Penobscot Valley Hospital v. Jovita Carranza — Proposed Findings and Conclusions (District of Maine, Doc 39)
Summary
Proposed findings and conclusions filed June 3, 2020 as Doc 39 in Case 20-01006 in the Bankruptcy Court for the District of Maine, in the consolidated suits of Penobscot Valley Hospital and Calais Regional Hospital against Jovita Carranza as SBA Administrator. The hospitals, both Chapter 11 debtors, challenged SBA Form 2483's question 1, which bars PPP loans to applicants presently involved in any bankruptcy. The court recounts the TRO it granted after an April 30, 2020 hearing and the trial evidence, including revenue shortfalls at both hospitals. It treats the case as two substantive claims, under section 525 of the Bankruptcy Code and the Administrative Procedure Act. It concludes that judgment should enter in favor of the SBA on all counts; the signature block names Bankruptcy Judge Michael A. Fagone.
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“Penobscot Valley Hospital v. Jovita Carranza — Proposed Findings and Conclusions (District of Maine, Doc 39).”
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MAINE
In re:
Chapter 11
Penobscot Valley Hospital, Case No. 19-10034
Debtor
Penobscot Valley Hospital,
Plaintiff
v. Adv. Proc. No. 20-1005
Jovita Carranza, in her capacity as Administrator for the
United States Small Business Administration,
Defendant
In re:
Chapter 11
Calais Regional Hospital, Case No. 19-10486
Debtor
Calais Regional Hospital,
Plaintiff
v. Adv. Proc. No. 20-1006
Jovita Carranza, in her capacity as Administrator for the
United States Small Business Administration,
Defendant
PROPOSED FINDINGS AND CONCLUSIONS
Boiled to its essence, the plaintiffs’ complaint is that they have been unfairly and illegally
denied their spot in the “corporate breadline.” These plaintiffs are not alone; many other chapter
11 debtors have the same view. This view is understandable and the plaintiffs here are
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particularly sympathetic. But the Court’s task is not to sympathize; it is to interpret the law.
Although there is room for disagreement on the law, the better view is that the defendant—armed
with a mandate from Congress and facing an economic crisis of unprecedented magnitude—
made reasonable choices about how to allocate a large but finite amount of aid among struggling
businesses. Those choices may produce seemingly harsh results, but they are not illegal.
I. Procedural History.
Penobscot Valley Hospital (“PVH”) and Calais Regional Hospital (“CRH”) are both
debtors in possession in chapter 11 cases. PVH and CRH are not affiliated, and their chapter 11
cases are separate. About five weeks ago, PVH and CRH each started adversary proceedings
against Jovita Carranza, in her capacity as Administrator for the United States Small Business
Administration (the “Administrator” or the “SBA”). Those adversary proceedings, which have
since been consolidated under Fed. R. Civ. P. 42, feature the same legal theories and nearly
identical pleadings. For this reason, the Court will often refer to both entities collectively as “the
Debtor” and employ the singular tense, differentiating between the two plaintiffs only where
warranted by distinctions in the factual landscape.
By its complaint, the Debtor seeks preliminary and permanent injunctive relief, damages,
declaratory relief, and a writ of mandamus. Shortly after the filing of the complaint, the Debtor
sought a temporary restraining order (“TRO”) that would enjoin the SBA and those acting in
concert with it from: (a) denying the Debtor’s application under the Paycheck Protection
Program, 15 U.S.C. § 636(a)(36) (the “PPP”) or refusing to guaranty a PPP loan sought by the
Debtor solely due to the Debtor’s present involvement in bankruptcy; and (b) authorizing,
guarantying, or disbursing funds appropriated for loans under the PPP without reserving
sufficient funds or guaranty authority to provide the Debtor access to PPP funds if the Debtor is
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eligible notwithstanding its present involvement in bankruptcy. Following an expedited hearing
on April 30, 2020, the Court granted the TRO over the SBA’s objection. With the SBA’s
consent, a trial on the merits of the complaint was then scheduled for May 27 and the TRO was
extended to May 28. The TRO was again extended with SBA’s consent, this time to 5:30 p.m.
on June 3, 2020.
II. Proposed Findings.
As discussed in more detail below, the Court is issuing proposed findings in these
proceedings. These proposed findings are based on the evidence admitted at trial on May 27,
including the parties’ stipulations.
On or about March 27, 2020, Congress enacted, and the President signed, the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act
included stimulus funds designed to assist businesses and ensure that American workers continue
to be paid despite the economic impact of Covid-19 and social distancing measures. Section
1102 of the CARES Act established the PPP under section 7(a) of the Small Business Act. A
PPP loan may be forgiven—in whole or in part—under the circumstances set forth in section
1106 of the CARES Act.
A party may apply for a PPP loan by submitting an application to a federally insured,
participating section 7(a) lender or any other lender approved by the SBA. The SBA has no
authority to make direct loans under the PPP; instead, the SBA may guarantee PPP loans. Before
providing a PPP loan number to a lender, the SBA does not analyze the PPP application to
determine whether the applicant is likely to liquidate or whether a loan to the applicant would be
of sound value. Under the CARES Act, eligibility determinations with respect to PPP applicants
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rest with lenders, not the SBA.1 However, the SBA has established minimal underwriting
requirements for lenders that make PPP loans, including review of the Paycheck Protection
Application Form, SBA Form 2483.
SBA Form 2483 provides, in relevant part, that if the applicant answers “Yes” to question
1, the loan will not be approved. Question 1 asks whether the applicant is “presently involved in
any bankruptcy[.]” This question effectively excludes applicants who are “presently involved in
any bankruptcy” from participating in the PPP. Eligible businesses, including hospitals that are
not in bankruptcy, have obtained PPP funds.
PVH and CRH submitted their initial PPP applications on April 3, 2020. To question 1,
PVH and CRH each answered “Yes.” First National Bank did not accept CRH’s application
because CRH had answered “Yes” to question 1. As to PVH, Machias Savings Bank (“MSB”),
sought guidance from the SBA about whether it should process the application in light of PVH’s
answer to question 1. The SBA indicated that the application should not be processed because
the affirmative response to question 1 rendered PVH ineligible. After receiving this guidance,
MSB did not process PVH’s application.
PPP funds are processed generally on a first come, first served basis. Neither PVH nor
CRH received PPP funds prior to their exhaustion under the first tranche of PPP funding. On or
about April 23, 2020, Congress enacted legislation making additional funds available for PPP.
PVH has submitted a revised PPP application to MSB, consistent with the terms of the
TRO, seeking a loan of approximately $1.5 million. On May 4, MSB submitted that revised
application on PVH’s behalf, and the loan was approved and funded (although the funds have not
1
The parties have stipulated to certain “facts” that more closely resemble statements of law. Some of
these stipulations have worked their way into this recitation of proposed findings. To the extent that the
parties have stipulated to conclusions of law, those stipulations are not binding on the Court.
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been disbursed to PVH). CRH has also prepared a revised PPP application consistent with the
terms of the TRO seeking a loan for approximately $1.7 million but it has been unable to identify
a lender that will process the application. June 30, 2020 is the current deadline for submissions
of PPP applications.
