Springfield Hosp., Inc. v. Guzman

28 F.4th 403

SPRINGFIELD HOSPITAL, INC., Springfield Medical Care Systems, Inc., Plaintiffs-Appellees,

v.Isabel GUZMAN, in her capacity as Administrator for the U.S. Small Business Administration, Defendant-Appellant.^*

No. 20-3902

No. 20-3903

August Term 2021

United States Court of Appeals, Second Circuit.

Argued: October 28, 2021

Decided: March 16, 2022

Joshua M. Salzman (Mark B. Stern, Lindsey Powell, on the brief), Appellate Staff, Civil Division, for Brian M. Boynton, Acting Assistant Attorney General, United States Department of Justice, Washington, DC, and Jonathan A. Ophardt, Acting United States Attorney for the District of Vermont, Burlington, VT, for Defendant-Appellant.

Andrew C. Helman, Dentons Bingham Greenebaum LLP, Portland, ME, for Plaintiff-Appellee Springfield Hospital, Inc.

Adam R. Prescott, D. Sam Anderson, Bernstein Shur Sawyer & Nelson, P.A., Portland, ME, for Plaintiff-Appellee Springfield Medical Care Systems, Inc.

Before: Kearse, Lohier, and Bianco, Circuit Judges.

Joseph F. Bianco, Circuit Judge:

In March 2020, in response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act" or the "Act"), which established the Paycheck Protection Program ("PPP"). The PPP authorized the Small Business Administration (the "SBA") to guarantee favorable and potentially forgivable loans to businesses negatively impacted by the pandemic. In administering the program, the SBA decided to automatically bar any applicant who was a debtor in bankruptcy from receiving PPP funds.

Plaintiffs-Appellees Springfield Hospital, Inc. and Springfield Medical Care Systems, Inc. (together, "Springfield")¹ are debtors in bankruptcy who applied for and were denied PPP funds due solely to their bankruptcy status. In April 2020, Springfield initiated this adversary proceeding in bankruptcy court against Defendant-Appellant, the Administrator of the SBA, in her official capacity, challenging the SBA's administration of PPP funds and requesting that the bankruptcy court enjoin the SBA from denying any PPP application on the sole basis of the applicant's bankruptcy status. Specifically, Springfield asserted that: (1) the SBA's decision to exclude bankrupt debtors from obtaining PPP loans violated Section 525(a) of the Bankruptcy Code, which provides that "a governmental unit may not deny ... a license, permit, charter, franchise, or other similar grant" to a debtor in bankruptcy solely because of that status, 11 U.S.C. § 525(a) ; and (2) the SBA is not immune from injunctive relief under the Small Business Act, 15 U.S.C. § 634(b)(1).

On June 22, 2020, the Bankruptcy Court for the District of Vermont (Brown, J. ) issued a Memorandum of Decision, concluding that, as a matter of law, PPP funds were "other similar grant[s]" under Section 525(a) and granting summary judgment in Springfield's favor. Further, the bankruptcy court concluded that Section 634(b)(1) did not bar it from enjoining the SBA and, after determining that Springfield had met the standard to obtain a permanent injunction, enjoined the SBA from denying Springfield PPP funds based on its bankruptcy status. The SBA appealed.

We hold, based upon the plain language of Section 525(a), that the PPP is a loan guaranty program and not an "other similar grant," and that Section 525(a) does not apply to PPP loans. Therefore, the bankruptcy court incorrectly ruled that Springfield was entitled to summary judgment and a permanent injunction, and we instead conclude, as a matter of law, that the SBA is entitled to summary judgment on the Section 525(a) claim.

Accordingly, we REVERSE the judgment, VACATE the permanent injunction, and REMAND to the bankruptcy court for further proceedings consistent with this opinion.

BACKGROUND

I. Statutory and Regulatory Background

A. Pre-CARES Act Statutory Context

The SBA was enacted in 1958 to "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns." Pub. L. No. 85-536, 72 Stat. 384 (1958) (codified as amended at 15 U.S.C. § 631(a), et seq. ); see also 15 U.S.C. § 633(a) (establishing the SBA). The SBA's primary mechanism for aiding small businesses is by financing private "Section 7(a) loans" under the Small Business Act. See 15 U.S.C. § 636(a). Although the SBA guarantees these loans, they are typically issued by private lenders rather than through direct disbursals from the SBA. Id .; United States v. Kimbell Foods, Inc. , 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). By statute, Section 7(a) loans are subject to a "sound value" requirement—namely, that "[a]ll loans made under [Section 7(a)] shall be of such sound value or so secured as reasonably to assure repayment[.]" 15 U.S.C. § 636(a)(6).

