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Wesley D. Ray (SBN 026351) [email protected] Philip R. Rudd (SBN 014026) [email protected] SACKS TIERNEY P.A. 4250 N. Drinkwater Blvd., 4th Floor Scottsdale, AZ 85251-3693 Telephone: 480.425.2600 Facsimile: 480.970.4610 Attorneys for Debtors
IN THE UNITED STATES BANKRUPTCY COURT
THE DISTRICT OF ARIZONA In re: ANDES INDUSTRIES, INC., PCT INTERNATIONAL, INC.,
Debtors.
Chapter 11 Proceedings Case No.: 2:19-bk-14585-PS Joint Administration With Case No. 2:19-bk-14586-PS Adv. No: 2:20-ap-00118-PS MOTION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION (Expedited Consideration Requested)
This filing applies to: Both Debtors X PCT International
___ Andes International
PCT INTERNATIONAL, INC., Plaintiff, v. JOVITA CARRANZA, IN HER CAPACITY AS ADMINISTRATOR FOR THE U.S. SMALL BUSINESS ADMINISTRATION, Defendant.
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PCT International, Inc. (“PCT” or “Plaintiff”), debtor and debtor-in-possession in the
above-captioned Chapter 11 proceeding, hereby requests that the Court issue a temporary
restraining order and preliminary injunction enjoining Defendant Jovita Carranza, in her
capacity as administrator for the U.S. Small Business Administration (“Defendant” or
“SBA”), from precluding (through rules or forms promulgated by the SBA) PCT from
participating in, and receiving funds pursuant to, the “Paycheck Protection Program”
implemented as part of the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748
(the “CARES Act”). This motion is supported by the accompanying Memorandum of Points
and Authorities and the Declaration of Douglas Drury in Support of Motion for Temporary
Restraining Order and Preliminary Injunction (“Drury Declaration”) submitted
contemporaneously herewith
MEMORANDUM OF POINTS AND AUTHORITIES
INTRODUCTION
Pursuant to the CARES Act, Congress and the President temporarily added a new
program entitled the “Paycheck Protection Program” to the SBA’s Section 7(a) Loan
Program (hereinafter referred to as the “PPP”). The pertinent portion of the CARES Act
relating to the PPP (i.e., Section 1102 of the CARES Act) is attached hereto as Exhibit “A.”
The PPP is intended to provide economic relief to small businesses nationwide who have
been adversely impacted under the Coronavirus Disease 2019 (“COVID-19”).
Among other things, the PPP provides that, so long as the funds disbursed to a small
business pursuant to the PPP are used for certain specified purposes, then the small business
will not have to repay the funds disbursed to it. Consequently, the PPP is “not a loan program
at all. It is a grant or support program.” See Opinion entered on May 1, 2020 (“New Mexico
Opinion”) in Roman Catholic Church of the Archdiocese of Sante Fe v. U.S. Small Business
Administration (Roman Catholic Church of the Archdiocese of Sante Fe), Case No. 18-13027
(Bankr. D.N.M. 2020) (“Roman Catholic Church Case”) at p. 10. A copy of the New Mexico
Opinion is attached hereto as Exhibit “B.”
There is nothing in the CARES Act that provides that Chapter 11 debtors-in-
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possession are disqualified from participating in the PPP. Nevertheless, in connection with
the administration of the PPP, Defendant issued Official Form 2483 entitled the Paycheck
Protection Program Borrower Application Form (the “PPP Application”) which requires
small business applicants for the PPP to state whether they are “presently involved in any
bankruptcy” (the “No Bankruptcy Requirement”) and, if they state that they are, then “the
loan will not be approved.” A copy of the PPP Application is attached hereto as Exhibit “C.”
Further, the SBA issued a Paycheck Protection Program Lender Application Form –
Paycheck Protection Program Loan Guaranty (“PPP Lender Application”) which states that
the PPP loan cannot be approved unless the applicant certifies that neither the applicant nor
any owner is presently involved in any bankruptcy. A copy of the PPP Lender Application
is attached hereto as Exhibit “D.”
On April 28, 2020, the SBA issued an interim final rule (the “April 28th Rule”). The
April 28th Rule purports to disqualify bankruptcy debtors from the PPP by stating:
Will I be approved for a PPP loan if my business is in bankruptcy?
No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. . . .The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk for an unauthorized use of funds or non-repayment of unforgiven loans. (emphasis added).
Defendant’s inclusion of the No Bankruptcy Requirement for participation in the
PPP—in the PPP Application, the PPP Lender Application, the April 28th Rule and in other
aspects of the administration of the PPP—is:
(a) “[A]rbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law” (5 U.S.C. § 706(2)(A));
(b) “[I]n excess of statutory jurisdiction, authority, or limitations, or short
of statutory right” (5 U.S.C. § 706(2)(A)); and
(c) Discriminatory against debtors in bankruptcy in violation of 11 U.S.C.
§ 525(a).
