United States Small Business Administration et al v. Alaska Urological Institute, P.C.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA
ALASKA UROLOGICAL
INSTITUTE, P.C.,
Plaintiff and
Appellee,
v.
UNITED STATES SMALL
BUSINESS ADMINISTRATION, et
al.,
Defendants and
Appellants.
Case No. 3:20-cv-00170-SLG
Bankruptcy Adv. No. 20-90004 GS
ORDER REGARDING MOTIONS FOR SUMMARY JUDGMENT
Before the Court at Docket 6 is Plaintiff Alaska Urological Institute’s (“AUI”)
Motion for Summary Judgment. Defendants United States Small Business
Administration (“SBA”); Jovita Carranza, Administrator of the SBA; Steven
Mnuchin, Secretary for the Treasury; and the United States responded in
opposition at Docket 9. Plaintiff replied at Docket 13. Also before the Court at
Docket 10 is Defendants’ Motion for Summary Judgment. Plaintiff responded in
opposition at Docket 13. Defendants replied at Docket 16. The Court heard
argument on the motions on August 14, 2020.
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BACKGROUND
A. The Paycheck Protection Program
On March 27, 2020, in response to the COVID-19 pandemic, Congress
enacted the Coronavirus Aid, Relief, and Economic Security Act ( “CARES Act”).1
Among other things, the CARES Act seeks to preserve American jobs in the face
of the economic uncertainty created by the global pandemic.2 Title I of the Act—
the Keeping American Workers Paid and Employed Act—created the Paycheck
Protection Program (“PPP”) to be administered by the SBA.3 The PPP was
codified in the SBA’s existing Section 7(a) loan program at 15 U.S.C. § 636(a)(36).4
Of the existing provisions of Section 7(a), § 636(a)(6) is most relevant to the
parties’ dispute and provides that: “[a]ll loans made under this subsection shall be
of such sound value or so secured as reasonably to assure repayment.”5
The PPP provides that an eligible small business may obtain a guaranteed
loan to cover authorized expenses, including payroll costs, mortgage interest, rent,
and utilities.6 The PPP loans may be forgiven if the borrower certifies that a
1 See CARES Act, P.L. 116–136, 134 Stat. 281 (2020).
2 See 166 Cong. Rec. S1975, 76 (daily ed. Mar. 24, 2020) (statement of Sen. McConnell); 166
Cong. Rec. E. E343 (daily ed. Mar. 31, 2020) (statement of Rep. Eshoo).
3 See CARES Act § 1102; 15 U.S.C. § 636(a)(36).
4 See P. L. 116–136, § 1102(a).
5 15 U.S.C. § 636(a)(6).
6 15 U.S.C. § 636(a)(36)(F)(i).
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specified percentage of the loan was used for those authorized purposes.7 The
loans are made by participating lenders and guaranteed by the SBA; if the loan
qualifies for forgiveness, the SBA pays the lender the amount forgiven plus any
interest accrued.8
The CARES Act granted the SBA emergency rulemaking authority, allowing
it to issue regulations to carry out the PPP without adherence to standard notice
requirements.9 Moreover, the CARES Act instructs that no later than 15 days after
its enactment, the SBA “shall issue regulations to carry out this title and the
amendments made by this title without regard to the notice requirements” of the
Administrative Procedure Act (“APA”).10 Pursuant to its emergency rulemaking
authority, the SBA published four interim final rules concerning the PPP, portions
of which are relevant to the current dispute.
The First Interim Rule was issued on April 2, 2020, and among other things,
provides that:
The intent of the Act is that SBA provide relief to America’s small
businesses expeditiously, which is expressed in the Act by giving all
lenders delegated authority and streamlining the requirements of the
regular 7(a) loan program. For example, for loans made under the
PPP, SBA will not require the lenders to comply with section 120.150
“What are SBA’s lending criteria?.” SBA will allow lenders to rely on
7 CARES Act § 1102(a)(2); 15 U.S.C. § 636(a)(36)(G); 15 U.S.C. § 9005(b).
8 CARES Act § 1106; 15 U.S.C. § 9005(b), (c)(3).
9 CARES Act § 1114; 15 U.S.C. § 9012.
10 15 U.S.C. § 9012.
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certifications of the borrower in order to determine eligibility of the
borrower and use of loan proceeds and to rely on specified documents
provided by the borrower to determine qualifying loan amount and
eligibility for loan forgiveness.11
The First Interim Rule outlines the program’s eligibility requirements.12 In relevant
part, it provides:
You are eligible for a PPP loan if you have 500 or fewer employees
whose principal place of residence is in the United States, or are a
business that operates in a certain industry and meet the applicable
SBA employee-based size standards for that industry, and
i. You are: A. A small business concern as defined in section 3 of the
Small Business Act (15 U.S.C. 632), and subject to SBA’s affiliation
rules under 13 CFR 121.301(f) unless specifically waived in the Act;
or B. A tax-exempt nonprofit organization described in section
501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans
organization described in section 501(c)(19) of the IRC, Tribal
business concern described in section 31(b)(2)(C) of the Small
Business Act, or any other business; and
ii. You were in operation on February 15, 2020 and either had
employees for whom you paid salaries and payroll taxes or paid
independent contractors, as reported on a Form 1099-MISC.
