By Rosie Manins

Law360 (December 15, 2020, 4:14 PM EST) -- The U.S. Small Business Administration asked the Eleventh Circuit on Tuesday to overturn a bankruptcy judge's ruling that a Florida radiology center is entitled to a $500,000 loan under the Paycheck Protection Program despite being a Chapter 11 debtor, saying the judge overstepped his authority.

Counsel for the SBA and Florida bank USF Federal Credit Union, which is holding the loan in escrow, told a three-judge federal appeals panel that Gateway Radiology Consultants PA didn't mention its bankruptcy when it applied for and was approved $527,710 to pay its 50 full-time employees.

They said U.S. Bankruptcy Judge Michael G. Williamson was wrong to decide in June that the SBA's rule disqualifying Chapter 11 debtors for PPP loans was discriminatory and against the intent of Congress when it enacted the Coronavirus Aid Relief and Economic Security (CARES) Act.

Judge Williamson ordered USF to release the loan to Gateway and for the SBA to guarantee it, but also certified the issue for direct appeal to the Eleventh Circuit and stayed the payment pending an appellate court ruling.

"This was an abuse of the process here," said Joshua M. Salzman of the U.S. Department of Justice's Civil Appellate Division, an attorney for SBA administrator Jovita Carranza. "The SBA has long standing authority to set criteria and nothing in the CARES Act replaces SBA's authority."

Eleventh Circuit Judges Robin S. Rosenbaum, R. Lanier Anderson III and Ed Carnes questioned whether they had jurisdiction to hear the appeal, which hasn't been heard by a federal district court. They also cited as a potential problem for Gateway its omission of its Chapter 11 status when applying for the loan, saying the SBA and USF indicated they never would have approved it if they had known at the time.

"We have to assume that was a lie," Judge Carnes said. "Your [Gateway's] position is, 'Lie first, explain later if you have to.' The bankruptcy court had to have assumed that it was a lie and then basically ruled that it didn't matter if it was."

Judge Anderson also questioned whether the bankruptcy judge had authority to make a final ruling with respect to the loan because it wasn't clear that it was a core part of the Chapter 11 case. He said that affected whether the appeal was properly before the appeals court, and that the bankruptcy court "perhaps" should have resolved the "falsification issue" first.

"I'm not at all sure that you [the SBA] are right that this is just an easy piggy back ride," Judge Anderson said. "If the bankruptcy court did not have constitutional authority to issue a final order then we do not have the appellate jurisdiction."

Maury L. Udell of Beighley Myrick Udell & Lynne PA, an attorney for Gateway, said the bankruptcy judge had authority to find the SBA's rule excluding Chapter 11 debtors from the PPP was discriminatory against such debtors.

He said normal bankruptcy court procedure with respect to approving loans was not applicable to the unique emergency situation created by the pandemic and that Gateway's bankruptcy status did not affect its ability to comply with the terms of a PPP loan.

"It's really a grant, it's not a loan in the ordinary term," Udell said. "A Chapter 11 debtor is under scrutiny from courts and creditors ...The statute [CARES Act] specifically did not exclude Chapter 11 debtors ... And repayment is not a factor in any PPP loan."

Megan Wilson Murray of Underwood Murray PA, an attorney for USF, said the bank only had two criteria for Gateway in issuing the PPP loan — that the SBA was going to guarantee the loan and that Gateway's representations that it met the eligibility criteria for the loan were accurate. She said USF didn't do any additional underwriting to verify Gateway's eligibility because the intent of the PPP was to quickly deploy funds to businesses during the pandemic.

Murray said the fact that the bankruptcy judge ordered USF to honor the loan that the SBA didn't want to guarantee because of Gateway's ineligibility meant the bank's "free will to make loans was taken away without its consent."

"There was really no meeting of the minds as to the intent of the bank to loan a PPP loan to a debtor," she said. "This debtor didn't comply with all of the rules and processes in order to obtain this loan, its application was incorrect."

Gateway filed its Chapter 11 petition in May 2019, reporting about $22 million in assets, $10.6 million in secured creditors debt and about $4 million in unsecured debt, as shown in bankruptcy court filings. Its 50 full-time employees had been working for half pay during the pandemic, the business reported to the court.

The bankruptcy court in June said as long as Gateway meets all requirements of the PPP, other than its Chapter 11 status, then its $527,710 loan is eligible for loan forgiveness and the SBA's guarantee. Judge Williamson then entered a preliminary injunction, enjoining the SBA from enforcing its rule disqualifying Chapter 11 debtors from the loan program.

Circuit Judges Robin S. Rosenbaum, R. Lanier Anderson III and Ed Carnes sat on the panel for the Eleventh Circuit.

USF is represented by Megan Wilson Murray and Adam M. Gilbert of Underwood Murray PA.

The SBA is represented by Joshua M. Salzman and Lindsey Powell of the DOJ's Civil Appellate Division.

Gateway is represented by Maury L. Udell and Thomas G. Zeichman of Beighley Myrick Udell & Lynne PA.

The case is USF Federal Credit Union et al. v. Gateway Radiology Consultants PA, case number 20-13462, in the U.S. Court of Appeals for the Eleventh Circuit.

--Editing by Gemma Horowitz.

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