Vestavia Hills, Ltd. v. U.S. Small Bus. Admin. (In re Hills), Case No.: 20-cv-01824-GPC-LL

• Court: United States District Courts. 9th Circuit. United States District Court (Southern District of California)
• Citation: 630 B.R. 816
• Decision Date: 26 March 2021
• Docket Number: Case No.: 20-cv-01824-GPC-LL,Adv. No. 20-90073-LA
• Parties: IN RE VESTAVIA HILLS, LTD, dba Mount Royal Towers, Debtor, Vestavia Hills, Ltd. dba Mount Royal Towers, Plaintiff, v. The U.S. Small Business Administration, et al., Defendants.

630 B.R. 816

IN RE VESTAVIA HILLS, LTD, dba Mount Royal Towers, Debtor,

Vestavia Hills, Ltd. dba Mount Royal Towers, Plaintiff,
v.
The U.S. Small Business Administration, et al., Defendants.

Case No.: 20-cv-01824-GPC-LL
Adv. No. 20-90073-LA

United States District Court, S.D. California.

Signed March 26, 2021
Filed April 6, 2021

630 B.R. 826

James Putnam Hill, Sullivan Hill Lewin Rez and Engel, San Diego, CA, for Plaintiff.

Glen Dorgan, U.S. Attorney's Office, San Diego, CA, for Defendants.

ORDER:

(1) VACATING BANKRUPTCY COURT'S ORDER GRANTING APPELLEE'S MOTION FOR A PRELIMINARY INJUNCTION; AND

(2) GRANTING THE SBA'S MOTION FOR WITHDRAWAL OF THE REFERENCE

Before the Court are (1) the appeal of Appellants U.S. Small Business Administration ("SBA") and Jovita Corranza, the SBA Administrator, of the June 26, 2020 bankruptcy court order granting the motion for a preliminary injunction filed by Appellee Vestavia Hills, Ltd. ("Vestavia"), in Case No. 20-cv-01308-GPC-LL; and (2) the motion for withdrawal of the reference to the bankruptcy court filed by the SBA and the SBA Administrator, in Case No. 20-cv-1824-GPC-LL.

For the reasons set forth below, the Court (1) VACATES the bankruptcy court's order granting Vestavia's motion for a preliminary injunction and (2) GRANTS the SBA's motion for withdrawal of the reference.

630 B.R. 827

Background

I. The CARES Act

On March 27, 2020, in response to the rapidly worsening coronavirus pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Stimulus Act ("CARES Act"), which created the Paycheck Protection Program ("PPP") to be administered by the SBA. Pub. L. 116-136, 134 Stat. 281 (2020). Congress placed the PPP within 15 U.S.C. § 636(a), the codification of Section 7(a) of the Small Business Act, which provides the SBA's existing authority to issue loans to small businesses. However, the CARES Act modified certain requirements of Section 636(a) and greatly expanded eligibility beyond the types of entities that would ordinarily be able to receive a small business loan. See CARES Act § 1102, codified at 15 U.S.C. § 636(a)(36). The PPP enables the SBA to guarantee loans to small businesses, non-profits, and other entities to allow them to keep employees on their payroll and continue operations during the pandemic. The CARES Act provides that a borrower can receive a covered loan in an amount not exceeding two and a half times its average monthly payroll costs up to ten million dollars. 15 U.S.C. § 636(a)(36)(E). Subject to certain limitations, borrowers are eligible to have their PPP loans forgiven to the extent they are used loans for payroll costs or covered mortgage interest payments, rent, and utilities. 15 U.S.C. § 9005(b).

After the adoption of the CARES Act on March 27, 2020, the SBA adopted several interim final rules ("IFRs") in quick succession related to the administration of the PPP, pursuant the emergency rulemaking authority granted by the CARES Act. 15 U.S.C. § 9012 (requiring SBA to issue regulations within 15 days without regard to the notice requirements of the APA). On April 3, 2020, the SBA posted its First IFR to the SBA website, which was published in the Federal Register on April 15, 2020. Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811 (Apr. 15, 2020). The First IFR "outline[d] the key provisions of SBA's implementation of sections 1102 and 1106 of the Act in formal guidance and request[ed] public comment." Id. The First IFR directed applicants to submit the PPP borrower application form (Form 2483). Id. Form 2483 requires the applicant to state, among other things, whether the applicant or its owner is presently involved in bankruptcy, and provides that the loan will not be approved if the answer is "yes." See SBA Form 2483: PPP First Draw Borrower Application Form (Version 1), https://www.sba.gov/document/sba-form-2483-ppp-first-draw-borrower-application-form.