. . .
You must also submit such documentation as is necessary to
establish eligibility such as payroll processor records, payroll tax
filings, or Form 1099-MISC, or income and expenses from a sole
proprietorship. For borrowers that do not have any such
documentation, the borrower must provide other supporting
documentation, such as bank records, sufficient to demonstrate the
qualifying payroll amount.13
11 Business Loan Program Temporary Changes; Paycheck Protection Plan, 85 Fed. Reg. 20,811,
20,812 (Apr. 15, 2020) [hereinafter “First Interim Rule”].
12 Id.
13 Id.
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It also explains that some business are ineligible even if they meet the eligibility
requirements:
You are ineligible for a PPP loan if, for example: i. You are engaged
in any activity that is illegal under Federal, state, or local law; ii. You
are a household employer (individuals who employ household
employees such as nannies or housekeepers); iii. An owner of 20
percent or more of the equity of the applicant is incarcerated, on
probation, on parole; presently subject to an indictment, criminal
information, arraignment, or other means by which formal criminal
charges are brought in any jurisdiction; or has been convicted of a
felony within the last five years; or iv. You, or any business owned or
controlled by you or any of your owners, has ever obtained a direct or
guaranteed loan from SBA or any other Federal agency that is
currently delinquent or has defaulted within the last seven years and
caused a loss to the government.14
In addition to these eligibility requirements, the First Interim Rule provides
information about how much an applicant can borrow, what qualifies as payroll
costs, how the PPP loans can be used, the interest rate and maturity date of the
loan, the requirements for loan forgiveness, the consequences of misusing the
loans, the certifications required by the applicant, and other such details.15
Subsection (q) of the rule explains how to submit an application: applicants must
submit SBA Form 2483 (the “PPP Application Form”).16 The SBA published the
PPP Application Form along with the First Interim Rule; among other questions,
the form asks whether the applicant or any owner of the applicant is involved in
14 Id.
15 Id. at 20,812–14.
16 Id. at 20,811.
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any bankruptcy, and instructs that if so, the loan will not be approved.17 The parties
refer to this exclusion of debtors from the PPP program as the Bankruptcy
Exclusion, and its validity lies at the heart of the parties’ dispute.18 The First Interim
Rule establishes the disputed Bankruptcy Exclusion by reference to Form 2483,
but does not otherwise mention it or explain it.
The First Interim Rule also provides information for lenders, including who
is eligible to make the loans, the terms for loan underwriting, and other details
about the fees they receive, the terms and conditions, and whether loans can be
resold or purchased in advance.19 Relevant here, the First Interim Rule instructs
that with respect to underwriting, the lenders need only:
i. Confirm receipt of borrower certifications contained in Paycheck
Protection Program Application form issued by the Administration;
ii. Confirm receipt of information demonstrating that a borrower had
employees for whom the borrower paid salaries and payroll taxes on
or around February 15, 2020;
iii. Confirm the dollar amount of average monthly payroll costs for the
preceding calendar year by reviewing the payroll documentation
submitted with the borrower’s application; and
iv. Follow applicable SBA requirements.20
17 Docket 4-1 at 62 (AUI Completed Application Form 2483 dated May 22, 2020); Docket 4-1 at
70 (AUI Completed Application Form 2483 dated June 4, 2020).
18 Docket 6 at 29; Docket 10 at 15.
19 First Interim Rule, 85 Fed. Reg. 20,811, 20,815–16 (Apr. 15, 2020).
20 Id. at 20,815.
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The Second and Third Interim Rules, published April 15, 2020, and April 20,
2020, respectively, are likewise silent as to the disputed Bankruptcy Exclusion.21
However, on April 28, 2020, the SBA published the Fourth Interim Rule, which
addresses the Bankruptcy Exclusion for the first time, stating: “[i]f the applicant or
the owner of the applicant is the debtor in a bankruptcy proceeding . . . the
applicant is ineligible to receive a loan.”22 By way of explanation, the Fourth Interim
Rule provides:
[T]he Administrator, in consultation with the secretary, 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. In addition, the Bankruptcy Code
does not require any person to make a loan or a financial
accommodation to a debtor in bankruptcy. The 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.
Lenders may rely on an applicant’s representation concerning the
applicant’s or an owner of the applicant’s involvement in a bankruptcy
proceeding.23
In connection with this action, the SBA filed a declaration by John A. Miller, dated
June 5, 2020 (“Miller Declaration”).24 Mr. Miller is an employee of the SBA and
declares that he is “duly authorized to make the statements contained in [the Miller
21 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg.
20,817 (Apr. 15, 2020) [hereinafter “Second Interim Rule”] and Requirements for Certain Pledges
of Loans, 85 Fed. Reg. 21,747 (Apr. 20, 2020) [hereinafter “Third Interim Rule”].
22 Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg.
23,450, 23,451 (Apr. 28, 2020) [hereinafter “Fourth Interim Rule”].
