Schuessler v. U.S. Small Bus. Admin.

• Decision Date: 22 May 2020
• Docket Number: Adv. Proc. No. 20-02068-bhl,Adv. Proc. No. 20-02069-bhl,Adversary No. 20-02065-bhl
• Parties: Robert L. Schuessler, Audra Schuessler, and Landl Farms, LLC, Plaintiffs, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of the U.S. Small Business Administration, Defendants. Arthur G. Steffen and Genart Hillcrest Farms, LLC, Plaintiffs, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of the U.S. Small Business Administration, Defendants. Thull Farms, LLC, Plaintiff, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of the U.S. Small Business Administration, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

Robert L. Schuessler, Audra Schuessler, and Landl Farms, LLC, Plaintiffs, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of

the U.S. Small Business Administration, Defendants.

Arthur G. Steffen and Genart Hillcrest Farms, LLC, Plaintiffs, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of

the U.S. Small Business Administration, Defendants.

Thull Farms, LLC, Plaintiff, v. The United States Small Business Administration and Jovita Carranza, Solely as Administrator of

the U.S. Small Business Administration, Defendants.

Adversary No. 20-02065-bhl

Adv. Proc. No. 20-02068-bhl

Adv. Proc. No. 20-02069-bhl

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN

May 22, 2020

DECISION ON CORE CLAIMS AND REPORT AND RECOMMENDATION ON NON-CORE CLAIMS

INTRODUCTION

These adversary proceedings concern efforts by the plaintiffs, debtors in pending Chapter 12 bankruptcy proceedings, to obtain benefits from the Small Business Administration (SBA) under the Paycheck Protection Program (PPP). Plaintiffs are family farmers whose PPP loan applications were denied because of their pending bankruptcy cases. Plaintiffs then filed adversary proceedings against the SBA and its Administrator (collectively the "SBA"), contending that the SBA's denial of their applications runs afoul of Bankruptcy Code section 525(a) and the Administrative Procedure Act. Plaintiffs seek declaratory and injunctive relief and a writ of mandamus, requiring the SBA to consider their applications without regard to their pending bankruptcy cases.

After a May 15 expedited preliminary hearing in Schuessler, et al. v. SBA, et al., Adv. No. 20-2065, the plaintiffs in that case filed a motion for injunctive relief and a supporting declaration. In the motion, plaintiffs ask the court to declare that the SBA's rule disqualifying bankruptcy debtors from receiving PPP loans is beyond the agency's statutory and regulatory authority, is arbitrary and capricious, and violates section 525(a) of the Bankruptcy Code. They also ask the court to enter various forms of injunctive relief against the SBA, including enjoining the agency from denying the plaintiffs a PPP loan based on their status as debtors in bankruptcy, requiring that the SBA set aside funds sufficient to satisfy the plaintiffs' PPP requests, and compelling the SBA to instruct plaintiffs' lender not to exclude them from the PPP based on their bankruptcies. The court set a final hearing on the motion for May 19, 2020.

Shortly before the May 19 hearing, the Schuessler plaintiffs, along with the plaintiffs in two other adversary cases, Steffen, et al. v. SBA, et al., Adv. No. 20-2068-beh, and Thull Farms, LLC v. SBA, et al., Adv. No. 20-2069-kmp, filed a joint motion with the defendants, asking the court to consolidate its consideration of all three adversary proceedings because the proceedings involve the same issues, the parties are represented by the same counsel, and consolidation would avoid unnecessary costs and delay. After the parties confirmed that all three cases were ripe for final resolution, the court granted the motion and continued the hearing to May 21, 2020, allowing time for the Steffen and Thull Farms plaintiffs to file similar motions for injunctive relief. The court then entered an Order directing the clerk to reassign the Steffen and Thull Farms proceedings and consolidating all three adversaries for resolution.

At the consolidated May 21, 2020 final hearing, the court issued an oral ruling, rejecting the merits of the plaintiffs' claims and denying their requests for relief. This decision documents and supplements the oral ruling.

BANKRUPTCY COURT JURISDICTION

Before addressing the parties' arguments, the court must consider its jurisdiction. Under 28 U.S.C. §1334(b) and the district court's order of reference, this court has jurisdiction over all civil proceedings arising under title 11, or arising in or related to cases under title 11. Plaintiffs' claims in this adversary proceeding arise under or relate to their bankruptcy cases and thus fall within the court's broad jurisdiction. Whether the bankruptcy court can finally resolve the parties' disputes requires further analysis.

Subject to constitutional limitations, a bankruptcy court can enter final orders only on "core" bankruptcy claims. See 28 U.S.C. §157. For "non-core" proceedings, the bankruptcy court is not authorized to enter final orders unless all parties consent. Id. This distinction affects the standard of review. As the Supreme Court has explained,

If a matter is core, the statute empowers the bankruptcy judge to enter final judgment on the claim, subject to appellate review by the district court. If a matter is non-core, and the parties have not consented to final adjudication by the bankruptcy court, the bankruptcy judge must propose findings of fact and conclusions of law. Then, the district court must review the proceeding de novo and enter final judgment.