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Accordingly, Plaintiff seeks in this action against the SBA, pursuant to the
Administrative Procedure Act, 5 U.S.C. §§ 701 et seq. (the “APA”) and 11 U.S.C. §§ 105
and 525:
a. An order setting aside and vacating the SBA’s No Bankruptcy Requirement in
the PPP Application, the PPP Lender Application, the April 28th Rule, and any and all other
procedures, processes and/or documents relating to the PPP.
b. A declaratory judgment that the SBA’s imposition of the No Bankruptcy
Requirement in the implementation of the PPP is unlawful, discriminatory against
prospective borrowers who are debtors in bankruptcy, and beyond its statutory authority.
c. A writ of mandamus under 28 U.S.C. § 1361 to compel the SBA the remove
its disqualification of bankruptcy debtors as viable applicants from all PPP applications,
including the PPP Application.
d. An order enjoining the SBA, and anybody acting in concert with or at the
direction of the SBA from denying Plaintiff a loan under the PPP based on the Plaintiff’s
status as a chapter 11 debtor or based on the words “or presently in bankruptcy” on the PPP
Application or PPP Lender Application.
e. An order requiring the SBA to remove all references to Plaintiff’s status as
being involved in any bankruptcy from its PPP Application and from any PPP loan policies
and procedures, and PPP loan agreements relating to Plaintiff.
f. An order requiring the SBA to instruct all lending institutions administering
PPP loans to which Plaintiff has submitted a PPP Application that there is no exclusion from
the PPP loan program on account of Plaintiff’s involvement in this Bankruptcy Case.
g. An order providing that the Defendant will not authorize, guaranty, or disburse
funds appropriated for loans under the PPP without reserving sufficient funds or guaranty
authority within the scope of the most recent appropriations to fund the PPP to provide
Plaintiff with access to funds under the PPP if the Debtor is eligible to receive PPP funds
following the implementation of the foregoing declarations and injunctions.
h. An order authorizing Plaintiff to submit a PPP Application, or any other
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documents necessary for the processing of the PPP Application, to a participating lender of
its choosing with the words “or presently involved in any bankruptcy” stricken from the PPP
Application and without any reference to this Bankruptcy Case, and providing that any lender
shall consider such PPP Application and other documentation to be complete and accurate.
Plaintiff also seeks an award of its costs and attorneys’ fees against the United States
generally, or against the SBA specifically, pursuant to the Equal Access to Justice Act, 28
U.S.C. § 2412.
JURISDICTION AND VENUE
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§
157 and 1334(b) because it arises under 11 U.S.C. §§ 101 et seq. (the “Bankruptcy Code”)
and arises in a case under the Bankruptcy Code. Jurisdiction over this matter is also proper
pursuant to the judicial review provisions of the APA. This is a core matter pursuant to 28
U.S.C. § 157(b)(2)(A), (D), and (O). Defendant’s decision to exclude Plaintiff from the PPP
is core because it “goes to the very heart of case administration, as the funds were intended
by Congress to replace Plaintiff’s lost revenue caused by the government lockdowns” and
the COVID-19 pandemic. See New Mexico Order at p. 8. A proceeding to determine
whether a governmental unit, such as Defendant, has violated 11 U.S.C. § 525(a) is a core
matter.
In the event that any part of this action is determined not to be a core matter, Plaintiff
consents to the Court’s entry of a final judgment pursuant to 11 U.S.C. § 157(c). The Court
therefore has Constitutional authority to enter a final judgment on all issues raised in this
Complaint. Declaratory and injunctive relief is sought consistent with 5 U.S.C. § 706 and as
authorized in 28 U.S.C. § 2201 and 2202, and pursuant to Rule 65, FRCP, as incorporated
herein by Rule 7065, FRBP. Venue is proper in this district pursuant to 28 U.S.C. § 1409.
FACTUAL BACKGROUND
The Parties
Plaintiff is a debtor in the above-captioned Chapter 11 cases, and remains in
possession of its property, and is operating its business, as a debtor-in-possession pursuant
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to §§ 1107 and 1108 of the Bankruptcy Code. Defendant is Jovita Carranza in her capacity
as administrator for the U.S. Small Business Administration (the “SBA”). The SBA is an
independent agency of the United States government and can sue and be sued in any court
of general jurisdiction. See 11 U.S.C. § 634(b).
The Debtors, their Operations and the Negative Impact of COVID-19
On November 15, 2019 (the “Petition Date”), involuntary Chapter 7 bankruptcy
petitions were filed against PCT and its parent corporation, Andes Industries, Inc. (“Andes”
and, together with PCT, the “Debtors”), thereby commencing the above-captioned
bankruptcy cases. On December 2, 2019, the Debtors filed motions to voluntarily convert
their bankruptcy cases to cases under chapter 11 of the Bankruptcy Code. The Debtors’
motions to convert were granted and an order for relief was entered in these cases on
December 4, 2019. The Debtors are authorized to operate their business as debtors in
possession pursuant to Bankruptcy Code sections 1107 and 1108.
The Debtors have been in business for over twenty years. They provide equipment
and solutions to telecommunications providers for the “last mile” of signal transmission
between major trunk lines and end-users’ homes and businesses. The Debtors offer a
complete line of products, including many interrelated components such as cable, taps,
connectors, amplifiers, filters, and splitters.
