Springfield Hosp., Inc., Springfield Med. Care Sys., Inc. v. Guzman
28f4th403
2d Cir.2022Background:
- Congress created the Paycheck Protection Program (PPP) under the CARES Act to provide potentially forgivable, SBA‑guaranteed loans to small businesses during the COVID‑19 pandemic.
- The SBA implemented PPP rules and adopted a policy automatically excluding applicants who were debtors in bankruptcy from receiving PPP funds.
- Springfield Hospital and Springfield Medical Care Systems (debtors in Chapter 11) applied for PPP funds, were denied solely because of their bankruptcy status, and sued the SBA in bankruptcy court under 11 U.S.C. § 525(a).
- The bankruptcy court granted summary judgment to Springfield, holding PPP funds are an “other similar grant” within § 525(a) and enjoined the SBA from denying PPP applications based on bankruptcy status.
- The Second Circuit reversed: it held § 525(a) does not cover PPP because PPP is a loan‑guaranty program (not a license/permit/charter/franchise or similar grant), vacated the injunction, and remanded for further proceedings; the court declined to decide SBA’s claimed immunity from injunctive relief under 15 U.S.C. § 634(b)(1).
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether PPP is covered by 11 U.S.C. § 525(a) | PPP is in substance a grant/support program (forgiveness and streamlined underwriting) and thus an “other similar grant” protected by § 525(a) | PPP is a loan guaranty program placed under Section 7(a) of the Small Business Act; § 525(a) does not cover loans or credit guarantees | Held: PPP is a loan guaranty program, not an “other similar grant”; § 525(a) does not apply to PPP (summary judgment for SBA) |
| Whether Goldrich (holding § 525(a) does not cover loans) remains controlling | Goldrich has been undercut by later developments and Stoltz; § 525(a) should be read broadly to protect debtors | Goldrich remains good law for the proposition that extensions of credit/loan guarantees fall outside § 525(a); Stoltz is factually distinct | Held: Goldrich remains controlling on loans; Stoltz is reconcilable and limited to government benefits unobtainable privately and essential to a fresh start |
| Availability of injunctive relief against the SBA under 15 U.S.C. § 634(b)(1) | Bankruptcy court concluded § 634(b)(1) did not bar injunctive relief | SBA argued § 634(b)(1) bars injunctions against the SBA (sovereign immunity from that relief) | Held: Court did not decide immunity question because Springfield’s § 525(a) claim fails on the merits; injunction vacated |
| Significance of subsequent legislation (Consolidated Appropriations Act / Economic Aid Act) | Subsequent congressional action does not resolve judicial interpretation; courts should construe § 525(a) to protect PPP recipients | Congress amended § 525 to protect certain CARES benefits but did not include PPP; Economic Aid Act created a specific process for bankrupt debtors to seek PPP eligibility—supporting that PPP was not intended to be covered by § 525(a) | Held: Post‑enactment laws support the conclusion that Congress did not extend § 525(a) protection to PPP loans |
Key Cases Cited
- In re Goldrich, 771 F.2d 28 (2d Cir.) (1985) (held § 525(a) does not cover student loan guaranty program; loans/credit guarantees are outside § 525(a))
- Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80 (2d Cir. 2002) (held public housing lease is an “other similar grant” because unobtainable privately and essential to fresh start)
- Perez v. Campbell, 402 U.S. 637 (1971) (Supreme Court decision motivating § 525’s protection of debtor’s fresh start)
- Pharaohs GC, Inc. v. U.S. Small Bus. Admin., 990 F.3d 217 (2d Cir. 2021) (discusses placement of PPP within § 7(a) of Small Business Act)
- In re Gateway Radiology Consultants, P.A., 983 F.3d 1239 (11th Cir. 2020) (treated PPP as a loan program and rejected § 525(a) claim)
- In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d 838 (5th Cir. 2020) (addressed injunction/sovereign immunity issues relating to SBA and PPP)