Roman Catholic Church of the Archdiocese of Santa Fe v. U.S. Small Bus. Admin. (In re Roman Catholic Church of the Archdiocese of Santa Fe)

• Decision Date: 01 May 2020
• Docket Number: No. 18-13027 t11,Adv. No. 20-1026 t,18-13027 t11
• Citation: 615 B.R. 644
• Parties: IN RE: ROMAN CATHOLIC CHURCH OF the ARCHDIOCESE OF SANTA FE, Debtor. Roman Catholic Church of the Archdiocese of Santa Fe, Plaintiff, v. United States of America Small Business Administration, Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

615 B.R. 644

IN RE: ROMAN CATHOLIC CHURCH OF the ARCHDIOCESE OF SANTA FE, Debtor.

Roman Catholic Church of the Archdiocese of Santa Fe, Plaintiff,

v.United States of America Small Business Administration, Defendant.

No. 18-13027 t11

Adv. No. 20-1026 t

United States Bankruptcy Court, D. New Mexico.

Signed May 1, 2020

Thomas D. Walker, Walker & Associates, P.C., Albuquerque, NM, for Plaintiff.

Kevin VanLandingham, DOJ-Civ., Washington, DC, for Defendant.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

The Court held a preliminary injunction hearing in this proceeding on April 30, 2020. During the hearing, the Court converted it to a trial on the merits, as allowed by Fed. R. Civ. P. 65(a)(2).¹ For the reasons stated herein, Plaintiff is entitled to relief under its complaint.

I. FINDINGS OF FACT ²

The Court finds:

Plaintiff is a catholic archdiocese in New Mexico and a New Mexico corporation. Its principal place of business is at 4000 St. Josephs Place NW, Albuquerque, New Mexico. Plaintiff has 70 employees. On December 3, 2018, Plaintiff filed this chapter 11 case. Since then Plaintiff has been operating as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108.

Defendant (sometimes referred to as the "SBA") is an agency of the United States of America. Its central office is located at 409 Third Street, S.W., Washington DC 20416.

On or about March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, P.L. 115-136 (the "CARES Act"). The CARES Act is intended, among other things, to provide stimulus to the economy by distributing approximately $2.3 trillion to various industries, programs, and individuals.

The CARES Act temporarily added a new "Paycheck Protection Program" (the "PPP") to be administered by Defendant. The CARES Act provisions relating to the PPP provide in pertinent part:

Section 1102. Paycheck Protection Program

(a) IN GENERAL.—Section 7(a) of the Small Business Act ( 15 U.S.C. 636(a) ) is amended—

(1) in paragraph (2)—

(A) in subparagraph (A), in the matter preceding clause (i), by striking "and (E)" and inserting "(E), and (F)"; and

(B) by adding at the end the following:

"(F) PARTICIPATION IN THE PAYCHECK PROTECTION PROGRAM.—In an agreement to participate in a loan on a deferred basis under paragraph (36), the participation by the Administration shall be 100 percent."; and

(2) by adding at the end the following:

"(36) PAYCHECK PROTECTION PROGRAM.—

"(A) DEFINITIONS.—In this paragraph—

...

"(iv) the term ‘eligible recipient’ means an individual or entity that is eligible to receive a covered loan;

...

"(B) PAYCHECK PROTECTION LOANS.—Except as otherwise provided in this paragraph, the Administrator may guarantee covered loans under the same terms, conditions, and processes as a loan made under this subsection.

...

"(D) INCREASED ELIGIBILITY FOR CERTAIN SMALL BUSINESSES AND ORGANIZATIONS.—

"(i) IN GENERAL.—During the covered period, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) shall be eligible to receive a covered loan if the business concern, nonprofit organization, veterans organization, or Tribal business concern employs not more than the greater of—

"(I) 500 employees; or

"(II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.

...

(F) ALLOWABLE USES OF COVERED LOANS.—

"(i) IN GENERAL.—During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for—

"(I) payroll costs;

"(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

"(III) employee salaries, commissions, or similar compensations;

"(IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);

"(V) rent (including rent under a lease agreement);

"(VI) utilities; and "(VII) interest on any other debt obligations that were incurred before the covered period.