PVH operates a 25-bed general medical and surgical hospital located in Lincoln, Maine,
with approximately 174 employees. CRH also operates a 25-bed general medical and surgical
hospital, located in Calais, Maine, with approximately 203 employees. The objective of both
PVH and CRH, in their respective chapter 11 cases, is to preserve hospital operations and
continuity of patient care in their service areas. To this end, both PVH and CRH have been
actively engaged in efforts to reorganize and preserve their businesses since their chapter 11
petitions were filed; these are not liquidation cases.
PVH’s and CRH’s business operations and exit from chapter 11 have been negatively
affected by economic consequences stemming from Covid-19. A significant portion of the cash
receipts and revenue derived by PVH and CRH flow from outpatient procedures and office visits
or medical procedures. In the wake of Covid-19, many procedures and office visits have been
postponed, rescheduled, or canceled. These cancellations and deferrals have had—and are
expected to continue to have—a negative impact on PVH’s and CRH’s cash receipts and
revenue. PVH’s net patient revenue is about $1.2 million less than budgeted for the period from
March through mid-May of 2020. At CRH, net patient revenue is nearly $1.8 million less than
budgeted for that same period. These revenue shortfalls will likely continue to increase into the
future until business operations and patient volume normalize.
Although patient volume at PVH and CRH may vary for many reasons—including stay-
at-home orders—PVH’s and CRH’s costs are generally fixed. In addition, PVH and CRH
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regularly receive payments from certain payors that are made prospectively each week in fixed
amounts. When patient volume is low, overpayments from these payors are more likely. As
such, both PVH and CRH are likely accruing overpayment liabilities to Medicaid and Anthem,
and perhaps Medicare, in amounts that are not yet known.
Since the initiation of these proceedings, PVH has received approximately $3.5 million,
and CRH has received more than $3.7 million, in federal stimulus funds for rural hospitals. Use
of these funds is restricted; they are to be used only to prevent, prepare for, and respond to
coronavirus, or for health care expenses or lost revenue attributable to coronavirus. Although
these stimulus funds have staved off the immediate risk of closure, they do not guarantee or
ensure a successful future outcome for either PVH or CRH, and both hospitals will need the
funds to prepare for and respond to future impacts of Covid-19. The futures of PVH and CRH
are still highly uncertain and closure is still possible—although the risk is less immediate than
when these proceedings were initiated—because the hospitals do not know when business
operations will normalize, what their revenue will be like at that time, or whether they will have
unrestricted funds that they can use to pay mounting liabilities.
Due to declining cash receipts in the aftermath of Covid-19, PVH was forced to use funds
in its operating account that had been informally budgeted to satisfy overpayment liabilities from
2019 and contract cure payments. PVH will need to resolve this issue in order to successfully
reorganize and avoid liquidation. CRH has experienced a period of extreme financial hardship
due to Covid-19, while likely accruing overpayment liabilities that will need to be resolved in
order to successfully reorganize and avoid liquidation. If PVH and CRH were able to obtain PPP
funds, those funds would provide needed liquidity and would facilitate their efforts to reorganize.
PPP funds would not be the sole determinant of a successful exit from chapter 11, but the funds
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would enhance those prospects. Due to the forgivable nature of PPP loans, participation in the
PPP would assist PVH and CRH sustain their respective business operations and exit from
chapter 11.
III. Jurisdiction & Judicial Power.
Although the complaint lists four separate counts, there are only two substantive claims
here: a claim under 11 U.S.C. § 525 (“section 525”) and a claim under the Administrative
Procedure Act (the “APA”). Beyond these two claims, the complaint identifies and requests
various types of remedies. The substantive claims either arise under the Bankruptcy Code or are
related to a case under the Bankruptcy Code. Gupta v. Quincy Med. Ctr., 858 F.3d 657, 663 (1st
Cir. 2017) (observing that “related to” jurisdiction is “quite broad”); see also Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (“The usual articulation of the test for determining
whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding
could conceivably have any effect on the estate being administered in bankruptcy.”). As such,
the District Court has subject matter jurisdiction over the parties’ disputes under 28 U.S.C. §
1334(b).
On the question of personal jurisdiction over the SBA generally, sovereign immunity
presents little difficulty. The federal government and its agencies are immune from suit in the
absence of a waiver. Dep’t of the Army v. Blue Fox, Inc., 525 U.S. 255, 260 (1999). However,
Congress has expressly waived and abrogated sovereign immunity “as to a governmental unit . . .
with respect to” section 525, 11 U.S.C. § 106(a)(1), permitting the court to “hear and determine
any issue arising with respect to the application” of section 525 to a governmental unit, id. §
106(a)(2). In light of section 106, and because the SBA qualifies as a governmental unit under
11 U.S.C. § 101(27), sovereign immunity does not preclude the exercise of jurisdiction over the
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SBA as to the Debtor’s claim under section 525. The District Court also has personal
jurisdiction over the SBA as to the Debtor’s claim under the APA. See 5 U.S.C. § 702
(providing that, in general, a person wronged, aggrieved, or adversely affected by agency action
may obtain judicial review in federal court and secure a judgment against the United States).2
These proceedings also raise a question about the exercise of judicial power, a question
that goes beyond subject matter and personal jurisdiction. As authorized by 28 U.S.C. § 157(a),
the District Court has referred these proceedings to this Court. See D. Me. LR 83.6(a). But the
existence of a reference from the District Court does not end the analysis. By statute, this Court
may hear and determine “core proceedings arising under title 11” and may enter “appropriate
orders and judgments, subject to review under [28 U.S.C. § 158].” 28 U.S.C. § 157(b)(1). This
Court may also “hear a proceeding that is not a core proceeding but that is otherwise related to a
case under title 11.” Id. § 157(c)(1). In such a proceeding (namely, a proceeding related to a
case under Title 11), the Court “shall submit proposed findings of fact and conclusions of law to
the district court,” unless the District Court has referred the matter to this Court with the consent
of all parties. Id. § 157(c)(1)-(2).
2
The sovereign immunity questions are a bit thornier when it comes to the remedies that might be
available to a plaintiff wronged by the conduct of the United States or its agencies. For example, the SBA
contends that 15 U.S.C. § 634(b) renders the Court powerless to enjoin it from conduct that violates
section 525. Although there is no need to reach this question or any of the other difficult questions
relating to remedies, the Court does not believe that section 634(b) functions as the SBA contends. See
Ulstein Mar., Ltd. v. United States, 833 F.2d 1052, 1057 (1st Cir. 1987) (“The no-injunction language [of
section 634(b)] protects the agency from interference with its internal workings by judicial orders
attaching agency funds, etc., but does not provide blanket immunity from every type of injunction.”). The
Court is similarly unpersuaded by the SBA’s contention that money damages are not available for a
violation of section 525. There is little reason to believe that Congress intended to create such a toothless
tiger. Why should any governmental unit be licensed to engage in illegal bankruptcy discrimination, with
the only remedies being declaratory or injunctive relief? That crabbed view has two apparent flaws: it
ignores the text of 11 U.S.C. § 105(a) and it would stymie the fresh start policy of bankruptcy. Moreover,
courts have not construed other sections of the Bankruptcy Code in a similarly effete manner. See, e.g.,
Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 445 (1st Cir. 2000) (“[I]t is clear . . . that a bankruptcy
court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and order
damages . . . if the merits so require.”).
