5th Circ. Says Bankruptcy Court Overstepped In Biz Loan Suit

By Katie Buehler
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Law360 (June 23, 2020, 6:20 PM EDT) -- The Fifth Circuit has told a Texas bankruptcy court it exceeded its authority when it ordered the U.S. Small Business Administration to review a coronavirus small-business relief loan application filed by an emergency services company despite its Chapter 11 status.

A three-judge Fifth Circuit panel ruled Monday that circuit precedent prohibits the injunctive relief a bankruptcy court granted April 25 to ambulance provider Hidalgo County Emergency Service Foundation, or Hidalgo County EMS, against SBA Administrator Jovita Carranza. The panel denied Hidalgo County EMS' request to make "an exception" under the rule, according to the opinion.

The panel's three-page opinion only addressed the bankruptcy court's authority over the SBA and not Hidalgo County EMS' argument that the SBA's "categorical exclusion" of bankruptcy debtors from the Coronavirus Aid, Relief and Economic Security Act's Paycheck Protection Program was unconstitutional.

"The issue at hand is not the validity or wisdom of the PPP regulations and related statutes, but the ability of a court to enjoin the administrator, whether in regard to the PPP or any other circumstance," the panel said. "Because, under well-established Fifth Circuit law, the bankruptcy court exceeded its authority when it issued an injunction against the SBA administrator, we vacate its preliminary injunction."

Hidalgo County EMS attorney Nathaniel Peter Holzer told Law360 on Tuesday that the company is considering requesting an en banc review of Monday's ruling. He said he also plans to head back to bankruptcy court for a trial on the merits.

"The [Fifth] Circuit's ruling does not end the fight to invalidate the SBA's arbitrary, capricious and discriminatory exclusion of my client from participating in the Paycheck Protection Program," Holzer said.

The SBA declined to comment.

Hidalgo County EMS, which was working on its exit out of Chapter 11 when the coronavirus pandemic hit and derailed its efforts, filed for a small-business loan on April 3 but was immediately denied, according to the company's June 17 appellate brief. Hidalgo County EMS claims that at the time of denial, the SBA hadn't issued its rule excluding bankruptcy debtors from loans.

The bankruptcy exclusion was published after Hidalgo County EMS' application denial in the April 28 issue of the Federal Register.

Hidalgo County EMS argued that Congress, which wrote a bankruptcy debtor exclusion into a midsize business loan program under the CARES Act but not the PPP, didn't intend to withhold relief from small businesses undergoing bankruptcy.

In a June 19 reply brief, the SBA contended that when Congress created the PPP, it vested the agency with emergency rulemaking authority and directed it to use that authority to quickly distribute $349 billion in relief loans. The agency then decided to exclude bankruptcies to create a streamlined evaluation of loan applications, the SBA added.

"Hidalgo is on no stronger ground in arguing that SBA's policy is arbitrary and capricious, because Hidalgo cannot plausibly dispute that SBA had a rational basis to conclude that entities in bankruptcy, as a whole, are more likely to use funds for non-PPP purposes, and are less likely to repay those funds, than businesses outside of bankruptcy," the agency said.

Hidalgo County EMS provides several southern Texas counties with ambulance services. The company filed for bankruptcy in October 2019 after it experienced rapid growth without access to working capital to pay its debts, according to court documents..

U.S. Circuit Judges Jerry E. Smith, Stephen A. Higginson and Kurt D. Engelhardt sat on the panel for the Fifth Circuit.

Hidalgo County EMS is represented by Nathaniel Peter Holzer of Jordan Holzer & Ortiz PC and Kay B. Walker.

Carranza and the SBA are represented by Mark B. Stern, Joshua M. Salzman, Joshua Revesz and Sarah E. Weiner of the U.S. Department of Justice's Civil Division.

The case is Hidalgo County Emergency Service Foundation v. Jovita Carranza, case number 20-40368, in the U.S. Court of Appeals for the Fifth Circuit.

--Editing by Bruce Goldman.

For a reprint of this article, please contact reprints@law360.com.

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