Opinion
19-10034 19-10486 Adversary 20-1005 19-10486
03-11-2021
In re: PENOBSCOT VALLEY HOSPITAL, Debtor. v. TAMI PERRIELLO, in her capacity as Acting Administrator for the U.S. Small Business Administration, Defendants. PENOBSCOT VALLEY HOSPITAL, Plaintiff, In n re: CALAIS REGIONAL HOSPITAL, Debtor. CALAIS REGIONAL HOSPITAL, Plaintiff, v. TAMI PERRIELLO, in her capacity as Acting Administrator for the U.S. Small Business Administration, Defendants.
BRIAN M. BOYNTON Assistant Attorney General DONALD E. CLARK Acting United States Attorney JAMES D. CONCANNON Assistant United States Attorney RUTH A. HARVEY, MARGARET M. NEWELL, MARC S. SACKS, DOMINIQUE V. SINESI, ERIC SCHMELZER Commercial Litigation Branch Civil Division United States Department of Justice ATTORNEYS FOR THE UNITED STATES
Chapter 11
TABLE OF CONTENTS
TABLE OF AUTHORITIES ...................................................................................................... iii
INTRODUCTION ......................................................................................................................... 1
STATEMENT OF THE CASE .................................................................................................... 1
A. Statutory & Regulatory Background .................................................................................... 1
1. The Small Business Administration ...................................................................................... 1
2. The CARES Act ...................................................................................................................... 4
3. PPP Lending Under The CARES Act ................................................................................... 5
4. The Consolidated Appropriations Act, 2021 ........................................................................ 7
B. Facts & Procedural History ................................................................................................... 9
1. The Adversarial Proceeding ................................................................................................... 9
2. The District Court's Review .................................................................................................. 9
3. The Recommitted Proceedings ............................................................................................ 10
STANDARD OF REVIEW ........................................................................................................ 12
ARGUMENT ............................................................................................................................... 12
I. The Bankruptcy Court Properly Held That The Miller Declaration Is Consistent With An Earlier Declaration Prepared By Mr. Miller And The Previously Established Administrative Record. . ..................................................... 12
A. The Bankruptcy Court Is Correct That No Discrepancy Exists Between The Declarations Of Mr. Miller. . ................................................................................................ 12
B. The Miller Declaration Is A Permissible Explanation of Agency Action. . ...................... 15
II. The Bankruptcy Court Properly Held That The SBA's Bankruptcy Exclusion Rule Comports With 5 U.S.C. § 706(2)(A) Of The APA As Interpreted By State Farm. ........................................................................................... 20
A. The Bankruptcy Court Is Correct That The SBA Permissibly Adopted A Reasonable Policy To Satisfy The "Sound Value" Requirement In An Administrable Manner ....... 21
B. Plaintiffs Do Not Meet Any Of The Factors Identified In State Farm For A Finding Of Arbitrary Or Capricious. ... 28
III. The Bankruptcy Court Properly Held That The SBA's Bankruptcy Exclusion Rule Satisfies Chevron's Step Two.... 33
A. The Bankruptcy Court Is Correct That The SBA's Bankruptcy Exclusion Rule Is Reasonable........................... 33
B. Congress's Recent Passage Of The 2021 CAA Confirms The Bankruptcy Court's Holding And Forecloses Plaintiffs' Arguments. .. ............................................................... 34
C. Plaintiffs' Objections Are Inappropriate Under Chevron's Step Two. . .......................... 36
CONCLUSION ........................................................................................................................... 39
TABLE OF AUTHORITIES
Cases
Andrus v. Glover Constr. Co., 446 U.S. 608 (1980) .................................................................................................................. 35
Barnhart v. Peabody, 537 U.S. 149 (2003) .................................................................................................................. 34
Bell v. New Jersey, 461 U.S. 773 (1983) .................................................................................................................. 35
Brewer v. Madigan, 945 F.2d 449 (1st Cir. 1991) ..................................................................................................... 30
Brown v. Sec'y of HHS, 46 F.3d 102 (1st Cir. 1995) ................................................................................................. 20, 25
California v. Azar, 950 F.3d 1067 (9th Cir. 2020) .................................................................................................. 32
Chevron, U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 842 (1984) ........................................................................................................... passim
City of Taunton v. U.S. EPA, 895 F.3d 120 (1st Cir. 2018) ..................................................................................................... 21
Cont'l Cas. Co. v. United States, 314 U.S. 527 (1942) .................................................................................................................. 35
Cousins v. Sec'y of the U.S. Dep't of Transp., 857 F.2d 37 (1st Cir. 1988) ....................................................................................................... 20
Defy Ventures, Inc. v. SBA, 469 F.Supp.3d 459 (D. Md. 2020) .......................................................................................... 37
Deja Vu-San Francisco LLC v. SBA, Case No. 20-cv-03982-LB, 2020 WL 6260010 (N.D. Cal.. Sept. 11, 2020) .................................................37
DHS v. Regents of the Univ. of Cal., 140 S.Ct. 1891 (2020) ....................................................................................................... passim
Diocese of Rochester v. SBA,
466 F.Supp.3d 363 (W.D.N.Y. 2020) ..................................................................................... 37
FCC v. Nat'l Citizens Comm. for Broad., 436 U.S. 775 (1978) ............................................................................................................ 19, 24
FERC v. Elec. Power Supply Assoc., 136 S.Ct. 760 (2016) ................................................................................................................ 25
Gonzalez v. Sabol, 517 F.3d 29 (1st Cir. 2008) ....................................................................................................... 33
In re Alaska Urological Inst., P.C., No. 20-00086 (Bankr. D. Alaska) ............................................................................................. 31
In re Henry Anesthesia Assocs. LLC, No. 19-64159-LRC, 2020WL 3002124 (Bankr. N.D.Ga. June 4, 2020) ........................................................... 27, 37
In re Sheridan, 362 F.3d 96 (1st Cir. 2004) ....................................................................................................... 12
In re: Gateway Radiology Consultants P.A., 983 F.3d 1239 (11th Cir. 2020) ......................................................................................... passim
Judulang v. Holder, 565 U.S. 42 (2011) .................................................................................................................... 30
Me. Med. Ctr. v. Burwell, 841 F.3d 10 (1st Cir. 2016) ....................................................................................................... 33
Motor Vehicle Mfrs. Ass'n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ............................................................................................................. passim
Olivares v. TSA, 819 F.3d 454 (D.C. Cir. 2016) ...................................................................................... 13, 15, 18
Pharaohs, GC, Inc. v. SBA, --- F.3d ---, No. 20-2170-cv, 2021WL 821457 (2d Cir. Mar. 4, 2021) .................................................................................. 37
R.I. Higher Ed. Assistance Auth. v. Sec'y, U.S. Dep't of Ed., 929 F.2d 844 (1st Cir. 1991) ..................................................................................................... 20
SBA v. McClellan, 364 U.S. 446 (1960) .................................................................................................................... 2
Schuessler v. SBA, Adv. No. 20-02065-bhl, 2020 WL 2621186 (Bankr. E.D. Wis. May 22, 2020) ............................................ 22, 27, 29, 39
Tradeways, Ltd. v. U.S. Dep't of the Treasury,
Civil Action No. ELH-20-1324, 2020 WL 3447767 (D. Md. June 24, 2020) ................................................ passim
United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979) .................................................................................................................... 2
Statutes
11 U.S.C. § 1183-84 ....................................................................................................................... 8
11 U.S.C. § 1203-04 ....................................................................................................................... 8
11 U.S.C. § 1304 ............................................................................................................................. 8
11 U.S.C. § 364(b) ........................................................................................................................ 31
11 U.S.C. § 364(c)(1) .................................................................................................................... 31
11 U.S.C. § 364(d) ........................................................................................................................ 31
11 U.S.C. § 503 ............................................................................................................................. 31
11 U.S.C. § 507(a)(2) .................................................................................................................... 31
11 U.S.C. § 525(a) .................................................................................................................... 9, 36
11 U.S.C. § 541(a) ........................................................................................................................ 32
11 U.S.C. § 726 ............................................................................................................................. 32
11 U.S.C. § 726(b) ........................................................................................................................ 32
15 U.S.C. § 1942 ........................................................................................................................... 36
15 U.S.C. § 632(a)(2) ...................................................................................................................... 2
15 U.S.C. § 632(a)(2)(A) ................................................................................................................ 2
15 U.S.C. § 632(h) .......................................................................................................................... 3
15 U.S.C. § 633(d) .......................................................................................................................... 2
15 U.S.C. § 634(b)(6)-(7) ............................................................................................................... 2
15 U.S.C. § 636(a)(36) .................................................................................................................... 4
15 U.S.C. § 636(a)(36)(B) ........................................................................................................ 5, 21
15 U.S.C. § 636(a)(36)(D) .............................................................................................................. 5
15 U.S.C. § 636(a)(36)(F) ......................................................................................................... 4, 29
15 U.S.C. § 636(a)(36)(I) ................................................................................................................ 5
15 U.S.C. § 636(a)(6) ............................................................................................................. passim
15 U.S.C. § 9005(b) .................................................................................................................. 4, 29
15 U.S.C. § 9012 ................................................................................................................... 4, 5, 19
5 U.S.C. § 553(c) .......................................................................................................................... 19
5 U.S.C. § 706(2)(A) ........................................................................................................... 1, 20, 23
5 U.S.C. § 706(2)(C) ....................................................................................................................... 9
Administrative Procedure Act (APA), 5 U.S.C. § 701-706 ............................................................................................................ passim
Consolidated Appropriations Act, 2021 (2021 CAA), Pub. L. No. 116-260, 134 Stat. 1182 (2020) ..................................................................... passim
