 1998)), in the other two cases, relief was granted on both the § 525 and
APA claims, see St. Alexius Hosp. Corp. #1, 20-ap-06005 (Bankr. E.D. Ky. May 22, 2020)7 and Alpha
Visions Learning Academy, Inc., 20-ap-00071 (Bankr. W.D. Tenn. June 3, 2020). In the latter decision,
6
The district court subsequently granted both the defendant’s request for a stay of the preliminary injunction pending appeal
and the plaintiff’s request for certification for direct appeal to the Fifth Circuit.
7
The plaintiff subsequently voluntarily dismissed its adversary proceeding without prejudice.
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Judge Latta concluded the Sixth Circuit’s decision in Toth did not require a determination that §525(a)
does not apply to the PPP. Hence, the caselaw in the Sixth Circuit does not markedly favor the Defendant
and, to the extent the SBA prevailed there, it did so because of Sixth Circuit precedent construing §525(a)
quite narrowly.
All four decisions issued thus far in the Seventh Circuit have ruled against the plaintiffs on their
§525(a) claims. A bankruptcy court there issued a joint decision in favor of the Defendant on the
plaintiffs’ § 525(a) claims in Schuessler et al., 20-ap-02065, Steffen, et al., 20-ap-02068, and Thull Farms,
LLC, 20-ap-02069 (Bankr. E.D. Wis. May 22, 2020), agreeing with the Cosi and Trudy’s courts and
applying the interpretation of § 525(a) adopted by the Third, Fourth, and Sixth Circuits in Watts v. Penn.
Housing Fin. Co., 876 F.2d 1090 (3d Cir. 1989), Ayes, and Toth, respectively.8 Likewise, in USA
Gymnastics, 20-ap-50055 (Bankr. S.D. Ind. June 12, 2020), the court denied the plaintiff’s request for a
preliminary injunction on its § 525(a) claim (and issued proposed findings in favor of the plaintiff’s
request for a preliminary injunction on its APA claim).
The Court has identified only one proceeding on the § 525(a) PPP issue within the Eighth Circuit,
Dancor Transit, Inc., 20-ap-07024 (Bankr. W.D. Ark.). There, the court scheduled a hearing on the
plaintiff’s request for a TRO on May 27, 2020 and has not yet issued a ruling on the docket.
The Court is aware of five PPP-related proceedings within the Ninth Circuit. Of these, three have
been decided in favor of the Defendant: NAI Capital, Inc., 20-ap-01051 (Bankr. C.D. Cal. May 20, 2020)
(denying TRO in summary order); Starplex Corp., 20-ap-00095 (Bankr. D. Ariz. May 26, 2020) (denying
preliminary injunction on § 525(a) and APA claims); PPV, Inc., et al., 20-ap-03054 (Bankr. D. Oreg. June
1, 2020) (denying TRO in summary order). The remaining two cases were decided in favor of the
plaintiffs based on their APA claims: Astria Health, et al., 20-ap-80016 (Bankr. E.D. Wash. June 10,
2020) (finding plaintiffs not likely to succeed on § 525(a) claim but granting preliminary injunction based
on APA claim);9 and PCT Int’l, Inc., 20-ap-00118 (Bankr. D. Ariz. June 12, 2020) (finding § 525(a)
inapplicable to PPP but issuing declaratory judgment in favor of plaintiff based on APA claim).
The Court has only identified one decision within the Tenth Circuit, Roman Catholic Church of
the Archdiocese of Santa Fe, 20-ap-01026 (Bankr. D.N.M. May 1, 2020). In that case, the court converted
the plaintiff’s request for a preliminary injunction to a trial on the merits and issued an opinion in favor of
the plaintiff on both its § 525(a) and APA claims.
In the Eleventh Circuit, the court in NRP Lease Holdings, LLC, et al., 20-ap-00055 (Bankr. M.D.
Fla May 27, 2020), granted the plaintiffs’ request for preliminary injunction based on their APA claims,
and was silent on the plaintiffs’ § 525(a) claims. In Gateway Radiology Consultants P.A., 20-ap-00330
8
The court also issued a report and recommendation in favor of the Defendant on the plaintiffs’ APA claims.
9
The court also certified the preliminary injunction order for direct appeal to the Ninth Circuit.
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(Bankr. M.D. Fla. June 8, 2020), the court found the plaintiff showed a substantial likelihood of success
on the merits of its APA claims, and thus declined to address the plaintiff’s § 525(a) claim on a
preliminary basis. In the remaining proceeding, Henry Anesthesia Assocs. LLC, 20-ap-06084 (Bankr.
N.D. Ga. June 4, 2020), the court denied the plaintiff’s request for a preliminary injunction on both its
§ 525(a) and APA claims.
Of these 34 decisions, three are awaiting decision, or were voluntarily dismissed prior to a ruling
on the merits. Twelve of the remaining 31 decisions have been decided in favor of the plaintiffs, including
six based at least in part on their § 525(a) claims, two based on their APA claims without a ruling on their
§ 525(a) claims, and four based on their APA claims but finding relief not warranted on their § 525(a)
claims. Nineteen decisions denied injunctive relief to the plaintiffs, with 11 of those denials emanating
from within the Third, Fourth, Fifth, and Sixth Circuits, where the Defendant asserted Watts, Ayes,
Exquisito, and Toth, respectively, preclude application of § 525(a) to the PPP (and, as noted above, some
bankruptcy courts determined they were bound by Circuit precedent to deny the plaintiffs’ § 525(a)
claims).
The Court does not view these 34 decisions as a tidal shift of cases in favor of the Defendant. On
the contrary, the Court finds this set of cases to reflect a wide spectrum of rationales and conclusions
across the courts, some of which are persuasive to this Court (as discussed below), but none of which are
binding. Against this survey of recent decisions, the Court turns to the pertinent Second Circuit case law
addressing § 525(a).
2. The Second Circuit’s Decisions in Goldrich and Stoltz
The Plaintiffs argue the controlling statement on the scope of § 525(a) is found in Stoltz v.
Brattleboro Housing Auth. (In re Stoltz), 315 F.3d 80 (2d Cir. 2002), in which the Second Circuit held a
public housing lease was an “other similar grant” under § 525(a) (AP # 20-1003, doc. # 48, pp. 11–12, 15;
AP # 20-1004, doc. # 45, pp. 12–13, 16). The Defendant contends § 525(a) does not apply to the PPP
based on an earlier Second Circuit decision, In re Goldrich, 771 F.2d 28 (2d Cir. 1985), in which the
Second Circuit declined to extend § 525 to student loan guarantees (AP # 20-1003, doc. # 56, pp. 8, 10,
12–13, 15–16; AP # 20-1004, doc. # 54, pp. 8, 10, 12–13, 15–16). These two Second Circuit cases turn on
markedly different analyses of § 525(a), which this Court must harmonize in order to determine the
appropriate framework against which to analyze the merits of the Plaintiffs’ § 525(a) claims.10
In the Second Circuit’s 1985 Goldrich decision, the appellee had obtained a student loan
guaranteed by appellant state education service. Goldrich, 771 F.2d at 28–29. The appellee defaulted on
10
In The Diocese of Rochester, et al., 20-cv-06243 (W.D.N.Y. June 10, 2020), the district court cited Goldrich and Stoltz and
briefly addressed Congressional disapproval of Goldrich in a footnote, id. at doc. # 42, pp. 19–20, n. 4, but did not further
analyze those cases in its decision denying the plaintiffs’ request for preliminary injunction.
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the loan, and later filed for bankruptcy relief and, as part of that case, he obtained a discharge of his
unsecured loan debt, including the unpaid student loan. Id. at 29. Both before and after his discharge,
various banks accepted other loan applications from the appellee, but the appellant governmental entity
refused to guarantee the loans based on a state law that eliminated eligibility for loans while an applicant
was in default status. Id.
The Second Circuit found § 525 did not promise protection against consideration of a prior
bankruptcy filing in post-discharge credit arrangements, because a credit guarantee was not a license,
permit, charter, or franchise, and was not in any way similar to those grants. Goldrich, 771 F.2d at 30. The
Second Circuit concluded the enumerated list in § 525(a) was composed solely of benefits conferred by
the state that were unrelated to credit, and found Congress’ failure to manifest any intention to include
benefits of a distinctly different character was unambiguous. Id. The court determined that while Congress
may have intended to allow expansion of the scope of § 525, it also clearly intended such expansion
would be limited to situations sufficiently similar to Perez to fall within the enumeration, and found the
extension of credit at issue before it was manifestly different from both examples given in the Senate
Report, i.e., licensing and exclusion from a union. Id. at 30–31.
In 1994, Congress signaled its disapproval of Goldrich by enacting § 525(c), as the Second Circuit
specifically acknowledged in Stoltz:
Although courts and commentators generally refer to section 525(a) as the
antidiscrimination provision, section 525 contains two additional antidiscrimination
provisions, which were added after the 1978 enactment of section 525(a). Section
525(b), enacted in 1984, prohibits discrimination against debtors by private employers.
