Gateway Radiology Consultants, P.A. v. Carranza (In re Gateway Radiology Consultants, P.A.)

• Decision Date: 08 June 2020
• Docket Number: Adv. No. 8:20-ap-00330-MGW,Case No. 8:19-bk-04971-MGW
• Citation: 616 B.R. 833
• Parties: IN RE: GATEWAY RADIOLOGY CONSULTANTS, P.A., Debtor. Gateway Radiology Consultants, P.A., Plaintiff, v. Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, et al., Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Florida

616 B.R. 833

IN RE: GATEWAY RADIOLOGY CONSULTANTS, P.A., Debtor.Gateway Radiology Consultants, P.A., Plaintiff,

v.Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, et al., Defendants.

Case No. 8:19-bk-04971-MGW

Adv. No. 8:20-ap-00330-MGW

United States Bankruptcy Court, M.D. Florida.

DATED: June 8, 2020

Joel M. Aresty, Esq., Joel M. Aresty P.A., Counsel for the Debtor

Christopher J. Emden, Counsel for Jovita Carranza, in her capacity as, Administrator for the U.S. Small, Business Administration

MEMORANDUM OPINION ON CHAPTER 11 DEBTOR'S ELIGIBLITY FOR PAYCHECK PROTECTION PROGRAM LOANS

Michael G. Williamson, United States Bankruptcy Judge

Because of the economic uncertainty caused by COVID-19, more than 20 million Americans have lost their jobs. To keep American workers employed, and to make sure they get paid, Congress passed the CARES Act, the largest stimulus package in history. At the heart of the CARES Act is the Paycheck Protection Program, which provides hundreds of billions of dollars in funding to small businesses to cover payroll, mortgage interest, rent, and utility costs.

Although referred to as PPP "loans," the Paycheck Protection Program functions like a grant. So long as a PPP borrower uses the "loan" for covered expenses (payroll, mortgage interest, rent, and utilities) the entire "loan" is forgiven. Because the loans are designed to be forgiven, both Congress and the SBA Administrator have dispensed with the underwriting typically required for SBA loans.

Even so, the SBA has promulgated a rule disqualifying debtors from participating in the Paycheck Protection Program because they supposedly pose an unacceptably high risk of using PPP "loans" for noncovered expenses, as well as an unacceptably high risk of not repaying any unforgiven amounts. Gateway Radiology Consultants, P.A., a chapter 11 debtor, asks the Court to enjoin the SBA Administrator from disqualifying it from participating in the Paycheck Protection Program.

The Court concludes that the SBA Administrator exceeded her authority when she promulgated the rule disqualifying Gateway Radiology from the Paycheck Protection Program. In order for a borrower to be eligible for a PPP Loan, Congress could have required borrowers to certify that they are not in bankruptcy. But Congress chose not to. By engrafting onto the Paycheck Protection Program a requirement that Congress chose not to insist on, the SBA Administrator exceeded her statutory authority.

Even if the SBA Administrator had not exceeded her authority, the rule disqualifying Gateway Radiology from participating in the Paycheck Protection Program is arbitrary and capricious because:

• the SBA Administrator considered factors Congress did not intend her to consider (i.e., collectability);

• the SBA Administrator failed to consider an important aspect of the problem (i.e., how the bankruptcy process promotes the same public policy as the CARES Act and how it makes it unlikely a chapter 11 debtor will use a PPP "loan" for noncovered expenses); and

• the SBA Administrator's explanation for her rule is contrary to the evidence before her (i.e., chapter 11 debtors are less likely to use PPP "loans" for noncovered expenses and more likely to repay PPP "loans").

The Court will therefore enjoin the SBA Administrator from disqualifying Gateway Radiology from participating in the Payroll Protection Program.

I. BACKGROUND ¹

A. COVID-19 caused the loss of more than 20 million jobs and threatened the loss of millions more.

On March 13, 2020, the President declared a national emergency.² Just three months earlier, Chinese officials detected an outbreak of a novel strain of coronavirus (known as COVID-19) in Wuhan, China.³ The disease quickly spread to the United States and other countries. By mid-March, when the President declared a national emergency, the United States had almost 2,000 confirmed COVID-19 cases,⁴ and the disease's rapid spread—thousands of new cases were being reported each day—was threatening to strain the nation's healthcare system.⁵

To keep our country's healthcare system from being overwhelmed, and to stem the tide of what had become a global pandemic, the United States started implementing social distancing measures. Those measures included statewide Stay-at-Home orders; closing schools; closing non-essential businesses; banning large gatherings; and limiting restaurants to takeout or delivery.⁶ While necessary to "flatten the curve,"⁷ the social distancing measures came with a cost.