2021 CAA, § 304, 134 Stat. at 1993 ............................................................................................... 8
2021 CAA, § 316-318, 134 Stat. at 2011-15 .................................................................................. 7
2021 CAA, § 320(f)(1)(A), 134 Stat. at 2016 ................................................................................. 8
2021 CAA, § 320, 134 Stat. at 2015 ............................................................................................... 8
2021 CAA, § 323(d)(1)(A), 134 Stat. at 2019 ................................................................................ 7
Coronavirus Aid, Relief, & Economic Stimulus Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020) ....................................................................... passim
CARES Act § 1102(a)(2), 134 Stat. at 286 ..................................................................................... 7
CARES Act § 1102(a)(2), 134 Stat. at 288 ..................................................................................... 5
CARES Act § 1102(a)(2), 134 Stat. at 291 ..................................................................................... 5
CARES Act § 1102(a), 134 Stat. at 286 ......................................................................................... 4
CARES Act § 1102(b)(1), 134 Stat. at 293 .................................................................................... 7
CARES Act § 1102, 134 Stat. at 290 .............................................................................................. 4
CARES Act § 1105, 134 Stat. at 298 .............................................................................................. 4
CARES Act § 1114, 134 Stat. at 312 .............................................................................................. 4
CARES Act, § 1102(a)(2), 134 Stat. at 287 .................................................................................... 5
CARES Act, § 4003(b)(4), (c)(3)(D), 134 Stat. at 473-74 ........................................................... 36
Extending Authority for Commitments for the Paycheck Protection Program & Separating Amounts Authorized, Pub. L. No. 116-147, § 1, 134 Stat. 660 (2020) ......................................................................... 7
Garcia v. Sessions, 856 F.3d 27 (1st Cir. 2017) ....................................................................................................... 33
Paycheck Protection Program & Health Care Enhancement Act (CARES Act II), Pub. L. No. 116-139, § 101(a)(1), 134 Stat. 620 (2020) ............................................................ 7
Paycheck Protection Program Flexibility Act of 2020, Pub. L. No. 116-142, § 3, 134 Stat. 641, 641-42 (2020) ............................................................ 7
Small Business Act of 1953, Pub. L. No. 83-163, § 202, 67 Stat. 232 (1953) ......................................................................... 2
Small Business Act, Pub. L. No. 85-536, § 7(a), 72 Stat. 384 (1958) ................................................................. 2, 3, 4
Rules
30 Fed.Reg. 9353 (July 28, 1965) .................................................................................................. 2
85 Fed.Reg. at 20, 812, 20, 815 ..................................................................................................... 13
Business Loan Program Temporary Changes; Paycheck Protection Program (First Interim Final Rule), 85 Fed.Reg. 20, 811 (Apr. 15, 2020) ................................................................................. passim
Business Loan Program Temporary Changes; Paycheck Protection Program- Additional Eligibility Criteria & Requirements for Certain Pledges of Loans (Third Interim Final Rule), 85Fed. Reg. 21, 747 (April 20, 2020) ................................................................................. 28, 29
Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, 86Fed. Reg. 3692 (Jan. 14, 2021) ............................................................................................ 34
Business Loan Program Temporary Changes; Paycheck Protection Program- Requirements-Promissory Notes, Authorizations, Affiliations, & Eligibility (Fourth Interim Final Rule), 85 Fed.Reg. 23, 450 (Apr. 28, 2020) ................................................................................. passim
Fed. R. Bankr. P. 9033(b) ............................................................................................................. 12
Fed. R. Bankr. P. 9033(d) ............................................................................................................. 12
Regulations
13 C.F.R. § 120.10 .......................................................................................................................... 3
13 C.F.R. § 120.100(a)-(c) .............................................................................................................. 2
13 C.F.R. § 120.100(d) ................................................................................................................... 2
13 C.F.R. § 120.100(e) .................................................................................................................... 3
13 C.F.R. § 120.101 ........................................................................................................................ 3
13 C.F.R. § 120.150 ............................................................................................................... passim
13 C.F.R. pt. 121 ............................................................................................................................. 3
BRIAN M. BOYNTON Assistant Attorney General
DONALD E. CLARK Acting United States Attorney
JAMES D. CONCANNON Assistant United States Attorney
RUTH A. HARVEY, MARGARET M. NEWELL, MARC S. SACKS, DOMINIQUE V. SINESI, ERIC SCHMELZER Commercial Litigation Branch Civil Division United States Department of Justice ATTORNEYS FOR THE UNITED STATES
UNITED STATES' RESPONSE TO PLAINTIFFS' OBJECTIONS TO THE COURT'S ADDITIONAL PROPOSED FINDINGS & CONCLUSIONS
INTRODUCTION
Defendant in the above-styled matters, Tami Perriello, in her capacity as Acting Administrator for the U.S. Small Business Administration (SBA or Defendant), responds to Plaintiffs' Objections to the Court's Additional Proposed Findings and Conclusions. [Dkt. No. 110.] Most recently, the Bankruptcy Court held that the SBA's rule excluding bankrupt debtors from Paycheck Protection Program (PPP) loan guarantees is not arbitrary or capricious under the Administrative Procedure Act (APA), 5 U.S.C. § 706(2)(A), as interpreted by Motor Vehicle Manufacturers Ass'n of the U.S. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 43 (1983), and meets the second step of the two-step framework for judicial review of administrative rules established by Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 842-43 (1984). [Dkt. No. 100, pp. 17-31.] Plaintiffs object to the Bankruptcy Court's holdings and certain factual findings.
STATEMENT OF THE CASE
A. Statutory & Regulatory Background
1. The Small Business Administration
Because Congress authorized the SBA to administer the PPP, and established the PPP under a pre-existing SBA loan program, the backdrop against which the SBA functions and that loan program operates provides important context. In re: Gateway Radiology Consultants P.A., 983 F.3d 1239, 1247 (11th Cir. 2020). Congress created the SBA to "aid, counsel, assist, and protect insofar as is possible the interests of small-business concerns." SBA v. McClellan, 364 U.S. 446, 447 (1960) (quoting the Small Business Act of 1953, Pub. L. No. 83-163, § 202, 67 Stat. 232, 232 (1953)). In so doing, Congress gave the SBA "extraordinary broad powers to accomplish these important objectives, including that of lending money to small businesses whenever they could not get necessary loans on reasonable terms from private lenders." Id.
In In re: Gateway Radiology Consultants, P.A., the Eleventh Circuit is the first federal appellate court to decide the merits of the SBA's bankruptcy exclusion rule in the context of an APA challenge. The Eleventh Circuit held that the SBA neither exceeded its statutory authority under Chevron nor acted arbitrarily or capriciously under State Farm. 983 F.3d at 1255-64.
Congress likewise delegated to the SBA an array of rulemaking and other powers. Gateway, 983 F.3d at 1248. It empowered the SBA to "make such rules and regulations as [it] deems necessary to carry out the authority vested in" it, to "take any and all actions . . . when it determines such actions are necessary or desirable in making . . . or otherwise dealing with or realizing on loans," and to "establish general policies . . . which shall govern the granting and denial of applications for financial assistance." 15 U.S.C. §§ 633(d), 634(b)(6)-(7); see also 30 Fed.Reg. 9353, 9353 (July 28, 1965). Congress also authorized the SBA to "specify detailed definitions or standards by which a business concern may be determined to be a small business concern." 15 U.S.C. § 632(a)(2)(A).
The SBA supports small businesses primarily through "Section 7(a) loans," referring to the section of the Small Business Act authorizing their issuance. See Small Business Act, Pub. L. No. 85-536, § 7(a), 72 Stat. 384, 387-89 (1958) (amending the Small Business Act of 1953). The SBA may provide Section 7(a) loans through a variety of financing arrangements, id., but typically guarantees loans made by private lenders. United States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3 (1979). Ordinarily, an applicant seeking a general Section 7(a) business loan must be a for-profit business located in the United States, 13 C.F.R. § 120.100(a)-(c); meet the size standards for a "small business concern," 15 U.S.C. § 632(a)(2); 13 C.F.R. § 120.100(d); 13 C.F.R. pt. 121; and demonstrate that the desired credit is not available elsewhere on reasonable terms. 15 U.S.C. § 632(h); 13 C.F.R. §§ 120.100(e), 120.101.
Additionally, applicants "must be creditworthy." 13 C.F.R. § 120.150. This creditworthy requirement flows directly from Section 7(a) of the Small Business Act requiring that "[a]ll loans made under this subsection shall be of such sound value or so secured as reasonably to assure repayment." Small Business Act § 7(a), 72 Stat. at 398 (codified at 15 U.S.C. § 636(a)(6)). Under the Section 7(a) Loan Program, then, and "[i]n obedience of that statutory mandate, the SBA has long included a creditworthiness requirement in its lending criteria." Gateway, 983 F.3d at 1248. Specifically, any Section 7(a) loan applicant must undergo a creditworthiness inquiry that considers the "credit history of the applicant," the "[s]trength of the business," the "[a]bility to repay the loan with earnings from the business," and the "[p]otential for long-term success." 13 C.F.R. § 120.150. In the same vein, and "[c]onsistent with the soundness and repayment criteria, the SBA considers an applicant's bankruptcy status or history." Gateway, 983 F.3d at 1248. The SBA's official Section 7(a) Loan Application Form, SBA Form 1919, historically has asked applicants whether they have "ever filed for bankruptcy protection." [Dkt. No. 72-1, p. 7.] SBA Form 1919, and all other "official SBA notices and forms," are part of the SBA's "Loan Program Requirements" imposed upon lenders. 13 C.F.R. § 120.10. The SBA also allows lenders to consider "past bankruptcy" and in fact requires that each lender's credit analysis include a discussion of any "bankruptcy filings" by the loan applicant when the lender recommends approving a loan application. Standard Operating Procedure § 50 10 5(K), Lender & Dev. Co. Loan Programs 37, 180 (Apr. 1, 2010), https://go.usa.gov/xwN2J (SOP § 50 10 5(K)). See generally Gateway, 983 F.3d at 1248.
2. The CARES Act
The Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020) (codified at 15 U.S.C. § 636(a)(36)), signed into law on March 27, 2020, sought to ameliorate the effects of COVID-19. Business Loan Program Temporary Changes; Paycheck Protection Program (First Interim Final Rule), 85 Fed.Reg. 20, 811, 20, 811 (Apr. 15, 2020). The act "temporarily adds a new product," known as the Paycheck Protection Program (PPP), "to the [SBA's Section] 7(a) Loan Program." Id.; see also CARES Act § 1102(a), 134 Stat. at 286 (noting "Section 7(a) of the Small Business Act. . . is amended" in creating the PPP). The PPP provides loans to eligible businesses for specified expenses. See CARES Act § 1102, 134 Stat. at 290 (enumerating "allowable" expenses for PPP loans) (codified at 15 U.S.C. § 636(a)(36)(F)). PPP loans used for certain allowable expenses, such as payroll costs, mortgage interest payments, and rent, are eligible for forgiveness. CARES Act § 1105, 134 Stat. at 298 (codified at 15 U.S.C. § 9005(b)). Critically, however, other allowable expenses under the PPP-such as costs related to the continuation of group health care benefits-will not be forgiven. Gateway, 983 F.3d at 1247 ("The statutory list of allowable uses of loan funds is longer than the list of uses that qualify for loan forgiveness; all forgivable uses are allowable, but not all allowable uses are forgivable.").
Under the CARES Act, Congress expressly gave the SBA rulemaking power for the PPP, specifying that the SBA "shall issue regulations to carry out this title." CARES Act § 1114, 134 Stat. at 312 (codified at 15 U.S.C. § 9012). Further, "Congress ordered that it be done posthaste," Gateway, 983 F.3d at 1249, requiring that the SBA issue regulations implementing the PPP "[n]ot later than 15 days after the date of enactment of this Act." 15 U.S.C. § 9012. To that end, Congress also directed that PPP regulations be issued "without regard to the notice requirements under [the APA]." Id.; see also Gateway, 983 F.3d at 1249 ("Recognizing the rulemaking deadline would otherwise be impossible, Congress freed the SBA from having to comply with the notice requirement that is a familiar part of the rulemaking process.").