11 U.S.C. § 525(b) (1999). Section 525(c), enacted in 1994, prohibits discrimination
against debtor-borrowers on the basis of discharged, unrepaid loans by governmental
units operating a student loan or grant program. 11 U.S.C. § 525(c) (2001). Section
525(c) signaled congressional disapproval of Goldrich v. New York State Higher
Educ. Servs. Corp., 771 F.2d 28 (2d Cir. 1985), in which this Court had narrowly
construed section 525(a)’s “other similar grant” language to not include
extensions of credit. Neither section 525(b) nor section 525(c) is implicated by this
appeal.
Stoltz, 315 F.3d at 86, n. 2 (emphasis added).
In the bankruptcy case underlying the Second Circuit’s 2002 Stoltz decision, this Court had
narrowly construed § 525(a), reasoning that § 525(a) did not protect debtor-tenants from eviction by
public housing authorities for nonpayment of prepetition rent and granting the defendant housing
authority’s motion for relief from stay. Stoltz, 315 F.3d at 83. The District Court reversed and reinstated
the automatic stay, thereby preventing the eviction, holding that § 525(a) did prohibit a public housing
authority from evicting a debtor-tenant from public housing based on nonpayment of discharged,
prepetition rent. Id. at 84. The Second Circuit affirmed the District Court, finding this Court had
construed § 525(a) too narrowly and further concluding § 525(a) controlled over § 365 and precluded the
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housing authority from evicting the debtor-tenant. Id.
The Second Circuit in Stoltz began its analysis of § 525(a) by reviewing the development of the
antidiscrimination provision, starting with the codification of Perez v. Campbell, 402 U.S. 637 (1971).
The Second Circuit observed that in Perez, the Supreme Court struck down a state statute that withheld
driving privileges from debtors who failed to satisfy motor-vehicle-related tort judgments discharged
under bankruptcy law, finding that statute discriminated against debtors in a manner contrary to “fresh
start” principles, and concluded Congress had signaled its approval of Perez by subsequently enacting
§ 525(a). Stoltz, 315 F.3d at 87. The Second Circuit found it notable that the text of § 525(a) did not limit
its scope to the facts presented in Perez, but instead applied to any governmental unit and covered not
only licenses, but also permits, charters, franchises, and other similar grants, and applied regardless of
whether the governmental unit involved was the creditor or a grantor conditioning a grant on the debtor’s
satisfaction of a discharged debt owed to a third party. Id. The Second Circuit then reviewed case law
development construing § 525(a) since its enactment, pointing out that courts had interpreted it to protect
debtors from discrimination in a wide variety of contexts, including a debtor’s right to operate a motor
vehicle, a debtor’s ability to engage in a trade or business, and a debtor’s ability to obtain essential goods
and services. Id. at 87–88. However, the court opined, the scope of § 525(a)’s protection in the context of
public housing was unsettled. Id. at 88.
Turning to the public housing lease at issue, the Second Circuit rejected the housing authority’s
argument that the eviction it sought was not proscribed by § 525(a) because a public housing lease is not
an “other similar grant” within the meaning of that provision. Stoltz, 315 F.3d at 89. The court described
the housing authority’s proposed construction of § 525(a) as “artificially narrow” because “the plain
language of the provision indicates that eviction would revoke a protected grant, i.e., the lease, in
violation of section 525(a).” Id.
In its analysis of the plain language of § 525(a), the Second Circuit began with the premise that the
term “other similar grant” was not defined by the Bankruptcy Code. Stoltz, 315 F.3d at 89. The court did
not find this surprising:
The omission of a statutory definition for the term “other similar grant” is
unsurprising in light of the antidiscrimination provision’s legislative history, which
indicates that “… the section is not exhaustive. The enumeration of various forms of
discrimination against former bankrupts is not intended to permit other forms of
discrimination …” and delegates to the judiciary the responsibility “to mark the
contours of the anti-discrimination provision in pursuit of sound bankruptcy policy.”
H. Rep. No. 95-595, at 366-67 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6323.
Id. at p. 89, n. 4. The Second Circuit looked first at the meaning of “grant,” finding:
In common parlance, a grant is “a transfer of property by deed or writing.” Merriam
Webster's Collegiate Dictionary 507 (10th ed. 2000). As a legal term, a grant is “an
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agreement that creates a right of any description other than the one held by the
grantor. Examples include leases, easements, charges, patents, franchises, powers,
and licenses.” Black's Law Dictionary 707 (7th ed. 1999) (emphasis added).
Similarly, a lease is “[a] contract by which a rightful possessor of real property
conveys the right to use and occupy that property in exchange for consideration.” Id.
at 898. Thus, a public housing lease is a grant by which a public housing authority
conveys to a public housing tenant the right to use and occupy public housing in
exchange for rent. The only question that remains is whether a public housing lease
is a grant “similar” to a “license, permit, charter, [or] franchise.”
Id. at 89–90 (emphasis in original).
In answering the question of whether a public housing lease is a grant “similar” to a “license,
permit, charter, [or] franchise” in the affirmative, the Second Circuit in Stoltz found two factors to be
determinative – the public housing lease at issue was (1) unobtainable from the private sector and
(2) essential to the debtor’s fresh start:
The common qualities of the property interests protected under section 525(a), i.e.,
“licenses, permits, charters, franchises, and other similar grants,” are that these
property interests are unobtainable from the private sector and essential to a debtor's
fresh start. For instance, a real estate license, state university transcript, or driver’s
license may only be obtained from a particular governmental unit. A debtor who
cannot obtain her real estate license will be unable to pursue her chosen profession; a
debtor who cannot obtain his transcript will be unable to apply for certain jobs or
further schooling; a debtor who cannot obtain a driver’s license will be unable to
commute to many jobs or school.
Public housing leases, too, are property interests unobtainable from the private sector
and essential to a debtor’s fresh start. Public housing leases are, by definition,
obtainable only from governmental entities. Furthermore, a public housing lease is
essential to a debtor’s fresh start. An individual qualifies for public housing because
he or she cannot afford housing at prevailing market rates. In light of the notoriously
lengthy waiting lists that may exist for public housing, see, e.g., Housing Auth. Of
Pittsburgh v. Collins (In re Collins), 199 B.R. 561, 568 n.13 (Bankr. W.D. Pa. 1996),
an evicted debtor-tenant, along with any [dependents], would quite possibly become
homeless – a status not conducive to economic survival. A debtor-tenant’s future
right to participate in public housing programs – on a space available basis – would
therefore be of little or no practical value upon eviction. A debtor-tenant’s “entire
economic status [therefore] is dependent on” his or her current public housing lease,
In re Day, 208 B.R. 358, 367 (Bankr. E.D. Pa. 1997), which is his or her “single
most significant material possession,” In re Whitsett, 163 B.R. 752, 755 (Bankr. E.D.
Pa. 1994). Eviction-induced homelessness would “seriously affect the debtors’
livelihood [and] fresh start.” H. Rep. No. 95-595, at 367 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6268. Conversely, preventing homelessness promotes the
Code’s fresh start policy by helping debtors maintain steady employment and self-
sufficiency.
Stoltz, 315 F.3d at 90.
Since the Second Circuit found the plain text of § 525(a) compelled the conclusion that a public
housing lease, and the debtor-tenant’s current right to participate in the public housing program, was a
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protected grant, the court found it unnecessary to delve into § 525’s legislative history. Stoltz, 315 F.3d at
92. However, the Second Circuit went on to find the legislative history supported its interpretation of
“other similar grants” as inclusive of public housing leases:
The legislative history specifically rejects a narrow construction of the
antidiscrimination provision and makes clear that 525(a) protects the debtor’s fresh
start.
Section [525(a)] 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 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.
H. Rep. No. 95-595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6323.
Id. at 92, n. 6 (modification in original).
In this Court’s view, Stoltz clearly denotes the Second Circuit’s departure from – and disapproval
of – its earlier narrow construction of § 525(a) in Goldrich. At the beginning of its discussion in Stoltz,
the Second Circuit points out that in Goldrich it had previously “narrowly construed section 525’s ‘other
similar grant’ language,” and Congress had signaled disapproval of Goldrich by enacting § 525(c). Stoltz,
315 F.3d at 86, n. 2 (emphasis added). The Second Circuit in Stoltz then proceeds to reject, at multiple
points throughout its decision, a narrow construction of § 525(a): it (i) expressly rejects the housing
authority’s “artificially narrow construction of section 525(a)” based on the plain language of that
provision, (ii) asserts “the legislative history fully supports [the court in Stoltz’s] interpretation of ‘other
similar grants’” as it “specifically rejects a narrow construction” of § 525(a); and (iii) concludes that this
Court, in the underlying bankruptcy case, had “construed section 525(a) too narrowly.” Id. at 84, 89, 92,
n.6. Otherwise, the Second Circuit in Stoltz does not reference Goldrich at all, and at no point does it
follow or even reference its earlier § 525(a) analysis in that case.