23 Id.
24 Docket 13-3.
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Declaration] to explain the basis for the SBA’s” Bankruptcy Exclusion.25 In relevant
part, the Miller Declaration provides:
The reason for including the bankruptcy exclusion in form 2483 was
that SBA in consultation with Treasury determined that in order to
meet the challenge of rescuing the economy from the effects of the
Covid-19 virus pandemic, loan assistance authorized by the Cares Act
had to be provided as expeditiously as possible with as little as
possible underwriting. 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 the possible resolution of a
host of other issues and the prospect of the incurring of fees by the
lender in monitoring the bankruptcy proceeding, it was determined
that the wording of Form 2483 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. The
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. SBA decided that this purpose would not
be served by including all bankruptcies. 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.26
B. Procedural History
On March 25, 2020, AUI filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code.27 AUI provides medical services to the public “in the areas
of urology, oncology, radiation oncology, surgery, breast reconstructive and
25 Docket 13-3 at 2, ¶ 1.
26 Docket 13-3 at 5, ¶ 17.
27 Docket 6 at 5.
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cosmetic surgery, pulmonology and hematology, and integrative medicine.”28 AUI
also conducts clinical research, vaccines studies, and drug development.29 At the
time it filed its petition for Chapter 11, AUI employed 84 persons and saw 25,000
patients a year.30
On May 22, 2020, in the wake of the CARES Act, AUI filed an application
for PPP with the First National Bank Alaska.31 The application was denied
because AUI truthfully certified that it was in bankruptcy proceedings.32 AUI filed
a second application, on June 4, 2020, with Nuvision Federal Credit Union, dba
Denali.33 Again, the application was rejected because AUI was in bankruptcy.34
On June 17, 2020, AUI commenced this adversary bankruptcy action
against Defendants in the U.S. Bankruptcy Court for the District of Alaska,35 and
immediately moved for a temporary restraining order and preliminary injunctive
relief to enjoin the denial of its applications based solely on the Bankruptcy
28 Docket 4-3 at 4, ¶ 2 (Second Declaration of Tina Presley).
29 Docket 4-3 at 4, ¶ 2 (Second Declaration of Tina Presley).
30 Docket 4-3 at 4, ¶ 2 (Second Declaration of Tina Presley).
31 Docket 4-3 at 4, ¶ 3 (Second Declaration of Tina Presley); Docket 4-1 at 62 (AUI Completed
Application Form 2483 dated May 22, 2020).
32 Docket 4-3 at 4, ¶ 3 (Second Declaration of Tina Presley).
33 Docket 4-3 at 4, ¶ 3 (Second Declaration of Tina Presley); Docket 4-1 at 70 (AUI Completed
Application Form 2483 dated June 4, 2020).
34 Docket 4-3 at 4, ¶ 3 (Second Declaration of Tina Presley).
35 Docket 4-1 at 9 (Complaint).
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Exclusion.36 AUI alleged that (1) the Bankruptcy Exclusion was unlawful under
APA 5 U.S.C. § 706(2)(C), because it had been promulgated in excess of the
SBA’s statutory authority; (2) the exclusion was unlawful under 5 U.S.C. §
706(2)(A), because it is arbitrary and capricious; and (3) the exclusion violated 11
U.S.C. § 525(a)’s prohibition against discriminatory treatment of bankruptcy
debtors.37
On June 19, 2020, Defendants opposed the motion for injunctive relief and
filed a motion for withdrawal of reference, contending that the issues required
statutory interpretation of non-bankruptcy law and should be heard by this Court.38
On June 22, 2020, at a hearing on AUI’s motion for a temporary restraining order
(“TRO”) and preliminary injunction (“PI”), SBA voluntarily agreed to set aside the
requested funds, thereby resolving AUI’s motion for a TRO.39 On June 26, 2020,
the bankruptcy court issued an oral ruling granting AUI’s motion for a preliminary
injunction, finding that AUI had a high probability of success on its APA claims but
not on its discrimination claim under 11 U.S.C. § 525(a).40 The injunction
36 Docket 4-1 at 81 (Motion for Temporary Restraining Order and Preliminary Injunction).
37 Docket 4-1 at 87–88.
38 Docket 4-1 at 224 (Defendant’s Opposition to Plaintiff’s Motion for Temporary Restraining
Order); Docket 4-1 at 214, 215 (Motion for Withdrawal of Reference).
39 Docket 4-1 at 500 (Order on Temporary Restraining Order and Modifying Deadlines for Hearing
on Motion for Preliminary Injunction).
40 Docket 14 at 18, 19 (Excerpt of Transcript of Preliminary Injunction Ruling); Docket 4-6 at 9–11
(Order Granting Request for Preliminary Injunction).
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authorized AUI to answer “no” to the PPP application’s question about whether it
was in bankruptcy.41 Thereafter, AUI filed a PPP application with Fundera, and
received a package of loan documents from First Home Bank.42 On July 15, 2020,
AUI received $1,256,700 from First Home Bank; those funds are being held in trust
pending a decision from this Court as well as authorization of the use of funds by
the bankruptcy court.43
On July 10, 2020, Defendants filed a notice of appeal of the preliminary
injunction and requested that this Court, rather than the Bankruptcy Appellate
Panel, hear the appeal.44 On July 13, 2020, AUI withdrew its objection to the
withdrawal of the reference and on July 14, 2020, the bankruptcy court entered a
recommendation that this Court withdraw the reference of the underlying adversary
action and also hear the appeal.45 On July 31, 2020, this Court granted SBA’s
motion for withdrawal of reference and entered the parties’ proposed expedited
briefing schedule.46 As provided for in the schedule, the parties filed cross-motions
for summary judgment and argued the motions to the Court on August 14, 2020.
