623 B.R. 392
Bankr. D. Md.2020Background
- Debtor iThrive Health, LLC (Village Green Apothecary), a Chapter 11 debtor operating with ~50 employees, sought approximately $418,000 under the CARES Act Paycheck Protection Program (PPP).
- SBA interim final rules (April 24, 2020) expressly disqualified applicants who are debtors in bankruptcy from receiving PPP loans; lenders declined debtor’s PPP applications for that reason.
- Debtor filed an adversary proceeding seeking a preliminary injunction under the Administrative Procedure Act (APA) and a §525(a) claim, arguing the SBA rule unlawfully excludes debtors and discriminates against debtors in bankruptcy.
- While the injunction motion was pending, debtor moved to dismiss its Chapter 11 case and said it would seek PPP funds immediately if the case were dismissed.
- The bankruptcy court concluded Fourth Circuit precedent interpreting 15 U.S.C. §634(b)(1) bars injunctions against the SBA, found debtor unlikely to succeed on its §525 claim under Ayes, denied the preliminary injunction, and granted dismissal of the bankruptcy case for cause to allow debtor to pursue PPP funds outside bankruptcy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether 15 U.S.C. §634(b)(1) bars injunctive relief against the SBA | §634(b)(1) should not preclude judicial review or relief here; Ulstein supports limited exceptions | Fourth Circuit precedent (J.C. Driskill, Duncan, Vincent) bars injunctions against the SBA | Court followed Fourth Circuit precedent and held it may not grant injunctive relief against the SBA |
| Whether SBA’s exclusion of debtors from PPP violates the APA (arbitrary, capricious, exceeds authority) | SBA acted beyond statutory authority and its rule is arbitrary and capricious | SBA acted within its rulemaking authority to implement PPP; relief is barred by §634(b)(1) | Court did not reach APA merits because §634(b)(1) precluded injunctive relief |
| Whether PPP exclusion violates 11 U.S.C. §525(a) (discrimination against debtors) | PPP funds are effectively grants (not loans) and are covered as “other similar grant” under §525(a) | PPP is a government-guaranteed lending program (not a license/permit) and Ayes limits §525(a) protection; Congress excluded such guarantees | Court held debtor unlikely to succeed under Ayes: PPP lacks the “family resemblance” to licenses/permits and §525(a) claim fails |
| Whether the bankruptcy case should be dismissed so debtor may pursue PPP funds | Dismissal would allow debtor to obtain PPP funds immediately and aid reorganization; debtor can refile if necessary | Objection resolved; dismissal appropriate given benefits outside bankruptcy | Court found cause under 11 U.S.C. §1112(b) and granted dismissal to permit debtor to seek PPP funds |
Key Cases Cited
- Ayes v. U.S. Dep’t of Veterans Affairs, 473 F.3d 104 (4th Cir. 2006) (limits “other similar grant” in §525(a) to government authorizations like licenses and excludes routine loan guaranties)
- J.C. Driskill, Inc. v. Abdnor, 901 F.2d 383 (4th Cir. 1990) (construed 15 U.S.C. §634(b)(1) to bar injunctions against the SBA)
- Duncan v. Furrow Auction Co., 564 F.2d 1107 (4th Cir. 1977) (applied §634(b)(1) to prohibit injunction against SBA)
- Vincent v. Small Business Administration, 402 F.2d 769 (4th Cir. 1968) (affirmed dissolution of injunction as precluded by §634(b)(1))
- Ulstein Maritime Ltd. v. United States, 833 F.2d 1052 (1st Cir. 1987) (held §634(b)(1) does not necessarily bar all injunctive relief; distinguishes interference with agency operations from judicial review)
- Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008) (establishes the four-factor preliminary injunction standard)