Although the Second Circuit found in Goldrich, in 1985, that Congress “clearly intended such
expansion would be limited to situations sufficiently similar to Perez to fall within the enumeration” of
§ 525(a), Goldrich, 771 F.2d at 30–31, by 2002 the Second Circuit in Stoltz had the benefit of hindsight,
and Congress’s clear message – issued with enactment of § 525(c) in 1994 – disagreeing with the Second
Circuit’s earlier interpretation of Congressional intent. See Stoltz, 315 F.3d at 86, n. 2. The Second
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Circuit in Stoltz takes a much broader view of Perez, and the items enumerated in § 525(a), than it had
taken 17 years earlier in Goldrich, finding that “[n]otably, the text of Section 525(a) does not limit its
scope to the facts presented in Perez,” and “section 525(a) has been interpreted by the courts to protect
debtors from discrimination in a wide variety of contexts.” Stoltz, 315 F.3d at 87.
Moreover, even absent this Court’s conclusion that Stoltz signals the Second Circuit’s departure
from its earlier legal analysis in Goldrich, the Court finds the PPP is only superficially similar to the
commercial extension of credit at issue in Goldrich, and is in fact much more akin to the public housing
lease in Stoltz.
In Goldrich, the appellee initially obtained a student loan from First National City Bank, which
was guaranteed by the appellant state education service. Goldrich, 771 F.2d at 28–29. The bankruptcy
court’s proposed findings indicated that loan carried 7.5% interest, 45 B.R. 514, 516 (Bankr. E.D.N.Y.
1984), which was not controverted by the Second Circuit decision. After the appellee’s bankruptcy
discharge, he sought additional student loan funds from, and his applications were accepted by, various
New York banks. Goldrich, 771 F.2d at 29. Nothing in Goldrich indicates the student loans at issue in that
case were other than an extension of credit on market terms, available in the private sector.
By contrast, the CARES Act was not enacted to increase the availability of commercial loans.11
Rather, it includes stimulus funds designed to assist businesses and ensure American workers continue to
be paid, despite the economic impact of Covid-19 and social distancing measures (UMF ¶5). The CARES
Act establishes the PPP as a convertible loan program with no repayment obligations for PPP
disbursements if, among other things, the funds are used for payroll and wage expenses (id.).
As the bankruptcy court in Alpha Visions found,
[The PPP] is intended to meet an unprecedented crisis using whatever tools were
ready to hand. The fact that SBA had existing relationships with lenders and their
small-business customers throughout the United States provided a structure for
distributing congressionally appropriated funds. The fact that notwithstanding the
Affordable Care Act’s expansion of the availability of health insurance to
Americans, many if not most Americans who have health insurance receive it as a
benefit of their employment. Thus, maintaining employees’ status as employees was
important for reasons other than merely providing income replacement. This may
have accounted for some of the more unusual provisions of this “loan” program,
most importantly, the fact that no underwriting function is anticipated and the fact
that the “loan” will be completely forgiven if the applicant simply uses 75% of the
loan proceeds to keep its employees employed.
This was the conclusion of Bankruptcy Judge David Jones in Hidalgo County
Emergency Service Foundation v. Carranza (In re Hidalgo County Emergency
11
This Court’s TRO decisions referenced the TRO in Penobscot Valley Hosp., 20-ap-01005 (Bankr. D. Me. May 1, 2020), doc.
# 18, p. 7, for the proposition that “the CARES Act is a grant of financial aid necessitated by a public health crisis.” (AP # 20-
1003, doc. # 20, p. 6; AP # 20-1004, doc. # 22 p. 7.) As the court in Penobscot has since changed its view on this issue in its
proposed findings and conclusions, Penobscot, 20-ap-01005, doc. # 58, p. 18 (“the PPP is a loan program; it is not merely a
grant of aid”), the Court does not rely on the Penobscot TRO in its characterization of the CARES Act here.
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Service Foundation), Case No. 19-20497; Adv. Pro. No. 20-2006, 2020 WL 2029252
(Bankr. S.D. Tex.) (transcript of oral ruling rendered April 24, 2020), who said:
And in fact there really isn’t an underwriting function…. There’s no
evaluation of ability to repay, there’s no evaluation of collateral….
The entire intent of the program is for people not to pay this back. It’s
a way of getting money from the government to people who are being
harmed. And so long as they use it the right way, they don’t have to
pay it back.
***
This isn’t a loan program. This is a support program.
Complaint, Ex. 10, transcript of April 24, 2020, TRO hearing, pp. 22–23. This was
also the conclusion of Bankruptcy Judge David T. Thuma in Archdiocese of Santa
Fe:
…
As shown above, the PPP is not a loan program. It is a grant or
support program. The target grant recipients are small businesses in
financial distress. The PPP could only be offered by the government;
private lenders do not give away money. PPP funds “are unobtainable
from the private sector.” Stoltz, 315 F.3d at 90. They also are
essential to Plaintiff’s fresh start. Id. Of all the benefits a government
can grant, free money might be the best of all. Denying Plaintiff
access to PPP funds solely because it is a debtor violates § 525(a).
Archdiocese of Santa Fe, 2020 WL 2096113, at *8.
Alpha Visions, 20-ap-00071 (Bankr. W.D. Tenn. June 3, 2020), doc. # 19, pp. 25–26.
While nominally designated as a “loan,” the unique features of the PPP, including a lack of any
underwriting and a repayment obligation that only arises if the borrower fails to use the funds for
purposes underlying the CARES Act, distinguish it from the commercial extension of credit at issue in
Goldrich.12 These same features render the PPP analogous to the public housing lease at issue in Stoltz.
Both subsidized public housing and the PPP are government grant or support programs aimed at
helping people in financial distress. Just as “a public housing lease is a grant by which a public housing
authority conveys to a public housing tenant the right to use and occupy public housing in exchange for
[reduced] rent,” Stoltz, 315 F.3d at 90, the PPP is a grant by which the federal government conveys to
small businesses impacted by the Covid-19 pandemic the right to use, with no obligation to repay, PPP
funds in exchange for using a certain portion of those funds for payroll and wage expenses13 (UMF ¶ 5).
12
The bankruptcy court in Alpha Visions, 20-ap-00071 (Bankr. W.D. Tenn. June 3, 2020), reaches a similar conclusion
regarding Toth. The court observes, “[t]he SBA responds that by its plain language, section 525(a) does not apply to lending or
loan guarantees. It claims that the Sixth Circuit directly addressed this issue in Toth[.]” Id. at doc. # 19, p. 23. However, rather
than finding Toth applicable, the court rules in favor of the plaintiffs on their § 525(a) claims, finding “the PPP is unlike any
other government program previously analyzed under section 525[.]” Id. at p. 25.
13
While the court in USA Gymnastics, 20-ap-50055 (Bankr. S.D. Ind. June 12, 2020), distinguished Stoltz on the basis that
“[t]here, the ‘grant’ was a public housing lease, not a monetary grant,” id. at doc. # 20, p. 15, the Court finds this distinction
puts form over substance. A public housing lease confers not just a place to live, but also a significant financial benefit in the
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Further, both types of government programs, and the benefits they confer, are unobtainable from
the private sector. “Public housing leases are, by definition, obtainable only from governmental entities.”
Stoltz, 315 F.3d at 90. Similarly, the CARES Act establishes the PPP under § 7(a) of the Small Business
Act, codified in 15 U.S.C. § 636, a program administered only by the SBA (UMF ¶ 5). While public
housing leases and the PPP are superficially similar to private sector activity – a residential lease and an
extension of credit, respectively – they confer unique benefits impossible to obtain from the private
sector. Just as private lessors do not offer subsidized or free housing, private lenders do not offer free
money.
Finally, both programs are essential to a debtor’s fresh start. In Stoltz, the Second Circuit found
the debtor-tenant’s “entire economic status [therefore] is dependent on” his or her current public housing
lease, and “[e]viction-induced homelessness would ‘seriously affect the debtors’ livelihood [and] fresh
start,’” whereas “preventing homelessness promotes the Code’s fresh start policy by helping debtors
maintain steady employment and self-sufficiency.” Stoltz, 315 F.3d at 90. Here, as the Court discusses
below, both Plaintiffs would be irreparably harmed absent a permanent injunction allowing them to
proceed with their PPP application. The Plaintiffs’ income from business operations have declined
dramatically, and their exits from chapter 11 have been negatively impacted, due to the Covid-19
pandemic and related federal and state restrictions, and it is unknown when the Plaintiffs will be able to
make pre-pandemic levels of services available or when patients will feel safe seeking such services
(UMF ¶¶ 19–21, 25, 27). Because of lack of access to PPP funds, the Plaintiffs have had to spend their
limited existing cash to pay employees and basic operating expenses, and obtaining the PPP funds would
provide additional, needed liquidity to the Plaintiffs and would likely help facilitate their successful
reorganization (UMF ¶ 26). Predictable financial sustainability is critical to having a chapter 11 plan
confirmed. The PPP funds would “seriously affect” the Plaintiffs’ ability to continue business operations
and successfully reorganize, and a confirmed and successful plan is essential to the fresh start of these
chapter 11 debtors.
Accordingly, based on the undisputed material facts and the Second Circuit’s reasoning in Stoltz,
the Court finds, as a matter of law, the PPP is an “other similar grant” within the meaning of § 525(a).