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A proceeding to determine whether a governmental unit has violated section 525 arises
under the Bankruptcy Code and fits within the statutory definition of “core proceedings.” See 28
U.S.C. § 157(b)(2). However, the Constitution imposes limits on the exercise of judicial power
and those limits cannot be altered by statute. See generally Stern v. Marshall, 564 U.S. 462
(2011) (concluding that bankruptcy court had statutory authority to enter judgment on a common
law tort claim but lacked constitutional authority to do so). As a general matter, whether the
Constitution presents an impediment to this Court’s exercise of judicial power with respect to
certain proceedings is an exceedingly complex question with no clear answer. With respect to
the Debtor’s section 525 claim, the Court need not grapple with the question for one simple
reason: the SBA has knowingly and voluntarily consented to the entry of judgment on the
Debtor’s claim under section 525. See Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665
(2015) (holding that Article III is not violated when the parties knowingly and voluntarily
consent to the bankruptcy court’s adjudication of claims for which the parties are constitutionally
entitled to an Article III adjudication).
That said, the Debtor’s complaint ventures far beyond the confines of the Bankruptcy
Code, asserting a claim under the APA. In that sense, this proceeding is not one arising in or
arising under the Bankruptcy Code, but rather is one related to a case under the Bankruptcy
Code. It is not a core proceeding and the SBA has not provided consent beyond that relating to
section 525. As a result, the Court is constrained to issue proposed findings of fact and
conclusions of law. See 28 U.S.C. § 157(c).3
3
Although one of the Debtor’s claims is core and the SBA has consented to entry of judgments and
orders on that claim, the Court is nevertheless making proposed findings and conclusions with respect to
the complaint in its entirety. Any attempt to issue proposed findings and conclusions on one aspect of the
complaint, along with a final judgment subject to appeal under 28 U.S.C. § 158 on other aspects, would
create unnecessary procedural complexity.
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IV. Proposed Conclusions.
a. Administrative Procedure Act.
The Debtor seeks a declaratory judgment that: (i) the CARES Act does not prohibit, and
in fact requires, the SBA to consider its PPP application on the same terms as other entities that
are not presently debtors in bankruptcy; and (ii) the Administrator exceeded her statutory
authority in promulgating a rule and an application form that exclude those who are presently
debtors in bankruptcy from the pool of applicants eligible for PPP loans. Although the pleading
does not invoke any particular statute, the request for a determination that the Administrator
exceeded her authority falls within the umbrella of the APA, which provides for judicial review
of whether an agency’s action is contrary to law in either procedure or substance. See Union of
Concerned Scientists v. Wheeler, 954 F.3d 11, 19 (1st Cir. 2020) (citing 5 U.S.C. § 706(2)).
Specifically, the APA provides that a reviewing court shall interpret statutory provisions
and “set aside agency action . . . found to be . . . arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law [or] . . . in excess of statutory . . . authority[.]” 5 U.S.C. §
706(2)(A) & (C). In Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the
Supreme Court articulated the following two-part framework for a court called upon to review an
agency’s interpretation of a statute:
First, always, is the question whether Congress has directly spoken to the precise
question at issue. If the intent of Congress is clear, that is the end of the matter;
for the court, as well as the agency, must give effect to the unambiguously
expressed intent of Congress. If, however, the court determines Congress has not
directly addressed the precise question at issue, the court does not simply impose
its own construction on the statute, as would be necessary in the absence of an
administrative interpretation. Rather, if the statute is silent or ambiguous with
respect to the specific issue, the question for the court is whether the agency’s
answer is based on a permissible construction of the statute.
The power of an administrative agency to administer a congressionally created . . .
program necessarily requires the formulation of policy and the making of rules to
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fill any gap left, implicitly or explicitly, by Congress. If Congress has explicitly
left a gap for the agency to fill, there is an express delegation of authority to the
agency to elucidate a specific provision of the statute by regulation. Such
legislative regulations are given controlling weight unless they are arbitrary,
capricious, or manifestly contrary to the statute. Sometimes the legislative
delegation to an agency on a particular question is implicit rather than explicit. In
such a case, a court may not substitute its own construction of a statutory
provision for a reasonable interpretation made by the administrator of an agency.
Id. at 842-44 (footnotes omitted) (quotation marks omitted). When a court detects a clear and
unambiguous answer from Congress, the court should not proceed to the second part of the
analytical framework. See Pereira v. Sessions, 138 S. Ct. 2105, 2113 (2018).
However, if Congress’ intentions are unclear, the Court proceeds to the second step of the
analysis, characterized by some amount of deference to the agency’s interpretations. See
Chevron, 467 U.S. at 844. “The fair measure of deference to an agency administering its own
statute has been understood to vary with circumstances, and courts have looked to the degree of
the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness of
the agency’s position[.]” United States v. Mead Corp., 533 U.S. 218, 228 (2001) (footnotes
omitted). “The approach has produced a spectrum of judicial responses, from great respect at
one end, to near indifference at the other[.]” Id. (citations omitted). In the second step of the
analysis, if an administrative interpretation “represents a reasonable accommodation of
conflicting policies that were committed to the agency’s care by the statute, [the court] should
not disturb it unless it appears from the statute or its legislative history that the accommodation is
not one that Congress would have sanctioned.” Chevron, 467 U.S. at 845 (quotation marks
omitted).
With this framework in place, the questions raised by the Debtor’s APA claim come into
sharper relief. First, did Congress directly address whether debtors in bankruptcy are eligible to
participate in the PPP? Stated differently, did Congress explicitly or implicitly leave a gap for
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the SBA to fill in determining whether debtors in bankruptcy are eligible? If there is a gap in the
statute, does the SBA’s exclusion of debtors in bankruptcy from the PPP reflect a “reasonable
accommodation of conflicting policies” committed to the SBA’s care? If yes, is this an
accommodation that Congress would have sanctioned? To answer these questions, consideration
of the text of the CARES Act and the powers and duties expressly conferred on the
Administrator with respect to the PPP is necessary.
i. The CARES Act.
The CARES Act was enacted in late March 2020 in response to a global pandemic that
had, at that time, begun tightening its grip on almost every aspect of American life. The CARES
Act contains six titles, but the parties’ dispute finds its footing in Title I, the Keeping American
Workers Paid and Employed Act. One way that Congress sought to keep American workers paid
and employed is the PPP, a program designed to help small businesses meet the challenges
caused by the various responses, both governmental and individual, to the pandemic.4 The PPP
is, in a manner of speaking, a lifeline for small business in this country.
At its core, the PPP provides that:
Except as otherwise provided in this paragraph, the Administrator may guarantee
covered loans under the same terms, conditions, and processes as a loan made
under this subsection.
15 U.S.C. § 636(a)(36)(B). The term “covered loan” is a critical term that permeates the statute.
An “eligible recipient” is “an individual or entity that is eligible to receive a covered loan[.]” Id.
§ 636(a)(36)(A)(iv). In a section titled “Increased eligibility for certain small businesses and
organizations,” the PPP expands the universe of eligible recipients beyond “small business
4
The PPP has been codified at 15 U.S.C. § 636(a)(36). Other parts of the CARES Act have also been
codified. See, e.g., 15 U.S.C. § 9005. In these proposed conclusions, the Court cites the codification of
the CARES Act rather than the public law.
