In re Gateway Radiology Consultants, P.A., No. 20-13462

• Court: U.S. Court of Appeals — Eleventh Circuit
• Writing for the Court: ED CARNES, Circuit Judge
• Citation: 983 F.3d 1239
• Parties: IN RE: GATEWAY RADIOLOGY CONSULTANTS, P.A., Debtor. USF Federal Credit Union, Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, Appellants, v. Gateway Radiology Consultants, P.A., Appellee.
• Docket Number: No. 20-13462
• Decision Date: 22 December 2020

983 F.3d 1239

IN RE: GATEWAY RADIOLOGY CONSULTANTS, P.A., Debtor.

USF Federal Credit Union, Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, Appellants,
v.
Gateway Radiology Consultants, P.A., Appellee.

No. 20-13462

United States Court of Appeals, Eleventh Circuit.

December 22, 2020

983 F.3d 1246

Megan Wilson Murray, Adam M. Gilbert, Underwood Murray, PA, Tampa, FL, for Plaintiff-Appellant USF Federal Credit Union.

Joshua Marc Salzman, U.S. Department of Justice, Washington, DC, Lindsey Powell, U.S. Attorney General's Office, Washington, DC, for Plaintiff-Appellant Jovita Carranza.

Maury L. Udell, Beighley Myrick Udell & Lynne, PA, Miami, FL, Thomas G. Zeichman, Counsel, Beighley Myrick Udell & Lynne, PA, Boca Raton, FL, for Defendant-Appellee.

Before ROSENBAUM, ANDERSON, and ED CARNES, Circuit Judges.

ED CARNES, Circuit Judge:

Gateway Radiology Consultants is a small business debtor in an active Chapter 11 bankruptcy proceeding seeking a loan under the Paycheck Protection Program (PPP). The problem for Gateway is that the Small Business Administration, which Congress authorized to implement the PPP and to issue regulations on the subject, has issued a rule that makes bankruptcy debtors ineligible for PPP loans.

Gateway applied for a PPP loan anyway. It would have been turned down but for the fact that the application form it filed falsely stated that it was not in bankruptcy. Because of that false statement, USF Federal Credit Union agreed to make a PPP loan to Gateway. But Gateway, like all debtors in bankruptcy, had to get the bankruptcy court's approval before it could incur any more indebtedness outside the ordinary course of business. When it filed a motion for approval in the bankruptcy court, the SBA objected that Gateway was ineligible for a PPP loan because it was in bankruptcy.

The bankruptcy court granted Gateway's motion anyway. It concluded that the SBA's rule rendering bankruptcy debtors ineligible for PPP loans was an unreasonable interpretation of the statute, was arbitrary and capricious under the Administrative

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Procedure Act, and as a result was unlawful and unenforceable against Gateway. It ordered the SBA not to deny Gateway's loan a guarantee or eligibility for forgiveness based on Gateway being in bankruptcy. Concluding that the SBA's rule is neither an unreasonable interpretation of the relevant statute nor arbitrary and capricious, we vacate the bankruptcy court's approval order. We also vacate a preliminary injunction order to the same effect that the bankruptcy court entered.

I. FACTUAL BACKGROUND

A. Statutory Background

In response to COVID-19-induced economic fallout, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. See Coronavirus Aid, Relief, and Economic Security Act, Pub L. No. 116-136, 134 Stat. 281 (2020). The Act is in large part aimed at helping businesses make payroll and pay operating expenses in order to keep people employed through the economic downturn. One of the Act's programs designed to accomplish that goal, and the one at issue in this appeal, is the PPP. Id. § 1102, 134 Stat. at 286 (codified at 15 U.S.C. § 636(a)(36) ).

The PPP is directed at small businesses and its principal function is to provide potentially forgivable loans to them. See 15 U.S.C. § 636(a)(36)(D)(I).¹ It is designed to give loans to eligible businesses and, if the loaned funds are used for specified expenses, to allow those loans to be forgiven. See 15 U.S.C. § 9005(b). The recipient can receive loan forgiveness if it uses the funds to cover payroll and certain other expenses like mortgage or rent payments and utility expenses. Id. Generally the amount of the loan that is forgiven is the amount used to pay those costs. Id. But the bulk of the funds, at least 60 percent, must be spent on payroll. Id. § 9005(d)(8).²

One might think that the list of allowable uses for PPP loan funds would be the same as the list of uses eligible for loan forgiveness, but one would be wrong. The statutory list of allowable uses of loan funds is longer than the list of uses that qualify for loan forgiveness; all forgivable uses are allowable, but not all allowable uses are forgivable. For example, payments related to health care benefits and interest on debt obligations are allowable uses of loan funds, but the portion of the loan used for those payments will not be forgiven. See id. § 636(a)(36)(F)(i)(I)–(VII); id. § 9005(b).