3. Other Circuits’ Decisions Construing § 525
In addition to Goldrich, the Defendant points to four decisions in other Circuits in support of its
argument that § 525(a) does not apply to the PPP, namely Watts, Ayes, Toth, and Exquisito. Although, as
set out above, this Court finds Stoltz to be dispositive of the Plaintiffs’ § 525(a) claims here, it will
form of rent subsidy. “An individual qualifies for public housing because he or she cannot afford housing at prevailing market
rates.” Stoltz, 315 F.3d at 90.
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examine the rationale in those other Circuit decisions since many of the decisions surveyed above relied
on them.
In Watts, the plaintiffs applied for loans under the Homeowner’s Emergency Mortgage Assistance
Program (“HEMAP”) and were deemed eligible for monthly assistance by the defendant housing agency.
Watts, 876 F.2d at 1091. After the plaintiffs filed for bankruptcy relief, the defendant reevaluated them
under HEMAP and terminated their mortgage assistance while the bankruptcy stay was in effect. Id. at
1091–92. The Third Circuit held Congress had limited the scope of § 525(a) to specified types of
transactions, and found even if it were inclined to venture beyond the confines of the language of the
statute, the suspension of mortgage financing at issue did not undermine the “fresh start” policy of the
Bankruptcy Code because assistance could be reinstated once the automatic stay was lifted if the debtor
were still at risk of foreclosure. Id. at 1094.
In Ayes, the appellant veterans were denied home loans from private lenders post-bankruptcy
because the appellee Veterans Affairs agency refused to extend a full guaranty, as it had suffered losses
on previous loan guarantees made on the veterans’ behalf that had not been repaid. Ayes, 473 F.3d at 108.
The Fourth Circuit held the guaranty entitlement was not an “other similar grant” under § 525(a) because,
unlike licenses, permits, charters, and franchises, it did not implicate the government’s gatekeeping role in
determining who might pursue certain livelihoods. Id. at 109.
By contrast, in Exquisito, the appellee food service provider participated in the SBA’s § 8(a)
program for socially and economically disadvantaged businesses. Exquisito, 823 F.2d at 152. After the
appellee filed for bankruptcy relief, the appellant United States Air Force (“USAF”) refused to renew the
appellees’ contract. Id. The Fifth Circuit compared two approaches in delineating the scope of § 525, one
construing § 525 liberally to preclude actions that would frustrate the policy of the Bankruptcy Code of
aiding the rehabilitation of the debtor and providing a fresh start, and the other focusing on the specific
language of the section, reading the legislative history more narrowly and tending to limit the application
of § 525 to situations strictly analogous to those enumerated in the statute. Id. at 153. The court adopted a
narrow construction approach to § 525(a) and focused its analysis on two factors, the character of the
relationship between the parties and the USAF's reason for refusing to exercise the option, in determining
whether the refusal was prohibited by § 525. Id. at 154. The court found that, under the § 8(a) program,
the SBA had contracted with the USAF to provide services, then the SBA had determined appellee would
have exclusive rights to perform for the length of the contract and the SBA would assist appellee during
the life of the contract. Id. The court held the § 8(a) program was essentially a franchise as defined in
Black’s Law Dictionary and, as such, within the scope of § 525(a), and discriminating against the appellee
solely because of filing under chapter 11 was prohibited. Id.
In Toth, the plaintiff applied to the defendant state housing development authority for a home
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improvement loan through a program administered for the U.S. Department of Housing and Urban
Development, several months post-bankruptcy. Toth, 136 F.3d at 478–79. HUD denied her loan
application based on the agency’s policy of requiring applicants to have at least three years between a
bankruptcy case and their application, in order to be eligible. Id. at 479. The Sixth Circuit held the items
enumerated in § 525(a) were benefits conferred by government that are unrelated to the extension of
credit, and the target of § 525(a) is the government’s role as a gatekeeper in determining who may pursue
certain livelihoods, and consequently denied the plaintiff’s request for § 525 relief. Id. at 480.
Although each of these four decisions cited Goldrich in support of their narrow construction of
§ 525(a),14 the majority opinion in Stoltz makes no reference to Watts, Exquisito, or Toth (Ayes was
issued after Stoltz). Instead, the Second Circuit repeatedly rejects a narrow construction of that provision.
Stoltz, 315 F.3d at 84, 89, 92, n.6. Notably, the dissent in Stoltz does cite Toth, arguing the common
thread through the enumerated items in § 525(a) is the “government’s role as a gatekeeper in determining
who may pursue certain livelihoods.” Stoltz, 315 F.3d at 95 (dissenting opinion, citing Toth, 136 F.3d at
480); see also Ayes, 473 F.3d at 109 (quoting Toth). The majority in Stoltz chose not to follow this
limited view of § 525(a) shared by the dissent and the courts in Toth and Ayes, given that a public
housing lease, which the Second Circuit determined in Stoltz to be within the purview of § 525(a), is
unrelated to the government’s role in gatekeeping the pursuit of livelihood.
B. A Permanent Injunction is Warranted
Having determined that the Defendant’s conduct – namely, excluding the Plaintiffs from
participation in the PPP program solely because of their status as bankruptcy debtors – constitutes
discrimination in violation of § 525(a) of the Bankruptcy Code, the Court turns next to the formulation of
a remedy for the Plaintiffs and the question of whether a permanent injunction is warranted.
The Plaintiffs have requested a four-part permanent injunction that
(i) requires the SBA to allow the Plaintiffs to participate fully in all aspects of the
PPP, if otherwise eligible, once the Debtor’s bankruptcy status is disregarded,
including submission of a PPP application, review of the application by a
participating financial institution, participation in forgiveness and review of an
application for forgiveness, and provision of a 100% SBA guaranty;
(ii) established the date the Plaintiffs’ applications were approved, pursuant to this
Court’s Second TRO, as the date the Plaintiffs received the PPP funds and the
start of the “covered period” as defined by §§ 1102 and 1106 of the CARES Act,
even if the Plaintiffs actually received the PPP funds at a later date;
(iii) provides that the Plaintiffs shall submit their PPP forgiveness applications at the
end of the “covered period”, and SBA shall process and review the Plaintiffs’
14
The courts in Watts and Ayes objected to characterizing their construction of § 525(a) as narrow. “As Watts noted, because
§ 525(a) is unambiguous, our interpretation is not ‘narrow,’ but instead succinctly correct.” Ayes, 473 F.3d at 111, citing
Watts, 876 F.2d at 1093–94. However, this Court is mirroring the language the Second Circuit itself uses to describe Goldrich.
See Stoltz, 315 F.3d at 86, n. 2 (“Goldrich … in which this Court had narrowly construed section 525(a)’s ‘other similar
grant’ language”) (emphasis added.)
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forgiveness applications as required by the CARES Act and the SBA’s rules and
guidance without regard to the Plaintiffs’ bankruptcy status; and
(iv) provides that the Plaintiffs’ bankruptcy status shall not be grounds for the SBA to
refuse to honor the forgiveness payment or guaranty obligations to a participating
financial institution that disbursed funds to them, under the PPP program.
(AP # 20-1003, doc. # 48, ¶¶ 2–3; AP # 20-1004, doc. # 45, ¶¶ 2–3).
Mascoma has not taken a position on the merits of the action, but has filed a memorandum of law
asking that any permanent injunction this Court grants include the following provisos, in order to protect
it from financial risk or loss:
(1) the Plaintiffs did not lose their qualification as “eligible recipients” as defined in
the CARES Act as a result of these bankruptcy cases or by filing PPP loan
applications that did not disclose their involvement in bankruptcy;
(2) any actions Mascoma took in accordance with the orders of this Court, including
without limitation its submission of loan applications to the SBA that did not
disclose that the Plaintiffs had filed bankruptcy cases, or any extension or delay in
meeting any time requirements for disbursing the PPP loan funds, shall:
(a) have no adverse effect on Mascoma’s eligibility for the SBA guaranty,
payment of lender processing fees, and remittance of amounts of loan
forgiveness by Mascoma, and
(b) not be treated as a breach or violation of Mascoma’s obligations under
section III.3.b of the First Interim Final Rule and the document collection
and retention requirements described in the lender application form (SBA
Form 2484); and
(3) any deadlines or other requirements for disbursing the PPP funds, for granting
loan forgiveness, or applying for remittances under 15 U.S.C. § 9005 are stayed
until entry of a final judgment, with these provisions, is not subject to further
appeal.
(AP # 20-1003, doc. # 54, p. 7; AP # 20-1004, doc. # 52, p. 7).
The Defendant opposes entry of any injunction, relying primarily on three arguments: (1) the
Plaintiffs are barred from obtaining an injunction based on her and the SBA’s sovereign immunity,
pursuant to 15 U.S.C. § 634(b)(1); (2) the Plaintiffs have failed to demonstrate the required elements
authorizing a permanent injunction; and (3) the scope of the injunction sought is overbroad and contrary
to law (AP # 20-1003, doc. # 56, pp. 3–4; AP # 20-1004, doc. # 54, pp. 3–4).