In addition to creating Section 7(a) loans, the Small Business Act authorizes the SBA Administrator to "make such rules and regulations as [s]he deems necessary" to implement the loan program. See 15 U.S.C. § 634(b)(6) ; id. § 634(b)(7) (vesting the SBA Administrator with the authority to create rules and "take any and all actions ... when [s]he determines such actions are necessary or desirable in making, servicing, ... or otherwise dealing with or realizing on loans made under the provisions of [the Act]"). Accordingly, the SBA has promulgated several rules to ensure that Section 7(a) loans, consistent with the "sound value" mandate, are sufficiently creditworthy and assured of repayment. See, e.g. , 13 C.F.R. § 120.150 (2022). In evaluating creditworthiness, the SBA considers various factors, including the "credit history of the applicant," the "[s]trength of the business," its "projected cash flow," and the applicant's "[a]bility to repay the loan with earnings from the business." Id. § 120.150(a) – (i). Additionally, as part of the creditworthiness inquiry, the SBA considers the bankruptcy status and history of each applicant, although a status or history of bankruptcy does not automatically render an applicant ineligible for a Section 7(a) loan. See SMALL BUS. ADMIN., SBA 7A BORROWER INFORMATION FORM 1919, https://www.sba.gov/sites/default/files/2021-12/Form%201919_10-21-2020-rev-1_lt-508.pdf; see also Standard Operating Procedure, § 50 10 5(K), Small Bus. Admin., Lender and Development Company Loan Programs 178–80 (Apr. 1, 2019), https://www.sba.gov/sites/default/files/2019-02/SOP%2050%2010%205%28K%29%20FINAL%202.15.19%20SECURED%20copy %20paste.pdf (outlining capital underwriting and capital analysis requirements for Section 7(a) loans).

B. COVID-19 and the CARES Act

In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act to, in part, alleviate the pandemic's substantial economic effects on small businesses. See Coronavirus Aid, Relief, and Economic Security Act, Pub L. No. 116-136, 134 Stat. 281, 286 (2020). Relevant here, Section 1102 of the Act establishes the PPP, a temporary program targeted at providing small businesses with the funds necessary to meet their payroll and operating expenses and therefore keep workers employed. See CARES Act § 1102, 134 Stat. at 286 (codified as amended at 15 U.S.C. § 636(a)(36) ). The PPP provides potentially forgivable loans to eligible small businesses, allowing the recipient to seek loan forgiveness if at least 60% of the loaned funds are used for specified expenses, such as payroll. See id. § 636(a)(36) ; id. § 636m(b)–(d). However, unauthorized uses of PPP funds, as well as certain authorized uses, are ineligible for loan forgiveness. Compare id. § 636(a)(36)(F) (detailing authorized uses), with id. § 636m(b) (detailing forgiveness-eligible uses). Congress initially authorized $349 billion in PPP loan commitments, but, after those funds were quickly depleted, added another $310 billion one month later and eventually extended a third round of PPP funding at the end of 2020. See CARES Act § 1102(b), 134 Stat. at 293; Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139, § 101(a)(1), 134 Stat. 620, 620 (2020); see Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, § 311, 134 Stat. 1182, 2001–07 (2020).

Rather than establishing the PPP as a standalone program, the CARES Act places the PPP under Section 7(a) of the Small Business Act, providing that the SBA "may guarantee covered [PPP] loans under the same terms, conditions, and processes" as other Section 7(a) loans.² 15 U.S.C. § 636(a)(36)(B) ; see CARES Act § 1102, 134 Stat. at 286 (amending "Section 7(a) of the Small Business Act"); Pharaohs GC, Inc. v. U.S. Small Bus. Admin. , 990 F.3d 217, 224 (2d Cir. 2021) (acknowledging the PPP's placement under Section 7(a)). The Act relaxed many of the Section 7(a) eligibility criteria for PPP applicants and waived some of the standard Section 7(a) requirements altogether. 15 U.S.C. §§ 636(a)(36)(D), (H)–(J), (R). However, the Act did not exempt PPP loans from Section 7(a)’s statutory "sound value" requirement.³ Id. § 636(a)(6).

Given the need to move expeditiously to address the pandemic's economic effects, the CARES Act directed the SBA to issue emergency regulations implementing the PPP within only fifteen days.⁴ CARES Act § 1114, 134 Stat. at 312 (codified as amended at 15 U.S.C. § 9012 ). In keeping with this statutory mandate, the SBA issued multiple rules implementing the PPP. The SBA's first interim final rule, which noted that "[t]he intent of the [CARES] Act is that SBA provide relief to America's small businesses expeditiously ... by ... streamlining the requirements of the regular 7(a) loan program," waived the standard Section 7(a) creditworthiness inquiry and full underwriting requirements for PPP loans.⁵ See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,811 –12, 20,815 (Small Bus. Admin. Apr. 15, 2020) (waiving the normal Section 7(a) criteria under 13 C.F.R. § 120.150 ); see also Business Loan Program Temporary Changes; Paycheck Protection Program—Additional Eligibility...