B. The Small Business Administration

Because the SBA administers PPP loans and does so under one of the loan programs that was already in place, understanding the SBA's functions and that pre-existing loan program helps put the issues in context. Since its creation, part of the SBA's purpose has been to "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise." See 15 U.S.C. § 631(a). It has "extraordinarily broad powers to accomplish these important objectives, including that of lending money to small businesses whenever they could not get necessary loans on reasonable terms from private

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lenders." SBA v. McClellan, 364 U.S. 446, 447, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960).

Congress has delegated to the SBA a variety of rulemaking and other powers. It has authorized the SBA to "make such rules and regulations as [it] deems necessary to carry out the authority vested in" it, 15 U.S.C. § 634(b)(6) ; and to "take any and all actions ... when [it] determines such actions are necessary or desirable in making ... or otherwise dealing with or realizing on loans," id. § 634(b)(7) ; and to "establish general policies ... which shall govern the granting and denial of applications for financial assistance by the [SBA]," id. § 633(d).

The SBA aids small businesses primarily through financing private loans. Typically it "prefers to guarantee private loans rather than to disburse funds directly." United States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). And most often it operates under 15 U.S.C. § 636(a) through what are called "section 7(a) loans."

Section 7(a) loans are subject to certain eligibility requirements. One is that an applicant must be a "small business concern," and the SBA is authorized to "specify detailed definitions or standards by which a business concern may be determined to be a small business concern." 15 U.S.C. § 632(a)(2)(A). It has done so. For example, the SBA has specified in a regulation that to qualify as a small business concern an entity must be an operating business organized for profit, located in the United States, and that it must fit within detailed size requirements that vary by industry. 13 C.F.R. § 120.100(a) – (e) ; see also id. § 121.201. In addition, it must be shown that the applicant cannot get credit elsewhere: "that the desired credit is unavailable to the applicant on reasonable terms and conditions" without SBA assistance. 13 C.F.R. § 120.101 ; see also 15 U.S.C. § 632(h) ; id. § 636(a)(1)(A)(i) ("No financial assistance shall be extended pursuant to this subsection if the applicant can obtain credit elsewhere.").

Section 7(a) loans are also, by statute, subject to a "sound value" requirement: "all loans made under [§ 7(a) ] shall be of such sound value or so secured as reasonably to assure repayment[.]" 15 U.S.C. § 636(a)(6). In obedience to that statutory mandate, the SBA has long included a creditworthiness requirement in its lending criteria. Those criteria require that a loan applicant "must be creditworthy" and that "[l]oans must be so sound as to reasonably assure repayment." 13 C.F.R. § 120.150. The soundness and repayment criteria include nine factors that the "SBA will consider," including the "[c]haracter, reputation, and credit history of the applicant," the "[s]trength of the business," and the "[a]bility to repay the loan with earnings from the business." Id. § 120.150(a) – (i).

Consistent with the soundness and repayment criteria, the SBA considers an applicant's bankruptcy status or history. The SBA's official § 7(a) loan application form, which is part of its loan program requirements, see 13 C.F.R. § 120.10, asks applicants if they have ever filed for bankruptcy, see SBA Form 1919. And its guidance to lenders requires that for "7(a) loans greater than $350,000 and loans of $350,000 or less that do not meet [the] SBA's minimum credit score requirements for 7(a) Small Loans," the lender's "credit memorandum" recommending approval "must address the Applicant's ability and likelihood to repay the loan from [its] cash flow." See SBA, Standard Operating Procedure, § 50 10 5(K), Lender and Development Company Loan Programs 178 (Apr. 1, 2019). And that part of the credit memorandum must disclose any bankruptcy filings, although they will not automatically render the applicant ineligible for a § 7(a) loan. Id. at 180.

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Section 7(a) matters to this case because the PPP was not created as a standalone program; instead it was added into § 7(a), albeit with several of that subsection's general...