U.S. Small Bus. Admin. v. Weather King Heating & Air, Inc.
| Decision Date | 31 January 2023 |
| Docket Number | Case No. 5:20-CV-2711 |
| Parties | U.S. SMALL BUSINESS ADMINISTRATION, Movant/Appellant, v. WEATHER KING HEATING & AIR, INC., Respondent/Appellee. |
| Court | U.S. District Court — Northern District of Ohio |
Marcus S. Sacks, Margaret M. Newell, Michael Tye, Robert E. Chandler, Ruth A. Harvey, U.S. Department of Justice, Washington, DC, Suzana Krstevski Koch, Office of the U.S. Attorney, Cleveland, OH, for Movant/Appellant.
Steven J. Heimberger, Todd A. Mazzola, Roderick Linton Belfance, Akron, OH, for Respondent/Appellee.
On May 22, 2020, the Northern District of Ohio Bankruptcy Court granted Respondent Weather King Heating & Air, Inc.’s ("Weather King") Motion for Preliminary Injunction in case number 19-52957. The Bankruptcy Court concluded that Weather King would likely prevail on the merits of its claim that the U.S. Small Business Administration ("SBA") exceeded its statutory authority when it categorically excluded bankruptcy debtors from Paycheck Protection Program ("PPP") eligibility, and that SBA engaged in retroactive rulemaking with respect to its application of the bankruptcy exclusion to Weather King. The Preliminary Injunction enjoins SBA from rescinding or altering Weather King's PPP loan approval or SBA's guarantee of that loan, and prohibits SBA from considering Weather King's bankruptcy status in connection with Weather King's application for loan forgiveness.
On June 19, 2020, SBA filed a Motion for Withdrawal of Reference and a Notice of Appeal of the Preliminary Injunction. Both matters have been consolidated into the above-captioned case. Concluding that SBA did not exceed its statutory authority when it excluded debtors in bankruptcy from PPP loan eligibility and that SBA did not engage in retroactive rulemaking as applied to Weather King, the Court VACATES the Bankruptcy Court's Preliminary Injunction. Further concluding that the bankruptcy exclusion is not arbitrary, capricious, or an abuse of discretion and that the bankruptcy exclusion does not violate 11 U.S.C. 525(a), the Court GRANTS SBA's Motion for Summary Judgment and DENIES Weather King's Motion for Summary Judgment.
Weather King files bankruptcy and obtains a PPP loan based on a false application
Weather King filed a Chapter 11 bankruptcy on December 16, 2019. (ECF No. 18, Declaration of Rajbinder S. Rai ("Rai Dec."), PageID# 201, ¶ 4). Five months later, Weather King applied for a PPP loan via Dollar Bank on April 14, 2020. (Id. at PageID# 202, ¶ 5). The application misrepresented Weather King's bankruptcy status, checking the "no" box when asked whether it was "presently involved in any bankruptcy." (See ECF No. 19-4, SBA Application Form 2483 ("SBA Form 2483"), PageID# 278).1 The parties do not dispute that Weather King's application included this misrepresentation; rather, Weather King argues that the bankruptcy question on SBA Form 2483 is compound and confusing, and does not provide adequate notice of the bankruptcy exclusion. (See ECF No. 22, Weather King Response in Opposition to SBA's Motion for Summary Judgment ("Weather King Response"), PageID# 332–35).
Based on the application submitted, Weather King received a PPP loan from Dollar Bank in the amount of $109,200.00 on April 22, 2022. (ECF No. 18, PageID# 202, ¶ 7). On May 5, 2020, Weather King moved the Bankruptcy Court for after-the-fact authorization to obtain credit, in essence asking the Bankruptcy Court to ratify the loan already applied for and received. (Case No. 19-52957, ECF No. 66, Emergency Motion of Weather King Heating & Air Inc. for Entry of an Interim Order Authorizing Debtor to Obtain Credit Pursuant to 11 U.S.C. § 364 and Setting a Final Hearing to Approve Same ("Emergency Motion")). SBA objected to the Emergency Motion, arguing that Weather King's PPP loan was "inappropriately obtained" (Case No. 19-52957, ECF No. 74, P. 2), and that the Bankruptcy Court therefore lacked jurisdiction to authorize Weather King's receipt and use of the PPP loan. The Bankruptcy Court granted the Emergency Motion on May 22, 2022. (Case No. 19-52957, ECF No. 77).
The same day, the Bankruptcy Court entered a Preliminary Injunction against SBA in a concurrently pending adversary proceeding, concluding that Weather King would prevail on the merits of its claims that SBA exceeded its authority when it categorically excluded bankruptcy debtors from PPP eligibility and that the bankruptcy exclusion violated 11 U.S.C. § 525 ’s mandate precluding government discrimination against bankrupt debtors when awarding grants and subsidies. (Case No. 20-05023, ECF No. 26). The Preliminary Injunction enjoined SBA from using the bankruptcy exclusion and Weather King's failure to identify itself as a bankrupt debtor in its PPP loan application to (1) "rescind, annul, or otherwise alter its approval of [Weather King's] PPP Loan;" (2) "rescind, annul, or otherwise alter its guaranty of [Weather King's] PPP Loan extended to Dollar Bank;" and (3) "process any application for forgiveness of the PPP Loan submitted by [Weather King]." (Id. ).
