Tradeways, Ltd. v. U.S. Dep't of Treasury, Civil Action No. ELH-20-1324

CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)
Writing for the CourtEllen Lipton Hollander United States District Judge
PartiesTRADEWAYS, LTD. Plaintiff, v. THE UNITED STATES DEPARTMENT OF THE TREASURY, et al., Defendants.
Decision Date24 June 2020
Docket NumberCivil Action No. ELH-20-1324

TRADEWAYS, LTD. Plaintiff,
v.
THE UNITED STATES DEPARTMENT OF THE TREASURY, et al., Defendants.

Civil Action No. ELH-20-1324

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

June 24, 2020


MEMORANDUM OPINION

This case concerns the validity of an interim final rule promulgated by the United States Small Business Administration ("SBA") in connection with the Paycheck Protection Program ("PPP"), a multibillion dollar federal loan program designed to provide emergency relief to small businesses in the midst of the COVID-19 pandemic. The rule, which establishes eligibility criteria for participation in the PPP, disqualifies potential borrowers if the borrower or its owner is a debtor in bankruptcy.

Plaintiff Tradeways Ltd. ("Tradeways" or the "Company") applied for, but was denied, a PPP loan of $86,000 because its owner is in Chapter 11 bankruptcy. As a result, the Company filed suit against several defendants: the SBA; Jovita Carranza, the Administrator of the SBA; the United States Department of the Treasury; and Steven Mnuchin, the Secretary of the Treasury (collectively, the "Government"). ECF 1 (the "Complaint"). Tradeways alleges that the SBA's rule violates the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2), and the Bankruptcy Code's antidiscrimination statute, 11 U.S.C. § 525.

Along with the suit, plaintiff filed an "Emergency Motion For A Temporary Restraining Order And Preliminary Injunction." ECF 2. It is supported by a memorandum of law (ECF 2-1) (collectively, the "Motion") and the Affidavit of Tradeway's owner, Joseph Gorski. ECF 2-3.

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Tradeways asks the Court, inter alia, to enjoin defendants from denying a PPP loan to Tradeways due to Mr. Gorski's status as a Chapter 11 debtor and to set aside $86,000 in PPP funding. ECF 2 at 2.

On June 1, 2020, the Court held an emergency telephone conference with counsel for both sides. See ECF 9. At that time, counsel agreed to proceed on the request for a preliminary injunction, rather than the request for a temporary restraining order. Id. Thereafter, defendants filed an opposition to the Motion (ECF 12), along with six exhibits. ECF 12-1 to ECF 12-6. Plaintiff has replied. ECF 15.

Due to the COVID-19 pandemic, the Court held a hearing by videoconference on June 23, 2020, at which argument was presented. For the reasons that follow, I shall deny the Motion.

I. Background
A. The SBA

Over fifty years ago, through the Small Business Administration Act, Congress established the SBA to "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns," in order to preserve the system of free competitive enterprise that is "essential" to the nation's economic wellbeing and security. Pub. L. 83-163, 67 Stat. 232 (1953) (codified at 15 U.S.C. § 631(a)); see also 15 U.S.C. § 633(a) (establishing the SBA). To effectuate these goals, Congress gave the SBA "extraordinarily broad powers," including "that of lending money to small businesses whenever they could not get necessary loans on reasonable terms from private lenders." Small Bus. Admin. v. McClellan, 364 U.S. 446, 447 (1960).

The SBA's authority to issue loans—whether in the form of direct loans, joint loans with lenders, or loan guarantees—flows from § 7(a) of the Small Business Act, which is titled "Loans to small business concerns; allowable purposes; qualified business; restrictions and limitations."

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Pub. L. 85-563, § 7, 72 Stat. 384 (1958) (codified at 15 U.S.C. § 636). Under § 7(a), the SBA is "empowered," subject to certain qualifications, "to make loans to any qualified small business concern," which "may be made either directly or in cooperation with banks or other financial institutions through agreements to participate on an immediate or deferred (guaranteed) basis." 15 U.S.C. § 636(a). Among other restrictions imposed on loans issued or guaranteed by the SBA, § 7(a) provides that such loans "shall be of such sound value or so secured as reasonably to assure repayment . . . ." Id. § 636(a)(6).

In order to ensure that the SBA could respond swiftly to economic developments, Congress placed the agency under the management of a single Administrator. Id. § 633(a), (b)(1). Further, Congress delegated authority to the Administrator to "make such rules and regulations as [she] deems necessary to carry out the authority vested in [her]," and "take any and all actions" that she "determines . . . are necessary or desirable in making, servicing, compromising, modifying, liquidating, or otherwise dealing with or realizing on loans made under" the Small Business Administration Act. Id. § 634(b)(6), (b)(7).