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concerns” in at least two respects. Id. § 636(a)(36)(D)(i)-(ii). In pertinent part, subparagraph
(D) explains that “[d]uring the covered period. . . any business concern . . . shall be eligible to
receive a covered loan” if it employs no more than the greater of 500 employees or, “if
applicable, the size standard in number of employees established by the Administration for the
industry” in which the business operates. Id. § 636(a)(36)(D)(i).
Subparagraph (F), entitled “Allowable uses of covered loans[,]” begins by identifying, in
general, the allowable uses of the proceeds of a covered loan. Id. § 636(a)(36)(F)(i). It
continues with an express delegation of authority from the SBA to lenders: “For purposes of
making covered loans . . ., a lender approved to make loans under [section 636(a)] shall be
deemed to have been delegated authority by the Administrator to make and approve covered
loans, subject to [section 636(a)(36)].” Id. § 636(a)(36)(F)(ii)(I). When evaluating the eligibility
of a borrower for a covered loan, lenders must consider whether the borrower was in operation
on February 15, 2020 and had employees for whom the borrower paid salaries or paid
independent contractors. Id. § 636(a)(36)(F)(ii)(II). This consideration is logically tied to the
eligibility criteria in section 636(a)(36)(D)(i).
By enacting the CARES Act, Congress granted the Department of the Treasury authority
to include in the PPP lenders that do not already participate in other SBA lending programs. 15
U.S.C. § 9008(b). The CARES Act further provides that the Secretary of the Treasury “may
issue regulations and guidance as necessary . . . to”: “(A) allow additional lenders to originate
loans under this section; and (B) establish terms and conditions for loans under this section,
including terms and conditions concerning compensation, underwriting standards, interest rates,
and maturity.” 15 U.S.C. § 9008(d)(1). Such terms and conditions are, “to the maximum extent
practicable,” to be “consistent with the terms and conditions required” by, among other things,
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15 U.S.C. § 636(a)(36)(D), the eligibility provision discussed above. With guidance from the
Secretary, the Administrator is tasked with administering the program established by 15 U.S.C. §
9008, a statute that refers specifically to the PPP. Id. § 9008(h). The Administrator is also given
authority to issue regulations to carry out Title I of the CARES Act without regard to the notice
requirements that might otherwise apply. 15 U.S.C. § 9012.
The CARES Act nestled the PPP into 15 U.S.C. § 636(a), which contains the terms
generally applicable to lending under section 7(a) of the Small Business Act. Certain provisions
of section 636(a) were expressly modified as to PPP loans, including the SBA’s “participation”
(i.e., the extent of the SBA’s guarantee). Compare 15 U.S.C. § 636(a)(2)(A) (providing for SBA
participation of 75 percent on a loan in excess of $150,000 and 85 percent on a loan less than or
equal to $150,000), with id. § 636(a)(2)(F) (providing for SBA participation in PPP loans of 100
percent). Other parts of section 636(a) were left unaltered as to PPP loans; subparagraph (B) of
the PPP provides that except as otherwise provided in paragraph (36), “the Administrator may
guarantee covered loans under the same terms, conditions, and processes as a loan made under
this subsection.” Id. § 636(a)(36)(B). Paragraph (36) did not “provide otherwise” or expressly
modify section 636(a)(6), which requires (subject to certain qualifications not relevant here), that
all loans made under subsection (a) “shall be of such sound value or so secured as to reasonably
assure repayment[.]” Id. § 636(a)(6).
ii. The SBA’s PPP Eligibility Rules.
As described above, the CARES Act itself established certain eligibility parameters for
participation in the PPP. 15 U.S.C. § 636(a)(36)(D). The Administrator, through regulations,
added to those parameters, explaining that an applicant would be ineligible if:
i. You are engaged in any activity that is illegal under Federal, state, or local law;
ii. You are a household employer . . .;
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iii. An owner of 20 percent or more of the equity of the applicant is incarcerated,
on probation, on parole; presently subject to an indictment, criminal information,
arraignment, or other means by which formal criminal charges are brought in any
jurisdiction; or has been convicted of a felony within the last five years; or
iv. You, or any business owned or controlled by you or any of your owners, has
ever obtained a direct or guaranteed loan from SBA or any other Federal agency
that is currently delinquent or has defaulted within the last seven years and caused
a loss to the government.
See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg.
20811 § III(2)(b) (April 15, 2020) (to be codified at 13 C.F.R. pt. 120). The Administrator also
altered, as to PPP applicants, some of its preexisting eligibility rules for participation in SBA
loan programs which are codified at 13 C.F.R. 120.110. For example, the SBA waived a rule
that would otherwise prohibit a business owned by a director or shareholder of a PPP lender from
applying for a PPP loan through that lender based on a recognition that, “unlike other SBA loan
programs, the financial terms for PPP Loans are uniform for all borrowers, and the standard
underwriting process does not apply because no creditworthiness assessment is required for PPP
Loans.” Business Loan Program Temporary Changes; Paycheck Protection Program—
Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, 85 Fed. Reg.
21747 § III(2)(a) (April 20, 2020) (to be codified at 13 C.F.R. pt. 120). Instead of the standard
underwriting process, the SBA implemented a “streamlin[ed]” process to “provide relief to
America’s small businesses expeditiously.” See 85 Fed. Reg. 20811 § III(1)
The rule specifically challenged by the Debtor here provides as follows:
4. Eligibility of Businesses Presently Involved in Bankruptcy Proceedings
Will I be approved for a PPP loan if my business is in bankruptcy?
No. If the applicant or the owner of the applicant is the debtor in a bankruptcy
proceeding, either at the time it submits the application or at any time before the
loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant
or the owner of the applicant becomes the debtor in a bankruptcy proceeding after
submitting a PPP application but before the loan is disbursed, it is the applicant’s
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obligation to notify the lender and request cancellation of the application. Failure
by the applicant to do so will be regarded as a use of PPP funds for unauthorized
purposes.
The Administrator, in consultation with the Secretary, determined that
providing PPP loans to debtors in bankruptcy would present an unacceptably high
risk of an unauthorized use of funds or nonrepayment of unforgiven loans. In
addition, the Bankruptcy Code does not require any person to make a loan or a
financial accommodation to a debtor in bankruptcy. The Borrower Application
Form for PPP loans (SBA Form 2483), which reflects this restriction in the form
of a borrower certification, is a loan program requirement. Lenders may rely on
an applicant’s representation concerning the applicant’s or an owner of the
applicant’s involvement in a bankruptcy proceeding.
Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—
Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450 § III(4) (April
28, 2020) (to be codified at 13 C.F.R. pts. 120-121).
iii. Legality of the Bankruptcy Exclusion Under the APA.
The Debtor contends that Congress, by statutory fiat, eliminated the SBA’s discretion in
administering the PPP. Specifically, the Debtor posits that the eligibility provisions of 15 U.S.C.
