Eleventh Circuit Finds SBA May Deny Payment Protection Program Loans to Bankrupt Debtors | Foley & Lardner srl


The Eleventh Circuit recently upheld the US Small Business Administration (“SBA”) rule that makes bankrupt debtors ineligible for a Payment Protection Program (“PPP”) loan under Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). In its overall opinion, the Eleventh Circuit determined that the SBA rule is not an unreasonable interpretation of the CARES Law and is not arbitrary and capricious.1 The Eleventh Circuit joins the Fifth Circuit, which also ruled in June 2020 that a bankruptcy court had overstepped its authority when it asked the SBA to make a PPP loan available to a bankrupt debtor.2

The Eleventh Circuit overturned a bankruptcy court’s finding that the SBA had exceeded its powers and acted in an arbitrary and capricious manner when it adopted the rule. The bankruptcy court determined that the rule was inapplicable as it excluded the debtor from participating in the PPP. The bankruptcy court also issued an injunction requiring the SBA to guarantee the loan if the applicant met all other conditions (apart from not being bankrupt) and prohibiting the SBA from making the cancellation of the loan conditional on the fact that the applicant is not bankrupt. The Eleventh Circuit analysis focused on the power of the SBA to adopt the rule and the fact that PPP loans are subject to the existing eligibility conditions for SBA loans.

The CARES Act gave the SBA the power to develop emergency rules to issue regulations for the implementation of the PPP. The SBA rule that is in issue is as follows: “If the plaintiff or the owner of the plaintiff is the debtor in a bankruptcy proceeding, either at the time of submitting the claim or at any time before the loan is disbursed, the applicant is not eligible to receive a PPP loan.3 The SBA’s explanation for this rule is that granting a PPP loan to a bankrupt debtor “present[s] an unacceptably high risk of unauthorized use of funds or non-repayment of unpaid loans.

In overturning the bankruptcy court ruling, the Eleventh Circuit pointed out that the Payment Protection Program is not a new stand-alone loan program for the SBA. Instead, PPP loans fall under the existing category of SBA loans known as “Section 7 (a) loans”.4 Loans under section 7 (a) are subject to established eligibility criteria, one of which is the “sound value” requirement. This means that all Section 7 (a) loans “must be of reasonable value or reasonably secured to ensure repayment.[.]”5 The SBA considers the bankruptcy status or history of an applicant under section 7 (a) as part of this analysis.

Although a PPP loan technically falls under the umbrella of Section 7 (a) loans, the CARES Act expands and relaxes certain Section 7 (a) requirements for PPP loans. For example, the CARES Act waives the requirement that an applicant cannot obtain credit elsewhere. It is important to note that the Eleventh Circuit emphasizes that the CARES Act does not “remove the requirement of sound value”. Instead, Congress left it up to the SBA to determine how to apply the sound value requirement to PPP loans and that includes specifying eligibility conditions.

The ownership of the Eleventh Circuit is limited to the States of that Circuit. However, other courts may look to this ruling and the Fifth Circuit ruling for guidance when faced with similar issues. It should also be noted that the most recent bipartite-bicameral omnibus COVID relief agreement signed by President Trump on December 27, 2020 does not expressly address the SBA rule. The new law temporarily amends the bankruptcy code to allow PPP loans to certain bankrupt debtors. However, this amendment does not enter into force until whether the SBA agrees to authorize PPP loans in bankruptcies. An in-depth analysis of the law is available here. For more information, please contact your Foley relationship partner or the Foley authors listed below.

1 The case is In re Gateway Radiology Consultants, PA, No. 20-13462 (11th Cir. 22 Dec. 2020) and a copy of the notice is available here

2 The case of the fifth circuit is In re Hidalgo County Emergency Services Foundation, 962 F.3d 838 (5th Cir. 2020) and a copy of the opinion is available here

3 85 Fed. Reg. 23 450 23 451 (April 28, 2020).

4 15 USC § 636 (a).

5 15 USC § 636 (a) (6).

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