The Court must determine, as a matter of law, whether the plaintiffs are entitled to a permanent
injunction and, if so, the scope of that relief. It begins with an analysis of the Defendant’s most
fundamental argument in opposition to injunctive relief.
1. Sovereign Immunity Does Not Bar Injunctive Relief Here
In its TRO decisions, the Court previously examined the question of whether the Defendant is
protected by sovereign immunity from the Plaintiffs’ requests for injunctive relief, and held (i) it has
statutory authority under 11 U.S.C. §§ 105, 106, and 525 to enter carefully tailored injunctive relief
against the Defendant; (ii) it has constitutional authority to enter a final judgment; and (iii) it is not barred
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from granting injunctive relief by 15 U.S.C. § 634(b)(1) (AP # 20-1003, doc. # 20, p. 5; AP # 20-1004,
doc. # 22, p. 5).
In her memorandum of law filed in connection with this summary judgment proceeding, the
Defendant again asserts injunctive relief is barred under 15 U.S.C. § 634(b)(1),15 but presents no new
arguments that persuade this Court there is any reason to disturb its earlier determination that §§ 105, 106,
and 525 abrogate the Defendant’s sovereign immunity. As this Court previously concluded, these
sections, taken together, authorize the Court to enjoin the Defendant from taking any action this Court
finds to be a violation of § 525(a). Moreover, notwithstanding the Defendant’s arguments to the contrary,
this Court finds the rationale of the First Circuit in Ulstein Maritime, Ltd. v. United States, 833 F.2d 1052
(1st Cir. 1987), to be persuasive. That court opined as follows:
The bare language facially [of § 634(b)(1)] suggests that “no . . . injunction” can be
directed at the SBA. Some courts have read the wording in this way, and concluded
that all injunctive relief directed at the SBA is absolutely prohibited. However, other
courts have found that § 634(b)(1) does not bar injunctions in all circumstances.
The meaning of the limitation on the waiver of immunity in § 634(b)(1) was
analyzed in Cavalier Clothes, 810 F.2d at 1108. There the court reviewed and
endorsed the careful analysis of the legislative history of § 634(b)(1) in Related
Industries, 2 Cl.Ct. at 522–23. The origin and purpose of the language in § 634(b)(1)
goes back to the decision in FHA v. Burr, 309 U.S. 242, 84 L. Ed. 724, 60 S. Ct. 488
(1940), which held that when Congress established an agency that was authorized to
engage in business transactions and permitted it to “sue and be sued” (as is true of
the SBA), this waiver extended to all civil processes incident to suit such as
garnishment and attachment of the agency’s assets. Therefore, language such as that
in § 634(b)(1) was added to enabling statutes to bar the attachment of agency funds
and other interference with agency functioning. The same boilerplate language is
found repeatedly in statutes establishing agencies that provide loans or funds to the
public, e.g., 7 U.S.C. § 1506(d) (Federal Crop Insurance Corporation); 15 U.S.C. §
714b(c) (Commodity Credit Corporation); 42 U.S.C. § 3211(11) (Secretary of
Commerce). While the specific legislative history of § 634(b)(1) is silent on the
purpose of this language, the legislative history of earlier statutes containing the
identical wording indicates that it was intended to keep creditors or others suing the
government from hindering and obstructing agency operations through mechanisms
such as attachment of funds. “Nothing in the language or the legislative history of §
634 suggests that Congress intended to grant the SBA any greater immunity from
injunctive relief than that possessed by other governmental agencies.” “Rather, it
merely intended to insure [sic] that the SBA be treated the same as any other
government agency in this respect.” The no-injunction language protects the
agency from interference with its internal workings by judicial orders attaching
15
15 U.S.C. § 634(b)(1) provides [with the Defendant’s emphasis added]:
the SBA may sue and be sued in any court of record of a State having general jurisdiction, or in any United
States district court, and jurisdiction is conferred upon such district court to determine such controversies
without regard to the amount in controversy; but no attachment, injunction, garnishment, or other
similar process, mesne or final, shall be issued against the [agency] or [its] property[.]
(AP # 20-1003, doc. # 56, p. 17; AP # 20-1004, doc. # 54, p. 17).
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agency funds, etc., but does not provide blanket immunity from every type of
injunction. In particular, it should not be interpreted as a bar to judicial review
of agency actions that exceed agency authority where the remedies would not
interfere with internal agency operations.
Ulstein, 833 F.2d at 1056–57 (internal citations omitted) (emphasis added).
Subsequent to this Court’s issuance of the TROs here, its sister court in Tennessee reached the
same conclusion in Alpha Visions, 20-ap-00071 (Bankr. W.D. Tenn. June 3, 2020), with respect to
sovereign immunity and acknowledged the importance and applicability of the Ulstein decision in PPP
causes of action. Id. at doc. # 19, pp. 6–9. In weighing the merits of the arguments before it, that court
also sought to deduce how the Sixth Circuit would likely view the sovereign immunity questions raised in
PPP litigation. To do this, the bankruptcy court examined the recent ruling in DV Diamond Club of Flint,
LLC, 2020 WL 2315880, *7 (E.D. Mich. May 11, 2020), in which the district court granted a preliminary
injunction against the SBA based on its denial of a certain entity’s PPP eligibility, and the Sixth Circuit’s
denial of a stay pending appeal of that ruling, DV Diamond Club of Flint, LLC, No. 20-1437 (6th Cir.
May 16, 2020). Those decisions persuaded the Alpha Visions court it had a solid jurisprudential basis for
finding sovereign immunity did not preclude it from entering a permanent injunction against the SBA
based on the SBA’s violation of the APA and § 525. In reaching that conclusion, the bankruptcy court
observed that Ulstein provided part of the foundation for the district court’s ruling.
This court is convinced that the refusal of the court of appeals to disturb the
injunction issued by the district court in DV Diamond Club is the best indication of
how the court of appeals will rule on the merits [of the plaintiff’s claim]. Relying on
Camelot Banquet Rooms, which in turn relied upon Ulstein Maritime, Ltd. v. United
States, 833 F.2d 1052, 1056–57 (1st Cir. 1987), the district court held that section
634(b)(1) does not preclude SBA from being enjoined to set aside unlawful agency
action. Here, as there, all that SBA will be enjoined to do is to direct the Plaintiff’s
chosen lender to process its loan application and to guarantee any PPP loan to which
Alpha is otherwise entitled. This court is persuaded that injunctive relief is available
to Alpha in the context of this adversary proceeding.
Alpha Visions, 20-ap-00071 (Bankr. W.D. Tenn. June 3, 2020), doc. # 19, p. 8. This Court reaffirms its
reliance on Ulstein and the applicability and significance of that case in analyzing the SBA’s sovereign
immunity defense in these PPP proceedings.
It is also significant that Congress enacted § 106 of the Bankruptcy Code in 1978, 20 years after it
enacted § 634 of the Small Business Act in 1958 (and 25 years after prior similar provisions of that Act
were originally enacted in 1953). The Court finds this sequence of events to support construing § 106(a)
as an expression of Congress’ intent to abrogate sovereign immunity with respect to Bankruptcy Code §§
105, 106, and 525. Congress has not authorized the Defendant to take actions that violate Bankruptcy
Code § 525(a), and the undisputed material facts do not show the injunction the Plaintiff seeks would
interfere with the SBA’s internal agency operations.
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Accordingly, this Court concludes it is not barred from entering a carefully crafted injunction
against the SBA by principles of sovereign immunity or 15 U.S.C. § 634(b)(1).
2. Plaintiffs Meet the Legal Standard to Obtain a Permanent Injunction
Having found there are no material facts in dispute, and sovereign immunity of the Defendant does
not bar the granting of this relief, the Court turns to the question of whether the Plaintiffs are entitled to an
injunction, as a matter of law. The legal standard for a permanent injunction is clear: the Plaintiffs must
demonstrate (a) they have suffered an irreparable injury, (b) the remedies available at law, such as
monetary damages, are inadequate to compensate for that injury, (c) considering the balance of hardships
between the Plaintiffs and the Defendant, a remedy in equity is warranted, and (d) the public interest
would not be disserved by a permanent injunction. Entergy Nuclear Vt. Yankee, LLC v. Shumlin, 733
F.3d 393, 422–23 (2d Cir. 2013) (quoting Monsanto Co. v. Geertson Seed Farms, 561 U.S. 139 (2010)).
“The decision to grant or deny permanent injunctive relief is an act of equitable discretion …”
eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). “In fashioning the injunction, the Court
should balanc[e] ... the equities to reach an appropriate result protective of the interests of both parties.”
Patsy’s Italian Rest., Inc. v. Banas, 658 F.3d 254, 272 (2d Cir. 2011) (emphasis in original) (quoting
Sterling Drug, Inc. v. Bayer AG, 14 F.3d 733, 747 (2d Cir. 1994)). Additionally, the Second Circuit has
instructed that the court’s duty in formulating the scope and contours of a permanent injunction is to
ensure that it is appropriate for the circumstances, and type of business, before it:
A district court has a “wide range of discretion in framing an injunction in terms it
deems reasonable to prevent wrongful conduct.” Given the district court’s great
flexibility in fashioning relief, we have frequently recognized that the use of a
disclaimer sign can, in the right circumstances, be appropriate relief. Whether [the
relief sought in the instant injunction] is appropriate “depends on the circumstances
of the relevant business and its consumers.”