§ 636(a)(36)(D) override any discretion inherent in the word “may” as featured in 15 U.S.C. §
636(a)(36)(B), and preclude any action by the Administrator that shrinks the pool of eligible
applicants specified in the statute. There is support for the Debtor’s perspective. See, e.g., DV
Diamond Club of Flint, LLC v. U.S. Small Bus. Admin., --- F. Supp. 3d ---, 2020 WL 2315880,
at *10 (E.D. Mich. May 11, 2020) (discussing section 636(a)(36)(D) and concluding that “the
text of the PPP makes clear that every business concern meeting the statutory criteria is eligible
for a PPP loan during the covered period”). Although this interpretive theory has some appeal, it
puts too much emphasis on certain words in isolation (“shall” and “may”) while ignoring the
critical concept of “eligibility.” In common parlance, the word “eligible” carries a connotation
of choice. See Webster’s II New University Riverside Dictionary 425 (Anne H. Soukhanov &
Kaethe Ellis eds., 1984). The Court does not believe that Congress would have infused the PPP
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with concept of “eligibility” if the intention was for the SBA to have no ability to choose which
individuals and businesses would benefit from loan guarantees. Congress did not explicitly say
whether debtors in bankruptcy are categorically excluded from the PPP. Congress did exclude
debtors from another form of economic aid described in the CARES Act. See 15 U.S.C. §
9042(c)(3)(D)(i)(V). This exclusion does not tip the scales one way or the other when it comes
to the PPP. See United States v. Granderson, 511 U.S. 39, 63 (1994) (Kennedy, J., concurring)
(explaining that presumption that Congress acts intentionally when it includes particular
language in one part of a statute but omits it in another “loses some of its force when the sections
in question are dissimilar and scattered at distant points of a lengthy and complex enactment”).
It does, however, suggest that Congress intended the SBA to fill a statutory gap and determine
whether debtors in bankruptcy would be eligible for the PPP. As a result, in evaluating the APA
claim, the Court proceeds to the second step of the Chevron framework.
The SBA defends the bankruptcy exclusion as a proper exercise of its rulemaking
function. In the SBA’s view, Congress defined the universe of “eligible recipients” but left the
SBA free to choose among those recipients when utilizing the guaranty authority appropriated
for the PPP. That act of choosing, says the SBA, is a prototypical exercise of discretion that
should not be set aside by the Court based on its own policy judgments. The Court agrees.
The SBA’s bankruptcy exclusion was a reasonable effort to accommodate the conflicting
policies committed to the SBA’s care, and one that Congress might reasonably have sanctioned.
Many approaches could have been taken when determining whether and under what
circumstances a debtor in bankruptcy might be approved for a PPP loan. The SBA could have
determined that any debtor could participate in the PPP if authorized by the bankruptcy court.
The SBA could have excluded chapter 7 debtors, but not debtors in other chapters; or some
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chapter 11 debtors, but not others. None of these approaches alter the reality that the SBA had
very little time to implement this program and that standard underwriting would have been
impractical. Under the circumstances, in light of Congress’ intent to see the PPP funds
distributed quickly, the SBA relaxed its underwriting standards. The SBA did not, however,
eliminate all underwriting; viewed together, the questions on SBA Form 2483 represent at least a
minimal effort to learn something about whether a covered loan will be repaid if not forgiven.
Despite the Debtor’s assertions and notwithstanding some of the preliminary
determinations made in the TRO, the PPP is a loan program; it is not merely a grant of aid.
Certain features of PPP loans make them highly desirable from a borrower’s perspective—most
notably the prospect of debt forgiveness. And there are many other features that distinguish PPP
loans from section 7(a) loans.5 But, a distribution of PPP funds initially assumes the form of a
loan. Congress knows how to distribute aid without strings attached and, in fact, did so recently.
See, e.g., 26 U.S.C. § 6428(a) (amending the IRC to provide so-called “recovery rebates” as tax
credits for certain individuals in the wake of Covid-19). With the PPP, however, Congress
elected to establish a loan program, albeit one that does not look like any other loan program
available from the government or the capital markets. These loans may function as a grant of aid
during a crisis, but they are still—at least at their inception—loans.
Given the nature of the PPP, the reasonableness of the SBA’s underwriting efforts,
however truncated—or, to use the SBA’s term, “streamlined”—becomes clear. Until a debt
5
For example, compare 15 U.S.C. § 636(a)(18), addressing guarantee fees for section 7(a) loans, and
15 U.S.C. § 636(a)(36)(H), waiving the guarantee fees. There are other differences as well, including
interest rate, loan term, prepayment penalties and deferment of principal payments. These distinctions in
the financial terms are likely what Congress had in mind when, in 28 U.S.C. § 636(a)(36)(B), it wrote
“Except as otherwise provided in [28 U.S.C. § 636(a)(36)] . . . .” To this extent, this Court parts ways
with DV Diamond Club of Flint, LLC v. U.S. Small Bus. Admin., --- F. Supp. 3d ---, 2020 WL 2315880,
(E.D. Mich. May 11, 2020).
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evidenced by a PPP note is forgiven in accordance with the law, the holder of the note and a
guarantor are rightfully concerned about the maker’s ability to satisfy the debt. This is true
whether or not the note bears a low, fixed rate of interest, and it is even more true where, as here,
there is no collateral for the debt and no personal guarantee supporting the obligation. See 15
U.S.C. § 636(a)(36)(J), (L). Perhaps a person’s status as a debtor presently involved in
bankruptcy is a crude measure of creditworthiness, but it is still a measure.6
The Debtor may counter all of this by observing that Congress expressly delegated
eligibility consideration to lenders, see 15 U.S.C. § 636(a)(36)(F)(ii), and that lenders, not the
SBA, are imbued with the discretion to make covered loans. Wrapping it all together, the Debtor
might say that Congress expanded the universe of eligible recipients and then instructed lenders,
not the SBA, to make decisions about how to choose among those recipients. The difficulty with
that line of attack is that it only looks at the loan, and not the guaranty which, as noted above, is a
full guaranty of an unsecured loan without any supporting obligation and with minimal
underwriting on the front end. The PPP was constructed on the strength of the public fisc, and it
would be counterintuitive to assume that the lenders—who one can assume are taking very little
risk—were given all of the discretion that Congress contemplated when it said that the SBA
“may” guarantee a covered loan.
6
Characterizing the PPP as a loan program is reconcilable with the SBA rule that states that “no
creditworthiness assessment is required” when that particular language is taken in context. See 85 Fed.
Reg. 21747 § III(2)(a). The rule permits the director or shareholder of a PPP lender to obtain a PPP loan
from that lender for an unrelated business concern in which that director or shareholder is involved,
despite a regulation that would prohibit such a transaction as to other section 7(a) loans. Id. The rule
reflects the reality that the underwriting process is so streamlined that a PPP lender has little ability to
play favorites or to relax standards when it comes to an application submitted by a director or shareholder
of the lender. In any event, the “no creditworthiness assessment” language is too slender a reed to support
the full weight of the Debtor’s argument when the entire program is considered.
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b. Section 525.
