In a Florida case that could have broader implications, a federal appeals court Tuesday upheld a U.S. Small Business Administration decision that prevents businesses from receiving Paycheck Protection Program loans if they are in bankruptcy proceedings.
A three-judge panel of the 11th U.S. Circuit Court of Appeals overturned a decision by U.S. Bankruptcy Judge Michael Williamson, who sided with Gateway Radiology Consultants, a Pinellas County medical practice that filed for Chapter 11 bankruptcy in 2019 and sought a $527,710 loan under the Paycheck Protection Program.
The program has been a key part of the federal CARES Act, which Congress passed this spring to bolster the economy amid the coronavirus pandemic. Under the program, small businesses have been able to receive forgivable loans to cover payroll and certain other expenses.
Williamson ruled this summer that the Small Business Administration had exceeded its authority under federal law when it disqualified businesses in bankruptcy proceedings from the loan program. Also, he ruled that the SBA’s decision was “arbitrary and capricious.”
Nevertheless, Williamson on July 1 asked the Atlanta-based appeals court to take up the issue, in part saying the SBA’s stance on the issue has “spawned litigation around the country.” The judge wrote that one court had tallied more than 30 lawsuits challenging the SBA’s position.
“Congress passed the CARES Act to provide immediate emergency relief to small businesses so that they could retain and pay American workers,” Williamson wrote in the July 1 document. “Because of the SBA’s rule, however, small businesses that need the relief the most --- small businesses in Chapter 11 bankruptcy --- have been denied access to funding to make payroll. For instance, Gateway Radiology’s employees, who are first responders in the COVID-19 crisis --- are working full-time for half-pay. The appeal, in this case, will determine whether Chapter 11 debtors like Gateway Radiology should be entitled to the emergency relief Congress provided so that they can retain and pay their workers.”
But in a 44-page opinion Tuesday, the appellate court panel concluded that Congress delegated to the SBA the question of whether businesses in bankruptcy proceedings are eligible for the loans. Also, the court rejected the argument that the SBA’s handling of the issue was arbitrary and capricious.
“The SBA did not exceed its authority in adopting the non-bankruptcy rule for PPP eligibility,” said the opinion, written by Chief Judge Ed Carnes and joined by Judges Robin Rosenbaum and R. Lanier Anderson III. “That rule does not violate the CARES Act, is based on a reasonable interpretation of the Act, and the SBA did not act arbitrarily and capriciously in adopting the rule.”
Though it was in bankruptcy, Gateway Radiology Consultants sought the $527,710 loan in April through USF Federal Credit Union. A document submitted to the credit union indicated Gateway was not in bankruptcy, and the credit union approved the loan, according to court documents.
The appeals court said there is a dispute about why the form said Gateway was not in bankruptcy. But Gateway still needed to get approval from the bankruptcy court to add debt, and the SBA objected because it said the firm was not eligible for the Paycheck Protection Program.