3. PPP Lending Under The CARES Act
As the Eleventh Circuit opined, "Section 7(a) matters to this case because the PPP was not created as a standalone program; instead it was added in § 7(a), albeit with several of that subsection's general eligibility requirements relaxed." Gateway, 983 F.3d at 1249. For instance, unlike the traditional Section 7(a) Loan Program, the PPP includes nonprofit organizations and relaxes size limitations, CARES Act § 1102(a)(2), 134 Stat. at 288 (codified at 15 U.S.C. § 636(a)(36)(D)), and exempts applicants from demonstrating that credit is not available elsewhere. CARES Act § 1102(a)(2), 134 Stat. at 291 (codified at 15 U.S.C. § 636(a)(36)(I)). Where not expressly modified, however, pre-existing Section 7(a) requirements govern the PPP. CARES Act, § 1102(a)(2), 134 Stat. at 287 (noting that, "[e]xcept as otherwise provided," the SBA "may guarantee covered loans under the same terms, conditions, and processes" as other Section 7(a) loans) (codified at 15 U.S.C. § 636(a)(36)(B)). One requirement Congress left in place is the statutory mandate that "[a]ll loans" must be of "sound value." 15 U.S.C. § 636(a)(6); see also Gateway, 983 F.3d at 1249 ("What the CARES Act did not do for PPP loans is also significant. It did not exempt them from the § 7(a) sound value requirement.").
Pursuant to Congress's broad delegation of authority, the SBA posted its first regulations implementing the PPP on April 2, 2020, less than one week after the CARES Act's passage. In its First Interim Final Rule, the SBA explained that the need to "provide relief to America's small businesses expeditiously," as Congress intended, required "streamlining the requirements of the regular 7(a) program." First Interim Final Rule, 85 Fed.Reg. at 20, 812. To that end, the SBA determined that PPP lenders would not have to undertake the multi-factor creditworthiness test set forth at 13 C.F.R. § 120.150. Id. Instead, lenders would "rely on certifications of the borrower" required on the PPP Application Form. Id. Under the heading "What do lenders have to do in terms of loan underwriting?" the SBA notes that lenders' must only "[f]ollow[] applicable [Bank Secrecy Act] protocols," "[c]onfirm[] receipt of information demonstrating" salaries, taxes, and payroll costs, and "[c]onfirm[] receipt of borrower certifications contained in [the PPP] [A]pplication [F]orm." Id. at 20, 815; see also id. ("Each lender's underwriting obligation under the PPP is limited to the items above and reviewing the [PPP] Application Form."). One question contained in the PPP Application Form asks whether the borrower is "presently involved in any bankruptcy." Paycheck Protection Program Borrower Application Form 1 (Apr. 2020), https://go.usa.gov/xwXfs [hereinafter SBA Form 2483]; [Dkt. No. 1-1, p. 1.]
In a rule providing additional explanation and guidance to borrowers, the SBA explained that, "[i]f the applicant . . . is the debtor in a bankruptcy proceeding . . . the applicant is ineligible to receive a PPP loan." Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements-Promissory Notes, Authorizations, Affiliations, & Eligibility (Fourth Interim Final Rule), 85 Fed.Reg. 23, 450, 23, 451 (Apr. 28, 2020). The Fourth Interim Final Rule also "explain[ed] why bankruptcy debtors are ineligible." Gateway, 983 F.3d at 1250. Specifically, the SBA determined that, "in consultation with the [Treasury] Secretary . . . providing PPP loans to debtors in bankruptcy would present an unacceptably high risk" of both "unauthorized use of funds" and "non-repayment of unforgiven loans." Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451. The Fourth Interim Final Rule further noted that "the Bankruptcy Code does not require any person to make a loan or financial accommodation to a debtor in bankruptcy" and that SBA Form 2483, which contains the bankruptcy certification, "is a loan program requirement." Id.
Congress initially authorized the SBA to guarantee up to $349 billion worth of PPP loans. CARES Act § 1102(b)(1), 134 Stat. at 293. On April 16, 2020, Congress increased the authorization to $659 billion. Paycheck Protection Program & Health Care Enhancement Act (CARES Act II), Pub. L. No. 116-139, § 101(a)(1), 134 Stat. 620, 620 (2020). Through the Paycheck Protection Program Flexibility Act of 2020, signed into law June 5, 2020, Congress, inter alia, altered certain requirements for loan forgiveness and revised the deferral period for PPP loans. Pub. L. No. 116-142, § 3, 134 Stat. 641, 641-42 (2020). As initially enacted, the CARES Act required PPP funds to be disbursed within just three months. CARES Act § 1102(a)(2), 134 Stat. at 286 (defining "covered period" to end on June 20, 2020). Congress subsequently extended PPP commitments through August 8, 2020. Extending Authority for Commitments for the Paycheck Protection Program & Separating Amounts Authorized, Pub. L. No. 116-147, § 1, 134 Stat. 660, 660 (2020).
4. The Consolidated Appropriations Act, 2021
On December 27, 2020, the Consolidated Appropriations Act, 2021 (2021 CAA), Pub. L. No. 116-260, 134 Stat. 1182 (2020), became law. Division N, Title III of the act, entitled "CONTINUING THE PAYCHECK PROTECTION PROGRAM AND OTHER SMALL BUSINESS SUPPORT," appropriates an additional $284,450,000,000 for the PPP, § 323(d)(1)(A), 134 Stat. at 2019, and makes a number of other changes to the PPP. For instance, Congress expanded PPP eligibility to housing cooperatives, news organizations, and 501(c)(6) and destination marketing organizations. § 316-318, 134 Stat. at 2011-15. Congress also expanded the categories of allowable expenses for PPP proceeds, § 304, 134 Stat. at 1993, and mandated a simplified forgiveness application for loans up to $150,000. § 307, 134 Stat. at 1998.
Particularly relevant here, section 320 of the act, entitled "Bankruptcy Provisions," makes certain categories of bankrupt debtors potentially eligible for PPP loans-subject to the SBA Administrator's advance, categorical authorization-but not traditional chapter 11 debtors. 134 Stat. at 2015. Specifically, section 320 would-if and when the SBA submits the proper written determination-amend the Bankruptcy Code to permit a bankruptcy court to "authorize a debtor in possession or a trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of [title 11]" to obtain a PPP loan. Id. The referenced provisions of the Bankruptcy Code relate to three specific categories of bankruptcies: (1) proceedings under the Small Business Reorganization Act, see 11 U.S.C. § 1183-84; (2) proceedings under provisions of the Bankruptcy Code applicable to "family farmers" and "family fisherman," see 11 U.S.C. § 1203-04; and (3) proceedings for adjust of debts of individuals with regular income. See 11 U.S.C. § 1304. As the Bankruptcy Court noted, the 2021 CAA "does not extend to chapter 11 debtors generally," such as Plaintiffs here. [Dkt. No. 110, p. 25 n.7.]
The amendments to the Bankruptcy Code in § 320 of the 2021 CAA will become effective only if "the [SBA] submits to the Director of the Executive Office for United States Trustees a written determination that, subject to satisfying any other eligibility requirements, any debtor in possession or trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of title 11, United States Code, would be eligible for a [PPP] loan." § 320(f)(1)(A), 134 Stat. at 2016. To date, the SBA has neither submitted nor made such a determination.
B. Facts & Procedural History
1. The Adversarial Proceeding
This matter began when Plaintiffs, two hospitals that are debtors in possession in chapter 11 bankruptcy cases, brought an adversary proceeding against the SBA for injunctive and declaratory relief, alleging the SBA's bankruptcy exclusion exceeded the SBA's statutory authority and was discriminatory under 11 U.S.C. § 525(a). [Dkt. No. 1, ¶¶ 32-53.] The Bankruptcy Court conducted an expedited trial and issued proposed findings and conclusions, finding in favor of the SBA on all counts. [Dkt. No. 39, p. 31.] With respect to Plaintiffs' claim that the SBA exceeded its statutory authority, the Bankruptcy Court applied Chevron's two-step framework. Under step one, the Bankruptcy Court held that "Congress intended the SBA to fill a statutory gap and determine whether debtors in bankruptcy would be eligible for the PPP." Id. at 17. Under step two, the Bankruptcy Court held that the SBA's bankruptcy exclusion was based on a permissible construction of the CARES Act that, inter alia, "was a reasonable effort to accommodate the conflicting policies committed to the SBA's care, and one that Congress might reasonably have sanctioned." Id.
The Bankruptcy Court interpreted Plaintiffs' claim that the SBA exceeded its statutory authority as a challenge under the APA. [Dkt. No. 39, p. 10.] The APA allows a reviewing court to set aside agency action that is "in excess of statutory. . . authority." 5 U.S.C. § 706(2)(C).
2. The District Court's Review
Plaintiffs objected to the Bankruptcy Court's legal conclusions. In response, the SBA included a declaration by SBA Deputy Associate Administrator for Capital Access John A. Miller that, according to the District Court, "elaborates on and helps to explain the [SBA]'s earlier stated reason for adopting the bankruptcy exclusion." [Dkt. No. 72-1.] Plaintiffs moved to strike the declaration in the District Court on the ground that it was not produced before the Bankruptcy Court, but the District Court denied the motion under Federal Rule of Bankruptcy Procedure 9033(d). [Dkt. No. 78, p. 4]. In denying Plaintiffs' motion, the District Court noted that, "[w]hen an agency's initial explanation indicate[s] the determinative reason for the final action taken, the agency may elaborate later on that reason (or reasons)," and that "courts have considered later-submitted declarations when they are merely explanatory of the original record and do not contain any new rationalizations." Id. at 5.
Plaintiffs also argued that the declaration is inconsistent with a previous declaration by Mr. Miller submitted by the SBA in a separate case. Id. at 6. The District Court recommitted the case to the Bankruptcy Court "for resolution of this possible discrepancy" and for the Bankruptcy Court "to consider the significance of the Miller Declaration in relation to the previously established administrative record and the other recent declaration or declarations prepared by Miller." Id. at 6-7. The District Court additionally instructed the Bankruptcy Court to "issue revised and/or additional findings of fact regarding the" SBA's reasoning for adopting the bankruptcy exclusion rule and to "consider those facts in reaching its conclusions of law as to both the second step of the Chevron analysis and the 'arbitrary or capricious' analysis" set forth in State Farm. Id. at 7.