The Debtor, like many others, believes that the SBA’s bankruptcy exclusion conflicts
with the Bankruptcy Code’s prohibition on discrimination. Invoking due process concepts and
anti-discrimination laws for protected classes of persons, the Debtor sees a clear case of “ad hoc,
unwarranted” discrimination prohibited by section 11 U.S.C. § 525(a). Before examining the
language of the statute, there is one overriding point that bears initial emphasis: the federal
government may discriminate against bankruptcy debtors, as long as the discrimination does not
run afoul of 11 U.S.C. § 525(a) or (c). Bankruptcy debtors simply do not enjoy the same level of
protection from discrimination as constitutionally protected classes of persons. With that in
mind, the Court turns to the place where the analysis must begin, the text of the statute.
In relevant part, section 525(a) provides:
[A] governmental unit may not deny, revoke, suspend, or refuse to renew a
license, permit, charter, franchise, or other similar grant to, condition such a grant
to, discriminate with respect to such a grant against, deny employment to,
terminate the employment of, or discriminate with respect to employment against,
a person that is or has been a debtor under this title or a bankrupt or a debtor
under the Bankruptcy Act, or another person with whom such bankrupt or debtor
has been associated, solely because such bankrupt or debtor is or has been a
debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been
insolvent before the commencement of the case under this title, or during the case
but before the debtor is granted or denied a discharge, or has not paid a debt that
is dischargeable in the case under this title or that was discharged under the
Bankruptcy Act.
11 U.S.C. § 525(a). Because the SBA is a governmental unit, 11 U.S.C. § 101(27), the Debtor is
a person, 11 U.S.C. § 101(41), and the Debtor’s status as debtor in a case under Title 11 was the
proximate cause of its exclusion from the PPP, see F.C.C. v. NextWave Personal
Communications Inc., 537 U.S. 293, 301 (2003), the only question is whether this case involves
a “license, permit, charter, franchise, or other similar grant” within the meaning of section
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525(a). The question is formulated with relative ease, but finding the answer is more
challenging.
i. License, Permit, Charter, or Franchise.
The words “license,” “permit,” “charter,” and “franchise” are not defined in the
Bankruptcy Code, leaving the Court to search elsewhere for their meanings. While some of
these terms have different meanings in the commercial context, section 525(a) is only concerned
with action by governmental units. Accordingly, the critical terms must be evaluated in light of
their meanings when used in the governmental context. A “license” is a “revocable permission
to commit some act that would otherwise be unlawful” or an “agreement . . . that it will be lawful
for the licensee to . . . do some act that would otherwise be illegal, such as hunting game.”
Black’s Law Dictionary 931 (7th ed. 1999). A “permit” is a “certificate evidencing permission”
or “a license.” Id. at 1160. A “charter” is an “instrument by which a governmental entity . . .
grants rights, liberties, or powers to its citizens.” Id. at 228. And finally, the term “franchise” is
defined as “[t]he right conferred by the government to engage in a specific business or to
exercise corporate powers.” Id. at 668. Each of the enumerated items is a type of grant from a
governmental actor that involves some permission for the holder of the grant to act in a particular
way. See Watts v. Pa. Hous. Fin. Co., 876 F.2d 1090, 1093 (3d Cir. 1989); see also Toth v.
Mich. State Hous. Dev. Auth., 136 F.3d 477, 480 (6th Cir. 1998) (quoting Watts). For example,
a driver’s license is a permission to operate a motor vehicle on public roads. That a “permit”
necessarily involves a permission is axiomatic. The terms “charter” and “franchise” have less
obvious connections to permissions, but the concept is there nevertheless.
The “permission” view of section 525(a) is sensible: the government should not be able
to erect barriers to the realization of a debtor’s fresh start solely because the debtor has availed
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itself of the right to a financial fresh start under federal law. There would be little sense in any
contrary view. Withholding permission for a debtor to operate a motor vehicle solely because
the debtor received a discharge would seriously undermine the debtor’s ability to earn a living.
See Perez v. Campbell, 402 U.S. 637 (1971) (invalidating, under the Supremacy Clause, an
Arizona law allowing the state to withhold a driver’s license from a person who received a
discharge solely because that person did not pay a discharged debt). But withholding a
permission to engage in activity that is essential to the enjoyment of the benefits of a fresh start a
la Perez is different from declining to provide assistance in the form of a loan on favorable terms
(or even a grant of aid) that might be useful to obtaining a fresh start.
The parties do not cite controlling authority applying section 525(a) to a loan. That is
understandable because, in general, a party cannot be forced to make a loan to a debtor. See 11
U.S.C. § 365(c)(2). Although section 365(c)(2) is not directly applicable here because there is
no prepetition contract to make a loan, the policy behind section 365(c)(2) supports an
interpretation of section 525(a) that does not extend to loans. As one court recently put it, the
point may be attenuated, but it is nevertheless a valid consideration. See Transcript of Hearing,
Cosi, Inc. v. U.S. Small Bus. Admin. (In re Cosi, Inc.), Adv. Proc. 20-50591 (Bankr. D. Del.
April 30, 2020), Dkt. No. 17.
Perhaps recognizing that section 525(a) is not sufficiently elastic to be stretched to cover
a loan, the Debtor argues that the PPP does not involve the provision of a loan.7 For the reasons
explained above, the Court is unpersuaded: the PPP creates a loan program. The existence of
favorable terms and a unique feature (namely, forgiveness under specified circumstances) does
7
The Debtor has consistently urged the Court to afford the Debtor the right to participate in the PPP.
The request is couched in terms of a “right” and, less explicitly, a “permission” to participate. Fair
enough, but it is apparent that the Debtor’s ultimate goal is the money.
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not change the character of what the Debtor wants to obtain: a loan that might be forgiven by the
lender. The Debtor makes much of the SBA’s concession that it does consider whether an
applicant is likely to liquidate before providing a loan number for an application. That does not,
in the Court’s view, establish that the PPP is a “grant program” instead of a “loan program.”
Instead, the SBA has recognized that, in these circumstances, there was insufficient time for
traditional underwriting processes to be utilized. The funds had to be deployed quickly, both
because of the immediate needs of the recipients and their employees and because of the
statutory deadlines.
But even if the Court were to conclude that the PPP establishes a grant program, the
benefits of this particular program would not constitute a license or a franchise.8 There is no
suggestion that the PPP would authorize the Debtor to undertake a particular act—an essential
feature of a license—and the PPP would not confer a special privilege on the Debtor to engage in
a specific business or exercise corporate power—an essential feature of a franchise.9
ii. Other Similar Grant.
The phrase “other similar grant” remains as the last arrow in the Debtor’s section 525
quiver. This arrow comes closer to the target, but, like the others, sails wide. “Although the
term ‘grant’ is not defined in the statute, the use of the word ‘similar’ limits the universe of
‘grants’ to which § 525(a) applies, ensuring that only grants bearing a family resemblance to
8
The Debtor does not appear to contend that the PPP qualifies as a permit or a charter.
9
Some decisions take a broader view of the meaning of the term “franchise.” For example, in
Exquisito Services Inc. v. United States (In re Exquisito Services, Inc.), 823 F.2d 151 (5th Cir. 1987), the
court concluded that the Air Force had violated section 525(a) by declining to exercise an option contract
with a company to provide services solely because that company had filed for bankruptcy. In so doing,
the court reasoned that the contract was “essentially a franchise” because it fell under the umbrella of the
SBA’s section 8(a) program, and the SBA would assist the company during the life of the contract. Id. at
154. Because the court did explain how any governmental program that assists people amounts to a
franchise, its decision carries limited persuasive force.