Banas, 658 F.3d at 273–74 (internal citations omitted). Here, the Court must consider what is appropriate
for entities that are on the front line of Covid-19 care, during a national pandemic caused by that disease.
In their memoranda of law, the Plaintiffs and the Defendant address the legal standard for a
permanent injunction in the context of SH and SMCS’ circumstances, with the Plaintiffs asserting they
have established all four prongs necessary to meet this standard and the Defendant contending the
Plaintiffs have failed to satisfy any of them.
a. Irreparable Injury
The first prong of the test, irreparable injury, can encompass intangible harm as well as economic
harm.
Irreparable harm is “harm for which there is no adequate legal remedy, such as an
award for damages.” For this reason, economic harm is not generally considered
irreparable. But where parties cannot typically recover monetary damages flowing
from their injury—as is often the case in APA cases—economic harm can be
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considered irreparable. Intangible injuries may also qualify as irreparable harm,
because such injuries “generally lack an adequate legal remedy.”
E. Bay Sanctuary Covenant v. Trump, 950 F.3d 1242, 1280 (9th Cir. 2020) (internal citations omitted and
emphasis added). Courts may also find irreparable harm where the “evidence suggest[s] that it is
impossible to precisely calculate the amount of damage plaintiff will suffer,” Southwest Stainless, LP v.
Sappington, 582 F.3d 1176, 1191 (10th Cir. 2009) (citing Equifax Servs., Inc. v. Hitz, 905 F.2d 1355,
1361 (10th Cir. 1990)).
In the instant proceedings, there are too many unknowns to precisely quantify the damages the
Plaintiffs are likely to suffer based on the Defendant’s discrimination. The following material facts are
undisputed and address that point:
(i) The Plaintiffs’ income from business operations have declined dramatically, and their exits from
chapter 11 have been negatively impacted, due to the Covid-19 pandemic and related federal and
state restrictions (UMF ¶¶ 19–21).
(ii) It is unknown if or when the Plaintiffs will be able to make available pre-Covid-19 levels of
services or, once that date arrives, when patients will feel safe seeking such services (UMF ¶¶ 21,
25, 27).
(iii) The first tranche of first come, first served PPP funds has already been exhausted, and it is
unknown whether there will be any funds under the PPP program available at the time litigation of
the instant issues concludes, or whether future funds will be made available under the PPP
program, once the current tranche of PPP funds are exhausted (UMF ¶¶ 5, 13, 22).
At this juncture, it is not possible to predict what resolutions or circumstances will flow from these
uncertainties. Hence, it is not possible to calculate the amount of the damages the Plaintiffs will ultimately
suffer. However, the Plaintiffs have established it is likely they will suffer a real and substantial loss if
deprived access to PPP funds. This will manifest both as the loss of opportunity to obtain funds that will
most likely turn out to be forgivable, which other non-debtor entities are able to obtain, as well as the loss
of cash to pay employees and basic operating expenses (see UMF ¶ 26). Denial of access to the PPP not
only denies the Plaintiffs a significant amount of money in the near-term, but also jeopardizes their ability
to reorganize, exit chapter 11, and continue operating in the future, causing immeasurable harm to the
Plaintiffs, their employees, and the community if these Plaintiffs – two of the largest employers in the
area and providers of essential medical services – are forced to shut down (UMF ¶¶ 1–2, 16, 26). The
Plaintiffs readily acknowledge they cannot pinpoint an exact date they will run out of money and disclose
that they have received other emergency funding, but repeatedly return to the reality we must all confront
today, which is that no one knows if or when there will be a vaccine available or, conversely, a second
wave of Covid-19 cases (UMF ¶¶ 20–25).
The Defendant argues the Plaintiffs have only shown that they would benefit from PPP funds, and
that showing is insufficient to demonstrate the requisite irreparable harm. She points in particular to their
receipt of significant federal stimulus funds, and their acknowledgement that those funds have staved off
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the immediate risk of closure and are not the sole determining factor of a successful exit from chapter 11.
The Defendant also points to the Plaintiffs’ inability to project an exact amount of damages or state with
certainty how much other stimulus money might become available to them or identify the date when their
business operations will normalize, in support of her claim that the Plaintiffs have failed to show
irreparable harm (AP # 20-1003, doc. # 56, p. 22; AP # 20-1004, doc. # 54, p. 22).
From the Court’s perspective, the declarations of the Plaintiffs’ interim/acting CEOs are
thoughtful, candid, and reflective of the uncertainty surrounding the coronavirus and its impact, and the
inability of anyone to prognosticate how this global pandemic will play out in this country, generally, or
with respect to the Plaintiffs’ operations, in particular.
The fatal flaw in the Defendant’s position that no injunction should be granted until it is clear the
Plaintiffs “will be unable to weather the storm,” id. at p. 23, is that position cannot be reconciled with the
uncertainty and unpredictability of the Covid-19 pandemic and its impact, which seems likely to be
significant for at least the next 12–18 months or until there is widespread treatment and a vaccine (see
UMF ¶ 27). By the time the Plaintiffs are in a position to make those determinations definitively, the
current tranche of PPP funds will likely be long gone, with no guarantee additional PPP funds will be
available. This issue of inherent uncertainty is analogous to the difficulty other courts have faced in trying
to discern and predict the damage that competition might cause. As Judge Hand opined, nearly 70 years
ago, irreparable injury has always included the kind of injury that is impossible to predict:
The plaintiff indeed has failed to show any “irreparable injury,” if by that is meant
that money will not satisfy any loss that the defendant's competition will cause;
nevertheless it has shown such an [irreparable] injury, if that includes the
impossibility of ascertaining with any accuracy the extent of the loss. That has
always been included in its meaning; and I cannot see how the plaintiff will ever be
able to prove what sales the defendant’s competition will make it lose, to say nothing
of the indirect, though at times far-reaching, effects upon its good will as the only
licensee of the British company.
Foundry Servs. v. Beneflux Corp., 206 F.2d 214, 216 (2d Cir. 1953) (Hand, J., concurring) (emphasis
added); see also Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992) (holding an injury is
irreparable “if the nature of the plaintiff’s loss would make damages difficult to calculate”); Berni v.
Barilla G. e R. Fratelli, S.p.A., 332 F.R.D. 14, 26 (E.D.N.Y. 2019) (“The Second Circuit has held on
multiple occasions that injunctive relief is appropriate where damages are not adequately ascertainable.”)
(citations omitted).
Based on the undisputed facts here, the Court concludes the Plaintiffs are now suffering harm –
and will continue to suffer harm – as a result of the Defendant’s discrimination. This finding is further
supported by the record in the underlying bankruptcy cases, including the financial reports, case
management conference orders, and sworn declarations attached to the parties’ statements of fact, without
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any objection (see AP # 20-1003, doc. # 36 (attaching copies of ch 11 # 19-10283, doc. ## 5, 336, 348),
doc. # 41; AP # 20-1004, doc. # 32 (attaching copies of ch 11 # 19-10285, doc. ## 11, 340, 357), doc. #
39; see also AP # 20-1003, doc. # 32 (attaching copies of ch 11 # 19-10283, doc. ## 337, 365, 384 and ch
11 # 19-10285, doc. ## 343, 357, 361, 379), doc. # 40; AP # 20-1004, doc. ## 30, 38). The difficulty (if
not impossibility) of quantifying that harm – particularly in the context of a global pandemic without a
vaccine – supports, rather than undercuts, the Plaintiff’s establishment of the irreparable injury prong.
b. No Adequate Remedy at Law
The salient question with respect to this prong is whether money damages would be adequate to
compensate the Plaintiffs for the discrimination they have suffered as a result of the SBA’s determination
that they are not eligible to participate in the PPP program solely because they are under the protection of
the Bankruptcy Code. As discussed above, where is it is not objectively and reasonably possible to
compute the amount of damages necessary to provide an appropriate remedy, there is no adequate remedy
at law. See Foundry Servs. v. Beneflux Corp., 206 F.2d at 216; see also Dresser-Rand Co. v. Virtual
Automation Inc., 361 F.3d 831, 848 (5th Cir. 2004) (holding “[F]or purposes of injunctive relief, an
adequate remedy at law exists when the situation sought to be enjoined is capable of being remedied by
legally measurable damages”) (citation omitted).
Indeed, as the District Court for the District of Vermont (Crawford, C. J.) observed just last year,
in the exercise of their “interstitial” equitable powers, courts may, and should, impose injunctive relief
where a sum of money is insufficient to remedy the injury before them:
Injunctive relief may be available in cases in which money damages cannot address
the loss. Appeal of Gadhue, 149 Vt. 322, 326, 544 A.2d 1151, 1153 (1987) (“Thus,
plaintiff's ability to request a mandatory injunction was in no way impaired by the
absence of special damages.”).
The equitable powers of our courts are available to address important public policy
concerns, especially those which have not been resolved through statutory or
common-law damages remedies. The equitable authority is interstitial. It fills gaps
and repairs unfairness in particular cases.
