avril 08 2022

Opinion of Interest – Springfield Hospital, Inc. v. Guzman: Second Circuit Upholds Federal Government’s Ability to Deny PPP Loans to Bankrupt Companies

Share

Recently, the Second Circuit became the first federal circuit court to rule that the federal government could deny a Paycheck Protection Program (“PPP”) loan to a debtor in bankruptcy solely because of an applicant’s bankruptcy status.[1] Prior to the Second Circuit’s decision in Springfield Hospital, Inc. v. Guzman, multiple lower federal courts were divided on the issue, although the majority of those courts reached the same conclusion as the Second Circuit.

When Congress enacted the Coronavirus, Aid, Relief and Economic Security Act, known as the CARES Act, they established the PPP loan program, a temporary program that provided small businesses with potentially forgivable loans to be used for payroll and other operating expenses in order to keep their workers employed during COVID-related shutdowns. The Small Business Administration (the “SBA”) was responsible for administering the program. The SBA automatically denied PPP loans to any applicant who was a debtor in bankruptcy, reasoning that “the Administrator, in consultation with the Secretary [of the Treasury], determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans.”[2]

Springfield Hospital in Springfield, Vermont, commenced voluntary chapter 11 bankruptcy proceedings in June 2019. The COVID-19 pandemic significantly impacted the hospital’s revenue streams when the majority of its outpatient and non-essential medical procedures were cancelled or postponed pursuant to federal and state shutdown orders. The hospital sought relief through bankruptcy, and also applied for PPP loans, but because it was in bankruptcy at the time of its application, the hospital’s PPP loan application was denied. The hospital challenged that denial in bankruptcy court, arguing that it violated Section 525(a) of the Bankruptcy Code, which prohibits the government from denying a grant to an applicant simply because it is in bankruptcy. The bankruptcy court agreed, and found that the PPP loan was, in substance, a grant to help entities in financial distress, relying in part on the PPP loan’s potential forgiveness and lack of underwriting. The government appealed.

The issue before the Second Circuit was whether the PPP loan was a “grant” under Section 525(a). Section 525(a) of the Bankruptcy Code is an important protection for debtors in bankruptcy, and provides, in part, that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to…a person that is or has been a debtor under this title…solely because such … debtor is or has been a debtor under this title…”[3]  Ultimately, the Second Circuit determined that the PPP loan was not a “grant” under Section 525(a) and reversed the bankruptcy court’s decision.

The Second Circuit pointed to the fact that Congress chose to characterize the PPP loans as “loans” in the CARES Act, noting that the word “loan” appears at least 75 times in the Act. Further, the court noted that PPP loans share common “loan” features, including a set interest rate, maturity date, refinancing terms, and a deferral mechanism. While PPP loans could be forgiven, the court noted that forgiveness was not guaranteed.  Instead, a PPP borrower had to apply, and be approved, for forgiveness. In the court’s reasoning, the fact that a loan has a forgiveness feature does not change such loan into a grant: “A forgiveness option, favorable as it is, cannot alter the structure of what a loan forgiveness program fundamentally is—namely a program to forgive loans.”

Finally, the Second Circuit rejected the bankruptcy court’s reliance on Stolz, a prior Second Circuit decision.[4] In Stoltz, the Second Circuit found that based on Section 525(a), public housing leases cannot be denied because of the applicant’s bankruptcy status because public housing leases are “property interests unobtainable from the private sector and essential to a debtor’s fresh start.”[5]  The Second Circuit noted that the PPP loans were distinguishable from public housing leases because a debtor could still seek traditional loans from a bank or receive other governmental support grants (which Springfield Hospital did), even if the debtor was denied a PPP loan. As a result, the PPP loans, unlike the public housing leases in Stolz, were not essential to a debtor’s fresh start.

While the PPP loan program ended in May 31, 2021, Springfield Hospital provides insight as to how government relief programs in the future may be interpreted by courts, including the importance and legal relevance of the distinction between grant and loan programs (even loan programs with generous forgiveness provisions).

[1] Springfield Hospital Inc. v. Guzman, No. 20-3902 (2d Cir. Mar. 16, 2022).

[2] Id. at 44.

[3] 11 U.S.C. § 525(a).

[4] Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80 (2d Cir. 2002).

[5] Id. at 90.

Compétences et Secteurs liés

Domaines de compétences

Stay Up To Date With Our Insights

See how we use a multidisciplinary, integrated approach to meet our clients' needs.
Subscribe