Importantly, the Debtors have been designated as providers of an “essential”
telecommunications infrastructure service. Indeed, the United States Department of Justice
once filed suit to protect the Debtors’ competitive position in the Debtors’ market space and
documented Debtors’ role in maintaining price competition with a competitive impact
statement filed with the Court in that case. The Debtors’ products, many of which were
developed by the Debtors, are technologically sophisticated and are protected by over 150
patents.
The Debtors and their wholly owned subsidiaries are a worldwide organization with
manufacturing operations in Vietnam and China. PCT’s shareholder, Deltacom Electronics,
produces RF products and jacket cable, utilized by the Debtors, in Bulgaria. PCT has
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engineering and product management services in the United States and China, warehouses
in the United States (in California, Virginia, Arizona and Florida), Vietnam, the United
Kingdom, and the Netherlands, and sales and support teams in, among other areas, the United
States, Europe, Asia, Mexico, Central and South America.
The Debtors employ, directly or indirectly through their various subsidiaries, over
250 employees in 7 countries. The Debtors’ creditors hold over $60,000,000 in claims.
As the Debtors demonstrated in connection with their motion to extend exclusivity,
the Debtors’ operations were significantly adversely affected by the COVID-19 epidemic
and the resultant worldwide economic turmoil. For example, PCT operates an assembly
plant in China, a manufacturing and assembly plant in Vietnam, and works closely with a
key supplier in Bulgaria. All of these operations rely on parts produced from third party
suppliers located in China. Yet, according to news reports, following the initial outbreaks of
COVID-19 on or around January 23, 2020, approximately 760 million Chinese citizens were
placed on lockdown.1
The shutdown affected all industrial areas and all of PCT’s China-based material
suppliers. Manufacturing plants and supply chains throughout China were shut down,
leaving manufacturers who relied on Chinese made parts, like PCT and its competitors,
facing two debilitating concerns: A lack of raw materials and components needed for their
production lines and an enormous shortage of workers due to the lockdown.2 Suppliers and
shippers were not allowed to operate. Prior to re-opening in late February or early March,
each business was required to get a permit from the Chinese government and had to test and
record, daily, each employee’s temperature.
1 See e.g.,https://www.nytimes.com/2020/02/15/business/china-coronavirus-lockdown.html.
2 See e.g., https://www.nbcnews.com/business/business-news/idled-car-production-iphone-delays-china-s-factory-closures-mean-n1133966.
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PCT’s assembly plant in China shut down on January 20, 2020, initially to
accommodate the Chinese New Year or Spring Festival, and did not reopen until the end of
February, 2020, after having been closed for 40 days. Similarly, PCT’s supplier in Bulgaria
was closed for two weeks in mid-March due to COVID-19 concerns. Although PCT’s
Vietnam manufacturing plant has not been forced to close, it relied upon parts from China to
operate which were not being shipped.
At the time of the shutdowns, and as predicted in the Debtors’ projections, PCT had
sufficient orders from its customers in February and March to reach its projected sales goals
of $3 million per month. However, the shutdowns and the cessation of parts production and
delivery in China resulted in a slowdown to PCT’s ability to fulfill the orders for
approximately 60 days.
PCT’s top line sales for February and March were, consequently, negatively affected
and the sales projections were, temporarily, not achieved. Indeed, the shut down and
COVID-19 have had a deleterious effect on the Debtors’ business operations and the Debtors
are still working through the setbacks that have plagued them as a result of the COVID-19
outbreak.
The Debtors are currently formulating a plan of reorganization that will allow them
to continue providing their essential services to the world, and keeping hundreds of people
employed. However, the Debtors’ on-going viability is affected by the dramatic and
unexpected decrease in their revenue caused by COVID-19 and its aftermath.
The Debtors’ on-going viability and their ability to pay their employees, vendors and
pre-petition creditors is negatively affected without the relief afforded by the CARES Act,
particularly the PPP. PCT needs the PPP loan to shore up its finances and allow it to continue
to support the community as an essential provider of necessary telecommunications
infrastructure during the crisis.
The CARES Act and the PPP
Overview of the PPP and Eligibility Requirements of the CARES Act
In response to the economic catastrophe caused by the COVID-19 pandemic,
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Congress passed the CARES Act, which was signed into law on March 27, 2020. The PPP
is part of the CARES Act that extends the loan program under section 7(a), 15 U.S.C. § 636,
of the Small Business Act to any business with less than 500 employees who apply for funds
through any participating federally insured lending institution. See generally § 1102 of the
CARES Act. The PPP allows a qualified business to receive loans equal to 2.5 times their
average monthly payroll, up to $10 million. No collateral or personal guarantees are required
to receive a PPP loan. Neither the SBA nor lenders charge any fees for the PPP loan. The
CARES Act explicitly waives certain requirements under section 7(a) of the Small Business
Act, such as exhausting other credit options first, prepayment penalties, and personal
guarantee requirements for PPP loans.
PPP loans may be fully forgiven if the money is used for payroll and related expenses
(subject to certain caps), rent, utilities, and interest on debts incurred before February 15,
2020. Loaned money used for other purposes would need to be repaid, but at a low, fixed
interest rate, and payments would be deferred for up to a year.
