Organic Power LLC v. Small Bus. Admin. (In re Organic Power LLC)

619 B.R. 540

IN RE: ORGANIC POWER LLC, Debtor.

Organic Power LLC, Plaintiff,

v.Small Business Administration and Jovita Carranza, as Administrator of the Small Business Administration, Defendants.

CASE NO. 19-01789-EAG11

ADV. PROC. NO. 20-00055

United States Bankruptcy Court, D. Puerto Rico.

Signed July 24, 2020

Rafael A. Gonzalez Valiente, Godreau & Gonzalez Law, San Juan, PR, for Plaintiff.

Rafael J. Lopez, United States Attorney's Office, San Juan, PR, Michael Tye, United States Department of Justice, Michael S. Tye, United States Department of Justice-Civil Division, Washington, DC, for Defendants.

OPINION AND ORDER

Edward A. Godoy, U.S. Bankruptcy Judge

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act, calling it "the single-biggest economic relief package in American history ...." H.R. 748, Pub. L. 116-136 (2020) ("CARES Act").¹ Title I of the CARES Act created the Paycheck Protection Program ("PPP"), which provided for "$350 billion in loans for small business, but it's structured in a way to incentivize them to keep their workers on payroll so that those loans could be forgiven at end of the [covered payroll] period."² Those monies were exhausted in less than one month, so Congress appropriated an additional $310 billion: raising the total amount appropriated for the PPP to $659 billion. H.R. 266, Pub. L. 116-139 (2020).

Although the dollar amount appropriated for the PPP is historic,³ it pales in comparison to the enormity of the economic damage inflicted by the Covid-19 pandemic on the U.S. economy.⁴

To push quickly out the door this huge amount of money to eligible small businesses, Congress placed the PPP within the existing section 7(a) loan program of the Small Business Act. 15 U.S.C § 636(a). On April 2, 2020, the Small Business Administration ("SBA") released the PPP application form. SBA Form 2843. The form asks whether the PPP applicant is "involved in any bankruptcy." If the applicant answers yes, the loan will not be approved according to the application form. On April 15, 2020, the SBA posted in the Federal Register its first interim final rule on the PPP, which does not itself make ineligible debtors but mentions that applicants need to submit Form 2843 in order to apply for the PPP. 85 Fed. R. 20811, Art. III § 2(q).

On April 14, 2020, Organic Power LLC submitted a PPP application to Banco Popular de Puerto Rico. Banco Popular denied the application on April 24, 2020 because Organic Power is in bankruptcy. On April 24, 2020, Oriental Bank likewise denied a separate PPP application submitted by Organic Power.

On April 27, 2020, Organic Power filed an adversary complaint and application for temporary restraining order and preliminary injunction against Jovita Carranza, in her capacity as Administrator of the SBA. The complaint and the temporary-restraining-order application requests that the court declare that the SBA's decision to exclude bankruptcy applicants from the PPP discriminates against Organic Power in violation of section 525(a) of the Bankruptcy Code and is beyond the SBA's statutory and regulatory authority under section 706(2)(C) of the Administrative Procedures Act ("APA").⁵ 5 U.S.C. § 706(2)(C). In the alternative, Organic Power asserts that the bankruptcy exclusion is arbitrary and capricious under section 706(2)(A) of the APA. 5 U.S.C. § 706(2)(A).

On April 28, 2020, the SBA posted in the Federal Register its fourth interim final rule providing further guidance on requirements for PPP eligibility. 85 Fed. R. 23450. The fourth interim final rule expressly states that businesses in bankruptcy are not eligible to apply for the PPP. Id. at Art. III § 4.

On May 8, 2020, the court issued a temporary restraining order against the SBA. Now, for the reasons set forth below, the court directs the entry of final judgment on the section 525(a) claim against the SBA, but denies the requests for preliminary and permanent injunctions. Because both parties agree that the claims under sections 706(2)(A) and (C) of the APA are non-core matters, the court leaves (as explained below) those matters for another day.

I. JURISDICTION

This court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a), Local Civil Rule 83K(a), and the General Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.). The section 525 claim is a core proceeding under 28 U.S.C. § 157(b) over which the court can enter a final judgment.

II. PROCEDURAL BACKGROUND

On April 1, 2019, Organic Power filed a petition for relief under chapter 11 of the Bankruptcy Code. [Bankr. Dkt. No. 1.]

On April 27, 2020, Organic Power commenced the adversary proceeding of caption. [Bankr. Dkt. No. 195; Adv. Dkt. Nos. 1, 4 & 5.]

On April 28, 2020, the court entered an order for the SBA to show cause why the application for temporary restraining order should not be granted at a hearing scheduled for May 6, 2020. [Adv. Dkt. No. 10.]