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licenses, permits, charters, and franchises enjoy the anti-discrimination protections of the
Bankruptcy Code.” Ayes v. U.S. Dep’t of Veterans Affairs, 473 F.3d 104, 108 (4th Cir. 2006);
see also Goldrich v. N.Y. Higher Educ. Servs. Corp. (In re Goldrich), 771 F.2d 28, 31 (2d Cir.
1985) (noting that “Congress rejected a flat prohibition on any form of discrimination” and
inferring that “Congress chose its words carefully”). The question then becomes: how strongly
must an item not specifically enumerated in the statute resemble the items enumerated in order to
fall within the anti-discrimination ambit?
Other courts have struggled to define the scope of section 525 based on its text. See
Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 88 (2d Cir. 2002) (“Despite more
than twenty years of judicial consideration, . . . the scope of Section 525(a)’s protection in the
context of public housing is still unsettled.”); Saunders v. Reeher (In re Saunders), 105 B.R. 781,
787 (Bankr. E.D. Pa. 1989) (observing that “there has been understandable difficulty in defining
the exact scope of this subsection given its language and legislative history”). Some courts
conclude that the common thread connecting licenses, permits, charters, and franchises is that all
are “governmental authorizations that typically permit an individual to pursue some occupation
or endeavor aimed at economic betterment.” Ayes, 473 F.3d at 108. Other courts observe that
these enumerated items are all unrelated to credit, Goldrich, 771 F.2d at 30, and do not give rise
to mutual obligations between the governmental unit and the individual, United States v. Cleasby
(In re Cleasby), 139 B.R. 897, 900 (W.D. Wis. 1992). Still others emphasize that licenses,
permits, charters, franchises, and other similar grants are items “unobtainable from the private
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sector and essential to a debtor’s fresh start.” In re Soltz, 315 F.3d at 90; see also In re Saunders,
105 B.R. at 787.10
The varied interpretations of section 525(a), combined with the elasticity inherent in the
word “similar,” might lead to the conclusion that section 525(a) is ambiguous. In that case,
resort to the legislative history, as a means of ascertaining the meaning of the words that
Congress used, would be appropriate. The House and Senate reports contain the following
explanation:
[Section 525] is an additional debtor protection. It codifies the result of
Perez v. Campbell, 402 U.S. 637 (1971), which held that a state would frustrate
the congressional policy of a fresh start for a debtor if it were permitted to refuse
to renew a drivers license because a tort judgment resulting from an automobile
accident had been unpaid as a result of a discharge in bankruptcy.
Notwithstanding any other laws, section 525 prohibits a governmental unit
from denying, revoking, suspending, or refusing to renew a license, permit,
charter, franchise, or other similar grant to, from conditioning such a grant to,
from discrimination with respect to such a grant against, deny[ing] employment
to, terminat[ing] the employment of, or discriminat[ing] with respect to
employment against, a person that is or has been a debtor or that is or has been
associated with a debtor. The prohibition extends only to discrimination or other
action based solely on the basis of the bankruptcy, on the basis of insolvency
before or during bankruptcy prior to a determination of discharge, or on the basis
of nonpayment of a debt discharged in the bankruptcy case (the Perez situation).
It does not prohibit consideration of other factors, such as future financial
responsibility or ability, and does not prohibit imposition of requirements such as
net capital rules, if applied nondiscriminatorily.
In addition, the section is not exhaustive. The enumeration of various
forms of discrimination against former bankrupts is not intended to permit other
forms of discrimination. The courts have been developing the Perez rule. This
section permits further development to prohibit actions by governmental or quasi-
governmental organizations that perform licensing functions, such as a state bar
association or a medical society, or by other organizations that can seriously
10
The Saunders court characterized section 525(a) as covering certain “property interests not
obtainable through the private sector.” 105 B.R. 781, 787 (Bankr. E.D. Pa. 1989). This Court is skeptical
of the notion that the items enumerated in section 525(a) amount to “property interests” in all
circumstances. The Saunders court also concluded that, even if section 525(a) had been violated, no
award of money damages was authorized. Id. at 788. In these two respects, Saunders is not convincing.
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affect the debtors’ livelihood or fresh start, such as exclusion from a union on the
basis of discharge of a debt to the union’s credit union.
The effect of the section, and of further interpretations of the Perez rule, is
to strengthen the anti-reaffirmation policy found in section 524(b).
Discrimination based solely on nonpayment could encourage reaffirmations,
contrary to the expressed policy.
The section is not so broad as a comparable section proposed by the
bankruptcy commission . . . which would have extended the prohibition to any
discrimination, even by private parties. Nevertheless, it is not limiting either, as
noted. The courts will continue to mark the contours of the anti-discrimination
provision in pursuit of sound bankruptcy policy.
H.R. Rep. 95-595, at 366-67 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6322-23; S. Rep. 95-
989, at 81 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5867. The House report also contains
further explanation of the genesis of section 525:
The bill [that became section 525(a)] codifies [an] important debtor
protection, first enunciated by the Supreme Court in 1971 in the case of Perez v.
Campbell. In that case, Arizona refused to renew a drivers license because the
driver had been in an automobile accident, had been sued as a result, and lost.
The driver was uninsured. He filed bankruptcy and the tort judgment was
discharged. Arizona had a general policy forbidding a drivers license to any
motorist that failed to pay a tort judgment arising out of an automobile accident.
The Supreme Court held that if such policy were applied to include nonpayment
by reason of a discharge in bankruptcy, the policy would run afoul of the federal
bankruptcy policy of ensuring the debtor in a bankruptcy case a fresh start. The
court ordered the license issued.
Similar discrimination has occurred in other areas as well. Municipalities
have occasionally dismissed employees such as foremen or policemen because of
a bankruptcy. Nonpayment of a debt to a credit union has occasionally resulted in
loss of a job. Various state and federal laws automatically deny certain licenses to
an individual solely on the basis of a bankruptcy.
These practices are seriously detrimental to a debtor’s fresh start, and are
contrary to bankruptcy policy. The courts have followed the Perez doctrine in
some of these instances, and have restored bankruptcy to positions from which
they were excluded because of the bankruptcy. The doctrine is a developing
doctrine, and its precise ultimate contours are not yet clear. More case law will
undoubtedly develop the extent of the discrimination that is contrary to
bankruptcy policy.
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Nevertheless, the bill [that became section 525(a)] codifies one important
aspect of the protection against discriminatory treatment . . . prohibit[ing] action
by a governmental agency, that is based solely on the basis of a filing under . . .
the Bankruptcy Code. The prohibition does not extend so far as to prohibit
examination of the factors surrounding the bankruptcy, the imposition of financial
responsibility rules if they are not imposed only on former bankrupts, or the
examination of prospective financial condition or managerial ability. The purpose
of the section is to prevent an automatic reaction against an individual for availing
himself of the protection of the bankruptcy laws. Most bankruptcies are caused
by circumstances beyond the debtor’s control. To penalize a debtor by
discriminatory treatment as a result is unfair and undoes the beneficial effects of
the bankruptcy laws. However, in those cases where the causes of a bankruptcy
are intimately connected with the license, grant, or employment in question, an
examination into the circumstances surrounding the bankruptcy will permit
governmental units to pursue appropriate regulatory policies and take appropriate
action without running afoul of bankruptcy policy.