The PPP has very few eligibility requirements under the CARES Act. Specifically,
an applicant must only:
a. Be a small business concern or any business concern, nonprofit
organization, veterans organization, or Tribal business concern described in section
31(b)(2)(C) of the Small Business Act;
b. Have fewer than 500 employees or, if applicable, the size standard in
number of employees established by the Administration for the industry in which the
business concern, nonprofit organization, veterans organization, or Tribal business
concern operates;
c. Have been in operation on February 15, 2020; and
d. Have had employees to whom the applicant pays salaries and payroll
taxes.
Plaintiff meets all eligibility requirements for a PPP loan under the CARES Act.
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Limited Availability of PPP Funds
The PPP was initially funded with $350 billion but, due to overwhelming demand,
that amount was quickly expended, and additional legislation has been passed to authorize
funding of at least an additional $320 billion. Upon information and belief the additional
PPP funds are very quickly being exhausted such that it is imperative that relief be granted
to PCT before all of the funds are depleted. Although things can change, political leaders
have indicated that there will not be further PPP funding after the current funds are exhausted.
There is No Prohibition Against Debtors in Bankruptcy Receiving a PPP Loan in the CARES Act
There is no statutory provision in either the CARES Act or the Small Business Act
that prohibits extending a PPP loan to a debtor and debtor in possession under Chapter 11 of
the Bankruptcy Code. Indeed, there is nothing in the CARES Act that requires an applicant
to show creditworthiness. Rather, “the CARES Act makes PPP money available regardless
of financial distress. Financial distress is presumed. Given the effect of the lockdown, many,
perhaps most, applicants would not be able to repay their PPP loans. They don’t have to,
because the ‘loans’ are really grants. Repayment is not a significant part of the program. That
is why Congress did not include creditworthiness as a requirement.” New Mexico Opinion
at p. 10.
The SBA’s Interim Rules Regarding the Administration of the PPP
On April 2, 2020, the SBA issued an interim final rule (the “First Interim Rule”)
providing guidance on, among other things, the eligibility requirements to receive a loan
under the PPP. The First Interim Rule adopts the ineligibility standards set forth in section
120.110, title 13 of the Code of Federal Regulations (“CFR 120.110”), as further described
in SBA's Standard Operating Procedure 50-10, Subpart B, Chapter 2 ("SOP 50-10"). See
First Interim Rule, 2(c) (“Businesses that are not eligible for PPP loans are identified in 13
CFR 120.110 and further described further in SBA's Standard Operating Procedure”). The
SOP 50-10 provides that a “Small Business Applicant” must, among other things: be an
operating business; be located in the United States; be small (as defined by the SBA); and
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demonstrate the need for the desired credit. See SOP 50-10, pg. 85. The SOP 50-10 also
provides that the businesses listed in CFR 120.110 are not eligible for an SBA loan.
Bankruptcy debtors are not the listed as an ineligible business in CFR 120.110. Nothing in
the SOP 50-10 makes the Plaintiff ineligible for a PPP loan.
On April 4, 2020, the SBA issued a supplemental interim final rule further providing
guidance on the PPP (the “Second Interim Rule”). Again, the Second Interim Rule does not
provide that bankruptcy debtors are ineligible for the PPP loan.
On April 28, 2020, the SBA issued another interim final rule (i.e., the April 28th Rule,
quoted above in the Introduction) which purports to disqualify bankruptcy debtors from the
PPP.
The PPP Application
To receive a disbursement under the PPP, a qualified business must submit a PPP
Application, using the PPP Application form created by the SBA on or about April 2, 2020,
with any federally insured participating lender. Even though neither the CARES Act nor the
SBA’s first three interim rules concerning the PPP, prior to the April 28th Rule, prohibits the
extension of a PPP loan to a Chapter 11 debtor-in-possession, the PPP Application asks if
“the Applicant … [is] presently involved in any bankruptcy.” See Question No. 1, PPP
Application, attached as hereto as Exhibit C.” The PPP Application states that “[i]f questions
(1) or (2) below are answered “Yes,” the loan will not be approved.” Id.
Plaintiff Applied for a PPP Loan and Was Rejected Solely Because it is a Debtor in Bankruptcy
Notwithstanding this prohibition in the PPP Application, PCT submitted a PPP
Application to its regular lender, Comerica Bank (“Comerica”) on April 14, 2020, and
answered “yes” to Question No. 1. Pursuant to its PPP Application, Plaintiff requested the
disbursement of PPP Funds to it in the amount of $847,535. A copy of PCT’s completed PPP
Application is attached hereto as Exhibit “E.”
The only reason PCT answered “yes” to Question #1 is because of this pending
Chapter 11 case. Indeed, neither PCT nor its owner are “presently suspended, debarred,
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proposed for debarment, declared ineligible, voluntarily excluded from participation in this
transaction by any Federal department or agency.” PCT meets all other requirements for
receipt of a PPP loan and Plaintiff is a business that Congress intended to benefit from the
PPP to alleviate some of its payroll difficulties.