3. The Recommitted Proceedings
On recommital, the Bankruptcy Court first held that no discrepancy existed between the Miller Declaration submitted in this case and the Miller Declaration submitted in a previous case. [Dkt. No. 100, pp. 15-16.] It next held, consistent with State Farm, that: (1) the bankruptcy exclusion rule "was the product of reasoned decision making" that considered the "relevant factors," id. at 21; (2) the Administrative Record "contains an explanation that provides a rational connection between the factors the [SBA] considered and the decision to exclude all debtors in bankruptcy from the PPP," id.; and (3) the SBA did not rely on any of the factors enumerated in State Farm suggesting that an agency rule is arbitrary or capricious. Id. at 25-28. The Bankruptcy Court likewise held that the bankruptcy exclusion rule "is a permissible construction" of the CARES Act, id. at 31, and noted that, "[a]t oral argument, the [Plaintiffs] . . . indicat[ed] that their arguments under Chevron and [State Farm] were basically one and the same." Id. at 17, 31. Further, the Bankruptcy Court stated that, even if the Miller Declaration was "excluded from consideration" so that the Administrative Record "consist[ed] solely of Form 2483 and the First and Fourth [Interim Final Rules]," it would still reach the same holding "that the bankruptcy exclusion is a reasonable construction of the statute and is neither arbitrary nor capricious." Id. at 14 n.4.
Plaintiffs object to the Bankruptcy Court's legal conclusions and factual findings. With respect to the Bankruptcy Court's conclusions under State Farm, Plaintiffs argue that the Administrative Record lacks certain data, facts, studies, and comparisons, and does not provide a sufficient explanation for the bankruptcy rule; that the SBA relied on factors Congress did not intend it to consider; and that the bankruptcy rule was not the product of agency expertise. [Dkt. No. 110, ¶¶ 9-19, 23-49, 60-74.] With respect to the Bankruptcy Court's conclusions under the Chevron analysis, Plaintiffs argue that Congress already "established eligibility requirements for participation in the PPP and did not grant SBA permission" to exclude bankrupt debtors. Id. at ¶ 78. Plaintiffs also point to another title of the CARES Act, which establishes a non-PPP loan program administered by the Secretary of Treasury that provides assistance to mid-sized businesses and excludes debtors in bankruptcy. Id. at ¶ 79.
With respect to the Miller Declaration, Plaintiffs argue that "it contains no facts or data regarding the bankruptcy exclusion, and, therefore, it contains no reasoning." [Dkt. No. 110, ¶ 16.] Plaintiffs also argue that the Miller Declaration's reasoning is "different from those in the Fourth Interim Final Rule and the [earlier Miller] Declaration." Id. at ¶ 20. Plaintiffs additionally argue that the Miller Declaration submitted here is a "post hoc rationalization" because it "was created after the start of litigation" and "provides new reasons for the bankruptcy exclusion." Id. at ¶¶ 50-59. Similarly, Plaintiffs argue that the SBA's interim final rules and the Miller Declaration lack certain facts, data, analyses, and studies. Id. at ¶¶ 8-14.
STANDARD OF REVIEW
When a party files "specific" written objections to a bankruptcy court's proposed findings of fact and conclusions of law, "[t]he district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made." Fed.R.Bankr.P. 9033(b), (d). In such circumstances, "[t]he district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions." Fed.R.Bankr.P. 9033(d); see also In re Sheridan, 362 F.3d 96, 100 (1st Cir. 2004); [Dkt. No. 78, p. 2.]
ARGUMENT
I. The Bankruptcy Court Properly Held That The Miller Declaration Is Consistent With An Earlier Declaration Prepared By Mr. Miller And The Previously Established Administrative Record.
A. The Bankruptcy Court Is Correct That No Discrepancy Exists Between The Declarations Of Mr. Miller.
To begin with, the District Court has already held that the Miller Declaration submitted in the instant proceeding is an appropriate document for consideration in evaluating Plaintiffs' claims on the grounds that the declaration "elaborates on and helps to explain the [SBA]'s earlier stated reason for adopting the bankruptcy exclusion" and does not contain "new" reasons for the SBA's action or "any new rationalizations." [Dkt. No. 78, p. 5 (quoting DHS v. Regents of the Univ. of Cal., 140 S.Ct. 1891, 1908 (2020), and Olivares v. TSA, 819 F.3d 454, 464 (D.C. Cir. 2016)).] The recommital was specifically for the Bankruptcy Court to resolve a "possible discrepancy" between Mr. Miller's declarations before undertaking the requisite analyses under Chevron's step two and State Farm. Id. at 6-7.
In the Miller Declaration submitted in the instant proceeding, which the Bankruptcy Court refers to as the "Maine Miller Declaration," Mr. Miller states the purpose of the PPP "would not be served by including all bankruptcies." [Dkt. No. 90-1, ¶ 17.] In Mr. Miller's declaration previously submitted by the SBA in an adversarial proceeding in the District of Vermont, which the Bankruptcy Court refers to as the "Vermont Miller Declaration," Mr. Miller states the purpose of the PPP "would not be served in a chapter 11 liquidation or in a chapter 7 case." [Dkt. No. 90-2, ¶ 21.]
As the Bankruptcy Court found, "[t]here is no inconsistency between the Miller declarations" and "they are not in conflict." [Dkt. No. 100, p. 16.] The statement in the Vermont Miller Declaration "is merely a subset of the broader statement in the Maine Miller Declaration." Id. Although Plaintiffs assert a blanket objection that the statements are "inconsistent with one another," they do not reckon with the Bankruptcy Court's finding. [Dkt. No. 110, ¶ 47.] Plaintiffs' erroneous characterization make too much of the different word choices in Mr. Miller's declarations and take that difference completely out of context. In an effort to streamline the requirements of the regular Section 7(a) Loan Program, the First Interim Final Rule limited each lender's underwriting obligation under the PPP to, inter alia, reviewing the PPP application form. 85 Fed.Reg. at 20, 812, 20, 815. In turn, the application form requires the borrower to certify that it is "not presently involved in a bankruptcy." SBA Form 2483 at 1. As such, the SBA's First Interim Final Rule expressly precludes both chapter 7 and 11 debtors from obtaining PPP loan guarantees and explains the reasoning behind the bankruptcy exclusion: to truncate Section 7(a)'s underwriting requirements in order to provide PPP loan guarantees expeditiously and consistent with congressional intent.
The SBA's Fourth Interim Final Rule then explains, "The Administrator . . . 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." 85 Fed.Reg. at 23, 451. The First and Fourth Interim Final Rules, promulgated before either of Mr. Miller's declarations, thus exclude debtors in bankruptcy without distinction between chapter 7 and 11 debtors. The Vermont Miller Declaration discusses chapter 7 liquidations, but not to the exclusion of chapter 11 reorganizations. The Maine Miller Declaration includes both chapter 7 liquidations and chapter 11 reorganizations.
In fact, the SBA made public the application form and First Interim Final Rule on April 2, 2020, so that PPP loans could be available beginning April 3, 2020. There is no dispute the SBA made a decision by April 2, 2020 to exclude debtors in bankruptcy because the exclusion was included on the PPP application form.
Additionally, both declarations then identically and immediately note, in the very next two sentences: "Certain creditors, including administrative creditors, could assert claims to the PPP loan funds that would interfere with its authorized uses and the requirements for PPP loan forgiveness. SBA, in consultation with the Department of Treasury, determined there should be one streamlined rule that applies to all debtors in bankruptcy to avoid the need for case by case reviews." [Dkt. No. 90-1, ¶ 17; Dkt. No. 90-2, ¶ 21 (emphasis added).] That first sentence is just as true for liquidations as it is for Chapter 11 reorganizations. The fact that Mr. Miller both times uses the phrase "all debtors in bankruptcy," moreover, further undermines Plaintiffs' misinterpretation that the Vermont Miller Declaration specifically excludes Chapter 11 reorganizations. In short, the Bankruptcy Court properly concluded that there is nothing inconsistent between the declarations, especially when Mr. Miller's wording is viewed in the context of the First and Fourth Interim Final Rules-which exclude all debtors in bankruptcy- and the broader language Mr. Miller uses in explaining the SBA's reasoning in both declarations.
B. The Miller Declaration Is A Permissible Explanation of Agency Action.
Plaintiffs' further object to the Maine Miller Declaration as a "post hoc" rationalization under Regents that "was created after the start of litigation" and "provided new reasons for the bankruptcy exclusion that were not contained in the Fourth Interim Final Rule." [Dkt. No. 110, ¶¶ 50-60.] Additionally, Plaintiffs argue that the Maine Miller Declaration, as well as the SBA's First and Fourth Interim Final Rules, contain "no facts or data" regarding the bankruptcy exclusion." [Dkt. No. 110, ¶¶ 1-19.]
1. At the outset, the District Court already rejected Plaintiffs' argument that the Maine Miller Declaration is an impermissible "post hoc" explanation. [Dkt. No. 78, p. 15.] As the District Court explained, "When an agency's initial explanation indicate[s] the determinative reason for the final action taken, the agency may elaborate later on that reason (or reasons) but may not provide new ones." Id. (quoting Regents, 140 S.Ct. at 1908). Under this rubric, "courts have considered later-submitted declarations when they are 'merely explanatory of the original record' and do not contain any new 'rationalizations.'" Id. (quoting Olivares, 819 F.3d at 464). Here, the District Court highlighted that the SBA's initial explanation contained in its interim final rules provided that "the reason . . . for enacting the bankruptcy exclusion rule was the need to establish a streamlined, expedited loan process reliant on certifications by applicants" and the SBA's "determination 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.'" Id. at 5 (quoting Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451). According to the District Court, "[t]he Miller Declaration is consistent with this view, explaining that '[c]ertain creditors, including administrative creditors, could assert claims to the PPP loan funds that would interfere with its authorized uses and the requirements for PPP loan forgiveness." Id. (quoting Dkt. No. 90-1, ¶ 17). Accordingly, it held that the Miller Declaration appropriately "elaborates on and helps to explain the [SBA]'s earlier stated reason for adopting the bankruptcy exclusion." Id.
Plaintiffs are thus rehashing a meritless argument that is additionally outside the instructions of the District Court on recommital. While the District Court recommitted the matter to resolve the "possible discrepancy" between Mr. Miller's declarations, it already held that the Maine Miller Declaration was appropriate for consideration in the context of evaluating Plaintiff's APA challenge.
2. Plaintiffs' reliance on Regents in an effort to demonstrate an impermissible post hoc rationalization is misplaced. There, the Court held that agency action was arbitrary and capricious because the agency's subsequent explanation relied on factors absent from its original decision, and the original explanation was insufficient. 140 S.Ct. at 1909-10. As explained in Regents, agencies may not make a decision for one reason and then attempt to justify it with another later. But an agency "can offer a fuller explanation of [its] reasoning" after taking an action so long as the explanation reflects the agency's reasoning "at the time of the agency action." Id. at 1907. Even an "amplified articulation of a prior conclusory observation" is permissible. Id. As discussed below, the Maine Miller Declaration is just that: a fuller explanation of the basis for the bankruptcy exclusion when it was made.