H.R. Rep. 95-595, at 165 (footnotes omitted).
To the extent that the text of section 525(a) provides some wiggle room, and to the extent
that the legislative history encourages courts to continue to develop the Perez rule, the PPP
nevertheless fails to qualify as an item protected by the anti-discrimination provision. The
exclusion of persons involved in bankruptcy from the PPP does not conflict with the fresh start
or otherwise frustrate the operation of the Bankruptcy Code. See generally Perez, 402 U.S. at
649-51 (analyzing whether a state statute was in conflict with the Bankruptcy Code’s fresh start
policy or otherwise frustrated the operation of the Code). The examples of prohibited
discrimination that might fall within the expanded ambit of section 525(a) identified in the
legislative history relate to restrictions on a debtor’s affiliations or activities that would render it
very difficult if not impossible for a debtor to pursue his or her chosen livelihood. In these
proceedings, the exclusion of the Debtor from the PPP is not similar to denying a debtor a license
to operate in his chosen field and thereby denying the debtor the opportunity to pursue economic
betterment. There is no question that the Debtor is experiencing serious financial hardship in the
current circumstances and some of that may be attributable to the Debtor’s decision to follow
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governmental recommendations designed to protect the public health. Despite its severity, that
financial stress was not caused by the SBA’s decision to exclude the Debtor from the PPP. It
may be harder for the Debtor to confirm a plan of reorganization without the PPP funds, but that
difficulty itself does not render the Administrator’s decision to exclude debtors from the PPP a
violation of section 525. See Jasper v. Bowdoinham Fed. Credit Union (In re Jasper), 325 B.R
50, 54 (Bankr. D. Me. 2005) (holding that denial of “check cashing privileges, ATM
transactions, online banking, minimum account balances and the like” did not violate section
525(a) even though the debtors would likely pay more for these services in the commercial
marketplace).
The PPP is not a grant that is similar to a license, permit, charter, or franchise. The PPP
is not a permission granted by the government to allow persons to engage in economic activity; it
is a government-guaranteed program of credit extension on generous terms with forgiveness
features intended to aid small businesses and incentivize them to retain employees during an
unprecedented economic downturn. Whether this program is properly characterized as a loan or
a grant, it is ultimately a form of “financial assistance [that] does not constitute a ‘similar grant’
within the scope of § 525.” See In re Cleasby, 139 B.R. at 900.
iii. The Broader View of Section 525.
Armed with both textual argument and policy-based arguments, the Debtor has advanced
its view that SBA’s bankruptcy exclusion violates section 525. Despite the appeal of that theory,
the caselaw that adopts a broader view of section 525 is either distinguishable or unpersuasive.
For example, Rose v. Connecticut Housing Authority (In re Rose), 23 B.R. 662 (Bankr. D. Conn.
1982) contains a cogent discussion of section 525 and the Congressional purpose animating that
section, as well as a survey of cases in this subject. However, Rose does not offer a persuasive
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explanation of how mortgage financing fits within the actual text of the statute adopted by
Congress. Hillcrest Foods, Inc. v. Briggs (In re Hillcrest Foods, Inc.), 10 B.R. 579 (Bankr. D.
Me. 1981) is similarly unhelpful to the Debtor. Hillcrest concluded preliminarily, and without
discussion, that a debtor’s ability to self-insure for worker’s compensation fell within the
protection of section 525(a). Id. at 579-80. There was, in Hillcrest, a “permission” (namely,
permission to self-insure) that is not present with a loan program.
Stinson v. BB & T Investment Services, Inc. (In re Stinson), 285 B.R. 239 (Bankr. W.D.
Va. 2002), relied on by the Debtor, is consistent with the interpretive approach employed here.
In Stinson, the court held that section 525(b) does not extend to a private employer’s refusal to
hire a person solely because that person had been a debtor or received a discharge. Id. at 250.
That conclusion was based on the words used in section 525(a)—which extends to a denial of
employment by a governmental unit—in comparison to the words used in section 525(b)—which
does not expressly extend to a denial of employment by a private employer. See id. at 247-48.
Stinson is a useful illustration of a court sticking to the words of the statute, even though the
purpose of the statute might have been promoted by the debtor’s preferred interpretation of
section 525(b). See id. at 247.
The Debtor fares better with its citation to In re The Bible Speaks, 69 B.R. 368 (Bankr.
D. Mass. 1987), where the court concluded that a school’s ability, under a federal statute, to offer
unaccredited courses and to have students receive tuition subsidies was analogous to a license or
franchise and constituted an “other similar grant.” The problem, however, with The Bible
Speaks and other similar cases is that they stretch the key terms in the statute too far. Congress
did not impose a flat prohibition on bankruptcy discrimination by governmental units (although
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doing so would have been entirely consistent with sound bankruptcy policy).11 The very words
on the page indicate a limitation. In its supplemental memorandum in support of its motion for a
TRO, the Debtor protests that “the government cannot bar a debtor from applying for a
government program solely because of the person’s status as a bankruptcy debtor.” But that is
not what section 525(a) says. It does not bar discrimination with respect to all “government
programs,” but instead uses more limited terms.
A final note about the caselaw cited by the Court in the TRO: although the Court cited
Stoltz, that decision is not binding. Further, even if the Court were to find Stoltz persuasive and
follow it here, the PPP would not qualify as an “other similar grant” under the reasoning
employed by the Second Circuit. In Stoltz, the court concluded that public housing leases are
items protected by section 525(a) because: (a) a lease is a type of grant and (b) public housing
leases are similar to the items enumerated in the statute because they are items conferred only by
the government and are essential to a debtor’s fresh start. 315 F.3d at 89-90. By contrast, a PPP
loan is not a grant and even if it were, the Court cannot conclude on this record that it is essential
to the Debtor’s fresh start; it might be helpful but there has been no showing that it is necessary.
In fact, the dissenting opinion in Stoltz contains what this Court believes is the better view of
section 525, both in terms of a textual analysis and in terms of making sense of section 525 in
light of the other parts of the Bankruptcy Code. See generally Stoltz, 315 F.3d at 95-97.
11
In fact, when the Commission on the Bankruptcy Law of the United States published its
recommendations to Congress in 1973, it proposed the enactment of a law providing that “[a] person shall
not be subjected to discriminatory treatment because he, or any person with whom he is or has been
associated, is or has been a debtor or has failed to pay a debt discharged in a case under the Act.” H. R.
Doc. No. 93-137, pt. 2, at 143-44 (1973). A reform bill drafted by the National Conference of
Bankruptcy Judges was nearly identical. In response to a hue and cry about the breadth of the proposals,
Congress altered the language, ultimately settling on the text of section 525(a) that is currently in effect.
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V. Conclusion.
Based on these proposed findings and conclusions, judgment should enter in favor of the
SBA and against the Debtor on all counts of the Debtor’s complaint.
Date: June 3, 2020 _______________________
Michael A. Fagone
United States Bankruptcy Judge
District of Maine
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