Executive Benefits Ins. Agency v. Arkison, 573 U.S. 25, 34 (2014).

"It is the bankruptcy court's responsibility to determine whether each claim before it is core or non-core." Id. at 33. "A proceeding is core under section 157 if it invokes a substantive right provided by title 11 or is a proceeding that, by its nature, could arise only in the context of a bankruptcy case." Barnett v. Stern, 909 F.2d 973, 981 (7th Cir. 1990) (quoting In re Wood, 825 F.2d 90, 97 (5th Cir. 1987)). "Core proceedings are actions . . . that arise under the Bankruptcy Code in the strong sense that the Code itself is the source of the claimant's right or remedy, rather than just the procedural vehicle for the assertion of a right conferred by some other body of law." In re United States Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997). A "non-core" proceeding, on the other hand, is one in which the plaintiff does "not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy . . . it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an 'otherwise related' or non-core proceeding." Barnett v. Stern, 909 F.2d at 981 (quoting In re Wood, 825 F.2d at 97) (emphasis in original).

The complaints in all three adversary proceedings are nearly identical. The only differences relate to each plaintiff's particular farming operation and the timing of eachplaintiff's PPP application and denial. The substantive legal portions of each complaint are the same. Defendants concede that Count III in each complaint, in which plaintiffs assert claims under section 525(a) of the Bankruptcy Code, is a core claim. Indeed, that cause of action is expressly premised on and arises under the Code, and this court can "hear and determine" and "enter appropriate orders and judgments" on it. See 28 U.S.C. §157(b)(1). The remaining three counts are another matter. Counts I, II, and IV allege violations of the APA and seek mandamus relief. These claims do not originate in the Bankruptcy Code and are non-core. Accordingly, the bankruptcy court may hear them, but cannot issue final orders or judgments without the parties' consent, which is absent in this case. See 28 U.S.C. §157(c)(1), (2).

The court's factual findings (both final on the core claim and recommended on the non-core claims) are set forth in the "Background and Factual Findings" section of this decision. The court's final legal conclusions on Count III are set forth in Part I of the "Legal Conclusions and Analysis" section. The court's recommended conclusions of law on the remaining non-core claims are set forth in Parts II and III of that section.

BACKGROUND AND FACTUAL FINDINGS

A. The Plaintiffs

1. Schuessler, et al. v. SBA, et al., Adv. No. 20-2065

On October 30, 2018, Robert L. Schuessler and Audra Schuessler filed a chapter 12 petition. (Case No. 18-30197, ECF No. 1.) On that same day, their wholly-owned limited liability company, Landl Farms, LLC, filed a separate chapter 12 petition. (Case No. 18-30199, ECF No. 1.) Landl Farms is the operating entity that runs the day-to-day farming operations and employs the farm help. The Schuesslers own the real estate and improvements and Robert Schuessler directs the farming operation. (Debtors' Mot. Joint Admin. 4, Case No. 18-30197, ECF No. 8.) The court entered an order directing joint administration of both cases on December 3, 2018. (Order, Case No. 18-30197, ECF No. 23.) The debtors' second amended plan was confirmed on May 8, 2019, and the debtors have been operating under the plan since confirmation. (Order, Case No. 18-30197, ECF No. 84.)

As their primary source of income, plaintiffs rely on revenue from selling milk and from the sale of cows culled from their herd and sold for meat. (Compl. ¶33, Adv. No. 20-2065, ECF No. 1.) Revenue from the sale of milk has declined by over 30% primarily due to the COVID-19crisis. Since January, plaintiffs' Class I milk price has dropped from nearly $19.00 to $12.50 per cwt. The current price is substantially below plaintiffs' cost of production. (Compl. ¶33, Adv. No. 20-2065, ECF No. 1.) Due to the closure of slaughterhouses in Wisconsin and the upper Midwest, plaintiffs have received historically low prices for cows recently culled from the herd. At the same time, plaintiffs have significant mortgage and utility expenses and employ 14 people with an average monthly payroll of $59,835. (Compl. ¶34, Adv. No. 20-2065, ECF No. 1.) Although they have obtained some temporary concessions from creditors, plaintiffs acknowledge this is not a sustainable near-term strategy until the market recovers. (Decl. Robert Schuessler, Adv. No. 20-2065, ECF No. 22.)

At the announcement of the Paycheck Protection Program through the SBA, plaintiffs took steps to obtain a conditionally forgivable PPP loan. They applied to a financial institution, Fox Communities Credit Union, and supplied requested...