Springfield Med. Care Sys., Inc. v. Carranza (In re Springfield Med. Care Sys., Inc.)

• Decision Date: 08 May 2020
• Docket Number: Adversary Proceeding # 20-01004,Case # 19-10285
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re: Springfield Medical Care Systems, Inc., Debtor-in-Possession. In re: Springfield Medical Care Systems, Inc., Plaintiff, v. Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, Defendant.

In re: Springfield Medical Care Systems, Inc., Debtor-in-Possession.In re: Springfield Medical Care Systems, Inc., Plaintiff, v. Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, Defendant.

Case # 19-10285

Adversary Proceeding # 20-01004

UNITED STATES BANKRUPTCY COURT DISTRICT OF VERMONT

May 8, 2020

Formatted for Electronic Distribution

Not for Publication

Chapter 11

Appearances:

D. Sam Anderson & Adam R. Prescott

Bernstein, Shur, Sawyer & Nelson, P.A.

Portland, ME

For the Plaintiff

Elizabeth A. Glynn

Ryan Smith & Carbine, Ltd.

Rutland, Vermont

For Berkshire Bank

Michael Tye

U.S. Department of Justice

Washington, DC

For the Defendant

Melissa A. D. Ranaldo

U.S. Attorney's Office - Vermont

Burlington, Vermont

For the Defendant

MEMORANDUM OF DECISION¹

GRANTING PLAINTIFF'S EMERGENCY MOTION FOR TEMPORARY RESTRAINING ORDER

The Plaintiff, Springfield Medical Care Systems, Inc., has filed a motion for a temporary restraining order (a "TRO") against the Defendant, Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration. Based on the record in this case, the arguments presented at the May 6, 2020 hearing, and for the reasons set forth below, the Court grants the Plaintiff's request for a TRO based on its claim under 11 U.S.C. § 525(a).

JURISDICTION

This Court has jurisdiction over this adversary proceeding and the TRO Motion pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered on June 22, 2012. This decision addresses a cause of action under § 525 of the Bankruptcy Code and thus is a core proceeding arising under Title 11 of the United States Code as described in 28 U.S.C. § 157(b)(2)(A), (D), and (O). Therefore, this Court has constitutional authority to enter a final judgment in this proceeding.

PROCEDURAL HISTORY

On April 29, 2020, the Plaintiff filed a verified complaint to commence this adversary proceeding (doc. # 1, the "Complaint") and a motion for an emergency hearing on its request for a temporary restraining order (doc. # 2, the "TRO Motion"). Pursuant to the Court's scheduling order on the TRO Motion (doc. # 6), the Defendant filed a response on May 4, 2020 (doc. # 11),² and the Plaintiff filed a supplemental memorandum of law on May 5, 2020 (doc. # 15).³ The Court held an emergency hearing on the TRO Motion on May 6, 2020 and took the matter under advisement.

ISSUES PRESENTED

The Plaintiff's Complaint includes four counts for relief: (I) preliminary and permanent injunction, (II) declaratory judgment (based on a claim that the Defendant exceeded her statutory authority), (III) determination of a violation of Bankruptcy Code § 525(a), and (IV) mandamus under 28 U.S.C. § 1361. The Plaintiff's TRO Motion (doc. # 2) asks the Court to enter a TRO, essentially, so the Plaintiff's application under the recently enacted Paycheck Protection Program (the "PPP") is considered without regard to the Plaintiff's status as a chapter 11 debtor.

As a threshold matter, the Court must determine whether the Defendant is immune from the Plaintiff's request for injunctive relief. If the Defendant is not protected by sovereign immunity, then the Court must next determine whether the Plaintiff has met its burden of establishing that a TRO is warranted based on any of the Plaintiff's prayers for relief.

LEGAL STANDARD

The standard for entry of a TRO is the same as for a preliminary injunction. Andino v. Fischer, 555 F. Supp. 2d 418, 419 (S.D.N.Y. 2008) (citations omitted). A party seeking a preliminary injunction must establish: (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm absent relief; (3) that the balance of equities weighs in its favor; and (4) that an injunction is in the public interest. Metro. Life Ins. Co. v. Bucsek, 919 F.3d 184, 188, n.2 (2d Cir. 2019) (citing Winter v. NRDC, Inc., 555 U.S. 7, 20(2008)).

DISCUSSION

A. Application of Sovereign Immunity to the Plaintiff's § 525(a) Claim

The Court considers first the Plaintiff's prayer for relief based on the Defendant's alleged violation of the anti-discrimination provision of the Bankruptcy Code, 11 U.S.C. § 525. The Defendant alleges its sovereign immunity precludes the Court from granting the Plaintiff injunctive relief on this basis (doc. # 11, p. 2). In response, the Plaintiff points to §§ 105, 106, and 525 of the Bankruptcy Code, which it asserts abrogate the Defendant's sovereign immunity (doc. # 15, p. 4). Those sections provide, in relevant part:

[A] governmental unit may not deny ... a license, permit, charter, franchise, or other similar grant to ... a person that is or has been a debtor under [the Bankruptcy Code, 11 USCS §§ 101 etseq.] ..., solely because such bankrupt or debtor is or has been a debtor under [the Bankruptcy Code][.]

