U.S. Small Bus. Admin. v. Roman Catholic Church of the Archdiocese of Santa Fe

Citation632 B.R. 816
Decision Date15 July 2021
Docket NumberCiv. No. 20-473 MV/GBW
CourtU.S. District Court — District of New Mexico

Kevin VanLandingham, Department of Justice Commercial Litigation Branch, Washington, DC, for Appellant.

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



THIS MATTER comes before the undersigned on Appellant's Notice of Appeal and Statement of Election (doc. 1 ) pursuant to the Court's Order of Reference (doc. 15 ). Having reviewed the related briefing (docs. 22, 24, 25 ) and submissions of supplemental authority (docs. 26, 27, 28, 29 ), and being fully advised in the premises, I recommend REVERSING the final judgment of the U.S. Bankruptcy Court for the District of New Mexico ("Bankruptcy Court") for the reasons discussed below.


This appeal arises from an adversary proceeding that Appellee, a tax-exempt nonprofit corporation in a Chapter 11 bankruptcy proceeding, filed against Appellant, the U.S. Small Business Administration ("SBA"), in the Bankruptcy Court. Bankruptcy Record on Appeal ("BRA") vol. 1 at 4–18. Appellee sought a declaratory judgment that the SBA's implementation of the Paycheck Protection Program ("PPP")—a temporary, short-term program under which the SBA guarantees loans with favorable terms to eligible recipients—violated the Administrative Procedure Act ("APA") and Chapter 11 of the U.S. Code. Id. at 17. Appellee also requested the Bankruptcy Court to preliminarily and permanently enjoin the SBA from denying Appellee a PPP loan for being bankrupt and to issue a writ of mandamus under 28 U.S.C. § 1361 to compel the SBA Administrator to remove language disqualifying bankruptcy debtors from PPP loan applications. Id. at 17–18. For reasons to be explained later, the Bankruptcy Court granted Appellee the requested declaratory and injunctive relief in a final judgment. Id. at 119–20. It did not reach the writ of mandamus issue.


The parties dispute the legality of a final rule issued by the SBA on April 28, 2020, that bars bankruptcy debtors from receiving PPP loans. See Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23,450, 23,451 (Apr. 28, 2020) (to be codified at 13 C.F.R. pts. 120 & 121) (hereinafter "Fourth Rule"). Before addressing the validity of this bankruptcy bar and the authority of the Bankruptcy Court to enter a final judgment on this issue and enjoin the SBA therein, it is useful to place this rule in its statutory and regulatory context.

1. Pre-CARES Act Statutory Context

The SBA is a federal agency created by Congress to "aid, counsel, assist, and protect insofar as it is possible the interests of small-business concerns." SBA v. McClellan , 364 U.S. 446, 447, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960) (quoting Small Business Act of 1953, Pub. L. No. 83-163, § 202, 67 Stat. 232, 232 (1953)). Among the "extraordinarily broad powers" that Congress gave to the agency to accomplish this objective was "lending money to small businesses whenever they could not get necessary loans on reasonable terms from private lenders." Id . The primary mechanism through which the SBA does so is a Section 7(a) loan, named after the section of the Small Business Act of 1958 that authorizes its issuance. These loans "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). In practice, the SBA prefers the latter, indirect approach. United States v. Kimbell Foods, Inc. , 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979).

In, and since, the Small Business Act of 1958, Congress created, and has periodically amended, a broad statutory regime for Section 7(a) loans. See Small Business Act of 1958, Pub L. No. 85-536, § 7(a), 72 Stat. 384, 387–88 (1958) (codified in 15 U.S.C. § 636(a) ). One statutory requirement is that all Section 7(a) loans "shall be of such sound value or so secured as reasonably to assure repayment." 15 U.S.C. § 636(a)(6). Another requirement is that no Section 7(a) loan "shall be extended ... if the applicant can obtain credit elsewhere." Id. § 636(a)(1)(A)(i). A third requirement sets the SBA's participation levels in agreements to participate in a loan on a deferred basis. Id. § 636(a)(2)(A) (requiring the SBA's participation to be seventy-five percent of the balance of the financing outstanding at the time of a loan's disbursement if that balance exceeds $150,000, or eighty-five percent of the balance of financing outstanding at that time if that balance is less than or equal to that sum). A fourth requirement caps the total amount that the SBA may lend (or guarantee) to a borrower. Id. § 636(a)(3)(A) (prohibiting the execution of Section 7(a) loan if the total outstanding, committed amount to the borrower from the business loan and investment fund established by chapter 14A of title 15 of the U.S. Code would exceed $3,750,000).

