By: Mary T. Michalos
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In response to the economic fallout of the global COVID-19 pandemic, Congress passed the CARES Act, a part of which made government-guaranteed loans available to qualified small businesses through the Paycheck Protection Program (“PPP”).[i] The Small Business Administration (“SBA”) swiftly implemented several regulations regarding PPP eligibility, one of which disqualified debtors in a bankruptcy case from getting PPP loans.[ii] The CARES Act does not contain such an exclusion. A bankruptcy court in Texas issued an injunction against the SBA Administrator, mandating that the SBA handle a debtor’s PPP application disregarding the debtor’s bankruptcy. However, in In re Hidalgo County Emergency Service Foundation, the United States Court of Appeals for the Fifth Circuit held that the bankruptcy court in Texas exceeded its authority and vacated the Texas bankruptcy court’s preliminary injunction.[iii]
Hidalgo County Emergency Service Foundation (“Hidalgo”), a chapter 11 debtor, filed a complaint against Jovita Carranza, in her capacity as SBA Administrator, challenging SBA’s regulation disqualifying bankrupt parties from obtaining PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). [iv] Hidalgo contended that the regulation violated anti-discrimination provisions in 11 U.S.C. § 525(a), because it was “arbitrary, capricious” and “in excess of . . . statutory right” under 5 U.S.C. § 706(2)(A) and (C).[v] The United States Bankruptcy Court for the Southern District of Texas concluded Hidalgo would suffer immediate and irreparable harm and thus issued a preliminary injunction mandating SBA handle Hidalgo’s PPP application without considering its ongoing bankruptcy.[vi] Thereafter, the United States District Court for the Southern District of Texas stayed the preliminary injunction and certified the case for direct appeal to the Fifth Circuit, which consented to take the direct appeal.
The Fifth Circuit reasoned that courts do not have the ability to enjoin the Administrator, whether it is in regard to PPP loans or other situations.[vii] A suit in which a party seeks injunctive relief against the Administrator is explicitly precluded by the Small Business Act, 15 U.S.C. § 6634(b)(1),[viii] which provides that “no . . . injunction . . . shall be issued against the Administrator.”[ix] In coming to its conclusion, the Fifth Circuit noted its prior decisions in Valley Const. Co. v. Marsh[x] and Enplanar, Inc. v. Marsh,[xi] where the court held that injunctive relief would be improper because the necessary party in the suit was the SBA and “§ 634(b)(1), precludes injunctive relief against the SBA.”[xii] In addition, the court referred to Expedient Servs., Inc. v. Weaver,[xiii] where the Fifth Circuit similarly reasoned that while section 634(b)(1) seems to be more a limitation than a restriction of the court's jurisdiction, a suit praying solely for injunctive relief against the Administrator is barred by the statute’s language.[xiv] Because the sole relief prayed for in the instant case was injunctive in nature, the Fifth Circuit found that the bankruptcy court exceeded its authority when it issued an injunction against the SBA Administrator.[xv]
By the CARES Act, Congress provided companies with the ability to obtain PPP loans. Congress further provided that the SBA will administer the PPP loan program. According to the Fifth Circuit, a court cannot require the SBA to allow a debtor to obtain a PPP despite the lack of such an exclusion in the CARES Act.
[i] See Hidalgo Cty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cty. Emergency Serv. Found.), 962 F.3d 838, 840 (5th Cir. 2020); see generally Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-137, 134 Stat. 281 (2020).
[ii] See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 840–41.
[iii] See id. at 841.
[iv] See id. at 840; see generally Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-137, 134 Stat. 281 (2020).
[v] See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 840; see also 11 U.S.C. § 525(a); 5 U.S.C. § 706(2)(A), (C).
[vi] See Hidalgo Cty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cty. Emergency Serv. Found.), No. 19-20497, 2020 WL 2029252, at *3 (Bankr. S.D. Tex. Apr. 25, 2020); see also In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 840.
[vii] See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 841.; accord Enplanar, Inc. v. Marsh, 11 F.3d 1284, 1290 n.6 (5th Cir. 1994); Valley Constr. Co. v. Marsh, 714 F.2d 26, 29 (5th Cir. 1983); Expedient Servs., Inc. v. Weaver, 614 F.2d 56, 58 (5th Cir. 1980).
[viii] See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 841; see also Expedient Servs., Inc., 614 F.2d at 58; 15 U.S.C § 634(b)(1) (2000).
[ix] In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 841.; see also 15 U.S.C § 634(b)(1) (2000).
[x] 714 F.2d 26 (5th Cir. 1983).
[xi] 11 F.3d 1284 (5th Cir. 1994).
[xii] Id. at 1290–91; see Valley Const. Co., 714 F.2d at 29.
[xiii] Expedient Servs., Inc. v. Weaver, 614 F.2d 56 (5th Cir. 1980).
[xiv] See id. at 59.
[xv] See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d at 841.