iThrive Health, LLC v. Carranza (In re iThrive Health, LLC), Case No. 19-25413-TJC

623 B.R. 392

IN RE: ITHRIVE HEALTH, LLC, Debtor

iThrive Health, LLC, Plaintiff

v.Jovita Carranza, in her capacity as Administrator for the U.S. Small Business Administration, Defendant

Case No. 19-25413-TJC

Adversary No. 20-00151

United States Bankruptcy Court, D. Maryland, at Greenbelt.

Signed June 8, 2020

Justin Philip Fasano, Janet M. Nesse, McNamee, Hosea et al., Greenbelt, MD, for Plaintiffs.

Alan Carl Lazerow, United States Attorney's Office, Baltimore, MD, Daniel Jeffrey Martin, Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OF DECISION

THOMAS J. CATLIOTA, U.S. BANKRUPTCY JUDGE

Chapter 11 debtor and plaintiff iThrive Health, LLC brings this motion for preliminary injunction against defendant Jovita Carranza, in her official capacity as Administrator for the United States Small Business Administration ("SBA"). Debtor contends defendant violated § 525(a) of the Bankruptcy Code by excluding it from participating in the Paycheck Protection Program (the "PPP") established by the Coronavirus Aid Relief Economic Security Act (the "CARES Act"), solely because it is a debtor in bankruptcy. Debtor also contends defendant exceeded its statutory authority and acted arbitrarily and capriciously by excluding bankruptcy debtors from participating in the PPP, in violation of the Administrative Procedures Act (the "APA"). Defendant opposes the motion. For the reasons that follow, the court concludes that binding Fourth Circuit precedent forecloses the relief sought by debtor. The motion will be denied.

While the preliminary injunction motion was pending, debtor filed a motion to dismiss its bankruptcy case and requested that, if the court denies the motion for a preliminary injunction, it should dismiss the bankruptcy case to allow debtor to seek PPP funds. As addressed further below, the court concludes that "cause" exists to dismiss the case and will grant the motion.

Jurisdiction

Debtor's claim that defendant violated 11 U.S.C. § 525(a) is one "arising under title 11" and is a core proceeding. 28 U.S.C. §§ 1334(b) and 157(a). Debtor's APA claims are "related to" a case in title 11. 28 U.S.C. § 1334(b). Although the APA claims are noncore, the court is not called upon to issue a final judgment in resolving the preliminary injunction motion. Finally, debtor's motion to dismiss the Chapter 11 case "arises in" a case under title 11 and is a core proceeding.

Facts

Debtor filed a Chapter 11 bankruptcy case on November 19, 2019. Case No. 19-25413. It is a pharmacy trading under the name Village Green Apothecary with approximately fifty (50) employees. ECF 1 ¶¶12-13. Debtor continues to operate and manage its business as a debtor-in-possession.

On March 27, 2020, the CARES Act¹ was signed into law in response to the COVID-19 pandemic and subsequent economic downturn. As part of the CARES Act, the PPP extended certain funding to small businesses via participating federally insured lending institutions. Defendant has been tasked with administering the PPP.

Debtor states it qualifies to receive approximately $418,000 in PPP funds. It approached several lending institutions to obtain PPP funding, each declining to process debtor's application because of its active bankruptcy status and defendant's guidelines prohibiting the extension of PPP funding to entities in bankruptcy.

Debtor filed its complaint on May 12, 2020. Along with the complaint, debtor filed a motion for temporary restraining order and preliminary injunction and a memorandum in support. ECF 3. At a status conference held on May 13, the parties reported that defendant had agreed to set aside PPP funds for debtor in the event it prevailed on its claims, thus obviating the need for resolving the motion for a temporary restraining order. The parties also presented a scheduling order for resolving the preliminary injunction motion, and the court held a hearing on the motion on June 3, 2020.²

In the meantime, debtor filed a motion to dismiss its bankruptcy case on May 15, 2020. ECF 98, Case No. 19-25413. Debtor requests that the court dismiss the case if it denies the motion for preliminary injunction. Debtor states that, outside of bankruptcy, it would immediately seek $418,000 of PPP funds, which would aid substantially in its reorganization effort. It also states that, after dismissal, if it fails to obtain the funds or otherwise continues to require debt relief, it would seek to refile under the provisions of the Small Business Reorganization Act. Debtor states that "the flexibility of the confirmation process and substantially reduced legal fees and costs under the Small Business rules would substantially enhance Debtor's probability of success in a Chapter 11 reorganization, and result in increased payments to creditors." Id. at 3.

CARES Act and the PPP

On March 13, 2020, the President declared the COVID-19 pandemic warranted an emergency declaration for all States, territories, and the District of Columbia. The President signed into law the CARES Act to provide emergency economic assistance to help individuals and businesses cope with the economic and public health crises triggered by the worldwide COVID-19 pandemic. See SBA, Interim Final Rule, 85 Fed. Reg. 20,811 (April 15, 2020) (the "First Interim Final Rule").

As described in the First Interim Final Rule, the SBA received funding and authority through the CARES Act to establish a new loan program to assist small businesses adversely impacted by the COVID-19 emergency. Section 1102 of the CARES Act temporarily permits the SBA to guarantee loans under the PPP. Section 1106 of the CARES Act provides for forgiveness of qualifying loans guaranteed under the PPP. Id. "The intent of the CARES Act is that SBA provide relief to America's small businesses expeditiously" with a "focus on keeping workers paid and employed." Id.

By law the SBA is managed by an Administrator who has the power to make rules that carry out the agency's objectives and programs. 15 U.S.C. § 633(a), (b)(1), (b)(6), (b)(7). The Administrator has promulgated several interim final rules which set forth PPP funding implementation, eligibility and criteria. The First Interim Final Rule described eligibility requirements. Second and third interim final rules were issued addressing affiliation rules, additional eligibility guidelines and pledges of loans. 85 Fed. Reg. 20,817 (April 15, 2020) ; 85 Fed. Reg. 21,747 (April 20, 2020). The third interim final rule also sets forth the parameters for loan forgiveness, which states "[t]he amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest." 85 Fed. Reg. 21,747 (April 20, 2020). Generally speaking, the amount of forgiveness is computed based on the amounts spent on payroll costs including taxes, insurance, salary, wages, and tips; owner compensation replacement; payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020 to the extent tax deductible; rent payments on lease agreements in force before February 15, 2020, to the extent tax deductible; and utility payments. Id.

A fourth interim final rule was issued on April 24, 2020, which provides:

4. Eligibility of Businesses Presently Involved in Bankruptcy Proceeding.

Will I be approved for a PPP loan if my business is in bankruptcy? No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant's obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.

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.

85 Fed. Reg. 23,450 (April 28, 2020).

Under the PPP, an SBA approved lending institution reviews a small business's application for PPP funding and decides whether it meets the SBA requirements to be funded. Upon approval, the lending institution and applicant execute a promissory note and PPP funds are disbursed. The applicant may then, after the requisite time period lapses, apply to their lending institution for loan forgiveness. Funds never pass between the SBA and applicant.

Preliminary Injunction Standards

"A preliminary injunction is ‘an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.’ " Mountain Valley Pipeline, LLC v. W. Pocahontas Props. Ltd. P'ship , 918 F.3d 353, 366 (4th Cir. 2019) (quoting Winter v. Nat. Res. Def. Council , 555 U.S. 7, 22, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008) ). " A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter , 555 U.S. at 20, 129 S.Ct. 365. The last two of these four factors "merge when the Government is the opposing party." Nken v. Holder , 556 U.S. 418, 435, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009). A plaintiff must make a clear showing that it...