B. COVID-19, the CARES Act, and the PPP1

The COVID-19 pandemic is, without dispute, the worst public health crisis the country has experienced since 1918. The novel coronavirus is a highly contagious and sometimes fatal respiratory illness.2 The virus first appeared in Wuhan, China in December 2019; in a matter of

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months, COVID-19 spread to every corner of the globe.3 On March 12, 2020, the World Health Organization declared COVID-19 a global pandemic. See WHO Director-General's opening remarks at the mission briefing on COVID-19, WORLD HEALTH ORG. (March 12, 2020), https://bit.ly/2XWdodD. The next day, President Trump declared a national emergency. See The White House, Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak (Mar. 13, 2020), https://bit.ly/3flFu8i.

There is currently no vaccine or cure for COVID-19. Therefore, the Centers for Disease and Control has implored citizens to practice "social distancing" in order to abate the spread of the virus. See Coronavirus Disease 2019 (COVID-19), How to Protect Yourself & Others, CTRS. FOR DISEASE CONTROL & PREVENTION, https://bit.ly/3dPA8Ba. To that end, nearly every state issued mandatory stay-at-home orders, directing residents to remain at home except to conduct essential activities. See Sarah Mervosh et al., See Which States Are Reopening and Which Are Still Shut Down, N.Y. TIMES (May 15, 2020), https://nyti.ms/2Z6Fm7F. As a result, life as we know it came to a halt; schools, restaurants, bars, movie theaters, shopping malls, retail stores, houses of worship, and gyms all shuttered for a significant period of time.

Social distancing measures were needed to thwart the spread of the virus and to "flatten" the epidemiological curve. But, these measures had tremendous economic consequences. Personal consumption in March 2020 plunged by a record 7.5 percent. See Personal Income and

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Outlays: March 2020, U.S. BUREAU OF ECON. ANALYSIS (Apr. 30, 2020 8:30), https://bit.ly/3d8wUZ2. In the month of April 2020 alone, more than 20 million Americans lost their jobs, driving the unemployment rate to 14.7 percent, the largest single-month increase ever recorded. See Economic News Release, U.S. BUREAU OF LAB. STAT. (May 8, 2020), https://bit.ly/2UGiOYr. Notably, these losses reached people from all stations of life: the leisure and hospitality industry lost 7.7 million jobs (nearly half the industry), while the education and health services industry, the professional and business services industry, and the retail trade industry each shed more than 2 million jobs. Id.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), Pub. L. 116-136, 134 Stat. 281 (2020), a $2.2 trillion stimulus package, in order alleviate the incredible economic devastation wrought by the COVID-19 pandemic. Among its many purposes, the CARES Act was designed to preserve American jobs. See, e.g., Cong. Rec. S1975 (daily ed. Mar. 24, 2020) (statement of Sen. McConnell) (identifying providing assistance to "Main Street small businesses" as a "key objective" of the CARES Act); Cong. Rec. E343 (daily ed. Mar. 31, 2020) (statement of Rep. Eshoo) (describing the PPP as one of "four major pillars" of the CARES Act). In particular, the CARES Act creates two distinct programs to encourage businesses to keep employees on the payroll.

First, Congress acted to bolster mid-size and large businesses. Section 4003 of Title IV of the CARES Act, entitled "Emergency Relief and Taxpayer Protection," directs the Treasury Department to disburse $454 billion to private lenders to make direct loans to businesses that have between 500 and 10,000 employees. Pub. L. 116-136, §§ 4003, 1107 (to be codified at 15 U.S.C. § 9042). To receive favorable loan terms, a borrower must agree to retain or restore ninety percent of its workforce. See 15 U.S.C. § 9042(c)(3)(D)(i)(lll). Of relevance here, the CARES Act

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expressly provides that a borrower seeking a loan under this program must certify that it "is not a debtor in a bankruptcy proceeding." Id. § 9042(c)(3)(D)(i)(V).

Second, Congress sought to provide emergency capital to small businesses. Section 1102 of Title I of the CARES Act, which is named the "Paycheck Protection Program," provides an aggregate $649 billion in loans to small businesses. Pub. L. 116-136, §§ 1102, 1107 (to be codified at 15 U.S.C. § 636).4 Whereas the lending program for mid-size businesses is housed in a freestanding section of the United States Code, Congress placed the PPP within 15 U.S.C. § 636(a). That is the statutory provision created by § 7(a) of the Small Business Act, and it concerns the SBA's lending authority. See Pub. L. 116-136, § 1102(a).

Under the PPP, an "eligible recipient" can receive a "covered loan" in an amount up to two and a half times its average monthly payroll. 15 U.S.C. § 636(a)(36)(E). An "eligible recipient" is defined as "an individual or entity that is eligible to receive a covered loan." Id. § 636(a)(36)(A)(iv). The CARES Act defines a "'covered loan'" as "a loan made under [the PPP] during the covered period," i.e., between February 15, 2020 and June 30, 2020. Id. § 636(a)(36)(A)(ii)-(iii).

The CARES Act provides that borrowers may "use the proceeds of the covered loan" for...

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