Over time, Congress has also created several special Section 7(a) loans and exempted them from statutory requirements that apply to ordinary Section 7(a) loans. See, e.g. , Small Business Reauthorization and Manufacturing Assistance Act of 2004 § 101(a), 15 U.S.C. § 636(a)(31) (creating the express loan program and limiting the maximum loan amount in this program to $350,000); Military Reservist and Veteran Small Business Reauthorization and Opportunity Act of 2008 § 208, 15 U.S.C. § 636(a)(33) (creating the increased veteran participation program and discounting the guarantee fee set in 15 U.S.C. § 636(a)(18) by fifty percent for this program's loans); Small Business Export Enhancement and International Trade Act of 2010 § 1206(f), 15 U.S.C. § 636(a)(34) (creating the export express program, limiting the program's maximum loan amount to $500,000, and setting the guaranty rates for this loan at ninety percent if the loan is for no more than $350,000 and seventy-five percent if the loan exceeds that sum).

2. Pre-CARES Act Regulatory Context

Turning to the regulatory regime, in the Small Business Act of 1958, Congress authorized the SBA Administrator to fill in the gaps of the Section 7(a) loan statutory scheme as necessary to implement the program. See § 5(b), 72 Stat. at 386 (codified in 15 U.S.C. § 634(b) ) (vesting the Administrator with the authority to "make such rules and regulations as he deems necessary to carry out the authority vested in him by or pursuant to this Act" and "take any and all actions .... determined by him to be necessary or desirable in making... or otherwise dealing with or realizing loans made under the provisions of this Act").

Wielding this authority, the SBA Administrator has issued regulations establishing six criteria that an applicant must satisfy to qualify for an ordinary Section 7(a) loan: (i) operate a business organized for profit in the United States, 13 C.F.R. § 120.100(a)(c) ; (ii) have a number of employees or sum of annual receipts that does not exceed the designated size for its industry, id. §§ 120.100(d), 121.201 ; (iii) demonstrate need for the desired credit, id. §§ 120.100(e), 120.101 ; (iv) be creditworthy, id. § 120.150; (v) not be a type of ineligible business, id. § 120.110; and (vi) have a sound business purpose for the loan, id. § 120.120. See generally Office of Fin. Assistance, U.S. Small Bus. Admin., SOP 50 10 5(K), Lender and Development Company Loan Programs (2019) (hereinafter "SOP 50 10 5(K)").

The SBA Administrator has also issued regulations and guidance documents for Section 7(a) loan lenders. See, e.g. , 13 C.F.R. § 120.410 ; SOP 50 10 5(K). Among other things, these regulations specify the criteria that a lender must satisfy to make Section 7(a) loans in partnership with the SBA and how a lender obtains "delegated authority" to issue loans without the SBA reviewing loan applications. See 13 C.F.R. §§ 120.410, 120.440. Guidance documents detail an underwriting process and factors—like an applicant's bankruptcy history—that a lender must consider during it. SOP 50 10 5(K) at 177–180. At the conclusion of this process, the lender makes an eligibility decision that is subject to the SBA's review unless the lender has delegated authority. Id. at 177.

3. CARES Act

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to mitigate the economic challenges posed by the COVID-19 pandemic. Section 1102 of this Act amends 15 U.S.C. § 636(a) to add another special Section 7(a) loan to the SBA's Section 7(a) loan portfolio, the PPP. CARES Act, Pub. L. No. 116-136, § 1102, 134 Stat. 281, 286 (2020) (codified in 15 U.S.C. § 636(a)(36) ). Section 1106 of this Act provides that, subject to certain limitations, the balance of a PPP loan may be forgiven in an amount up to the sum of certain costs incurred and payments made during an eight-week period beginning on the PPP loan's origination date.2 Id. § 1106, 134 Stat. at 297 (codified in 15 U.S.C. § 636m ).

To structure the PPP, Congress modified several statutory requirements that apply to ordinary Section 7(a) loans—just like it did for other special Section 7(a) loan programs. Congress set the SBA's participation level in an agreement to participate in a PPP loan on a deferred basis at one hundred percent. Id. § 1102, 134 Stat. at 286 (codified in 15 U.S.C. § 636(a)(2)(F) ). It also expanded borrower eligibility for a PPP loan to include nonprofit organizations and entities able to obtain credit elsewhere. Id. at 288, 291 (codified in 15 U.S.C. § 636(a)(36)(D)(i), (I) ). Finally, Congress provided that, "[e]xcept as otherwise provided in [ 15 U.S.C. § 636(a)(36) ], the [SBA] Administrator may guarantee [...

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