The First Interim Final Rule-which reflects the agency's reasoning at the time of the agency action-explains that the SBA "streamlin[ed] the requirements of the regular 7(a) program" after determining that Congress required the SBA to "provide relief to America's small businesses expeditiously." 85 Fed.Reg. at 20, 811-12. As an example, the First Interim Final Rule provides that lenders may "rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds," id. at 20, 812, and that "[e]ach lender's underwriting obligation under the PPP is limited to," inter alia, reviewing the PPP application form. Id. at 20, 815. In turn, the application form requires the borrower to certify that it is "not presently involved in a bankruptcy." SBA Form 2483 at 1. As such, the SBA's First Interim Final Rule expressly precludes debtors in bankruptcy from obtaining PPP loan guarantees and explains the reasoning behind the bankruptcy exclusion. In the Fourth Interim Final Rule, the SBA further explains, "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." 85 Fed.Reg. at 23, 451.
The Maine Miller Declaration is thus nothing more than an "amplified articulation" of the SBA's reasoning at the time of its action to streamline Section 7(a)'s requirements. Regents, 140 S.Ct. at 1907. For instance, as Mr. Miller explains, the SBA determined, inter alia that: (1) "loan assistance authorized by the Cares Act had to be provided as expeditiously as possible with as little as possible underwriting" so that the SBA could "meet the challenge of rescuing the economy from the effects of the Covid-19 virus pandemic"; (2) "the wording of the [PPP Application Form]" to exclude bankrupt debtors "would be expeditious and less likely to slow the administration of the program and less likely to require the expenditure of additional time, effort and other resources" since "a company in bankruptcy required an inquiry into the state of the proceeding and possibly a court order for [debtor-in-possession] financing, as well [as] . . . the prospect of incurring of fees by the lender in monitoring the bankruptcy proceeding"; and (3) "[c]ertain creditors . . . could assert claims to the PPP loan funds that would interfere with tis authorized use and the requirements for PPP loan forgiveness" since "[t]he purpose of a PPP loan is to help small businesses pay their employees and maintain operations to allow them to restart quickly over the next few months." [Dkt. No. 90-1, ¶ 17.] The Maine Miller Declaration is thus entirely consistent with the SBA's explanation in the interim final rules that the PPP had to be implemented as a "streamlin[ed]" program that was "rel[iant] on certifications of the borrower" in order to "expeditiously" guarantee small business loans, First Interim Final Rule, 85 Fed.Reg. at 20, 812, and that bankrupt debtors posed "an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans." Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451.
3. Plaintiffs' argument that the Maine Miller Declaration "was created after the start of litigation" fairs no better. [Dkt. No. 110, ¶ 50.] The relevant question is not when the agency explanation was made, but whether it permissibly elaborates on the reason for the agency action. Regents, 140 S.Ct. at 1908. Tellingly, Plaintiffs cite no case law for their argument excluding agency explanations made after the start of litigation. In fact, in Regents itself, the declaration under consideration was made after litigation commenced, but the Supreme Court did not cite the timing of the explanation as a factor in its decision. Id. The same is true in Olivares v. TSA, cited with approval by the District Court. 819 F.3d at 463-64; [Dkt. No. 78, p. 5].
4. To the extent Plaintiffs argue that the interim finals rules and Maine Miller Declaration contain "no facts or data" regarding the bankruptcy exclusion rule, [Dkt. No. 110, ¶¶ 1-19], Plaintiffs demand a far more expansive administrative record than what the law requires under the circumstances. See, e.g., FCC v. Nat'l Citizens Comm. for Broad., 436 U.S. 775, 813-14 (1978) (holding that, where agency determinations are "primarily of a judgmental or predictive nature," "complete factual support in the record . . . is not possible or required" and "necessarily involves deductions based on the expert knowledge of the agency"). As the Bankruptcy Court noted, moreover, "In [Plaintiffs'] view, the SBA should have, within the fifteen-day rulemaking window, solicited input or sought an expert opinion about how cumbersome it would been to include debtors in bankruptcy in the PPP." [Dkt. No. 100, p. 22.] Under normal circumstances, "an agency's explanation or a rule is connected to the 'relevant matter presented' during the notice and comment period." Gateway, 983 F.3d at 1263 (quoting 5 U.S.C. § 553(c)). During the notice and comment period, an agency may seek expert opinion and conduct hearings. See, e.g., State Farm, 463 U.S. at 34-40; Nat'l Citizens Comm. for Broad., 436 U.S. at 783-87. But here, "Congress did away with the notice and comment period by ordering the SBA to issue regulations 'without regard to the notice requirements.'" Gateway, 983 F.3d at 1263 (citing 15 U.S.C. § 9012). Likewise, Congress "gave the SBA only 15 days to issue rules, which is practically warp speed for regulatory action, a command that undoubtedly sprang from the felt need for quick action in light of the burgeoning economic crisis stemming from the pandemic." Id. at 1262; 15 U.S.C. § 9012. The upshot "inevitabl[y] . . . is a far more limited administrative record than [courts] might otherwise have had." Gateway, 983 F.3d at 1263.
As the Bankruptcy Court intuited, "One can easily imagine the outcry that would have ensued if, following the adoption of the CARES Act, the SBA had conducted studies or gathered statements before promulgating the PPP application form." [Dkt. No. 100, p. 30.] Neither the Bankruptcy Court here nor the Eleventh Circuit in Gateway was "troubled that the SBA did not marshal the type of information one might ordinarily classify as 'evidence' before adopting the bankruptcy exclusion.'" Id.; Gateway, 983 F.3d at 1263. At bottom, the relevant inquiry is "the SBA's contemporaneous explanation of the eligibility rule." Gateway, 983 F.3d at 1263. Plaintiffs do not dispute the Bankruptcy Court's conclusion that "common sense can appropriately play a role in agency rulemaking." [Dkt. No. 100, p. 22 (collecting cases)]. Their arguments that the Administrative Record-consisting of the SBA's interim final rules and Maine Miller Declaration-does not contain sufficient facts or data are entirely unfounded given the circumstances and congressional mandate.
II. The Bankruptcy Court Properly Held That The SBA's Bankruptcy Exclusion Rule Comports With 5 U.S.C. § 706(2)(A) Of The APA As Interpreted By State Farm.
The Bankruptcy Court correctly held that the SBA's decision-making was neither arbitrary nor capricious under 5 U.S.C. § 706(2)(A) of the APA and State Farm. In conducting an arbitrary-or-capricious review, the reviewing court considers only "whether the [agency] decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Cousins v. Sec'y of the U.S. Dep't of Transp., 857 F.2d 37, 40 (1st Cir. 1988) (quoting State Farm, 463 U.S. at 43). An agency's explanation is satisfactory so long as it "may reasonably be discerned," even if the explanation is "of less than ideal clarity." State Farm, 463 U.S. at 43; see also Brown v. Sec'y of HHS, 46 F.3d 102, 107 (1st Cir. 1995) (noting that "the court must defer to the agency if the agency's findings have a rational basis and the regulation is reasonably related to the purposes of the enabling legislation"). Judicial review is therefore "narrow" and mandates "that a court not 'substitute its judgment for that of the agency.'" Cousins, 857 F.2d at 40 (quoting State Farm, 463 U.S. at 43); see also R.I. Higher Ed. Assistance Auth. v. Sec'y, U.S. Dep't of Ed., 929 F.2d 844, 855 (1st Cir. 1991) ("This standard of review is a generous one. Absent mistake of law, reversal will lie only if the Secretary's action lacked a rational basis.") (citing State Farm, 463 U.S. at 42-43).
Under arbitrary-or-capricious review, "[reviewing courts] are to leave agency action undisturbed unless[:]" (1) "the agency has relied on factors which Congress has not intended it to consider"; (2) "entirely failed to consider an important aspect of the problem"; (3) "offered an explanation for its decision that runs counter to the evidence before the agency"; or (4) "is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." City of Taunton v. U.S. EPA, 895 F.3d 120, 126 (1st Cir. 2018) (quoting State Farm, 463 U.S. at 43).
A. The Bankruptcy Court Is Correct That The SBA Permissibly Adopted A Reasonable Policy To Satisfy The "Sound Value" Requirement In An Administrable Manner.
The SBA's bankruptcy regulation readily satisfies APA arbitrary-or-capricious review. The SBA adopted its policy towards bankrupt debtors in furtherance of the "sound value" requirement for Section 7(a) loans, which squarely applies to the PPP. 15 U.S.C. § 636(a)(6), (a)(36)(B); Gateway, 983 F.3d at 1249, 1263. In the typical Section 7(a) context, the SBA implements the sound value provision by requiring that applicants are "creditworthy." 13 C.F.R. § 120.150. To that end, the SBA insists upon a multi-factor inquiry into, inter alia, the "credit history of the applicant," "[s]trength of the business," "[a]bility to repay the loan with earnings from the business," and "[p]otential for long-term success," id., and asks on the application form for regular Section 7(a) loans whether the applicants or their affiliates have ever filed for bankruptcy protection. SBA Form 1919 at 2.
In implementing the PPP, the SBA recognized that its usual approach to determining "sound value" would not permit it to "provide relief to America's small businesses expeditiously." First Interim Final Rule, 85 Fed.Reg. at 20, 812. The SBA therefore sought to "streamlin[e] the requirements of the regular 7(a) loan program" by excusing PPP lenders from assessing the various indicia of creditworthiness set forth in 13 C.F.R. § 120.150. Id. Instead, the SBA would "allow lenders to rely on certifications of the borrower in order to determine [borrower] eligibility," id., including the question of whether the applicant is presently involved in a bankruptcy. SBA Form 2483 at 1. Thus, the bankruptcy question on the PPP application form provides "a much simpler 'bright-line' rule" that "reconcile[s] the 'sound value' instruction . . . with Congress's instruction to proceed expeditiously with the PPP." Schuessler v. SBA, Adv. No. 20-02065-bhl, 2020 WL 2621186, at *12 (Bankr. E.D. Wis. May 22, 2020); see also id. ("Using the bankruptcy exclusion question on the PPP has the obvious benefit of being easy to administer. That is not a small matter, given the speed with which Congress and the President directed the SBA to implement the CARES Act and PPP."). As the Bankruptcy Court noted, "[t]o provide that expeditious relief, the SBA streamlined its lending criteria and created an application process that would allow lenders to underwrite PPP loans by relying on borrower certifications . . . ." [Dkt. No. 100, p. 20.] The SBA then "supplemented this need-for-speed rationale" with the explanation "'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.'" Id. (quoting Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451). The SBA consulted with the Secretary of the Treasury in reaching its conclusion, "which means that the expertise of two agencies was brought to bear on the issue." Gateway, 983 F.3d at 1263. For these reasons alone, the Eleventh Circuit held that the SBA's bankruptcy exclusion was a rational conclusion" that comported with arbitrary-or-capricious review under 5 U.S.C. § 706(2)(A) and State Farm. Id. at 1262-64. Id.