Comerica rejected PCT’s PPP loan application. Comerica specifically informed PCT
that it rejected the PPP application because of PCT’s status as a Chapter 11 debtor-in-
possession. Upon information and belief, but for PCT’s status as a Chapter 11 debtor-in-
possession, Comerica would have made the PPP loan to PCT.
PCT has contacted several other banks regarding a PPP loan and has been informed
that, because PCT is a Chapter 11 debtor-in-possession, it is ineligible for a PPP loan, despite
the lack of any such disqualifying criteria in the CARES Act.
There are no administrative appeals or remedies available to Plaintiff to seek review
of Defendant’s decision to exclude Plaintiff from the PPP.
If approved, PCT would have used, and, if allowed to reapply for a PPP loan with the
bankruptcy exclusion removed, will use the funds to only pay items that qualify for
forgiveness, including its rent, utility, insurance, and full-time employees’ payroll costs.
These are all permissible uses under either under section 1102 or 15 U.S.C. § 636(a) that
allow use of loaned funds for “working capital.”
Plaintiff has the financial and accounting ability to follow all PPP rules and
requirements regarding the use of PPP funds to ensure that the “loan” will be forgiven
pursuant to the terms of the CARES Act. Moreover, Plaintiff will file a motion in the
Bankruptcy Court seeking entry of an order pursuant to Bankruptcy Code § 364(b)
authorizing Plaintiff to obtain post-petition financing on an unsecured basis (the “PPP DIP
Financing Motion”).
ANALYSIS
Because the SBA’s No Bankruptcy Requirement violates the APA and is unlawfully
discriminatory in violation of § 525 of the Bankruptcy Code, PCT is entitled to the
injunctions, articulated in the introduction above, that will allow PCT to participate in the
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PPP without the unlawful No Bankruptcy Requirement.
Basis for the Issuance of An Injunction
In the Ninth Circuit, a plaintiff seeking a temporary restraining order or preliminary
injunction “must establish that he is likely to succeed on the merits, that he is likely to suffer
irreparable harm in the absence of preliminary relief, that the balance of equities tips in his
favor, and that an injunction is in the public interest.” Am. Trucking Ass’ns, Inc. v. City of
Los Angeles, 559 F.3d 1046, 1052 (9th Cir. 2009) (quoting Winter v. Nat. Res. Def. Council,
555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008)).
The court may then supplement its preliminary injunction inquiry by considering
whether “the likelihood of success is such that ‘serious questions going to the merits were
raised and the balance of hardships tips sharply in [the requesting party’s] favor.’” Alliance
for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1132 (9th Cir. 2011) (quoting Clear Channel
Outdoor, Inc. v. City of L.A., 340 F.3d 810, 813 (9th Cir. 2003)).
Here, Plaintiff satisfies all four conditions for the issuance of an injunction.
Moreover, serious questions concerning the merits of Plaintiff’s claims against the SBA have
been raised and the balance of hardships tip overwhelmingly in Plaintiff’s favor.
Likelihood of Success on the Merits
It is highly likely that Plaintiff will succeed on the merits of its claims that the SBA
has violated the APA and § 525 of the Bankruptcy Code. Indeed, to date, at least four (4)
other Bankruptcy Courts that have addressed an injunction against the SBA on the same or
similar grounds have issued injunctions against the SBA. See e.g. Hidalgo County
Emergency Service Foundation v. Jovita Carranza, in her capacity as administrator for the
U.S. Small Business Administration (In re Hidalgo County Emergency Service Foundation),
Case No. 19-20497, Adv. Proc. No. 20-2006 (Bankr. S.D. Tex. 2020) (a copy of the Court’s
TRO and a copy of the transcript regarding the hearing on the TRO are attached hereto as
Exhibits “F” and “G”); the Roman Catholic Church Case (a copy of the New Mexico Opinion
attached hereto as Exhibit “B”); Calais Regional Hospital v. Jovita Carranza, in her capacity
as administrator for the U.S. Small Business Administration (In re Calais Regional
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Hospital), Case No. 19-10486, Adv. Proc. No. 20-1006 (Bankr. D. Me. 2020) (a copy of the
court’s TRO is attached hereto as Exhibit “H”); Penobscott Valley Hospital v. Jovita
Carranza, in her capacity as administrator for the U.S. Small Business Administration (In re
Penobscott Valley Hospital), Case No. 19-10034, Adv. Proc. No. 20-1005 (Bankr. D. Me.
2020) (a copy of the court’s TRO is attached hereto as Exhibit “I”); Springfield Hospital,
Inc. v. Jovita Carranza, in her capacity as administrator for the U.S. Small Business
Administration (In re Springfield Hospital, Inc.), Case No. 19-10283, Adv. Proc. No. 20-
01003 (Bankr. D. Vt. 2020) (copies of the Court’s Memorandum Decision and TRO are
attached hereto as Exhibits “J” and “K”).