41 Docket 4-6 at 10 (Order Granting Request for Preliminary Injunction).
42 Docket 7 at 2–3, ¶¶ 4–9 (Declaration of Tina Presley re: PPP Loan).
43 Docket 7 at 3, ¶ 11 (Declaration of Tina Presley re: PPP Loan).
44 Docket 4-7 at 12 (Notice of Appeal Under 11 U.S.C. § 158 and Statement of Election).
45 Docket 4-7 at 8 (Plaintiff’s Withdrawal of Objection to Withdrawal of Reference); Docket 4-7 at
33–38 (Report and Recommendation).
46 Docket 12.
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At oral argument, with agreement from the parties, the Court stayed the briefing
on the appeal pending resolution of the summary judgment motions.
LEGAL STANDARD
I. Summary Judgment
Federal Rule of Civil Procedure 56(a) directs a court to grant summary
judgment “if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to a judgment as a matter of law.” An issue is
“genuine” if there is a sufficient evidentiary basis on which a reasonable fact-finder
could find for the non-moving party, and a dispute is “material” if it could affect the
outcome of the suit under the governing law.47 When considering a motion for
summary judgment, “[t]he evidence of the nonmovant is to be believed, and all
justifiable inferences are to be drawn in his favor.”48
DISCUSSION
The parties agree that there are no disputed facts and that the case is ripe
for summary judgment.49 The parties disagree only as to whether (1) the SBA is
protected from injunctive relief by sovereign immunity; (2) the SBA exceeded its
47 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
48 Moldex-Metric, Inc. v. McKeon Prods., Inc., 891 F.3d 878, 881 (9th Cir. 2018) (alteration in
original) (quoting Anderson, 477 U.S. at 255).
49 See Docket 6 at 10 and Docket 9 at 19, 20–21.
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statutory authority in promulgating the Bankruptcy Exclusion; and (3) the SBA’s
Bankruptcy Exclusion is arbitrary and capricious.50
I. Sovereign Immunity
As a threshold issue, the parties dispute whether the SBA is subject to
injunctive relief. In creating the SBA, Congress narrowed the SBA’s immunity in
15 U.S.C. § 634(b)(1), which provides:
Powers of the Administrator. In the performance of, and with
respect to, the functions, powers, and duties vested in him by this Act
the Administrator may—
(1) sue and be sued in any court of record of a State having general
jurisdiction, or in any United States district court, and jurisdiction is
conferred upon such district court to determine such controversies
without regard to the amount in controversy; but no attachment,
injunction, garnishment, or other similar process, mesne or final, shall
be issued against the Administrator or his property. . . .51
Defendants contend that § 634(b)(1) is an absolute bar to injunctive relief. But AUI
insists that in spite of the no-injunction language, the SBA is subject to injunctive
relief when it exceeds its agency authority.52
In support of its interpretation, AUI relies on the First Circuit’s decision in
Ulstein Maritime, Ltd. v. United States, which held:
50 See generally Docket 6 and Docket 10. AUI has withdrawn its claim that the SBA’s Bankruptcy
Exclusion rule violated 11 U.S.C. § 525’s prohibition of discrimination against debtors. Docket 13
at 26 (“Debtor has elected not to pursue its claim that the Bankruptcy Exclusion violates 11 U.S.C.
§ 525.”). Accordingly, the Court will not address it.
51 Small Business Act, P.L. 85-536, 72 Stat. 348 (1958) (codified at 15 U.S.C. § 634).
52 Docket 6 at 14–17.
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The no-injunction language of [section 634(b)] protects the agency
from interference with its internal workings by judicial orders attaching
agency funds, etc., but does not provide blanket immunity from every
type of injunction. In particular, it should not be interpreted as a bar
to judicial review of agency actions that exceed agency authority
where the remedies would not interfere with internal agency
operations.53
Thus, as AUI explains it, where “a disgruntled bidder, borrower, or other party
involved in a particular transaction, asserts that SBA exercised its discretion poorly
. . . in that particular transaction,” § 634(b)(1) protects the SBA from injunctive
relief.54 But, in contrast, AUI contends that it does not protect the SBA from
injunctive relief where the SBA’s rulemaking exceeds its agency authority.55
Although AUI acknowledges that courts are divided on the scope of the no-
injunction language, it contends that only the Fifth Circuit has held that § 634(b)(1)
is an absolute bar to injunctive relief and that in the other instances where courts
enforced § 634(b)(1) immunity, the agency was undisputedly operating within the
scope of its authority.56 AUI emphasizes that while the Ninth Circuit has not ruled
on the scope of sovereign immunity under § 634(b)(1), the district court for the
53 Docket 6 at 14 (alteration in original) (quoting 833 F.2d 1052, 1056 (1st Cir. 1987)). AUI
contends that other courts have expressed similar views. Docket 6 at 15 (citing Okla. Aerotronics
v. United States, 661 F.2d 976, 977 (D.C. Cir. 1981); Cavalier Clothes v. United States, 810 F.2d
1108, 1112 (Fed. Cir. 1987)).