Sullivan v. Saint-Gobain Performance Plastics Corp., 431 F. Supp. 3d 448, 456–57, 2019 U.S. Dist.
LEXIS 221612 (D. Vt. 2019).
Based on the undisputed material facts and the equitable exigencies presented in this proceeding,
the Court finds there is no adequate remedy at law and the Plaintiffs, therefore, prevail on this prong of
the test.
c. The Balance of Hardships
The Defendant rests on her previous briefing to demonstrate that the balance of hardships weighs
in her favor (AP # 20-1003, doc. # 56, p. 23; AP # 20-1004, doc. # 54, p. 23). The Court found above the
Plaintiffs would suffer irreparable harm absent a permanent injunction and that they have no adequate
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remedy at law. The Defendant’s primary argument on this issue has been that injunctive relief could
disrupt administration of the PPP. In its TRO decisions, the Court found to be without merit (AP # 20-
1003, doc. # 20, p. 9; AP # 20-1004, doc. # 22, pp. 9–10). In the absence of any new argument by the
Defendant, and for the same reasons as set forth in its previous decisions, the Court finds the balance of
hardships weighs definitively in favor of granting the permanent injunction.
d. The Public Interest
The Defendant also rests on her previous briefing with respect to the how public interest affects,
and would be affected by, the outcome of this dispute (AP # 20-1003, doc. # 56, p. 23; AP # 20-1004,
doc. # 54, p. 23). In its TRO decisions, the Court found the Plaintiffs’ businesses, both as “front line”
health care providers and as two of the largest private sector employers in the area, are vital to the public,
especially in the midst of the Covid-19 pandemic, and the scope of injunctive relief sought was
sufficiently narrow to allay the public interest concerns articulated by the Defendant (AP # 20-1003, doc.
# 20, pp. 9–10; AP # 20-1004, doc. # 22, pp. 10–11). There have been no new arguments or facts asserted
that persuade the Court to reach a different conclusion here. Accordingly, for the same reasons set forth in
its previous decisions, the Court finds the public interest is best served by granting the permanent
injunction.
e. Impediment to the Reorganization Process
Additionally, the Second Circuit – and the bankruptcy courts within this Circuit – have held that
bankruptcy courts have the authority to issue injunctions under § 105 when necessary to enjoin conduct
that “might impede the reorganization process,” and may do so even if the plaintiff has not established the
four usual required elements for an injunction described above. In reviewing the bankruptcy court’s
authority to issue such an injunction, the Second Circuit emphasized the equitable power of the
bankruptcy court, under § 105, to grant such extraordinary relief:
The permanent injunction entered by the bankruptcy court also is supported by its
equitable powers pursuant to § 105(a). That provision grants the bankruptcy court
power to “issue any order, process, or judgment that is necessary or appropriate to
carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a) (1988). “This
provision has been construed liberally to enjoin [actions] that might impede the
reorganization process.” MacArthur Co. v. Johns–Manville Corp. (In re Johns–
Manville Corp.), 837 F.2d 89, 93 (2d Cir.), cert. denied, 488 U.S. 868 (1988).
In re Prudential Lines Inc., 928 F.2d 565, 574 (2d Cir. 1991) (emphasis added and modification in
original). Prudential Lines reads as an endorsement of the ruling three years earlier in LTV Steel Co. v.
Bd. of Ed. (In re Chateaugay Corp. Reomar, Inc.), 93 B.R. 26 (S.D.N.Y. 1988), where the district court
held, “[t]he usual grounds for injunctive relief such as irreparable injury need not be shown in a
proceeding for an injunction under section 105(a).” Chateaugay, 93 B.R. at 29. Bankruptcy courts have
subsequently relied on those decisions to enter injunctions without requiring plaintiffs to demonstrate the
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four prongs of the injunction test, including the irreparable harm prong. See Adelphia Communs. Corp. v.
America Channel, LLC (In re Adelphia Communs. Corp.), 345 BR 69, 85 (Bankr. S.D.N.Y. 2006) (“the
Court notes that it has been repeatedly held in this district that the usual grounds for injunctive relief, such
as irreparable injury, need not be shown in a proceeding for an injunction under section 105(a)”).
This is consistent with the perspective of the leading bankruptcy treatise, which describes the
bankruptcy court’s equitable powers under § 105 by reference to a seminal U.S. Supreme Court decision,
Celotex Corp. v. Edwards, 514 U.S. 300 (1995):
The [Celotex] Court took an expansive view of “related to” jurisdiction, even
wondering at one point that “[t]he jurisdiction of bankruptcy courts may extend more
broadly” in chapter 11 cases than in chapter 7 cases. This gives some credence to
the argument that section 105 orders need to be assessed against the
background of the provisions and purposes of title 11.
In some respects, Celotex follows the Court’s lead in Energy Resources [495 U.S.
545 (1990)]. Energy Resources confirmed the equitable nature of the bankruptcy
power. The equitable origins of the bankruptcy power suggest substantial leeway to
tailor solutions to meet the diverse problems facing bankruptcy courts. Section 105
gives the bankruptcy court the power to fill in gaps and further the statutory
mandates of Congress in an efficient manner.
COLLIER ON BANKRUPTCY ¶ 105.01 (Richard Levin & Henry J. Sommer eds., 16th ed.) (emphasis added).
While this Court found above that the Plaintiffs have established the four elements traditionally
required for the issuance of an injunction, it finds further authority under § 105 to grant the injunction.
The Covid-19 pandemic has negatively impacted the Plaintiffs’ exit from chapter 11, as they have each
experienced an unforeseen, drastic and material drop in cash receipts (UMF ¶¶ 19, 21). Due to the lack of
PPP funds available to them, the Plaintiffs have had to spend their limited cash on payroll and other
immediate business operation needs; PPP funds would provide needed liquidity and likely help facilitate
their successful reorganizations and exits from chapter 11 (UMF ¶ 26).
Based on these undisputed facts, and acknowledging the impossibility of predicting the precise
impact of the coronavirus and the restrictions imposed in response to it, the Court finds that denying the
Plaintiffs’ access to the PPP funds might, and most likely will impede their reorganization process. This
finding is further supported by the undisputed record in these underlying bankruptcy cases, including
financial reports, case management conference orders, and sworn declarations attached to the parties’
statements of fact (see above). Based on Prudential Lines, and the jurisprudence regarding the criteria for
injunctive relief under § 105 within this Circuit, this record constitutes a sufficient basis for granting the
Plaintiffs’ request for a permanent injunction under § 105.
3. Plaintiffs’ Requested Injunctive Relief is Not Overly Broad or Contrary to Law
The Defendant argues that the scope of the injunction the Plaintiffs seek is overly broad and
contrary to law. She does not, however, explicate a rational basis for that position. The Plaintiffs are not
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seeking a national injunction or an injunction on behalf of anyone other than themselves. Contrary to the
Defendant’s interpretation of the Plaintiffs’ request for injunctive relief – see AP # 20-1003, doc. # 56, p.
24; AP # 20-1004, doc. # 54, p. 24 – the Plaintiffs are not asking this Court to direct any lender to make
the loan or the SBA to guaranty or forgive this loan (“at the front end of the loan application process” or
at any time), nor are they asking this Court for any special treatment other than the same access to the PPP
funds that all other similarly situated businesses would have if not in bankruptcy. The Defendant asserts
the “Plaintiffs are seeking to dramatically alter the status quo and favor these Plaintiffs over every other
recipient of a PPP loan.” Id. at p. 26. The Court finds this argument to be wholly unfounded; the Plaintiffs
are instead seeking equal footing with other applicants.
The only rather unconventional term the Plaintiffs seek in the injunction is a directive that, for
purposes of the CARES Act and the PPP program, the funds shall be “deemed disbursed” as of the date
their loan applications were approved. In light of the complexities and continually evolving nature of the
CARES Act legislation and its progeny, and the unpredictability of the Defendant’s interim and final
rules, this seems a prudent safeguard to include for both the Plaintiffs and their putative lender. The Court
does not find the terms the Plaintiffs have requested, even with this one unconventional contour, to be
overly broad or contrary to law.
In sum, the Court finds the Defendant’s three objections are unavailing. First, neither principles of
sovereign immunity nor any statute protects the Defendant from entry of an injunction against her based
on her discrimination against the Plaintiffs and violation of § 525(a) of the Bankruptcy Code. Second, the
undisputed material facts demonstrate the Plaintiffs have established the criteria for entry of an injunction
under both the generally accepted four-part test and the lower threshold test authorized by case law
construing the authority of bankruptcy courts to enter injunctions pursuant to § 105. Finally, the SBA’s
argument that the injunction is overly broad and contrary to law fails because the Court is granting a
narrowly tailored injunction, which is only as expansive in scope as is necessary to ensure that the
Plaintiffs have the same access to PPP funds, and PPP loan forgiveness, as they would have if they were
not in a bankruptcy case.
