466 F.Supp.3d 363
W.D.N.Y.2020Background:
- Plaintiffs are the Roman Catholic Diocese of Rochester and Diocese of Buffalo, both chapter 11 debtors that applied for PPP loans and claim combined eligibility for $2,836,096.
- CARES Act created the Paycheck Protection Program (PPP) and granted the SBA emergency rulemaking authority; SBA published interim rules and the PPP application asked borrowers to certify they were not in bankruptcy.
- On April 28, 2020, SBA’s Fourth Interim Rule expressly excluded debtors in bankruptcy, citing unacceptable risk of unauthorized use or non-repayment.
- Plaintiffs sued under the APA and 11 U.S.C. § 525(a) and moved for a preliminary injunction; the district court issued a Rule 56(f)(3) notice and considered summary judgment on two legal questions.
- The court withdrew the bankruptcy-court reference, held the CARES Act is silent on bankruptcy eligibility, and concluded SBA’s exclusion is a permissible exercise of its authority.
- The court granted summary judgment to defendants on the CARES Act and § 525(a) claims and denied the preliminary injunction (no likelihood of success on the APA §706(2)(A) claim and no irreparable harm).
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SBA exceeded CARES Act authority by excluding debtors in bankruptcy from PPP | CARES Act language ("any business concern") and size criteria unambiguously include bankrupt debtors; SBA cannot add eligibility limits | CARES Act is silent on bankruptcy status; Congress left details to SBA and SBA may impose rules to ensure sound lending under §636(a) | Court: CARES Act silent; Chevron step 2 deference applies; SBA’s exclusion is a permissible, reasoned policy choice; summary judgment for defendants |
| Whether SBA’s exclusion violates 11 U.S.C. § 525(a) | §525(a) forbids governmental units from denying grants/ similar benefits to debtors; PPP participation is a protected "grant-like" benefit | §525(a) does not cover loans or credit and PPP loans are loans (forgivable only upon conditions); PPP is not analogous to licenses or property interests protected by §525(a) | Court: §525(a) not violated; PPP not within §525(a)’s protections; summary judgment for defendants |
| Whether SBA acted arbitrarily and capriciously under APA §706(2)(A) (preliminary injunction) | SBA’s interim rules are inconsistent and adoption of the bankruptcy exclusion was unexplained or procedurally defective | SBA adopted a bright-line rule to expedite processing and to mitigate risk; provided a reasoned explanation given exigent circumstances | Court: Plaintiffs failed to show likelihood of success on the §706(2)(A) claim and failed to show irreparable harm; preliminary injunction denied |
| Whether the district court should retain the case or defer to Bankruptcy Court | (Plaintiffs did not move to withdraw reference) claims arise under Title 11 and are related to bankruptcy proceedings | District court may withdraw reference for cause to avoid jurisdictional uncertainty and promote efficiency | Court: Withdraws referral to Bankruptcy Court in its entirety for cause (efficiency, uniformity, clarity) |
Key Cases Cited
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (established the two-step framework for judicial review of agency statutory interpretation)
- Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (standards for arbitrary and capricious review under APA §706(2)(A))
- Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492 (2d Cir. 2017) (application of Chevron deference in the Second Circuit)
- Stern v. Marshall, 564 U.S. 462 (2011) (limits on bankruptcy court authority over certain claims and relevance to core/non-core analysis)
- Whitman v. Am. Trucking Ass’ns, 531 U.S. 457 (2001) (courts should not assume Congress quietly displaced fundamental regulatory details)
- Corley v. United States, 556 U.S. 303 (2009) (canon against rendering statutory provisions superfluous)
- In re Stoltz, 315 F.3d 80 (2d Cir. 2002) (discussion of §525(a) property interests and "fresh start" rationale)
- In re Goldrich, 771 F.2d 28 (2d Cir. 1985) (§525(a) does not extend to loans or credit)
- Otoe‑Missouria Tribe of Indians v. N.Y. State Dep’t of Fin. Servs., 769 F.3d 105 (2d Cir. 2014) (preliminary injunction standards and heightened standard for government actions)