The Administrative Record that the Eleventh Circuit reviewed consisted only of the SBA's First and Fourth Interim Final Rules and did not contain the Miller Declaration. The Bankruptcy Court here held that its conclusion under Chevron's step two and State Farm would be the same even without consideration of the Maine Miller Declaration. [Dkt. No. 100, p. 14 n.4.]
As Mr. Miller notes in the Maine Miller Declaration, moreover, the SBA determined that: (1) the bankruptcy question on the PPP Application Form "would be expeditious and less likely to slow the administration of the program" because "a company in bankruptcy required an inquiry into the state of the proceeding and possibly a court order for [debtor-in-possession] financing"; (2) the "purpose of a PPP loan"-which "is to help small businesses pay their employees and maintain operations to allow them to restart quickly over the next few months"- "would not be served by including all bankruptcies" because "[c]ertain creditors, including administrative creditors, could assert claims to the PPP loan funds that would interfere with its authorized uses and the requirements for PPP loan forgiveness"; and (3) after "consultation with the Department of Treasury," that "there should be one streamlined rule that applies to all debtors to avoid the need for case by case reviews." [Dkt. No. 90-1, ¶ 17.]
Plaintiffs make a number of objections to the Bankruptcy Court's holding. First, they object that the interim final rules and Maine Miller Declaration "are devoid of facts, data, or reasoned decision-making," since the SBA "made no effort to quantify or qualitatively describe what an acceptable risk level would be, what constitutes an unacceptably high level of risk, how this compares to the same risks for non-debtors . . . or provide any fact-based or data-driven explanation of the bankruptcy exclusion, such as projected comparison of default rates for debtors versus non-debtors." [Dkt. No. 110, ¶¶ 32-33.] At the outset, "[b]ankruptcy debtors are financially distressed and have competing creditors, which it is not implausible to believe will increase the risk of unauthorized use of funds and non-repayment." Gateway, 983 F.3d at 1263; see also Dkt. No. 100, p. 24 (holding that the SBA's stated risks-including "that PPP loan funds might not be used for their intended purposes . . . and might instead be gobbled up by administrative creditors" and that "debtors, as a group, were more likely than non-debtors to be suffering from financial distress unrelated to COVID-19 and teetering on the verge of ceasing operations"-is "a fair, commonsense generalization"). The SBA's determination concerning bankrupt debtors is thus "primarily of a judgmental or predictive nature," for which reviewing courts acknowledge that "complete factual support in the record . . . is not possible or required" and "necessarily involves deductions based on the expert knowledge of the agency." Nat'l Citizens Comm. for Broad., 436 U.S. at 814. Plaintiffs' objection is an end-run around the narrow standard of review; they essentially seek to substitute their view "for the SBA's judgment that the gravity of the risk is unacceptably high." Gateway, 983 F.3d at 1263; see also Dkt. No. 100, p. 27 ("The Court's task is not to second-guess, but rather to determine whether the bankruptcy exclusion was supported by adequate reasoning.") (citing Chevron, 567 U.S. at 843 n.11).
Nevertheless, the SBA's rule was indeed the product of its consideration of multiple relevant factors, including: (a) Congress's goal to provide immediate relief to small businesses, [Dkt. No. 90-1, ¶¶ 5, 17]; (b) Congress's decision to implement the PPP under the Section 7(a) Loan Program, id. at ¶ 6; (c) Congress's decision not to alter Section 7(a)'s sound value requirement, id. at ¶¶ 6-13; (d) the SBA's decades-long focus on bankruptcy status as relevant to "sound value" for Section 7(a) loan guarantees, id. at ¶¶ 8-12; (e) the need to execute Congress's objective through a two-page form reliant upon borrower certifications, id. at ¶ 17; and (f) the risk of unauthorized use of funds and the risk of non-payment by lending to bankrupt borrowers. Id. at ¶ 17. In any event, the APA prohibits Plaintiffs or reviewing courts from "ask[ing] whether a regulatory decision is the best one possible or even whether it is better than the alternatives." FERC v. Elec. Power Supply Assoc., 136 S.Ct. 760, 782 (2016). Plaintiffs' demands for additional fact-finding, data analyses, and default rate comparisons are unmoored from the limits of arbitrary-or-capricious review.
Second, Plaintiffs object that the interim final rules do not reference the need for PPP funds "to be distributed as quickly as possible." [Dkt. No. 110, ¶ 41.] The argument has no basis in fact and entirely ignores the First Interim Final Rule. There, the SBA explained that the need to "provide relief to America's small businesses expeditiously," as Congress intended, required "streamlining the requirements of the regular 7(a) program." 85 Fed.Reg. at 20, 812. To that end, the SBA expressly noted that PPP lenders would not have to undertake the multi-factor creditworthiness test set forth at 13 C.F.R. § 120.150, and that they instead could rely on the borrower certifications contained in the PPP Application Form as a proxy for creditworthiness. Id.
Third, Plaintiffs quarrel with the lack of "facts or data" explaining "why case-by-case review is necessary for debtors," "how permitting debtors to participate in PPP would prevent streamlined applications for non-debtors," or "how permitting debtors in reorganization cases to participate would delay disbursement of funds to the overwhelming majority of [non-bankruptcy] PPP recipients." [Dkt. No. 110, ¶ 43.] Plaintiffs again demand more than the standard of review requires. Here, the relevant question is whether the SBA's action has a rational basis. Cf. Brown, 46 F.3d at 109 ("Micro-arguments of this sort . . . ignore the breadth of the [agency's] discretion. The [agency] was not required to base [its] regulations only on perfect information. Rather, the [agency's] policy choice needed only to be rational."). It is not, as the Bankruptcy Court noted, incumbent on the SBA "to consider all policy alternatives in reaching a decision." [Dkt. No. 100, p. 27 (quoting State Farm, 463 U.S. at 51).] Plaintiffs ignore that an administrable rule for PPP lenders was essential in a context where the SBA was tasked with developing a program capable of rapidly distributing hundreds of billions of dollars to millions of distinct borrowers. See SBA, Paycheck Protection Program (PPP) Report 2 (2020), https://go.usao.gov/xw5cn (noting that nearly 4.5 million loans were processed in just the first two months of the program). The SBA's endeavor to have hundreds of billions of dollars disbursed to millions of applicants in a matter of months, all in an effort "to stop the nation's economic tailspin" during "an unprecedented global pandemic," Tradeways, Ltd. v. U.S. Dep't of the Treasury, Civil Action No. ELH-20-1324, 2020 WL 3447767, at *15 (D. Md. June 24, 2020), while still ensuring the sound value of its loans, would have been impossible without a modification to the normal underwriting process. The SBA's bankruptcy exclusion rule, moreover, "did not arise out of thin [air]" since "the SBA's pre-existing § 7(a) loan application asks a prospective borrower to disclose whether it or an affiliate has filed for bankruptcy." Id.
Plaintiffs' hyper-technical demands not only stray far beyond the scope of judicial review, but fail to grapple with "the extraordinary circumstances surrounding the passage of the CARES Act . . . and the congressional directive that the [SBA] get the PPP off the ground immediately to provide economic relief to struggling businesses and their employees." [Dkt. No. 100, p. 13.] Nor do Plaintiffs reckon with the task Congress placed upon the SBA to stand up a multi-hundred billion dollar program in barely more than two weeks.
Fourth, Plaintiffs object that the SBA's interim final rules and Maine Miller Declaration "should be given no weight" because neither the SBA nor Mr. Miller has "experience or expertise lending to debtors or with [the] bankruptcy process." [Dkt. No. 110, ¶¶ 46, 74.] The argument inappropriately shifts the focus under the APA. The relevant question for arbitrary-and-capricious review is whether the SBA has experience crafting loan policy that properly identifies the factors necessary to ascertain an applicant's creditworthiness, so as to determine the "sound value" of any federally-guaranteed small business loan for purposes of "assur[ing] repayment." 15 U.S.C. § 636(a)(6). Undoubtedly, the SBA has decades of such experience. [Dkt. No. 90-1, ¶¶ 11-13). The fact that traditional Section 7(a) applicants in active bankruptcy likely will not satisfy the requisite Section 7(a) credit review, based on the SBA's historical underwriting requirements for Section 7(a) loans, does not mean that the SBA lacks experience identifying the factors for assessing sound value. See Gateway, 983 F.3d at 1255 n.8 (stating that "[t]he bankruptcy debtor eligibility question . . . is squarely within . . . the SBA's expertise").
In short, the SBA's rule, although "blunt," is rational. Schuessler, 2020 WL 2621186, at *12 ("That the SBA chose to use a broad and blunt instrument-flatly excluding bankrupt debtors from PPP participation-does not make the SBA's rule arbitrary and capricious. The law does not require precision or perfection, particularly at the expense of other valid and competing Congressional goals."). On the basis of the Administrative Record, this Court can reasonably discern why the SBA did what it did and conclude as a matter of substance that it did not act arbitrarily or capriciously. Tradeways, 2020 WL 3447767, at *16 ("[W]hat [plaintiff] considers arbitrary agency action is simply the SBA fillings in the gaps Congress left in the CARES Act so that it could nimbly respond to a complex, rapidly-evolving crisis."); In re Henry Anesthesia Assocs. LLC, No. 19-64159-LRC, 2020 WL 3002124, at *10 (Bankr. N.D.Ga. June 4, 2020); Schuessler, 2020 WL 2621186, at *12. The bankruptcy regulation reflects a valid accommodation of the exigencies that necessitated streamlining the underwriting process through the use of plainly rational criteria. See generally Gateway, 983 F.3d at 1263-64. Requiring anything more from the SBA runs counter to the deferential arbitrary-and-capricious standard of review. Id.
B. Plaintiffs Do Not Meet Any Of The Factors Identified In State Farm For A Finding Of Arbitrary Or Capricious.
1. First, Plaintiffs object that the SBA "relied on factors that Congress did not intend" because "Congress did not intend for SBA to consider credit-worthiness of a PPP applicant." [Dkt. No. 110, ¶ 61.] Plaintiffs contend that, regardless of whether the sound value requirement applies to PPP loans, the SBA "waiv[ed] it as to all PPP applicants" based on statements in the First Interim Final Rule that lenders do not have to comply with 13 C.F.R. § 120.150 and in the Third Interim Final Rule that "no creditworthiness is required for PPP loans." Id. at ¶ 64; Business Loan Program Temporary Changes; Paycheck Protection Program-Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (Third Interim Final Rule), 85 Fed.Reg. 21, 747, 21, 750 (April 20, 2020). Plaintiffs additionally argue that "Congress was not concerned with the risk of non-repayment for unforgiven amounts." Id. at ¶ 73.