4. Mascoma’s Request for Certain Terms in Injunction
Mascoma’s memorandum of law focuses on the terms to be included in any judgment or
injunction this Court enters in this matter, and how those terms intersect – or potentially conflict – with
the CARES Act provisions for protection of lenders (AP # 20-1003, doc. # 54; AP # 20-1004, doc. # 52).
In particular, Mascoma raises concerns about whether the SBA will honor its guaranty to Mascoma if this
Court grants all of the relief the Plaintiffs have requested. Mascoma is a crucial party in interest based on
its role as the recipient of the Plaintiffs’ PPP applications and the Plaintiffs’ putative PPP lender.
Mascoma points out that it is a preferred lender under SBA’s 7(a) loan program, see 15 U.S.C. § 636(a)
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and, though it is not required to make PPP loans, it has chosen to do so as part of its commitment to small
businesses and nonprofit entities in Vermont and New Hampshire (AP # 20-1003, doc. # 54, pp. 2–3; AP
# 20-1004, doc. # 52, pp. 2–3). The following points are essential to Mascoma’s position: (i) it, as the
lender (rather than the SBA), extends the funds advanced under the PPP program; (ii) the PPP program
includes a 100% guarantee by the SBA (a higher rate than other SBA guarantee programs), compare 15
U.S.C. §9005(c)(2) and 15 U.S.C. § 636(a)2)(F); and (iii) recent rules suggest the SBA may not honor its
guarantee of any PPP loan a lender makes to a bankruptcy debtor. Id. at p. 3.
Mascoma indicates the Final Interim Rules published on April 15, 2020, at 15 Fed. Reg. 20811
gave it some comfort, as it included this reassuring guidance in a question-and-answer format:
4. What do both borrowers and lenders need to know and do?
a. What are the loan terms and conditions?
Loans will be guaranteed under the PPP under the same terms, conditions and
processes as other 7(a) loans, with certain changes including but not limited to:
i. The guarantee percentage is 100 percent.
ii. No collateral will be required.
iii. No personal guarantees will be required.
iv. The interest rate will be 100 basis points or one percent.
v. All loans will be processed by all lenders under delegated authority and
lenders will be permitted to rely on certifications of the borrower in order
to determine eligibility of the borrower and the use of loan proceeds.
(AP # 20-1003, doc. # 54, pp. 3–4; AP # 20-1004, doc. # 52, pp. 3–4). Mascoma also points out that the
SBA repeated that assurance in the interim rule published on June 1, 2020, at 85 Fed. Reg. 33010, § III 3.
a and b. However, Mascoma calls the Court’s attention to SBA’s introduction of uncertainty regarding its
guaranty in the last line of section III 3 c (with Mascoma’s emphasis):
b. Are lender processing fees subject to clawback if SBA determines that a borrower
is ineligible?
Yes. For any SBA-reviewed PPP loan, if within one year after the loan was
disbursed SBA determines that a borrower was ineligible for a PPP loan based on the
provisions of the CARES Act or applicable rules or guidance available at the time of
the borrower’s loan application, or the terms of the loan application, SBA will seek
repayment of the lender processing fee from the lender. However, SBA’s
determination of borrower eligibility will have no effect on SBA’s guaranty of the
loan if the lender has complied with its obligations under section III.3.b of the First
Interim Final Rule and the document collection and retention requirements described
in the lender application form (SBA Form 2484).
c. Are lender processing fees subject to clawback if a lender has not fulfilled its
obligations under PPP regulations?
Yes. If a lender fails to satisfy the requirements applicable to lenders that are set
forth in section III.3.b of the First Interim Final Rule or the document collection and
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retention requirements described in the lender application form (SBA Form 2484),
SBA will seek repayment of the lender processing fee from the lender and may
determine that the loan is not eligible for a guaranty.
(AP # 20-1003, doc. # 54, pp. 4–5; AP # 20-1004, doc. # 52, pp. 4–5).
If enforced, this aspect of the rule would allow the SBA to refuse to guarantee the Plaintiffs’ loans,
based solely on their status as bankruptcy debtors, even if the SBA determined the Plaintiffs were entitled
to forgiveness and were not required to repay the PPP advance to Mascoma. Most problematic perhaps is,
as Mascoma frames it,
SBA continues to issue new notices and interim rules, as recently as June 1, and
many aspects of the program, including the mechanics applying for loan forgiveness
and remittance to the lender, have yet to be detailed … That uncertainty, especially
as to the SBA’s guaranty, places the risk of nonpayment squarely on Mascoma or
any other lender advancing funds to these [Plaintiffs], which is not present in any
other PPP loan advanced to non-debtor entities.
Id. at pp. 5–6.
Based on those very legitimate concerns and the fluid and evolving nature of the SBA’s rules, the
Court finds it is appropriate to fine-tune the injunction even more than the Plaintiffs have requested, to
ensure that the injunction neither places Mascoma at great risk of losing its guaranty nor discourages
Mascoma from advancing funds to the Plaintiffs under the PPP program based on that perceived risk.16
In its TROs, this Court authorized the Plaintiffs to file PPP applications without checking the box
indicating they were debtors, and directed the SBA and its authorized lenders to process the Plaintiffs’
applications as if they were not debtors. In this way, the discriminatory eligibility factor was taken out of
the analysis. However, the Court finds the current rules, including the Forgiveness Rule (see UMF ¶ 18),
require an affirmative finding that the Plaintiffs are “eligible recipients,” as defined in the CARES Act, to
protect Mascoma, as the PPP lender, from being denied a guaranty to which it would otherwise be entitled
if these Plaintiffs were not being discriminated against based on their status as bankruptcy debtors.
Mascoma also asks that the Court make clear in the injunction that the SBA may not deny a
guaranty, payment of lender processing fees, or loan forgiveness to Mascoma, based on any action
Mascoma takes to comply with this Court’s orders. (AP # 20-1003, doc. # 54, p. 7; AP # 20-1004, doc. #
52, p. 7.) This Court specifically asked the Defendant if she might deny benefits to Mascoma for actions it
took pursuant to Court orders, at the oral arguments held on June 10, 2020, and the Defendant did not
give a clear or direct response despite the Court’s repeated attempts to get an answer to that question.
Thus, the Court concludes this provision is also necessary to protect Mascoma and avoid potential
disputes and litigation over this question.
16
At the oral arguments held on June 10, 2020, Mascoma indicated it could not risk advancing a loan of this size to the
Plaintiffs while the risk of losing its guaranty remained.
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Finally, Mascoma asks that the Court stay the deadlines and other requirements for disbursing the
PPP funds, and for granting loan forgiveness or applying for remittance under 15 U.S.C. §9005, until a
final judgment on this issue is entered and no longer subject to appeal (AP # 20-1003, doc. # 54, p. 7; AP
# 20-1004, doc. # 52, p. 7). This is the caveat that presents the most controversy and logistical challenge.
The Defendant opposes inclusion of this term because, as she argued at the oral arguments, it would
effectively eliminate her appeal rights. This is a valid point. If the Court directs Mascoma to disburse PPP
funds to the Plaintiffs immediately (so the Plaintiffs can disburse them within the required time frame),
and directs the Defendant to ensure the SBA honors its guaranty to Mascoma as long as Mascoma
complies with all rules other than those directed at the Plaintiffs’ eligibility related to the discrimination
issue, then any appeal the Defendant files could easily be moot by the time it is before an appellate court.
On the other hand, if the Court does not direct immediate disbursement of the PPP funds, and the
Defendant files an appeal and obtains a stay pending appeal, then the Plaintiffs will not likely be able to
disburse the funds in time to qualify for forgiveness, under the CARES Act requirements. Although this
issue was debated at the oral arguments, the parties were not able to offer any language that would protect
all of their interests at that time, and have not presented any compromise for dealing with this apparent
irreconcilable difference with respect to the schedule for implementing the PPP process here, subsequent
to that hearing.
The Plaintiffs request asks that the Court impose a temporal fiction with regard to implementing
the PPP requirements, to allow them to satisfy the timing requirements to qualify for forgiveness without
the funds actually being disbursed until a future date – which, presumably, could be after a final order is
no longer subject to appeal. While this approach is rather unconventional, the Court finds it is the most
effective way to balance the risks to, and protect the rights of, the Plaintiffs, Defendant, and Mascoma.
Based on the foregoing findings and conclusions, the Court will convert the temporary relief
granted in the Second TROs to a permanent injunction, with additional safeguards for Mascoma and the
Defendant.
CONCLUSION
Based on the record in the Plaintiffs’ chapter 11 bankruptcy cases and in these adversary
proceedings, including the parties’ arguments at the June 10, 2020 hearing, the Court finds there are no
material facts in dispute with respect to the Plaintiffs’ § 525(a) claims or the Plaintiffs’ request for a
permanent injunction, the Plaintiffs are entitled to judgment as a matter of law on their § 525(a) claims,
and a permanent injunction is warranted, on the terms more fully described in the accompanying order.
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This memorandum of decision constitutes the Court’s findings of fact and conclusions of law. 17
__________________________
June 22, 2020 Colleen A. Brown
Burlington, Vermont United States Bankruptcy Judge
17
The Court has considered all of the parties’ arguments and, to the extent not specifically addressed herein, finds them to be
without merit.
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