The SBA’s Violation of § 706(2)(A) of the APA
Under § 706(2)(A) of the APA, an agency action must be upheld unless it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. §
706(2)(A). In the Ninth Circuit, a “rule is arbitrary and capricious ‘if the agency has relied
on factors which Congress has not intended it to consider, entirely failed to consider an
important aspect of the problem, offered an explanation for its decision that runs counter to
the evidence before the agency, or is so implausible that it could not be ascribed to a
difference in view or the product of agency expertise.’” Providence Yakima Med. Ctr. v.
Sebelius, 611 F.3d 1181, 1190 (9th Cir. 2010) (quoting Motor Vehicle Mfrs. Ass’n of the
U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443
(1983)).
Generally, “the touchstone of ‘arbitrary and capricious’ review under the APA is
‘reasoned decision-making.’” Altera Corp. & Subsidiaries v. Comm’r of Internal Revenue,
926 F.3d 1061, 1080 (9th Cir. 2019) (quoting Motor Vehicle Mfrs. Ass’n, 463 U.S. at 52, 103
S.Ct. 2856). An agency action will be upheld if the agency has “examine[d] the relevant data
and articulate[d] a satisfactory explanation for its action including a ‘rational connection
between the facts found and the choice made.’” Id. (quoting Motor Vehicle Mfrs. Ass’n, 463
U.S. at 43, 103 S.Ct. 2856 (internal quotation omitted)).
Although in deciding whether an agency’s action was arbitrary and capricious, courts
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should be “highly deferential” to the agency’s decision” [Providence Yakima, 611 F.3d at
1190], an agency cannot engage in post-hoc rationalizations. Western Watersheds Project v.
Zinke, ---F. Supp.3d---, 2020 WL 959242 (D. Idaho 2020). Indeed, “[t]he grounds upon
which an administrative order must be judged are those upon which the record discloses that
its action was based.” Id. (quoting Sec. & Exch. Comm’n v. Chenery Corp., 318 U.S. 80, 87,
63 S.Ct. 454, 87 L.Ed. 626 (1943). Moreover “[d]espite this forgiving standard, there is no
room for a court to ‘rubber-stamp’ an administrative decision. There must be ‘a substantive
inquiry[,] ... a thorough, probing, in-depth review’ of the agency action. Id. (quoting Native
Ecosystems Council v. U.S. Forest Serv., 418 F.3d 953, 960 (9th Cir. 2005) (citing Citizens
to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415-16, 91 S.Ct. 814, 28 L.Ed.2d 136
(1971)).
Here, as articulated by the Court in the New Mexico Opinion and by the Hidalgo
Court in its discussion concerning the TRO in that case, the SBA’s decision to exclude
debtors in bankruptcy from participating in the PPP is arbitrary and capricious.
First, the No Bankruptcy Rule is nowhere to be found in the CARES Act and, rather,
is completely opposite of the articulated intention and purpose of the CARES Act. Indeed,
the eligibility requirements under the CARES Act do not include creditworthiness. Rather,
the CARES Act makes PPP funds available regardless of an applicant’s financial distress.
Indeed, “[f]inancial distress is presumed.” New Mexico Opinion at p. 10. Moreover, given
the adverse economic consequences of the COVID-190 outbreak, “many, perhaps most,
applicants would not be able to repay their PPP loans. They don’t have to, because the ‘loans’
are really grants. Repayment is not a significant part of the program. That is why Congress
did not include creditworthiness as a requirement.” Id. See also, the Hidalgo TRO hearing
transcript, attached hereto as Exhibit “G,” at pp. 29-30. Additionally, the structure of the
PPP demonstrates that an applicant’s financial ability to repay the loan should be, and is,
irrelevant. Again, the New Mexico Opinion is instructive: “The structure of the PPP is
simple: PPP funds must be used for payroll, mortgage interest, rent, or utilities. If the funds
are used as required, they do not have to be repaid. Given the obvious purpose of the PPP, it
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was arbitrary and capricious for Defendant to engraft a creditworthiness test where none
belonged.” New Mexico Opinion at pp. 10-11.
Second, the test itself—are you “presently involved in any bankruptcy”—is arbitrary
and capricious. As noted by the Court in Hidalgo, this phrase could mean that a party who
is “involved” in a bankruptcy case as a creditor would be required to check the No
Bankruptcy Requirement box on the PPP Application and, therefore, would not be able to
participate in the PPP. See e.g. the Hidalgo TRO hearing transcript, attached hereto as
Exhibit “G,” at p. 10. Also, as the New Mexico Opinion points out, there are many more
accurate criteria for determining an applicant’s ability to repay a PPP loan—e.g., balance
sheet insolvency, credit score, etc. Being “involved” in a bankruptcy is meaningless. This
is particularly true when the CARES Act has no underwriting requirements for a PPP loan
and the PPP “loan” may be forgiven.
Third, the SBA’s only justification for the No Bankruptcy Requirement is that
bankruptcy debtors “present an unacceptably high risk for an unauthorized use of funds or
non-repayment of unforgiven loans.” As both the Roman Catholic Case court and the
Hidalgo court recognized, this justification is “frivolous” and arbitrary and capricious.