At the outset, Congress housed the PPP in the Section 7(a) Loan Program, "which has a sound value requirement that applies to all § 7 (a) loans," so the sound value requirement undoubtedly applies to the PPP. Gateway, 983 F.3d at 1262; see also Dkt. No. 100, p. 26 ("[T]he sound value requirement is hard-wired in the statute such that it cannot be brushed aside."). Agencies, moreover, cannot "waive" statutory requirements as a matter of law, as Plaintiffs contend the SBA did here. Nevertheless, nothing in the First Interim Final Rule suggests that the SBA abandoned considerations of creditworthiness altogether. Although the SBA determined in the First Interim Final Rule that PPP lenders would not have to undertake the multi-factor creditworthiness test set forth at 13 C.F.R. § 120.150, it still required that lenders "rely on certifications of the borrower" provided on the PPP Application Form. 85 Fed.Reg. at 20, 812. Under the heading "What do lenders have to do in terms of loan underwriting?" the SBA notes that lenders must, inter alia, "[c]onfirm[] receipt of borrower certifications contained in [the PPP] [A]pplication [F]orm." Id. at 20, 815; see also id. ("Each lender's underwriting obligation under the PPP is limited to the items above and reviewing the [PPP] Application Form."). The PPP Application Form in turn asks whether the borrower is "presently involved in any bankruptcy." SBA Form 2483 at 1; Schuessler, 2020 WL 2621186, at *10 ("Even the First Interim Final Rule included references to the application form, which included the bar on bankrupt debtor participation."). The SBA thus used the bankruptcy question as a proxy for the multi-factor creditworthiness inquiry under the traditional Section 7(a) Loan Program, but did not entirely cast aside its statutory obligation to ensure the sound value of its loans.
Further, Plaintiffs' reliance on the Third Interim Final Rule-which states that "PPP loans are uniform for all borrowers" and that the "standard underwriting process does not apply because no creditworthiness assessment is required," 85 Fed.Reg. at 21, 750-is misplaced. For the reasons discussed above, the Third Interim Final Rule already presupposes that debtors in bankruptcy are excluded from PPP loan guarantees, since the bankruptcy certification had been present on the PPP Application Form at the time the First Interim Final Rule was promulgated.
As the Eleventh Circuit held in summarily rejecting the State Farm-based argument that the SBA relied on factors which Congress did not intend it to consider:
[The SBA] relied primarily on two factors: the risk of unauthorized use of funds and the risk of non-repayment. The unauthorized use of funds was clearly a relevant factor, because Congress had defined a specific list of "[a]llowable uses" for PPP loans, 15 U.S.C. § 636(a)(36)(F), and a specific list of costs for which loan forgiveness would be available, id. § 9005(b). And Congress indicated that the risk of non-repayment was a relevant factor by adding PPP into § 7(a) and maintaining the sound value requirement, which is implemented by creditworthiness regulations.Gateway, 983 F.3d at 1263-64. Accordingly, Plaintiffs' argument that "Congress was not concerned with the risk of non-repayment for unforgiven amounts" is unfounded.
2. Second, Plaintiffs object that the SBA "failed to consider important aspects of the problem" because the Administrative Record does not reflect "the protections afforded by the bankruptcy process." [Dkt. No. 110, ¶ 68.] Plaintiffs also claim that a slew of additional facts or data are missing from the Administrative Record. Id. at ¶¶ 69-72. For instance, they object that "there are no facts, data, studies, or any factual or data-driven information considering repayment prospects of PPP recipients in chapter 11 compared to non-debtor PPP recipients, any comparison of default rates for loans to debtors outside the context of PPP, or any consideration of the fact that there is a well-developed private sector market lending to debtors." Id. at ¶ 69.
To begin with, although Plaintiffs tick off a number of items they allege the SBA failed to consider, Plaintiffs do not explain how these items are "important aspects of the problem" evinced by Congress in the CARES Act. As the Bankruptcy Court explained, "The enabling statute . . . is the principal source of relevant factors to be considered by the agency in promulgating regulations" and the reviewing court should look to that statute's "purpose" in considering the relevant factors. [Dkt. No. 100, p. 21 (quoting Brewer v. Madigan, 945 F.2d 449, 457 (1st Cir. 1991), and Judulang v. Holder, 565 U.S. 42, 55 (2011)).] Nor do Plaintiffs explain why the items they enumerate should take precedence over the SBA's conclusion, based on its reasonable interpretation of the CARES Act and Congress's intent, to prioritize the quick distribution of loans to small businesses in distress while still ensuring the sound value of all its loans. Given the circumstances of the CARES Act, moreover-for which the SBA quickly stood up a multi-hundred billion dollar loan program for thousands of borrowers-Plaintiffs do not explain how the SBA realistically could have conducted all the studies, comparisons, and data-driven analyses upon which they insist.
With respect to Plaintiffs' argument that the SBA did not consider certain "protections afforded by the bankruptcy process," Plaintiffs ignore a number of undisputed characteristics of the bankruptcy process. For one thing, the purported safeguards noted by Plaintiffs require discretionary acts of vigilance by actors outside of the SBA's control. The SBA has no guarantee that the actors involved will monitor a debtor-in-possession's expenditures, let alone effectively. Although a bankruptcy court can impose conditions that limit how a debtor will use borrowed funds, nothing in the Bankruptcy Code requires that the bankruptcy court obligate a debtor to use PPP funds only for forgivable purposes. In fact, at least one bankruptcy court has already authorized a bankrupt debtor to use PPP proceeds for unauthorized purposes. In re Alaska Urological Inst., P.C., No. 20-00086 (Bankr. D. Alaska) (Dkt. No. 183) (authorizing the debtor in bankruptcy to use PPP funds for medical software expenses and professional fees).
Further undermining Plaintiffs' argument concerning the bankruptcy process is that, although a debtor in possession may receive the bankruptcy court's permission "to obtain unsecured credit," such as a PPP loan, the unsecured credit is treated as "an administrative expense" in the hierarchy of priority. 11 U.S.C. §§ 364(b), 507(a)(2). This has several ramifications, including: (1) the PPP lender, and by extension, the SBA as guarantor, would share administrative-expense priority with a potentially long list of other post-petition creditors, 11 U.S.C. § 503; (2) the bankruptcy court may authorize the debtor to obtain additional credit "with priority over any or all administrative expenses," 11 U.S.C. § 364(c)(1) (emphasis added); see also 11 U.S.C. § 364(d); and (3) if the bankruptcy converts into liquidation, all pre-conversion administrative-expense claims are subordinated to post-conversion claims. 11 U.S.C. § 726(b). Given these layers of priorities, the SBA was entirely reasonable in concluding that "providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of . . . non-repayment of unforgiven loans." Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451.
Even if a debtor has every intention of complying with its financial obligation, the very real risk remains that PPP loans to bankrupt applicants would go to creditors rather than employees. If a debtor's Chapter 11 reorganization were to fail-and many do-any unspent PPP funds would be property of the debtor's estate and subject to distribution according to creditor's priority. See 11 U.S.C. §§ 541(a), 726. At that point, no amount of oversight would supersede the Bankruptcy Code's priority list. The upshot is that taxpayer money could enrich creditors in the event of conversion or dismissal of the bankruptcy case. That scenario simply is not present with non-bankrupt borrowers. See generally Dkt. No. 100, pp. 24-25 (stating that Plaintiffs' argument distinguishing chapter 11 reorganizations from chapter 7 or 11 liquidations "pose[s] a false dichotomy" for which "the distinction" alleged by Plaintiffs is not "quite so stark"). Plaintiffs' overbroad generalizations about certain protections afforded by the Chapter 11 process highlight why federal courts defer to the agency's "weighing of risks and benefits" and the agency's "predictive judgments about areas that are within [its] field of discretion and expertise." California v. Azar, 950 F.3d 1067, 1096 (9th Cir. 2020). It was not arbitrary or capricious for the SBA to take into account the risks that bankrupt debtors posed to the PPP. It would, however, be erroneous for a court to substitute Plaintiffs' proposed rulemaking for that of the SBA. Id.
III. The Bankruptcy Court Properly Held That The SBA's Bankruptcy Exclusion Rule Satisfies Chevron 's Step Two.
A. The Bankruptcy Court Is Correct That The SBA's Bankruptcy Exclusion Rule Is Reasonable.
In addition to recommitting the case for the Bankruptcy Court to evaluate Plaintiffs' APA claim under State Farm, the District Court instructed the Bankruptcy Court to consider Plaintiffs' claims under Chevron's step two. [Dkt. No. 78, pp. 6-7.] Chevron articulates a two-step process. Garcia v. Sessions, 856 F.3d 27, 35 (1st Cir. 2017). The first step asks "whether Congress has directly spoken to the precise question at issue." Id. If not, the second step asks whether the agency's interpretation is permissible. Id. At step two, "[courts] do[] not simply impose [their] own construction on the statute, as would be necessary in the absence of an administrative interpretation." Id. Instead, "if the implementing agency's construction is reasonable, Chevron requires a federal court to accept the agency's construction of the statute." Id.; see also Gonzalez v. Sabol, 517 F.3d 29, 34-35 (1st Cir. 2008) ("If . . . we find the statute ambiguous, we afford significant deference to the agency's interpretation, and ask only whether the agency's answer is based on a permissible construction of the statute."). Where, as here, "Congress has entrusted the agency with rulemaking authority," "[p]articular deference is owed to the agency's interpretation of its own regulations." Me. Med. Ctr. v. Burwell, 841 F.3d 10, 17 (1st Cir. 2016). And where the agency makes a "choice represent[ing] a reasonable accommodation of conflicting policies that were committed to [its] care by the statute," courts "should not disturb it unless it appears . . . that the accommodation is not one that Congress would have sanctioned." Chevron, 467 U.S. at 845; see also Garcia, 856 F.3d at 39 (applying Chevron deference where the agency "reasonably balance[d]" various statutory provisions in "tension" with one another).
In holding that the SBA's bankruptcy exclusion rule was reasonable under Chevron's second step, the Eleventh Circuit emphasized the "manifestly competing interests" in the CARES Act: one the one hand, "the purpose of the PPP was to quickly help small businesses in distress or before they become distressed," but, on the other hand, "as we have stressed and stressed again, Congress did put the program in § 7(a), which has a sound value requirement that applies to 'all' § 7(a) loans." Gateway, 983 F.3d at 1262 (quoting 15 U.S.C. § 636(a)(6)). Congress, moreover, "did not accommodate [such manifestly competing interests] with specificity when it came to whether bankruptcy debtors are eligible for PPP loans," and instead "left that to the SBA." Id. According to the Eleventh Circuit, the SBA "reasonabl[y] accommodat[ed] . . . the competing interests . . . by replacing its usual lending criteria with a simple bright-line proxy based on bankruptcy status." Id. Gateway noted its holding was further buttressed "[g]iven all of the circumstances and the urgency with which [the SBA] was forced to act." Id.
