In response to the COVID-19 pandemic, Congress enacted a Paycheck Protection Program (“PPP”) under which businesses adversely impacted by the pandemic may obtain loans from the Small Business Administration (“SBA”) and use the proceeds to pay payroll and certain other operating expenses.  If the businesses use the loan proceeds for approved purposes and satisfy certain other criteria for retaining employees, the loans are forgiven.  If the loans are not forgiven, they must be repaid, albeit at a favorable interest rate.

Businesses so adversely affected by COVID-19 that they have resorted to filing for bankruptcy, however, have been shut out of the PPP.  Regulations adopted by the SBA provide that,  “[i]f [an] applicant . . . is the debtor in a bankruptcy proceeding, . . . th[at] applicant is ineligible to receive a PPP loan.”  Throughout the country, businesses in bankruptcy have sued the SBA in bankruptcy court seeking to compel the SBA to make PPP loans to them.  The suits are based on the theory that the SBA regulation violates Section 525 of the Bankruptcy Code.  That section provides that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title… solely because such bankrupt or debtor is or has been a debtor under this title.”

The SBA has defended such suits on two theories.  First, the SBA has argued that bankruptcy courts lack jurisdiction to order it to make PPP loans because of the provisions of 15 U.S.C. § 634(b)(1).  That section provides that “no…injunction…shall be issued against the [SBA] Administrator or his property.”  Second, the SBA has argued that PPP loans are not necessarily “grants” and are not being denied to businesses in bankruptcy “solely” because they are in bankruptcy, but because the SBA will not be able to collect the loans if the borrowers do not satisfy the requirements for forgiveness of the loans.

Results at the bankruptcy court level have been mixed.  Some bankruptcy courts have held that 15 U.S.C. § 634(b)(1) only prohibits injunctions against the SBA if the SBA is following properly adopted regulations and that a regulation that violates Bankruptcy Code Section 525 is not properly adopted.  Others have accepted one or both of the SBA’s arguments.

On June 22, the United States Court of Appeals for the Fifth Circuit became the first U.S. Court of Appeals to address the issue.  In a three page opinion in Hidalgo County Emergency Service Foundation v. SBA, the Fifth Circuit reversed an injunction entered by a Texas bankruptcy court directing the SBA to make a PPP loan to a debtor on the grounds that “well established Fifth Circuit law” made it clear that courts do not have jurisdiction to enjoin the SBA.  Because of that well-established law, the Court said, “The issue at hand is not the validity or wisdom of the PPP regulations and related statutes.”  Whether the regulations violated the Bankruptcy Code or not, the bankruptcy court had no power to do anything about it.

Although one might question the proposition the one federal statute can bar a suit to prevent violation of another federal statute when there is no indication that Congress intended to either one to be more important that the other, the Fifth Circuit’s opinion regarding the effect of 15 U.S.C. § 634(b)(1) on the power of a court to enjoin the SBA is consistent with decisions of other Circuit Courts of Appeal outside of the PPP loan context.    The Fifth Circuit’s decision in Hidalgo County Emergency Service Foundation will most likely put an end to the controversy as to whether the SBA can deny PPP loans to borrowers in bankruptcy.