Indeed, given the oversight that debtors-in-possession must endure—from the Court, the
United States Trustee and the constituents of the bankruptcy case—the “risk” of an
unauthorized use of funds is extremely low for a debtor in bankruptcy. Also, the PPP loan,
to the extent it will not be forgiven, is given administrative priority pursuant to § 364 of the
Bankruptcy Code. Therefore, the prospects of being repaid by a debtor in bankruptcy are
greater than a distressed, non-debtor applicant.
Finally, other provisions of the CARES Act explicitly exclude participation by debtors
in bankruptcy. See e.g. § 4003 of the CARES Act. This demonstrates that Congress knew
how to exclude debtors in bankruptcy from certain benefits of the CARES Act, but
specifically chose not to exclude them in the PPP.
Based on the foregoing, the Plaintiff has a high likelihood of success demonstrating
the SBA’s violation of § 706(2)(A) of the APA in its administration and implementation of
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the PPP.
The SBA’s Violation of § 706(2)(C) of the APA
In determining whether an agency’s action is “not in accordance with the law,” 5
U.S.C. § 706(2)(A), or “in excess of statutory jurisdiction, authority, or limitations, or short
of statutory right,” 5 U.S.C. § 706(2)(C), courts apply the framework for review established
in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81
L.Ed.2d 694 (1984). See East Bay Sanctuary Covenant v. Trump, 349 F. Supp. 3d 838, 855
(2018)
Chevron requires that the court consider “‘whether Congress has directly spoken to
the precise question at issue. If the intent of Congress is clear, that is the end of the matter.’
[citations omitted]. In other words, the Court asks ‘whether, ‘applying the normal tools of
statutory construction,’ the statute is ambiguous.’ [citations omitted] Second, ‘if the statute
is silent or ambiguous with respect to the specific issue, the question for the court is whether
the agency’s answer is based on a permissible construction of the statute.’” Id. at 855-856
(citations omitted).
Here, the CARES Act directly, explicitly and unequivocally addresses the eligibility
requirements for the PPP. See § 1102 of the CARES Act. Those requirements do not include,
or even contemplate, the SBA’s No Bankruptcy Requirement. To the contrary, as discussed
above, the No Bankruptcy Requirement is directly contrary to the purpose of the PPP as
articulated in the CARES Act. Also, as mentioned above, Congress knew how to exclude
debtors in bankruptcy from the benefits of the CARES Act (see § 4003) but chose not to with
respect to the PPP. Therefore, the first prong of the Chevron test is satisfied and the inquiry
is over—the SBA’s imposition of the No Bankruptcy Requirement is not in accordance with
the unambiguous provisions of the CARES Act, violates of § 706(2)(C) of the APA.
The SBA’s Violation of § 525 of the Bankruptcy Code
Section 525(a) of the Bankruptcy Code provides, in pertinent part, 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
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respect to such a grant 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 . . ., has been
insolvent before the commencement of the case under this title, or during the case but before
the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the
case under this title . . . .” The No Bankruptcy Rule improperly and unlawful discriminates
against PCT simply because of PCT’s status as a debtor in bankruptcy in violation of § 525.
As discussed above and as several courts have determined in addressing this issue, the
PPP is not a loan program; rather, it is a grant or support program. As the Court in the Roman
Catholic Church Case noted when it found that the SBA is in violation of § 525:
The target grant recipients are small businesses in financial distress. The PPP could only be offered by the government; private lenders do not give away money. PPP funds “are unobtainable from the private sector.” Stolz, 315 F.3d at 90. They also are essential to Plaintiff’s fresh start. Id. Of all the benefits a government can grant, free money might be the best of all. Denying Plaintiff access to PPP funds solely because it is a debtor violates § 525(a).
New Mexico Opinion at p. 14.
Similarly, in addressing the SBA’s violation of § 525, the Hidalgo court observed:
Practically speaking, this program isn't designed to be a commercial product; it is a support product. The only entity that would ever engage in this type of activity is the government because, again, it's a support for citizens. I can think of no greater example of the government performing its gatekeeping role as to who can engage in commerce and pursue certain livelihoods than this particular program; because if we didn't have this program, there would be no ambulance services, there would be no nail salons, there would be no convenience stores. Society would be in a very difficult (indisc.) so I do think the requirements of Section 525(a) are absolutely in play. I do think that the choice of the words in the form -- and, again, I made the example with Mr. Holzer, and I am bothered by the use of the words. I disagree with Mr. Holzer that, well, of course everybody knows what that means, it's simply if you're a debtor. Couldn't be further from the truth. Congress knew how to say we don't give these loans to debtors. They did it within the CARES Act itself. And then to have a form that simply says if an owner or a business is presently involved in a bankruptcy, I have zero idea what that means. It means if you have filed a proof of claim in the General Motors bankruptcy umpteen years ago and haven't yet received a final distribution on your claim, you have to check that box "no." That's silly. It's even sillier in light of the purpose of this program.