54 Docket 13 at 9.
55 Docket 13 at 9.
56 Docket 13 at 7–8 (citing Hidalgo Cty. Emergency Serv. Found. v. Carranza, 962 F.3d 838, 840–
41 (5th Cir. 2020); Mar v. Kleppe, 520 F.2d 867, 869 (10th Cir. 1975) (commenting that other
cases “suggest[] that injunctive relief may be obtained if the Administrator exceeds his
authority.”)).
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Central District of California has concluded that injunctive relief is available where
the SBA acts beyond the scope of its authority.57 In Dubrow v. Small Business
Administration, the plaintiffs brought suit for injunctive relief on behalf of a class of
people whose applications for disaster relief loans from the SBA had been
denied.58 The SBA maintained that § 634(b) precluded injunctive relief against it,
but the district court disagreed, stating that: “it should be clear . . . that when the
Administrator acts beyond the scope of his authority, 15 U.S.C. § 634(b) does not
preclude injunctive action.”59 The court reasoned that “the language precluding
injunctive action against the administrator is qualified by the introductory clause of
15 U.S.C. § 634(b) ‘[] In the performance of, and with respect to[,] the functions,
powers[,] and duties vested in him by this [Act] . . . .’”60
AUI also cites a handful of recent decisions from bankruptcy courts across
the country that, when faced with similar challenges to the SBA’s Bankruptcy
Exclusion, held that an injunction is allowable where the SBA acts beyond its
agency authority.61
57 Docket 6 at 15 (citing Dubrow v. Small Bus. Admin., 345 F.Supp. 4 (C.D. Cal. 1972)).
58 345 F.Supp. at 5.
59 Id. at 7.
60 Id. at 7 n.5.
61 Docket 6 at 16–17 (citing In re Vestavia Hills, Ltd., Adv. No. 20-90073-LA, 2020 WL 3581019
(Bankr. S.D. Cal. June 26, 2020); In re Gateway Radiology Consultants, Adv. No. 8:20-ap-00330-
MGW, 2020 WL 3048197 (Bankr. M.D. Fla. June 8, 2020); Camelot Banquet Rooms, Inc. v. U.S.
Small Bus. Admin., Case. Nos. 20-C-0601, 20-C-634, 2020 WL 2088637 (E.D. Wis. May 1,
2020)).
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For their part, Defendants contend that the statute’s meaning is plain from
its language, thereby precluding the Court from further statutory interpretation.62
Defendants add that the Supreme Court of the United States instructs that waivers
of sovereign immunity should be narrowly construed in favor of the sovereign, and
that the waiver at issue clearly does not extend to injunctive relief.63 Defendants
contend there is no significance to the introductory clause of § 634(b)(1) as it is the
introductory phrase for fourteen enumerated powers and therefore does not serve
to narrow the “no injunction” language.64
Defendants maintain that the Fifth and Tenth Circuits have each interpreted
§ 634(b)(1) as an absolute bar to injunctive relief,65 and emphasize that the Fifth
Circuit recently invoked the SBA’s immunity to overturn a district court’s injunction
against the SBA prohibiting application of the Bankruptcy Exclusion.66 Defendants
contend that Ulstein and its progeny are inconsistent with the statute’s language,
enlarge jurisdiction beyond what the language requires, and ignore principles of
62 Docket 9 at 23 (citing Bostock v. Clayton Cty., U.S. ,140 S. Ct. 1731, 1754 (2020)).
63 Docket 9 at 22–23 (citing Ruckelshaus v. Sierra Club, 463 U.S. 680, 685 (1983); United States
v. Sherwood, 312 U.S. 584, 590 (1941)).
64 Docket 9 at 24 (distinguishing Dubrow v. Small Bus. Admin., 345 F.Supp. 4 (C.D. Cal. 1972)).
65 Docket 9 at 22 (citing Mar. v. Kleppe, 530 F.2d 867, 869 (10th Cir. 1975); Romeo v. United
States, 462 F.2d 1036, 1037–38 (5th Cir. 1972)).
66 Docket 9 at 22 (citing Hidalgo Cty. Emergency Serv. Found. v. Carranza, 962 F.3d 838, 840–41
(5th Cir. 2020)).
