615 B.R. 644
Bankr. D.N.M.2020Background
- Debtor: Roman Catholic Church of the Archdiocese of Santa Fe, a New Mexico chapter 11 debtor-in-possession, sought relief after losing substantial revenue due to COVID-19 lockdowns (≈$300,000/mo).
- Congress enacted the CARES Act creating the Paycheck Protection Program (PPP), administered by the SBA, with broadly permissive eligibility and highly favorable, potentially forgivable loan terms (designed as support/grant-like relief, not credit-based lending).
- SBA Form 2484 (Apr. 2, 2020) asked whether applicants were "presently involved in any bankruptcy,” and an SBA interim rule (Apr. 28, 2020) expressly declared applicants who are bankruptcy debtors ineligible for PPP funds.
- Plaintiff applied for a $900,000 PPP loan (Apr. 20); lender did not proceed because of the SBA bankruptcy-ineligibility rule; no administrative appeal was available.
- Bankruptcy court converted a preliminary-injunction hearing to a trial on the merits and held SBA’s exclusion of bankruptcy debtors arbitrary and capricious under the APA, beyond SBA statutory authority, and in violation of 11 U.S.C. § 525(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SBA’s bankruptcy exclusion is arbitrary and capricious under the APA | SBA’s rule conflicts with PPP’s statutory scheme (no creditworthiness requirement); excluding debtors was unexplained and irrational | Bankruptcy status poses unacceptable risk of unauthorized use or non-repayment | Court: exclusion arbitrary and capricious; SBA failed to consider relevant factors and implanted an improper underwriting criterion |
| Whether SBA exceeded statutory authority (Chevron) | CARES Act eligibility is unambiguous as to PPP; SBA lacked authority to add bankruptcy disqualification | SBA claims rulemaking authority to implement PPP regulations | Court: SBA exceeded authority; PPP is distinct from other CARES programs and SBA’s addition is unlawful (no Chevron deference) |
| Whether exclusion violates 11 U.S.C. § 525(a) (government discrimination against debtors) | PPP funds are a governmental "grant" unobtainable from private sector and essential to a debtor’s fresh start; denial is discrimination solely because of bankruptcy status | SBA treats bankruptcy status as legitimate eligibility criterion to protect funds | Court: exclusion violates § 525(a); PPP is a government grant-like program and cannot be denied solely for debtor status |
Key Cases Cited
- Motor Vehicles Mfrs. Ass'n of U.S., Inc. v. State Farm, 463 U.S. 29 (1983) (sets arbitrary-and-capricious review framework)
- Chevron U.S.A., Inc. v. Nat. Res. Def. Council, 467 U.S. 837 (1984) (framework for agency deference to statutory interpretation)
- Util. Air Regulatory Grp. v. EPA, 573 U.S. 302 (2014) (no deference when agency acts outside statutory authority)
- FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) (limits on agency expertise and need to respect congressional intent)
- Judulang v. Holder, 565 U.S. 42 (2011) (courts ensure agencies engage in reasoned decisionmaking)
- New Mexico Health Connections v. U.S. Dep’t of Health & Hum. Servs., 946 F.3d 1138 (10th Cir. 2019) (describes APA review role of courts)
- Stolz v. Brattleboro Hous. Auth., 315 F.3d 80 (2d Cir. 2002) (interpreting "other similar grant" under § 525(a))