630 B.R. 816
S.D. Cal.2021Background:
- Congress enacted the CARES Act, creating the Paycheck Protection Program (PPP) administered by the SBA; SBA issued expedited interim final rules (IFRs) including a Fourth IFR that excluded entities "presently involved in bankruptcy proceedings" from PPP eligibility.
- Vestavia Hills, a Chapter 11 debtor operating Mount Royal Towers, applied for a PPP loan; its lender refused to submit the application because of Vestavia’s bankruptcy status.
- Vestavia sued the SBA in bankruptcy court (APA and 11 U.S.C. § 525(a) claims) and obtained a preliminary injunction ordering the SBA to consider its PPP application; SBA appealed and moved to withdraw the bankruptcy reference.
- The district court reviewed mootness, sovereign-immunity, and merits (Chevron and arbitrary-and-capricious) issues concerning the SBA’s exclusion of debtors in bankruptcy and also considered whether withdrawal of the reference was mandatory under 28 U.S.C. § 157(d).
- The district court vacated the bankruptcy court’s preliminary injunction (finding Vestavia unlikely to succeed on APA and § 525 claims) and granted the SBA’s motion for mandatory withdrawal of the reference.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Mootness of appeal | Moot because SBA already disbursed funds | Not moot; reversal affects loan forgiveness and future rights | Not moot (neither constitutional nor equitable moot) |
| Sovereign immunity (15 U.S.C. § 634(b)(1)) | Clause should be read narrowly; injunctions allowed in some circumstances | Clause bars injunctions against SBA | Court found waiver ambiguous but declined to resolve definitively because Vestavia failed on merits |
| APA — statutory authority (Chevron) | CARES Act unambiguously allows all "any business concern" including bankruptcy debtors | CARES Act silent; SBA reasonably relied on existing 7(a) "sound value" authority to exclude debtors | Court: statute ambiguous; SBA’s interpretation permitting exclusion is permissible (Vestavia unlikely to succeed) |
| APA — arbitrary & capricious (5 U.S.C. § 706(2)(A)) | Exclusion was rushed, illogical, failed to consider bankruptcy protections, and is post hoc | SBA balanced speed and collectability, considered bankruptcy risks, articulated reasons in later IFR & declaration | Court: SBA’s explanation suffices; rule not arbitrary or capricious (Vestavia unlikely to succeed) |
| 11 U.S.C. § 525(a) nondiscrimination claim | PPP is a government "grant" and denial discriminates against debtor | PPP is not the kind of "grant" (license/permit-like) §525(a) protects | Court: §525(a) does not cover PPP loans as "other similar grant" — Vestavia unlikely to succeed |
| Withdrawal of reference (28 U.S.C. § 157(d)) | Untimely; bankruptcy court can decide APA issues | Mandatory withdrawal required because resolution requires substantial interpretation of non-bankruptcy federal law (CARES Act) | Motion timely; mandatory withdrawal granted |
Key Cases Cited
- Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) (standard for preliminary injunction)
- Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) (framework for judicial review of agency statutory interpretation)
- Motor Vehicle Mfrs. Ass'n v. State Farm, 463 U.S. 29 (1983) (arbitrary-and-capricious review standard)
- King v. Burwell, 576 U.S. 473 (2015) (limits on Chevron deference for major questions)
- Department of Homeland Sec. v. Regents of the Univ. of California, 140 S. Ct. 1891 (2020) (post-hoc rationalizations and contemporaneous administrative record)
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (equitable mootness in bankruptcy appeals)
- In re Excel Innovations, Inc., 502 F.3d 1086 (9th Cir. 2007) (appealability of bankruptcy court preliminary injunction)