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statutory construction dictated by the Supreme Court.67 Indeed, Defendants
maintain that Ulstein’s interpretive approach, which they contend relied on the
statute’s legislative history to infer a broad waiver of sovereign immunity,68 was
discredited when the Supreme Court recently reaffirmed that “[l]egislative history
cannot supply a waiver that is not clearly evident from the language of the
statute.”69 Lastly, Defendants challenge AUI’s interpretation as limitless since any
challenge to the SBA’s rulemaking could be framed as unauthorized conduct.70
Defendants conclude that contrary to AUI’s assertions otherwise, § 634(b)(1) does
not leave a plaintiff with no relief; it simply bars injunctive relief.71
The Court adopts the view that § 634(b)(1) does not shield the SBA from
injunctive relief where the agency has exceeded its agency authority. Like the
Dubrow court, this Court finds that the introductory language of § 634(b)—“[i]n the
performance of, and with respect to, the functions, powers, and duties vested in
him by this Act”—presumes that the Administrator is acting within her authority and
qualifies the language precluding injunctive relief.72 Moreover, Defendants
67 Docket 9 at 23.
68 See Ulstein Mar., Ltd. v. United States, 833 F.2d 1052, 1056–57 (1st Cir. 1987).
69 Docket 16 at 5 (alteration in original) (quoting FAA v. Cooper, 566 U.S. 284, 290 (2012)).
70 Docket 9 at 23–24.
71 Docket 9 at 24.
72 See 345 F.Supp. 4, 7 n.5 (C.D. Cal. 1972); see also Small Business Act, P.L. 85-536, 72 Stat.
348 (1958) (codified at 15 U.S.C. § 634).
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interpretation would prevent courts from enjoining agencies that have exceeded
their authority even in cases of blatant constitutional violations; the Court agrees
with those courts that have concluded that such a result would be “absurd.”73
In the instant case, an injunction based on violations of the APA would “not
interfere with agency functioning,” but “merely require[] the SBA to function within
the parameters created for it by Congress.”74 Accordingly, the Court concludes
that the SBA cannot invoke sovereign immunity to avoid judicial review of unlawful
agency action.
II. Administrative Procedure Act Claims
AUI contends that the SBA’s Bankruptcy Exclusion is unlawful because (1)
it is arbitrary and capricious,75 and (2) it exceeds the SBA’s statutory authority.76
A. 5 U.S.C. § 706(2)(A)
73 In re Gateway Radiology Consultants, Adv. No. 8:20-ap-00330-MGW, 2020 WL 3048197, at *9
(Bankr. M.D. Fla. June 8, 2020); see also Camelot Banquet Rooms, Inc. v. U.S. Small Bus.
Admin., Case. Nos. 20-C-0601, 20-C-0634, 2020 WL 2088637, at *4 (E.D. Wis. May 1, 2020) (“[I]f
provisions such as § 634(b)(1) meant that the agency could never be enjoined, then an agency
could adopt unconstitutional policies and continue to follow them even after a court declared them
unconstitutional . . . [including] a policy stating that it will extend small business loans only to
companies owned by white men.”); DV Diamond Club of Flint, LLC v. U.S. Small Bus. Admin.,
Case No. 20-cv-10899, 2020 WL 2315880, at *7–8 (E.D. Mich. May 11, 2020) (“Plaintiffs here
seek only ‘to set aside unlawful agency action.’”); Defy Ventures, Inc. v. U.S. Small Bus. Admin.,
Case Nos. CCB-20-1838, CCB-20-1736, 2020 WL 3546873, at *6 (D. Md. June 29, 2020)
(distinguishing case law denying injunctions where “[n]either injunction related to the SBA in its
rulemaking capacity”).
74 In re Vestavia Hills, Ltd., Adv. No. 20-90073-LA, 2020 WL 3581019, at *5 (Bankr. S.D. Cal. June
26, 2020).
75 Docket 6 at 21–36.
76 Docket 6 at 17–21.
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Section 706(2)(A) of the APA provides that a “reviewing court shall . . . hold
unlawful and set aside agency action, findings, and conclusions found to be . . .
arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law.”
AUI’s threshold argument is straightforward: the Bankruptcy Exclusion is
arbitrary and capricious because the record is devoid of agency reasoning. AUI
contends that the Court’s review of agency action is limited to the matters that the
agency considered at the time of its decision, and that here, “there is no evidence
of what the SBA actually considered, or exactly who at SBA actually did the
considering.”77 AUI contends that there is “no administrative record whatsoever
supporting the SBA’s decision” to implement the Bankruptcy Exclusion.78
Accordingly, it concludes that the Bankruptcy Exclusion is necessarily arbitrary and
capricious: “if there is no stated rationale at all, then that action cannot be anything
but arbitrary and capricious.”79 In support of its position, AUI quotes at length from
the TRO and PI hearings, and subsequent order, of the bankruptcy court for the
Western District of Washington in Astria Health v. U.S. Small Business
Administration.80 In evaluating the SBA’s Bankruptcy Exclusion, the Astria court
77 Docket 6 at 22–26 (discussing Dep’t of Homeland Sec. v. Regents of the Univ. of Cal., __ U.S.
__, 140 S. Ct. 1891 (2020)).
78 Docket 6 at 26.
79 Docket 6 at 26.
80 Docket 6 at 27–31. AUI attached to its motion the transcripts for the TRO and PI hearings in
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concluded that there was “essentially no administrative record supporting the
ultimate conclusion” and that a “nonexistent record, by definition, cannot be
sufficient to support any conclusion.”81
AUI contends that neither the interim rules nor the Miller Declaration are part
of the administrative record. With regards to the interim rules, AUI contends that
the administrative record is meant to justify the agency action, not be the action,
reasoning that otherwise the action will always be an administrative record that
justifies itself.82 Separately, AUI urges the Court to reject the Miller Declaration as
an inappropriate post-hoc rationalization,83 emphasizing that multiple courts have
done just that.84 AUI contends that the disparity between an earlier version of the
Miller Declaration (dated May 14, 2020), and the one filed in this action (dated June
5, 2020) reveals that the justifications therein for the Bankruptcy Exclusion are
post-hoc rationalizations.85 Specifically, AUI highlights the fact that the earlier
that case as exhibits. See Docket 6 at 39–56; Docket 6 at 57–105.