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I also have found but I've not been cited to any legitimate basis for including that language in the form. I take umbrage of the fact that if I look at question one and I look at the list and I think just rules of normal construction, and I realize that this is not a statute but it's a form that is derived from a statute, it says if a business or owner is presently suspended, debarred, proposed to be debarred declared ineligible, voluntarily excluded from participation in this transaction by any (indisc.) department or agency all conduct which society frowns upon, involves potentially wrongful acts, involves potentially criminal conduct. And then as an add-on, it says: "Or presently involved in any bankruptcy." Plain meaning: as a creditor, as a landlord, as a partner in another business, as a shareholder in another business. It's entirely inappropriate that those words were added into that form in that list in that manner. And I see no authority anywhere for including those words in that form. It serves no purpose. I do find that by including the words "or presently involved in any bankruptcy," they are intended to be discriminatory. They are intended to be discriminatory toward debtors for reasons offered that somehow we lose control of the money, again I find to be completely frivolous. I cannot imagine anything less controlling than to simply give out money with no underwriting, with no oversight, and then complain that if I have a Federal judge who makes sure that the debtor complies with the law, ensures that the debtors file monthly operating reports, ensure that copies of bank statements are filed on the docket every month, that they somehow lost control. I simply don't buy it. I find the arguments to lack any good faith.
Transcript of TRO hearing in Hidalgo, attached hereto as Exhibit “G,” at pp. 30-31.
Based on the foregoing, the Plaintiff has a high likelihood of success demonstrating
the SBA’s violation of § 525 of the Bankruptcy Code.
Irreparable Harm
The Court is well aware of the adverse impact that the COVID-19 pandemic and the
resultant economic upheaval has had on PCT’s operations and sales. While PCT’s sales are
improving, it is still reeling from the reduced sales in the first months of this case due to the
pandemic. PPP funds will help PCT to meet its future goals, although its March and April
goals were affected by the recent revenue shortfalls. In the absence of PPP funding, PCT
may be forced to lay off additional employees. Due to the nature of PCT’s business
operations, it is absolutely necessary for PCT to continue employing its workers and staff in
order to continue its essential telecommunications services. Indeed, the Debtor’s prospects
of reorganizing could be adversely affected if PCT is unable to participate in the PPP. Yet,
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because of the limited amount of funds available in the PPP, and the “first-come, first-served”
nature of the PPP disbursements, the PPP funds may be depleted before a loan to PCT is
approved. PCT would then lose out on a PPP benefits, simply because of its status as a debtor
in bankruptcy, if the relief requested herein is not granted expeditiously. Thus, PCT will be
irreparable harmed if an injunction is not entered.
Balance of the Equities
The balance of the equities clearly weigh in favor of the issuance of an injunction.
Indeed, the SBA will not suffer any harm by virtue of an injunction requiring the SBA not to
discriminate against PCT and to process PCT’s PPP Application without considering this
bankruptcy case. See Memorandum Decision in the Springfield Hospital case, attached
hereto as Exhibit “J,” at p. 9. On the other hand, as discussed above, if PCT is not able to
participate in the PPP, then PCT may be required to reduce its already diminished employee
base and operations may suffer, thereby adversely affecting the Debtors’ ability to
reorganize.
Public Policy
Public policy also clearly favors the issuance of the requested injunctions. First, the
“public’s interest in successful reorganizations is significant.” In re PTI Holding Corp., 346
B.R. 820, 832 (Bankr. D. Nev. 2006). This is particularly true here with respect to PCT and
its provision of essential telecommunications services to the country and the world. Second,
the Congressional purpose of the CARES Act itself—to provide broad, nationwide relief to
entities, and their employees, that are suffering economically as a result of the COVID
pandemic and its aftermath—demonstrates that public policy favors the issuance of the
requested injunctions.
CONCLUSION
Based on the foregoing, the injunctions requested herein and in PCT’s Complaint
….
….
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should issue to allow PCT to participate in the PPP without the SBA’s discrimination.
DATED: May 5, 2020.
SACKS TIERNEY P.A. By: /s/ Phil R. Rudd
Wesley D. Ray Philip R. Rudd Attorneys for Debtors
COPY of the foregoing mailed (or served via electronic notification if indicated by an “*”) on May 5, 2020, to:
U.S. Small Business Administration Attn: Jovita Carranza, Administrator 409 3rd Street SW Washington, DC 20416 Office of the U.S. Attorney, District of Arizona Attn: Civil Process Clerk Two Renaissance Square 40 N. Central Avenue, Suite 1800 Phoenix, AZ 85004-4449
Office of the Attorney General of the United States of America Attn: Civil Process Clerk U.S. Department of Justice 950 Pennsylvania Avenue, N.W. Washington, DC 20530-0001
Joseph H. Hunt, Assistant Attorney General, Civil Division Ruth A. Harvey, Director Margaret M. Newell, Assistant Director Kevin P. VanLandingham*, Trial Attorney Email: [email protected] P.O. Box 875, Ben Franklin Station Washington, D.C. 20044-0875
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U.S. Trustee * [email protected] OFFICE OF THE U.S. TRUSTEE 230 North First Avenue, Ste. 204 Phoenix, AZ 85003-1725
Christopher J. Pattock * [email protected] Office of U.S. Attorney 230 N. First Ave., Ste. 204 Phoenix, AZ 85003-1706
By: /s/ Sandra E. Dousdebes
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