Fifth Circuit Holds that the SBA Cannot Be Enjoined from Denying Bankrupt Entities Access to PPP Funds

In a earlier article, entitled “New Mexico Court Holds that Bankrupt Entities are Eligible for the Paycheck Protection Program,” we described how some bankruptcy courts  confronted with exigent circumstances (including several within the 1st, 5th and 10th Circuits) have granted injunctive relief to debtors in bankruptcy who have been denied  loans under Payment Protection Program (“PPP“), which is part of the Coronavirus Aid, Relief and Economic Security Act, Pub. L. No. 116-136, 134 Stat. 281 (2020), simply because they were insolvent.  Several of the decisions reached by these bankruptcy courts are now making their way through the judicial system.

In Hidalgo County Emergency Service Foundation v. Jovita Carranza (In re Hidalgo County Emergency Service Foundation), No. 20-40368 (5th Cir. June 22, 2020), the Fifth Circuit recently reviewed one of the earlier decisions granting injunctive relief against the Small Business Administration (“SBA“), which is responsible for administering the PPP and has restricted eligibility under this program to solvent small businesses.

In a case involving a direct appeal from the bankruptcy court’s decision, the Fifth Circuit held that, pursuant to 15 U.S.C. § 634(b)(1) and well-established precedent, injunctive relief against the SBA is prohibited.  See Enplanar, Inc. v. Marsh, 11 F.3d 1284, 1290 n.6 (5th Cir. 1994) (emphasis added) (quotation marks omitted); see also Valley Constr. Co. v. Marsh, 714 F.2d 26, 29 (5th Cir. 1983) (“The Small Business Act, 15 U.S.C. § 634(b)(1), precludes injunctive relief against the SBA.”); Expedient Servs., Inc. v. Weaver, 614 F.2d 56, 58 (5th Cir. 1980) (“Section 634(b)(1) provides, inter alia, that no ‘injunction . . . or other similar process . . . shall be issued against the Administrator.’ . . . [A] suit praying solely for injunctive relief against the Administrator is barred by the language of § 634(b)(1). Since we have determined that the sole relief prayed for in the instant case was injunctive in nature, the suit should have been dismissed.”).  Thus, the Court reversed the bankruptcy court’s preliminary injunction mandating that the SBA handle Hidalgo County’s (debtor’s) PPP application without consideration of its ongoing bankruptcy.

While Hidalgo County argued that the Court should create an exception “under the extreme facts and highly compressed time frame presented in this case,” the Court found that under its rule of orderliness it was bound by Circuit precedent.  See Teague v. City of Flower mound, 179 F.3d 377, 383 (5th Cir. 1999).  Thus, the Court did not accept the invitation by the debtor to revisit its prior precedent or create an exception to its prior precedent.

But, the Fifth Circuit also did not opine on the rationale for the SBA’s regulations restricting eligibility to PPP funds.  According to the Fifth Circuit:

The issue at hand is not the validity or wisdom of the PPP regulations and related statutes, but the ability of a court to enjoin the [SBA] Administrator, whether in regard to the PPP or any other circumstance. Because, under well-established Fifth Circuit law, the bankruptcy court exceeded its authority when it issued an injunction against the SBA Administrator, we VACATE its preliminary injunction.

Takeaway–the decision in Hidalgo County certainly appears to shut the door on debtors in the Fifth Circuit from seeking to enjoin the SBA from enforcing their PPP regulations, which several bankruptcy courts have previously reasoned to be unfounded and discriminatory.  Whether other Circuit Courts reach the same decision remains to be seen.  But, whether this issue ever reaches the Supreme Court based on a Circuit-split is questionable, because the purpose behind the PPP funds was to provide timely relief to companies in great need during extreme circumstances.  Six months or years later (when an appeal to SCOTUS is actually ripe), the small business debtors litigating these issues–assuming they survive–will likely not have the same pressing issues facing their company and thus little incentive to keep the debate about the restrictive PPP regulations alive.

Partner at FisherBroyles, LLP