11 U.S.C. § 525(a).

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.

11 U.S.C. § 105(a).

Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:

(1) Sections 105, 106, ... 525 of [the Bankruptcy Code].

(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.

(3) The court may issue against a governmental unit an order, process, or judgment under such sections[.]

(4) The enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such governmental unit[.]

11 U.S.C. § 106(a).

Together, these sections appear on their face to authorize the Court to enjoin the Defendant from taking any action this Court finds to be a violation of § 525(a). The Defendant is resolute, however, in her position that these Bankruptcy Code sections are insufficient to defeat the sovereign immunity she has from injunctive relief under nonbankruptcy law, namely § 634(b)(1) of the Small Business Act (doc. # 11, pp. 10-14). That statute provides, in relevant part:

(b) Powers of Administrator. In the performance of, and with respect to, the functions, powers, and duties vested in him by this Act the Administrator may—

(1) sue and be sued in any court of record of a State having general jurisdiction, or in any United States district court, and jurisdiction is conferred upon such district court to determine such controversies without regard to the amount in controversy; but no ... injunction ... or other similar process, mesne or final, shall be issued against the Administrator or his property[.]

15 U.S.C. § 634(b)(1).

In two recent companion decisions, the Bankruptcy Court for the District of Maine harmonized these potentially conflicting statutes and determined it was authorized to enter a carefully tailored TRO against the SBA based on the Defendant's discriminatory conduct, notwithstanding § 634(b), in reliance on Bankruptcy Code §§ 105, 106, and 525. See Penobscot Valley Hospital v. Carranza (In re Penobscot Valley Hospital), Adv. No. 20-ap-01005 (Bankr. D. Me. May 1, 2020); Calais Regional Hospital v. Carranza (In re Calais Regional Hospital), Adv. No. 20-ap-01006 (Bankr. D. Me. May 1, 2020) (Fagone, J.) (citing Ulstein Maritime, Ltd. v. United States, 833 F.2d 1052 (1st Cir. 1987). Although Ulstein is not binding in this Circuit, in the absence of binding authority from the Second Circuit, the Court finds Ulstein's rationale - as well as the reasoning of its sister court in Penobscot and Calais - to be persuasive.

In Ulstein, the First Circuit opined:

The bare language facially [of § 634(b)(1)] suggests that "no . . . injunction" can be directed at the SBA. Some courts have read the wording in this way, and concluded that all injunctive relief directed at the SBA is absolutely prohibited. E.g., Valley Constr. Co. v. Marsh, 714 F.2d at 29; Little v. United States, 489 F. Supp. 1012, 1016 (C.D. Ill. 1980), aff'd, 645 F.2d 77 (7^th Cir. 1981); Mar v. Kleppe, 520 F.2d at 869; Romeo v. United States, 462 F.2d 1036, 1038 (5^th Cir.), cert. denied, 410 U.S. 928, 35 L. Ed. 2d 589, 93 S. Ct. 1361 (1973), Expedient Servs., Inc. v. Weaver, 614 F.2d 56 (5th Cir. 1980); Jets Servs., Inc. v. Hoffman, 420 F. Supp. 1300, 1308-09 (M.D. Fla. 1976). However, other courts have found that § 634(b)(1) does not bar injunctions in all circumstances. Cavalier Clothes v. United States, 810 F.2d 1108, 1112 (Fed. Cir. 1987); Oklahoma Aerotronics v. United States, 213 U.S. App. D.C. 64, 661 F.2d 976, 977 (D.C. Cir. 1981); Related Indus. v. United States, 2 Cl. Ct. 517, 522 (1983). SeealsoDubrow v. Small Business Admin., 345 F. Supp. 4, 7 (D.Cal. 1972); Simpkins v. Davidson, 302 F. Supp. 456, 458 (S.D.N.Y. 1969).

The meaning of the limitation on the waiver of immunity in § 634(b)(1) was analyzed in Cavalier Clothes, 810 F.2d at 1108. There the court reviewed and endorsed the careful analysis of the legislative history of § 634(b)(1) in Related Industries, 2 Cl.Ct. at 522-23. The origin and purpose of the language in § 634(b)(1) goes back to the decision in FHA v. Burr, 309 U.S. 242, 84 L. Ed. 724, 60 S. Ct. 488 (1940), which held that when Congress established an agency that was authorized to engage in business transactions and permitted it to "sue and be sued" (as is true of the SBA), this waiver extended to all civil processes incident to suit such as garnishment and attachment of the agency's assets. Therefore, language such as that in § 634(b)(1) was added to enabling statutes to bar the attachment of agency funds and other interference with agency functioning. The same boilerplate language is found repeatedly in statutes establishing agencies that provide loans or funds to the public, e.g., 7 U.S.C. § 1506(d) (Federal Crop Insurance Corporation); 15 U.S.C. § 714b(c) (Commodity Credit Corporation); 42 U.S.C. § 3211(11) (Secretary of Commerce). SeeRelated Industries, 2 Cl. Ct. at 522 n.2. While the specific legislative

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