SBA may deny PPP loan due to bankruptcy, appeals court rules

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(Reuters) – The Small Business Administration was within its rights to deny pandemic aid to a nonprofit hospital on the basis that it was bankrupt, a federal appeals court ruled on Wednesday.

The 2nd United States Circuit Court of Appeals said in a ruling that although bankruptcy law prohibits government entities from denying a debtor a permit, license or “other similar grant” because of its bankruptcy status, the SBA’s Paycheck Protection Program, which provided funding to small businesses affected by the COVID-19 pandemic, were not eligible for such a grant because the funding it offered was in the form of a loan.

Although many courts have considered whether PPP financing qualifies as a grant, the 2nd Circuit is the first appellate court to rule on the issue.

The three-judge panel reversed a June 2020 ruling by U.S. Bankruptcy Judge Colleen Brown in Vermont that the SBA could not deny Springfield Hospital Inc.’s PPP funding application.

Lawyers for the hospital and an SBA spokesperson did not immediately respond to requests for comment.

Springfield Hospital and Springfield Medical Care Systems Inc, a Vermont-based critical access hospital and medical service provider, filed for Chapter 11 protection in June 2019, but continued operations during bankruptcy. . He applied for $3.6 million in PPP funds while bankrupt.

The government loan program was enacted in March 2020 to provide small businesses with financing to help pay payroll and operating expenses during the pandemic. The SBA has disbursed nearly $800 billion in PPP loans.

Springfield sued the SBA in April 2020 after it denied the hospital’s request for funding. In response, the SBA argued that the funds it distributed through the PPP were loans, not grants protected by bankruptcy law.

The hospital was cleared from Chapter 11 in December 2020.

In Wednesday’s decision, written by U.S. Circuit Judge Joseph Bianco, the panel concluded that just because the SBA forgives many of the loans does not automatically qualify them as grants. Rather, businesses must meet certain financial criteria to get loan forgiveness, he said.

“In short, the mere existence of a forgiveness option does not turn the PPP into a ‘free money’ grant, as the bankruptcy court called it,” Bianco wrote.

The case is Springfield Hospital Inc v. Guzman, US Circuit Court of Appeals, No. 20-3902.

For Springfield: Andrew Helman of Dentons Bingham Greenebaum; and Adam Prescott and D. Sam Anderson of Bernstein, Shur, Sawyer & Nelson

For the SBA: Acting Assistant Attorney General Brian Boynton; Acting U.S. Attorney for the District of Vermont Jonathan Ophardt; and Joseph Salzman, Mark Stern and Lindsay Powell of the US Department of Justice

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