"(ii) DELEGATED AUTHORITY.—

"(I) IN GENERAL.—For purposes of making covered loans for the purposes described in clause (i), a lender approved to make loans under this subsection shall be deemed to have been delegated authority by the Administrator to make and approve covered loans, subject to the provisions of this paragraph.

"(II) CONSIDERATIONS.—In evaluating the eligibility of a borrower for a covered loan with the terms described in this paragraph, a lender shall consider whether the borrower—

"(aa) was in operation on February 15, 2020; and

"(bb)(AA) had employees for whom the borrower paid salaries and payroll taxes; or

"(BB) paid independent contractors, as reported on a Form 1099–MISC.

...

SEC. 1106. Loan Forgiveness.

(a) DEFINITIONS.—In this section—

(1) the term "covered loan" means a loan guaranteed under paragraph (36) of section 7(a) of the Small Business Act ( 15 U.S.C. 636(a) ), as added by section 1102;

...

(7) the term "expected forgiveness amount" means the amount of principal that a lender reasonably expects a borrower to expend during the covered period on the sum of any—

(A) payroll costs;

(B) payments of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);

(C) payments on any covered rent obligation; and

(D) covered utility payments; and

(8) the term "payroll costs" has the meaning given that term in paragraph (36) of section 7(a) of the Small Business Act ( 15 U.S.C. 636(a) ), as added by section 1102 of this Act.

(b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

(1) Payroll costs.

(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).

(3) Any payment on any covered rent obligation.

(4) Any covered utility payment.

SEC. 1114. Emergency Rulemaking Authority.

Not later than 15 days after the date of enactment of this Act, the Administrator shall issue regulations to carry out this title and the amendments made by this title without regard to the notice requirements under section 553(b) of title 5, United States Code.

As can be seen from the statute, funds from the PPP have the following extremely favorable terms:

• No collateral or personal guarantees are required;

• Funds are available regardless of the applicant's creditworthiness.

• No fees are charged;

• The loans mature in 2 years;

• The interest rate is 1%; and

• The loans are fully forgiven if the funds are used as required .

The PPP has very few eligibility requirements. Applicants must:

1. Be a small business concern or any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act;

2. Have fewer than 500 employees or, if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates;

3. Have been in operation on February 15, 2020; and

4. Have had employees to whom the applicant pays salaries and payroll taxes.

Faith-based organizations like Plaintiff are eligible to receive PPP loans. Plaintiff clearly met all eligibility requirements under the CARES Act.

Funds available under the PPP are limited and administered on a first-come, first-served basis. Demand for the PPP funds has been overwhelming. The funds were exhausted once, but were replenished by Congress on or about April 24, 2020. The Court does not know the current status of PPP fund availability or whether Congress will replenish the fund again.

On April 2, 2020, Defendant issued Official SBA Form 2484, which is the form applicants must use to apply for a PPP loan. The form states that the applicants "presently are involved in any bankruptcy" are not eligible.³

On April 15, 2020, Defendant published in the Code of Federal Regulations an "interim final rule" implementing the PPP (the "First Rule"). The First Rule, like the CARES Act, says nothing about bankruptcy debtors being ineligible for the PPP.⁴

Plaintiff filed a loan application on April 20, 2020, for a $900,000 PPP loan. The lender, Wells Fargo, did not act on the application because of the bankruptcy ineligibility provision.

On April 28, 2020, the SBA issued another interim final rule (the "Second Rule"). The Second Rule purports to disqualify bankruptcy debtors from the PPP:

Will I be approved for a PPP loan if my business is in bankruptcy?

No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan....The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk for an unauthorized use of funds or non-repayment of unforgiven loans.

Like many New Mexico businesses, Plaintiff has been severely financially affected by the federal, state, and local government "lockdown" orders issued in response to the coronavirus pandemic. On March 23, 2020, the New Mexico Department of Health issued a "stay at home" order, prohibiting mass gatherings and requiring all non-essential businesses to cease in-person operations. On April 6, 2020, the Governor issued Executive Order 2020-22, which extended the stay at home order through April 30, 2020. The Governor recently announced that s...