81 Astria Health v. U.S. Small Bus. Admin., Adv. No. 20-0016-WHL, 2020 Bankr. LEXIS 1720, at
*21 (Bankr. E.D. Wash. June 10, 2020)). AUI also relies on In re: Roman Catholic Church of the
Archdiocese of Santa Fe, in which the Bankruptcy Court for the District of New Mexico “held that
the SBA bankruptcy exclusion rule was arbitrary and capricious.” Docket 6 at 32 (citing 615 B.R.
644, 654 (Bankr. D.N.M. 2020)).
82 Docket 13 at 22.
83 Docket 6 at 33.
84 Docket 6 at 33–34 (citing PCT Int’l v. Carranza, Adv. No. 2-20-00118 (Bankr. D. Ariz. June 12,
2020)); Docket 13 at 23 (citing Tradeways, Ltd. v. U.S. Dept. of the Treasury, Case No. ELH-20-
1324, 2020 WL 3447767, at *15 n.8 (D. Md. June 24, 2020)). A transcript of the oral decision in
PCT Int’l is in this record at Docket 4-1 at 378–416.
85 Docket 13 at 24. AUI attached the May 14, 2020 declaration to its filing at Docket 13. See
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declaration states that the “purpose [of the PPP] would not be served in a chapter
11 liquidation or in a chapter 7 case,” whereas the declaration filed in this case
states that the “purpose would not be served by including all bankruptcies.”86 AUI
contends that this change demonstrates that the SBA realized that the earlier Miller
Declaration did not indicate that PPP loans were being denied to Chapter 11
reorganization debtors and changed the language to provide justification for the
Bankruptcy Exclusion.87
AUI also challenges the Miller Declaration on substantive grounds.88 It
contends that the Miller Declaration is devoid of any evidence that the SBA
communicated with the Secretary of the Treasury or that any real analysis was
undergone in those alleged communications.89 It adds that the Miller Declaration
reveals that the SBA relied on factors that Congress had not intended it to
consider—namely, the risk of unauthorized use of funds and non-repayment—and
that it establishes that the SBA has no expertise in making loans to debtors and
thus no basis on which to conclude that debtors posed those risks or that excluding
Docket 13-4. The May 14, 2020 declaration was filed in Springfield Medical Care Center Systems,
Inc. v. Carranza, Adv. No. 20-01004 (Bankr. D. Vt. May 14, 2020).
86 Docket 13 at 24 (first quoting Docket 13-4; then quoting Docket 13-3).
87 Docket 13 at 24–25.
88 Docket 6 at 33.
89 Docket 6 at 35 (citing PCT Int’l v. Carranza, Adv. No. 2-20-00118 (Bankr. D. Ariz. June 12,
2020), in this record at Docket 4-1 at 368).
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them would streamline the process.90 AUI maintains that the Miller Declaration
provides no explanation for the absence of mention of the Bankruptcy Exclusion in
the first three interim rules, and makes no effort to reconcile the Bankruptcy
Exclusion with the statement in the Third Interim Rule that “no creditworthiness
assessment is required for PPP loans.”91
Defendants dispute that the Bankruptcy Exclusion is arbitrary and
capricious. Defendants contend that, contrary to AUI’s assertions, the relevant
administrative record consists not only of the SBA’s four interim rules, but also the
Miller Declaration.92 They maintain that a declaration of agency policy is an
acceptable method to convey the reasoning behind the agency’s decision-making,
especially where, as here, there was limited time to promulgate the rules.93 They
dispute that either the Fourth Interim Rule or the Miller Declaration is an invalid
post-hoc rationalization, contending instead that both are valid subsequent
explanations of the decisions made in the First Interim Rule and Application Form
2483.94 Defendants maintain that while an agency may not make a decision for
90 Docket 6 at 34–35 (citing PCT Int’l v. Carranza, Adv. No. 2-20-00118 (Bankr. D. Ariz. June 12,
2020), in this record at Docket 4-1 at 368).
91 Docket 6 at 35–36 (quoting Third Interim Rule, 85 Fed. Reg. 21,747, 21,751 (Apr. 20, 2020)).
92 Docket 9 at 43–44, 46. Defendants acknowledge that the record is small, but note that the SBA
only had fifteen days to issue the regulations. Docket 9 at 46–47.