B. Congress's Recent Passage Of The 2021 CAA Confirms the Bankruptcy Court's Holding And Forecloses Plaintiffs' Arguments.
If more were needed, Congress's recent passage of the 2021 CAA, supra pp. 7-8, resolves all doubt that the SBA's statutory interpretation is reasonable. As explained above, the 2021 CAA renders three categories of debtors potentially eligible for PPP loan guarantees, but traditional chapter 11 debtors, like Plaintiffs here, are not among them. The 2021 CAA unequivocally demonstrates that Congress has not mandated that traditional chapter 11 debtors be eligible for PPP loan guarantees. Barnhart v. Peabody, 537 U.S. 149, 168 (2003) (explaining that "items not mentioned" in a statute are "excluded by deliberate choice, not inadvertence" when the "items expressed are members of an associated group or series"); Andrus v. Glover Constr. Co., 446 U.S. 608, 616-17 (1980) ("Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent."). This well-accepted rule of statutory construction is based upon the principle of expressio unius est exclusio alterius, meaning that "legislative affirmative description implies denial of the nondescribed [items]." Cont'l Cas. Co. v. United States, 314 U.S. 527, 533 (1942).
In the SBA's first interim final rule issued since the 2021 CAA, it continues to prohibit bankrupt debtors from obtaining PPP loan guarantees. See Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, 86 Fed.Reg. 3692, 3698 (Jan. 14, 2021) (providing that "[t]he Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement" and lenders may continue to "rely on an applicant's representation concerning the applicant's or an owner of the applicant's involvement in a bankruptcy proceeding.")
The 2021 CAA, moreover, confirms the Bankruptcy Court's prior conclusion of law that Congress did not mandate that chapter 11 debtors be eligible for PPP loan guarantees in the initial CARES Act. The very same Congress that passed the initial CARES Act subsequently provided for potential eligibility only for limited classes of debtors and did not include Plaintiffs' class of traditional chapter 11 debtors. Through the most recent amendments to the PPP, then, "Congress is not merely expressing an opinion . . . but is acting on what it understands its own prior [legislative] acts to mean." Bell v. New Jersey, 461 U.S. 773, 785 n.12 (1983). In those prior legislative acts concerning the PPP, Congress was not mandating that the SBA guarantee PPP loans to traditional chapter 11 debtors.
The 2021 CAA marks the fourth time that Congress has amended the PPP. See supra, p. 7. Each of the four amendments came after the SBA promulgated its rule excluding debtors in bankruptcy from PPP loan guarantees and after bankrupt debtors brought publicized challenges under the APA and 11 U.S.C. § 525(a). In the first three amendments, Congress declined the opportunity to mandate that debtors in bankruptcy be eligible for PPP loan guarantees. In the 2021 CAA Congress provided potential eligibility only for three specific types of debtors, none of which includes traditional chapter 11 debtors.
C. Plaintiffs' Objections Are Inappropriate Under Chevron's Step Two.
Plaintiffs make a number of objections, most, if not all of which, relate to Chevron's first step and therefore are not appropriate for consideration here. For instance, Plaintiffs argue that "the CARES Act established eligibility requirements for participation in PPP and did not grant SBA permission to modify those requirements," and that a different title of the CARES Act- one that creates a non-PPP loan program for mid-sized business under the Secretary of the Treasury, see CARES Act, § 4003(b)(4), (c)(3)(D), 134 Stat. at 473-74 (codified at 15 U.S.C. § 1942)-expressly excludes bankrupt debtors. [Dkt. No. 110, ¶¶ 78-79.] These arguments concern the statutory question at Chevron's first step of whether the CARES Act unambiguously provides for PPP loan guarantees for debtors in bankruptcy. The Bankruptcy Court already rejected Plaintiffs' arguments in its first Proposed Findings of Fact and Conclusions of Law, which the District Court accepted and adopted. As noted above, Chevron's second step focuses on the reasonableness of the SBA's interpretation, which is not addressed by Plaintiffs' rehashed statutory arguments. Their statutory arguments have, in any event, been rejected by other U.S. Courts of Appeals, U.S. district courts, and bankruptcy courts. See, e.g., Pharaohs, GC, Inc. v. SBA, --- F.3d ---, No. 20-2170-cv, 2021 WL 821457, at *3-4 (2d Cir. Mar. 4, 2021); Gateway 983 F.3d at 1256-1262; Deja Vu-San Francisco LLC v. SBA, Case No. 20-cv-03982-LB, 2020 WL 6260010, at *7 (N.D. Cal.. Sept. 11, 2020); Defy Ventures, Inc. v. SBA, 469 F.Supp.3d 459, 472-73 (D. Md. 2020); Tradeways, 2020 WL 3447767, at *14; Diocese of Rochester v. SBA, 466 F.Supp.3d 363, 374-378 (W.D.N.Y. 2020); Henry, 2020 WL 3002124, at *8; Schuessler, 2020 WL 2621186, at *10-11.
Plaintiffs also incorporate their objections to the Bankruptcy Court's first Proposed Findings of Fact and Conclusions of Law, [Dkt. No. 62], in their discussion of Chevron's second step. They point specifically to ¶¶ 15-23 of their first objections. Those arguments likewise all focus on whether Congress has unambiguously addressed the question at issue at Chevron's first step. For instance, at ¶ 20 of their first objections, Plaintiffs argued that the phrase "any business concern" in 15 U.S.C. § 636(a)(36)(D) renders the CARES Act "unambiguous." Likewise, Plaintiffs argued at ¶ 22 of their first objections that § 4003(c)(3)(D) shows that Congress "[c]learly . . . knew how to alter debtors' rights." The Bankruptcy Court already rejected Plaintiffs' arguments in this regard, and the District Court accepted and adopted the Bankruptcy Court's Proposed Findings of Fact and Conclusions of Law at Chevron's first step. Plaintiffs' arguments are entirely inappropriate at Chevron's second step.
Plaintiffs' remaining arguments are meritless. First, they claim that "Congress established the PPP as a 'no look' program under which any company meeting basic eligibility requirements would be able to obtain PPP funds regardless of the company's creditworthiness," and it therefore "is an unreasonable construction of the CARES Act to treat bankruptcy status as an off switch that bars otherwise viable companies from obtaining [PPP loans] that are available to insolvent companies that have not filed for bankruptcy protection." [Dkt. No. 110, ¶ 81.] Second, Plaintiffs say that the "SBA's rationale for excluding debtors-that creditors could obtain PPP funds-applies with the same force to non-debtors because their creditors could assert claims to avoid and recover transfer of PPP funds under state fraudulent transfer law," so "[i]t is unreasonable to construe the CARES Act as excluding debtors from PPP but including insolvent non-debtors." Id. at ¶ 82.
To begin with, Congress's recent passage of the 2021 CAA entirely forecloses Plaintiffs' arguments. In any event, by implementing the PPP under the Section 7(a) Loan Program and leaving intact the "sound value" requirement, Congress did not establish the PPP as a "no look" program. That certain insolvent companies outside the bankruptcy process may obtain PPP loan guarantees, moreover, is inapposite. The SBA recognized that the exigent circumstances giving rise to the PPP made it impossible for lenders to undertake the customary case-by-case evaluation of a borrower's creditworthiness. Tradeways, 2020 WL 3447767, at *14 ("Time was of the essence. And, Congress clearly communicated the urgency of the crisis to the SBA."); First Interim Final Rule, 85 Fed.Reg. at 20, 811-12 (noting "[t]he CARES Act was enacted to provide immediate assistance" and "relief to America's small businesses expeditiously"). Accordingly, the SBA adopted the bankruptcy regulation after concluding that a streamlined process was necessary and consistent with congressional intent, see id., and that, particularly absent the safeguards provided by the usual, more extensive and tailored underwriting practices for Section 7(a) loans, allowing businesses in active bankruptcy to participate in the PPP would present "an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans." Fourth Interim Final Rule, 85 Fed.Reg. at 23, 451. The SBA's determination "did not arise out of thin [air]" since the "SBA's pre-existing [Section] 7(a) loan application asks a prospective borrower to disclose whether it or an affiliate has filed for bankruptcy." Tradeways, 2020 WL 3447767, at *14; SOP § 50 10 5(K) at 37, 180. A bright line rule excluding debtors in bankruptcy was thus a reasonable effort to accommodate the CARES Act's conflicting policies.
With respect to Plaintiffs' argument that creditors "could obtain PPP funds" from nondebtors by asserting claims against them under state fraudulent transfer law, Plaintiffs do not explain why this argument, even if true, means that a reviewing court should not afford the SBA Chevron deference. The SBA reasonably determined that the risk of guaranteeing PPP loans to bankrupt debtors was unacceptably high considering, inter alia, the fact that bankruptcy debtors are financially distressed and have competing creditors. In light of "the circumstances and the urgency with which [the SBA] was forced to act, and the "manifestly competing interests" in the CARES Act that the SBA sought to accommodate, Gateway, 983 F.3d at 1262, Plaintiffs objection that certain creditors may obtain PPP proceeds from non-debtors through state fraudulent transfer law is insufficient to establish that the SBA's bankruptcy exclusion rule was not reasonable. Id. ("In gauging the reasonableness of [the SBA's] interpretation, it does not matter if the SBA's is the reading [we] would have reached if the question initially had arisen in a judicial proceeding, because we cannot substitute our own judgment for the SBA's . . . Instead, we consider only whether the SBA's interpretation is rational.").
Consistent with the SBA's broad authority under the Section 7(a) Loan Program, it permissibly excluded debtors in bankruptcy from PPP loan guarantees. Schuessler, 2020 WL 2621186, at *10 ("Against this backdrop, the court cannot conclude that the SBA's adoption of a rule excluding debtors from the PPP is beyond the agency's delegated authority."); see also Tradeways, 2020 WL 3447767, at *14 ("[T]he Court cannot conclude that the SBA's rule is an unreasonable interpretation of the priorities evinced in the CARES Act."). Whether a court believes the SBA made the best statutory interpretation is inapposite. Gateway, 983 F.3d at 1262 ("We do not say [the SBA's rule] is an inevitable interpretation of the statute; but it is assuredly a permissible one."). The SBA's answer to the rulemaking powers thrust upon it reconciled Section 7(a)'s lending requirements with the goals of the CARES Act in a manner that was entirely reasonable.
CONCLUSION
In light of the foregoing, this Court should accept and adopt the Bankruptcy Court's Additional Proposed Findings and Conclusions.