On May 4, 2020, the SBA filed a memorandum in opposition to the application for temporary restraining order and injunctive relief. [Adv. Dkt. No. 19.] On May 5, 2020, Organic Power filed a reply. [Adv. Dkt. No. 22]

On May 6, 2020, the court held the hearing on the temporary restraining order and took the matter under advisement. [Adv. Dkt. No. 27.] The court granted Organic Power 24 hours to submit a sworn statement in support of its request for injunctive relief and 24 hours thereafter for the SBA to reply. [Id.] The court also set a status conference for May 19, 2020. [Id.]

As ordered, on May 6, 2020, Organic Power filed a supplemental unsworn declaration, and on May 7, 2020 the SBA replied. [Adv. Dkt. Nos. 23 & 25.]

On May 8, 2020, the court issued a temporary restraining order against the SBA. [Adv. Dkt. No. 29.]

On May 19, 2020, Organic Power filed a motion informing that Banco Popular "granted" its PPP application and disbursed to it $129,500. [Adv. Dkt. No. 33.]

On May 19, 2020, the court held a status conference where it consolidated the application for preliminary injunction with the trial on the merits and set the trial for June 22, 2010. [Adv. Dkt. No. 34.] A schedule was also established to govern the pretrial preparation. [Id.] The pretrial conference was set for June 19, 2020. [Adv. Dkt. No. 37.] And the temporary restraining order was extended until June 23, 2020. [Adv. Dkt. No. 34.]

On May 21, 2020, Organic Power filed a motion informing it had opened a special debtor-in-possession bank account for the PPP money. [Adv. Dkt. No. 38.] On that same day, Organic Power filed a motion requesting disbursement of the PPP money. [Adv. Dkt. No. 39.]

On May 29, 2020, the SBA filed a motion to inform that it had agreed with Organic Power to extend the deadline to respond to the complaint to June 8, 2020. [Adv. Dkt. No. 43.] On June 8, 2020, the SBA moved the court to dismiss the case. [Adv. Dkt. No. 44.] On June 12, 2020, the court granted Organic Power's motion requesting approval to disburse the PPP money. [Adv. Dkt. No. 48.]

On June 12, 2020, Organic Power opposed the SBA's dismissal request. [Adv. Dkt. No. 51.]

The SBA and Organic Power filed their supplemental memoranda of law on June 15 and 16, 2020, respectively. [Adv. Dkt. Nos. 56 & 57.]

On June 18, 2020, in compliance with the pretrial order: the SBA filed a motion informing its trial exhibits [Adv. Dkt. No. 59], Organic Power filed its reply to the SBA's supplemental memorandum [Adv. Dkt. No. 60], Organic Power and the SBA filed a joint pretrial report [Adv. Dkt. No. 61], and Organic Power filed a motion informing its trial exhibits. [Adv. Dkt. No. 62.]

On June 19, 2020, Organic Power filed a second unsworn statement by its president in support of its request for injunctive relief. [Adv. Dkt. No. 63.]

At the pretrial hearing held on June 19, 2020, the court granted the SBA until June 24, 2020 to submit another supplemental brief and Organic Power until June 26, 2020 to reply. [Adv. Dkt. No. 65.] The court continued the trial to June 29, 2020 and extended the temporary restraining order until June 30, 2020. [Id.]

On June 24, 2020, the SBA filed its supplemental memorandum. [Adv. Dkt. No. 66.] On June 26, 2020, Organic Power filed its opposition. [Adv. Dkt. No. 69.]

On June 26, 2020, Organic Power filed its first motion informing the use of the PPP money as of that date. [Adv. Dkt. No. 70.]

The trial was held on June 29, 2020. [Adv. Dkt. No. 72.] And the court again extended the temporary restraining order until it reached a decision on the merits of the case. [Adv. Dkt. Nos. 72 & 76.]

On July 3, 2020, Organic Power filed a second motion informing its use of the PPP money as of that date. [Adv. Dkt. No. 74.] On July 10, 2020, Organic Power filed a third motion informing that its use of the PPP money as of that date. [Adv. Dkt. No. 77.] On July 17, 2020, Organic Power filed a fourth motion informing its use of the PPP money as of that date. [Adv. Dkt. No. 78.] On July 24, 2020, Organic Power filed a fifth motion informing its use of the PPP money as of that date. [Adv. Dkt. No. 79.]

III. UNCONTESTED FACTS

The following facts are uncontested as found in the record of this case and the stipulated facts submitted by the parties in their pretrial report filed at docket number 61:

Organic Power is in business to recycle organic waste into animal feed and natural gas to generate electricity. [Adv. Dkt. No. 61, p. 3, ¶ 10.] However, it currently generates electricity with propane gas. [Id.] Organic Power's income comes primarily from its clients that generate organic waste and purchase its electricity and animal feed. [Id.]

On April 1, 2019, Organic Power filed a petition for relief under chapter 11 of the Bankruptcy Code. [Bankr. Dkt. No. 1.] On March 12, 2020, the Governor of Puerto Rico issued an Executive Order imposing a drastic lockdown of non-essential businesses and a mandatory curfew on the...