The Fresh Start Paradox: Economic Disaster Relief Available to Title 11 Debtors

• Publication year: 2023

The Fresh Start Paradox: Economic Disaster Relief Available to Title 11 Debtors

Kellsie Davis Ruane

THE FRESH START PARADOX: ECONOMIC DISASTER RELIEF AVAILABLE TO TITLE 11 DEBTORS ABSTRACT

The Small Business Administration ("SBA") has been providing disaster relief in the form of Economic Injury Disaster Loans ("EIDLs") since its inception in 1953. In the context of the COVID-19 pandemic, the CARES Act charged the SBA with issuing forgivable loans through the Paycheck Protection Program ("PPP") to small businesses which would otherwise face permanent closure. Though the CARES Act did not specifically grant the SBA authority to do so, the SBA interpreted its powers to include the ability to set requirements for loan approval which were not laid out in the Act itself. Specifically, the SBA promulgated a rule indicating that loan applicants presently involved in a bankruptcy petition were ineligible for PPP loans. This rule has become the subject of extensive litigation and courts have been forced to answer the question of whether the SBA's conduct violates 11 U.S.C. § 525(a), which prohibits discrimination in the award of certain government programs by governmental entities. Some courts have found the SBA to have violated this provision, while others have declined to rule against the SBA. Among the reasons cited for finding for the SBA is the argument that the Chevron Doctrine constrains the judiciary's ability to scrutinize the actions of the agency. The result of this judicial split is an uneven application of bankruptcy law and a violation of the Code's overall purpose.

This Comment first discusses the history of PPP loans and Economic Injury Disaster Loans generally. Next, this Comment surveys the statutory landscape of section 525(a) and the existing case law arising from PPP loan litigation. The subsequent analysis considers the merits of various arguments presented both against and in favor of the SBA's position and explains why Economic Injury Disaster Loans, such as PPP loans, should be protected under section 525(a). Finally, this Comment concludes by looking at how resolution of the PPP loan dispute will impact small businesses in the future and by offering a legislative solution for closing the gaps in the Code's current provisions.

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TABLE OF CONTENTS

INTRODUCTION.......................................................................................... 155

I. BACKGROUND AND LEGAL DOCTRINES........................................... 157

A. The PPP as an Economic Injury Disaster Loan ....................... 158
B. PPP Denial Based on Bankruptcy Status ................................. 159
C. Competing Interpretations of 11 U.S.C. § 525(a)..................... 160

1. Using the Chevron Doctrine in Support of the SBA............ 161
2. Constructions of "Other Similar Grant" Favoring the SBA .................................................................................. 162
3. Arguments Opposing the SBA's Actions ............................ 163

II. ANALYSIS....................................................................................... 165

A. Impermissible Construction of the CARES Act ........................ 166

1. Prior Legislative History................................................... 166
2. Concurrent Legislative History ......................................... 167
3. Subsequent Legislative History .......................................... 168

B. Impermissible Violation of Section 525(a)............................... 169

1. Purpose of the Bankruptcy Code ....................................... 169
2. Purpose of Chapter 5 ........................................................ 171
3. Purpose of Section 525(a) ................................................. 171
4. Textual Context................................................................. 173
5. Violation of Section 525(a)................................................ 178

III. IMPLICATIONS BEYOND COVID-19................................................ 180

A. Economic Injury Disaster Loans ............................................. 181
B. Meaning of "Other Similar Grant" in Other Contexts............. 181
C. Disparate Impact on Minority Communities ............................ 183
D. Judicial Economy ................................................................... 184

IV. RECOMMENDATION........................................................................ 184

A. The Proposal .......................................................................... 184

1. Definitions ........................................................................ 185
2. Fluidity of Classification ................................................... 187
3. Disaster Loans .................................................................. 189

