(The Center Square) — Businesses in bankruptcy proceedings should be barred from receiving federal pandemic assistance, a three-judge panel at the 11th U.S. Circuit Court of Appeals in Atlanta has determined in a ruling involving a medical practice in Florida that could have significant implications for small businesses nationwide.
In a 44-page notice, the appeal panel said Gateway Radiology Consultants was not entitled to receive a $527,710 Paycheck Protection Protection (PPP) loan last spring to pay 50 full-time employees because it has been bankrupt since May 2019.
Tuesday’s ruling, at the request of the US Small Business Administration (SBA), reversed a July ruling by US bankruptcy judge Michael Williamson, who found the SBA was “arbitrary and capricious” in exceeding its authority by disqualifying companies in PPP bankruptcy proceedings. .
“The SBA did not exceed its authority in adopting the non-bankruptcy rule for PPP eligibility,” said the opinion, written by Chief Justice Ed Carnes and joined by Justices Robin Rosenbaum and R. Lanier Anderson III, noting that Congress has delegated to the SBA whether companies in bankruptcy proceedings are eligible for loans.
Therefore, the opinion continues, the SBA’s rule regarding bankrupt business eligibility “does not violate the CARES Act, is based on a reasonable interpretation of the law, and the SBA did not act arbitrarily. and capricious in adopting the rule”.
Passed as part of the $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act, the PPP provided one-time loans to cover up to eight weeks of payroll and other expenses for businesses, up to to a maximum of $10 million.
The loans, guaranteed by the SBA but issued by banks and other lenders, are canceled and repaid by the federal government if business owners comply with PPP rules.
According to the SBA, $523 billion in PPP loans were issued to 5.2 million borrowers nationwide before it expired in August. The $900 billion congressional stimulus package passed on Monday includes $284 billion to revive the program.
Gateway filed for Chapter 11 bankruptcy in May 2019. According to its documents, it held approximately $22 million in assets, $10.6 million in secured creditor debt and approximately $4 million in unsecured debt. .
Gateway received a $527,710 loan in April through the USF Federal Credit Union to pay its 50 workers who were on half pay.
According to the SBA and the credit union, the company never said it was in bankruptcy proceedings in its loan application and might have avoided scrutiny if it didn’t need government approval. a bankruptcy court to add debt.
Williamson dismissed the lawsuit from the SBA and USF Federal Credit Union challenging the legality of the loan on July 1, noting that the objections defeat the purpose of the CARES Act and the PPP, which is “to provide immediate emergency assistance to small businesses so they could retain and pay American workers.
“Because of the SBA rule, however, the small businesses most in need of relief — small businesses in Chapter 11 bankruptcy — have been denied access to financing to perform payroll,” continued Williamson. “For example, Gateway Radiology employees – who are the first responders in the COVID-19 crisis – are working full-time for half pay.”
Williamson, however, also asked the 11th Circuit to review the case, noting that the SBA’s rule excluding businesses in bankruptcy proceedings has “spurred litigation across the country,” with at least more than 30 lawsuits. of this type to his knowledge.
“The appeal in this case will determine whether Chapter 11 debtors like Gateway Radiology should be eligible for emergency relief provided by Congress so they can retain and pay their workers,” Williamson wrote.