The SBA thereafter issued two subsequent IFRs, neither of which had any reference to the bankruptcy exclusion. See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20817 (Apr. 15, 2020) ; Business Loan Program Temporary Changes; Paycheck Protection Program—Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, 85 Fed. Reg. 21747 (Apr. 20, 2020). The Third IFR notes that "the standard underwriting process does not apply because no creditworthiness assessment is required for PPP Loans." Id. On April 24, 2020, the SBA posted the Fourth IFR to its website, which was published in the Federal Register on April 28, 2020. Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450 (Apr. 28, 2020). The Fourth IFR explicitly states that businesses presently involved in bankruptcy proceedings are not eligible for PPP loans. Id. The Fourth IFR further explains that:

630 B.R. 828

The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy. The Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement. Lenders may rely on an applicant's representation concerning the applicant's or an owner of the applicant's involvement in a bankruptcy proceeding.

Id.

Through subsequent legislation, the PPP has been extended and altered several times. E.g. , Extending Authority for Commitments for the Paycheck Protection Program & Separating Amounts Authorized, Pub. L. No. 116-147, 134 Stat. 660 (2020) ; Paycheck Program Flexibility Act of 2020, Pub. L. No. 116-142, 134 Stat. 641 (2020) ; Paycheck Protection Program & Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620 (2020) ; Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020).

II. Appellant's Bankruptcy Case and Adversary Proceeding

Appellee Vestavia owns and operates Mount Royal Towers, a senior housing community located at 300 Royal Tower Drive, Vestavia Hills, Alabama. Adv. No. 20-90073-LA, ECF No. 1 ("Adv. Complaint") ¶ 6. On January 3, 2020, Vestavia filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of California. Bk. No. 20-00018-LA11. Vestavia continued to operate its business while in bankruptcy. Adv. Complaint ¶ 7. In April or May of 2020, Vestavia applied through a federally insured participating lender for a loan through the PPP. Id. ¶¶ 21–22. On May 6, 2020, the lender declined to submit Vestavia's PPP application to the SBA because Vestavia did not meet the "SBA eligibility criteria." Id. ¶ 22. Vestavia asserts the sole reason it did not meet the "SBA eligibility criteria" was its status as a Chapter 11 bankruptcy debtor. Id. ¶ 23. On May 27, 2020, Vestavia initiated an adversary proceeding against Appellants SBA and the SBA Administrator (hereafter collectively referred to as "the SBA"). See Adv. No. 20-90073-LA. In its adversary complaint, Vestavia alleged that the SBA violated the Administrative Procedures Act ("APA") and the non-discrimination provision of 11 U.S.C. § 525(a) by prohibiting current bankruptcy debtors from being considered for PPP loans. Adv. Complaint ¶¶ 33–45.

On May 29, 2020, Vestavia filed an emergency application for a temporary restraining order and injunctive relief with the bankruptcy court, seeking to require the SBA to consider Vestavia's PPP loan application. Adv. No. 20-90073-LA, ECF No. 5. The parties eventually stipulated to have the emergency application treated as a motion for a preliminary injunction. Adv. No. 20-90073-LA, ECF No. 17. On June 26, 2020, after a hearing and over the opposition of the SBA, the bankruptcy court granted Vestavia's motion and entered a preliminary injunction barring the SBA from disqualifying or denying Vestavia's PPP application on the basis of Vestavia's status as a bankruptcy debtor or refusing to guaranty a PPP loan sought by Vestavia on that basis. Adv. No. 20-90073-LA, ECF No. 26. The bankruptcy court subsequently issued a Memorandum of Decision. Adv. No. 20-90073-LA, ECF No. 27. On July 10, 2020, the SBA appealed. ECF No. 1. On July 29, 2020, the SBA filed a

630 B.R. 829

motion for mandatory withdrawal of the reference, which was transmitted to the district court on September 16, 2020. Case No. 20-cv-1824-GPC-LL, ECF No. 1; Adv. No. 20-90073-LA, ECF No. 45.

Appeal of Bankruptcy Court's Preliminary Injunction Order

The Court will first consider the bankruptcy court's order granting Vestavia's motion for a preliminary injunction before turning to the SBA's motion to withdraw the reference to the bankruptcy court.

I....