Alaska Urological Inst., P.C. v. U.S. Small Bus. Admin.

619 B.R. 689

ALASKA UROLOGICAL INSTITUTE, P.C., Plaintiff and Appellee,

v.UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants and Appellants.

Case No. 3:20-cv-00170-SLG

Bankruptcy Adv. No. 20-90004 GS

United States District Court, D. Alaska.

Signed August 20, 2020

Cabot C. Christianson, Christianson & Spraker, Anchorage, AK, for Plaintiff and Appellee.

Daniel Jeffrey Martin, U.S. Department of Justice, Washington, DC, Lisa Johnson, U.S. Small Business Administration, Seattle, WA, Steven E. Skrocki, U.S. Attorney's Office, Anchorage, AK, for Defendants and Appellants United States Small Business Administration, Jovita Carranza.

Daniel Jeffrey Martin, U.S. Department of Justice, Washington, DC, Steven E. Skrocki, U.S. Attorney's Office, Anchorage, AK, for Defendants and Appellants Steven Mnuchin, United States of America.

ORDER REGARDING MOTIONS FOR SUMMARY JUDGMENT

Sharon L. Gleason, UNITED STATES DISTRICT JUDGE Before the Court at Docket 6 is Plaintiff Alaska Urological Institute's ("AUI") Motion for Summary Judgment. Defendants United States Small Business Administration ("SBA"); Jovita Carranza, Administrator of the SBA; Steven Mnuchin, Secretary for the Treasury; and the United States responded in opposition at Docket 9. Plaintiff replied at Docket 13. Also before the Court at Docket 10 is Defendants' Motion for Summary Judgment. Plaintiff responded in opposition at Docket 13. Defendants replied at Docket 16. The Court heard argument on the motions on August 14, 2020.

BACKGROUND

A. The Paycheck Protection Program

On March 27, 2020, in response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").¹ Among other things, the CARES Act seeks to preserve American jobs in the face of the economic uncertainty created by the global pandemic.² Title I of the Act—the Keeping American Workers Paid and Employed Act—created the Paycheck Protection Program ("PPP") to be administered by the SBA.³ The PPP was codified in the SBA's existing Section 7(a) loan program at 15 U.S.C. § 636(a)(36).⁴ Of the existing provisions of Section 7(a), § 636(a)(6) is most relevant to the parties' dispute and provides that: "[a]ll loans made under this subsection shall be of such sound value or so secured as reasonably to assure repayment."⁵

The PPP provides that an eligible small business may obtain a guaranteed loan to cover authorized expenses, including payroll costs, mortgage interest, rent, and utilities.⁶ The PPP loans may be forgiven if the borrower certifies that a specified percentage of the loan was used for those authorized purposes.⁷ The loans are made by participating lenders and guaranteed by the SBA; if the loan qualifies for forgiveness, the SBA pays the lender the amount forgiven plus any interest accrued.⁸

The CARES Act granted the SBA emergency rulemaking authority, allowing it to issue regulations to carry out the PPP without adherence to standard notice requirements.⁹ Moreover, the CARES Act instructs that no later than 15 days after its enactment, the SBA "shall issue regulations to carry out this title and the amendments made by this title without regard to the notice requirements" of the Administrative Procedure Act ("APA").¹⁰ Pursuant to its emergency rulemaking authority, the SBA published four interim final rules concerning the PPP, portions of which are relevant to the current dispute.

The First Interim Rule was issued on April 2, 2020, and among other things, provides that:

The intent of the Act is that SBA provide relief to America's small businesses expeditiously, which is expressed in the Act by giving all lenders delegated authority and streamlining the requirements of the regular 7(a) loan program. For example, for loans made under the PPP, SBA will not require the lenders to comply with section 120.150 "What are SBA's lending criteria?." SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.¹¹

The First Interim Rule outlines the program's eligibility requirements.¹² In relevant part, it provides:

You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry, and

i. You are: A. A small business concern as defined in section 3 of the Small Business Act ( 15 U.S.C. 632 ), and subject to SBA's affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Act; or B. A tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business; and

ii. You were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

...

You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.¹³

It also explains that some business are ineligible even if they meet the eligibility requirements:

You are ineligible for a PPP loan if, for example: i. You are engaged in any activity that is illegal under Federal, state, or local law; ii. You are a household employer (individuals who employ household employees such as nannies or housekeepers); iii. An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or iv. You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.¹⁴

In addition to these eligibility requirements, the First Interim Rule provides information about how much an applicant can borrow, what qualifies as payroll costs, how the PPP loans can be used, the interest rate and maturity date of the loan, the requirements for loan forgiveness, the consequences of misusing the loans, the certifications required by the applicant, and other such details.¹⁵ Subsection (q) of the rule explains how to submit an application: applicants must submit SBA Form 2483 (the "PPP Application Form").¹⁶ The SBA published the PPP Application Form along with the First Interim Rule; among other questions, the form asks whether the applicant or any owner of the applicant is involved in any bankruptcy, and instructs that if so, the loan will not be approved.¹⁷ The parties refer to this exclusion of debtors from the PPP program as the Bankruptcy Exclusion, and its validity lies at the heart of the parties' dispute.¹⁸ The First Interim Rule establishes the disputed Bankruptcy Exclusion by reference to Form 2483, but does not otherwise mention it or explain it.

The First Interim Rule also provides information for lenders, including who is eligible to make the loans, the terms for loan underwriting, and other details about the fees they receive, the terms and conditions, and whether loans can be resold or purchased in advance.¹⁹ Relevant here, the First Interim Rule instructs that with respect to underwriting, the lenders need only:

i. Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration;

ii. Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;

iii. Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower's application; and

iv. Follow applicable SBA requirements.²⁰

The Second and Third Interim Rules, published April 15, 2020, and April 20, 2020, respectively, are likewise silent as to the disputed Bankruptcy Exclusion.²¹ However, on April 28, 2020, the SBA published the Fourth Interim Rule, which addresses the Bankruptcy Exclusion for the first time, stating: "[i]f the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding ... the applicant is ineligible to receive a loan."²² By way of explanation, the Fourth Interim Rule provides:

[T]he 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.²³

In connection with this action, the SBA filed a declaration by John A. Miller, dated June 5, 2020 ("Miller Declaration").²⁴ Mr. Miller is an employee of the SBA and declares that he is "duly authorized to make the statements contained in [the Miller Declaration] to explain...