Personal consumption in March 2020 fell by 7.5%—the largest recorded drop in history.⁸ And nonfarm employment dropped by almost 900,000 jobs, before plummeting by more than 20 million jobs in April.⁹ Those job losses were widespread: the leisure and hospitality industry lost 7.7 million jobs (almost half the industry), while the education and health services industry; the professional and business services industry; and the retail trade industry each lost more than 2 million jobs.¹⁰ As a result, the unemployment rate skyrocketed from 4.4% to 14.7%—the largest single-month increase in history.¹¹

B. Congress provided nearly $350 billion in funding for forgivable loans so small businesses could make payroll.

To provide emergency relief to American workers and small businesses, Congress passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").¹² Although the CARES Act was intended, in part, to help American workers who had already lost their job, much of the $2 trillion in relief provided for under the CARES Act was intended to preserve American jobs.¹³ Two of the ways it did so are relevant here.

First, as part of a $454 billion relief package, Congress directed the Treasury Department to provide financing to lenders who make direct loans to mid-size businesses (businesses with between 500 and 10,000 employees).¹⁴ In exchange for favorable repayment terms, borrowers have to agree to retain or restore 90% of their workforce.¹⁵ To be eligible for the mid-size loan program, a borrower has to certify (among other things) that it is not a debtor in bankruptcy.¹⁶

Second, for small businesses (those with 500 employees or fewer), Congress initially provided $349 billion in funding for the Paycheck Protection Program.¹⁷ Under the Paycheck Protection Program, eligible small businesses can borrow up to two and a half times their average monthly payroll.¹⁸ The loan proceeds can be used to pay:

• payroll costs;

• group health benefits and insurance premiums; and

• mortgage interest, rent, and utilities.¹⁹

Although the Paycheck Protection Program refers to the financing as a "loan," in all respects it operates as a grant. That's because the Paycheck Protection Program provides generous loan forgiveness: if the borrower uses the loan proceeds for payroll and other approved expenses (referred to as "covered expenses"), the entire loan will be forgiven.²⁰

Congress imposed few requirements on borrowers and lenders participating in the Paycheck Protection Program. To be eligible for a PPP Loan, a borrower need only be a small business concern or a nonprofit organization, veterans organization, or Tribal business concern with fewer than 500 employees.²¹ When applying for a PPP Loan, a borrower must also certify that:

• because of the economic uncertainty caused by COVID-19, the business needs the PPP Loan for its ongoing operations;

• the business will use the PPP Loan proceeds to retain workers and maintain payroll or make mortgage interest, lease, and utility payments; and

• between February 15, 2020 and December 31, 2020, the business has not and will not receive another PPP Loan.²²

Unlike it does for the mid-size loan program, the CARES Act does not require a small business applying for a PPP Loan to certify that it is not a debtor in bankruptcy.

In deciding whether to approve a PPP Loan, SBA lenders need only consider two criteria: (1) Was the borrower operating on February 15, 2020?; and (2) Did the employer have employees for whom it paid salaries and payroll taxes (or did it have paid independent contractors)?²³ Congress did not direct SBA lenders, to whom Congress delegated the SBA Administrator's authority to make and approve PPP Loans, to consider whether a borrower was in bankruptcy.²⁴

C. Congress authorizes the Small Business Administration to implement the Paycheck Protection Program.

More than 65 years ago, Congress created the Small Business Administration to aid, assist, and protect the interests of small businesses.²⁵ Because the country's security and economic well-being hinges on maximizing the potential of small businesses, ²⁶ Congress has committed to using all reasonable means to create and sustain programs that promote investment in small businesses—including investments that expand employment opportunities.²⁷

This is mainly accomplished by the SBA providing financial assistance to small businesses—in the form of direct loans, joint loans with a lender, or loan guarantees—under § 7(a) of the Small Business Act. Under § 7(a), loans must be of "such sound value or so secured as reasonably to assure repayment."²⁸

To determine whether a loan is sound, the SBA ordinarily considers the following criteria set forth in 13 C.F.R. § 120.150 : the applicant's character, reputation, and credit history; the experience and depth of management; the strength of the business; past earnings, projected cash flow, and future prospects; the ability to repay the loan with business earnings; whether the business has sufficient equity to operate on a sound basis; the potential for long-term success; and the nature and value of collateral securing the loan.²⁹

When Congress passed the CARES Act, it placed the Paycheck Protection Program under § 7(a) of the Small Business Act and authorized the Administrator to issue regulations to carry out the Paycheck Protection Program.³⁰

D. The SBA Administrator's interim final rule clarified that PPP Loans do not require underwriting.

On...