B. Room for Growth .................................................................... 191

CONCLUSION............................................................................................. 192

ADDENDUM - PROPOSED 11 U.S.C. § 525 .................................................. 194

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INTRODUCTION

In the small city of Grapevine, Texas, a business named Classic Chevrolet serves the community's automobile sale needs.¹ Though considered large for a town with only 50,000 residents,² Classic Chevrolet is a relatively small company, employing under 400 workers.³ Like so many other businesses of its size, Classic Chevrolet felt the impact of the COVID-19 pandemic soon after its appearance in the united States. Despite these financial pressures, the business owners upheld their commitment both to serving the Grapevine community and to providing employment to several hundred of its residents.⁴ unfortunately, Classic Chevrolet only had enough resources to maintain operations for two months;⁵ without external assistance, the company might have been forced to lay off a substantial portion of its employees or to cease operations temporarily or permanently. Receipt of a Paycheck Protection Program ("PPP") loan made the difference for Classic Chevrolet, as it had for approximately 76% of small businesses in the United States.⁶ Because of the disaster relief funds made available by the government, the employees of Classic Chevrolet were able to keep their jobs and continue providing for their families. While the PPP was life-changing for the Classic Chevrolet workforce, many small businesses were unable to reap the benefits of the program, not because of its terms, but because of the inappropriate rulemaking of the Small Business Administration ("SBA").

Since its inception in 1953, the SBA has provided assistance to individuals and businesses who are financially impacted by natural disasters.⁷ For instance, following Hurricanes Katrina, Rita, Wilma, Gustav, and Ike, the SBA approved 176,134 Disaster Assistance Loans, including $2,855,811 in Business Loans and

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$211,167 in Economic Injury Disaster Loans ("EIDLs").⁸ In the wake of the California wildfires, the SBA made available to business owners both property loss loans, and loans to aid small businesses in recovering from the fires' economic impact.⁹ EIDLs are available for businesses with fewer than 500 employees, including sole proprietorships, independent contractors, and individuals who are self-employed.¹⁰ Applications are evaluated using the applicant's credit score, credit history, and number of employees.¹¹ As of June 2020, approximately 1.43 million EIDLs had been approved by the SBA, with a large number of applications pouring in since the start of the COVID-19 pandemic.¹²

In an effort to mitigate the financial hardship resulting from the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 25, 2020.¹³ Section 1102 of the CARES Act establishes the Paycheck Protection Program ("PPP"), which provides funding to small businesses for certain expenses related to the operation of the business. Funds received from a PPP loan can be used to cover payroll distributions, mortgage or lease payments, and utility charges.¹⁴ To qualify for a PPP loan, section 1102(a)(2) of the Act provides that business owners must certify that: (1) the loan is required to maintain normal operation of business in the current economic climate; (2) funds will be used as outlined in section 1102; (3) they do not have an application pending for a duplicative PPP loan; and (4) they have not received a separate loan for the same purpose.¹⁵ Under section 1102, the SBA is authorized to grant PPP loans to eligible borrowers under the terms provided in the CARES Act.¹⁶ The SBA has used this decision-making authority

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to deny PPP loans to applicants who have a history of bankruptcy under Title 11 of the United States Code.¹⁷

In the wave of litigation that has ensued, the circuit courts remain split over whether the SBA's denial of PPP loans on this basis constitutes a violation of 11 U.S.C. § 525(a),¹⁸ which prohibits government agencies from making decisions regarding a "license, permit, charter, franchise, or other similar grant" solely based on an entity's status as a debtor under Title 11.¹⁹ Courts condemning the SBA's conduct have found PPP loans to be protected under the language of section 525 and have concluded that a denial of PPP loans based on the applicant's bankruptcy status is a violation of those provisions.²⁰ Those courts which have upheld the SBA's conduct have done so both by finding that PPP loans do not qualify for protection under section 525(a) and by determining that judicial review of SBA action is limited by the Chevron Doctrine.²¹ Because these courts contend their review of administrative actions is constrained by the Chevron Doctrine, legislative action is required to extend the protections of section 525(a) to government programs such as the PPP.

This Comment proceeds by analyzing in detail the legal framework of chapter 5's anti-discrimination...