SBA appeals the Preliminary Injunction and moves the District Court for Mandatory Withdrawal of the Reference
SBA responded to the Preliminary Injunction by filing both a Notice of Appeal to the District Court (Case o. 5:20-cv-1241) and a Motion for Mandatory Withdrawal of the Reference in this case on June 19, 2020 (ECF No. 1). This Court granted SBA's Motion to Withdraw the Reference on December 4, 2020, and consolidated the appeal with this case on December 13, 2020. (ECF No. 4).
Withdrawal of the reference is predicated on Weather King's claim that the PPP bankruptcy exclusion violates existing law, and that resolution of that claim requires the interpretation of new, non-bankruptcy law—namely, the CARES Act. Following the Court's withdrawal of the reference, the parties filed cross motions for summary judgment and opposed each other's affirmative motion. Weather King asserts that: (1) SBA exceeded its statutory authority when it excluded bankruptcy debtors categorically from PPP eligibility; (2) SBA's rule excluding bankruptcy debtors from PPP eligibility is arbitrary, capricious, an abuse of discretion, and/or otherwise not in accord with the law; (3) the bankruptcy exclusion as applied to Weather King is impermissible retroactive rulemaking in violation of 5 U.S.C. 706(2)(A) and (D), and offends 5 U.S.C. 552(A) ; and (4) the bankruptcy exclusion violates 11 U.S.C. 525(A).
The CARES Act and SBA's implementation of the CARES Act
During the pendency of Weather King's bankruptcy, the COVID-19 Pandemic ("Pandemic") began in earnest, as did the federal government's efforts to keep the American economy afloat during an unprecedented time of crisis and uncertainty. A key product of these efforts was the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which provided for, inter alia , the PPP: a unique, fast-tracked, federally-guaranteed loan program that put money in the hands of small businesses to pay their employees, continue existing benefit programs, and remain current on rent, mortgage, and utility payments. See CARES Act, Pub. L. No. 116-136, § 1102, 134 Stat. 281 (2020). If a small business used the loan funds for certain permissible purposes, the loan became eligible for forgiveness, up to the full amount of the loan. Id. at § 1102(a)(M).
The PPP was inserted beneath the umbrella of SBA's robust 7(a) Loan Program. See CARES Act, Pub. L. No. 116-136, § 1102(a), 134 Stat. 281 (2020) ; Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811 (Apr. 15, 2020) ; Small Business Act, 15 U.S.C. § 636(a) (Oct. 1, 2021). Section 1102(a)(2)(B) of the CARES Act explains that PPP loans may be guaranteed by SBA "under the same terms, conditions, and processes" as any other 7(a) loan. Even so, the PPP expressly modifies certain requirements for other 7(a) loans, such as eliminating the need for business owners to personally guarantee the loan and the applicant's inability to obtain credit elsewhere; the PPP does not supplant or stand on footing apart from section 7(a), since the PPP represents amendments—new inclusions and new exclusions—to the existing mandates expressed in section 7(a). See CARES Act, Pub. L. No. 116-136, § 1102(a), 134 Stat. 281 (2020). The parties do not dispute that the changes made to section 7(a) to accommodate the PPP hastened the loan application, approval, and funding process, and provided parameters for potential loan forgiveness.
Thus, the CARES Act provided that PPP loans are SBA guaranteed and exist within the confines of SBA's 7(a) loan program; yet the need to immediately infuse the economy with PPP loan money was critical. To that end, Congress, via the CARES Act, required the SBA Administrator to promulgate rules within 15 days of the CARES Act's passage to implement the program, and permitted SBA to issue rules without regard to the Administrative Procedure Act's ("APA") traditional notice and comment period. Id. at § 1114, 134 Stat. at 312. The SBA Administrator described Congress's directive in its First Interim Final Rule:
The intent of the Act is that SBA provide relief to America's small businesses expeditiously. This intent, along with the dramatic decrease in economic activity nationwide, provides good cause for SBA to dispense with the 30-day delayed effective date provided in the Administrative Procedure Act. Specifically, small businesses need to be informed on how to apply for a loan and the terms of the loan under section 1102 of the [CARES] Act as soon as possible because the last day to apply for and receive a loan is June 30, 2020.
SBA's First Interim Final Rule became effective on April 15, 2020 ("First IFR").2 The First IFR instructed small businesses (1) how to apply for a PPP loan, (2) how to use PPP loan funds, and (3) how to receive PPP...
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