93 Docket 16 at 14–15 (citing Clifford v. Pena, 77 F.3d 1414, 1418 (D.C. Cir. 1996)).
94 Docket 16 at 14–16 (citing Dep’t of Homeland Sec. v. Regents of the Univ. of Cal., __ U.S. __,
140 S. Ct. 1891, 1907 (2020)). Defendants contend that the differences between the two Miller
Declarations highlighted by AUI are explained by the fact that the earlier declaration was a
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one reason and then attempt to justify it with a different reason later, it can offer a
fuller explanation as long as it reflects the agency’s reasoning at the time of the
agency action.95
Defendants contend that the record shows that the SBA’s Bankruptcy
Exclusion decision was based on consideration of multiple factors including:
(a) Congress’s objective of providing immediate and substantial relief
to small businesses, Miller Decl. ¶¶ 5, 17; (b) Congress’s decision to
implement the PPP under section 7(a), id. ¶ 6; (c) Congress’s decision
not to alter section 7(a)’s sound value requirement, id. ¶¶ 6–13; (d)
the SBA’s decades-long focus on bankruptcy status as relevant to
“sound value” for section 7(a) loan guarantees, id. ¶¶ 8–12; (e) the
need to execute Congress’s objective through a two-page form reliant
upon borrower certifications, id. ¶ 17; and (f) the risk of lending to
borrowers in bankruptcy. Id.96
Based on the foregoing, Defendants contend that “the agency’s path to its ultimate
conclusion may reasonably be discerned,” adding that “[f]or example, the SBA
determined that ‘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 possible resolution of a host of other issues.’”97 Defendants add that the
Bankruptcy Exclusion was “a way to ‘meet the challenge of rescuing the economy’
personal affidavit, whereas the one at issue in this case is an official agency statement wherein
Mr. Miller was authorized to make statements to explain the SBA’s decision-making. Docket 16
at 16–17.
95 Docket 9 at 44 (citing Regents of the Univ. of Cal., 140 S. Ct. at 1909–10).
96 Docket 9 at 42–43.
97 Docket 9 at 43 (alteration in original) (quoting Docket 13-3 at 5, ¶ 17).
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while providing loan guarantees ‘as expeditiously as possible with as little as
possible underwriting’” and that it “sought to reduce the risk that PPP loans would
not be used as Congress intended.”98 As another example, Defendants suggest
that “the SBA concluded that the PPP’s placement within the section 7(a) program
meant its historical consideration of an applicant’s bankruptcy status should
continue.”99 Defendants contend that since lenders do not typically, if ever, extend
Section 7(a) loans to debtors in active bankruptcy, the SBA’s Bankruptcy Exclusion
plausibly relied on its long-standing expertise in guaranteeing Section 7(a)
loans.100 Thus, Defendants maintain that the record shows that the SBA examined
the relevant data and articulated a satisfactory explanation for the Bankruptcy
Exclusion that connects its findings to the rule.101
Defendants further contend that based on the interim rules alone, the Court
should conclude that the agency examined the relevant data including “(1) the risks
debtors in bankruptcy pose to the PPP, (2) an appropriate application form to
streamline the loan process, and (3) the certifications necessary for the agency to
ensure its loan guarantees complied with existing law,” and that it “rationally
concluded that the bankruptcy exclusion . . . allowed the SBA to provide relief to
98 Docket 9 at 43 (quoting Docket 13-3 at 5, ¶ 17).
99 Docket 9 at 43 (citing Docket 13-3 at 4, ¶¶ 12–13).
100 Docket 9 at 43.
101 Docket 9 at 43–44.
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America’s small businesses expeditiously and in compliance with section 7(a)
statutory requirements and congressional intent.”102 They maintain that the First
Interim Rule provides the reasoning behind the Bankruptcy Exclusion: “namely, to
‘streamlin[e] the requirements of the regular 7(a) loan program.’”103 Thus, the First
Interim Rule provides that lenders can rely on certifications of the borrower to
determine eligibility and limit underwriting to a review of the PPP Application Form
(which includes the Bankruptcy Exclusion.).104 Defendants draw the following
conclusion:
[T]he SBA’s First Interim Final Rule expressly precludes debtors in
bankruptcy from obtaining PPP loan guarantees and explains the
reasoning behind the bankruptcy exclusion; namely to ‘streamlin[e]
the requirements of the regular 7(a) loan program’—i.e., to truncate
section 7(a) underwriting requirements—in order to provide PPP loan
guarantees expeditiously and consistent with congressional intent.105
They add that the Fourth Interim Rule then provides detail to this reasoning by
explaining that the Administrator and Secretary of the Treasury had concluded that
102 Docket 9 at 47. Defendants contend that, contrary to AUI’s position, rules are part of the
administrative record. Defendants explain that, as part of the traditional notice-and-comment
rulemaking process, agencies publish rules after the notice period is over that respond to
comments and explain the basis and purpose of the rule and that these explanations are
acceptable statements of agency decision-making. Docket 16 at 14–15.
103 Docket 9 at 45 (quoting First Interim Rule, 85 Fed. Reg. 20,811, 20,812 (Apr. 15, 2020)).
104 Docket 9 at 45.
105 Docket 9 at 45 (quoting First Interim Rule, 85 Fed. Reg. at 20,812).
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providing PPP loans to debtors would present an unacceptably high risk of
unauthorized use of funds or non-repayment of unforgiven loans.106
The Court’s review of agency action under § 706(2) is narrow; a court is not
to substitute its own judgment for that of the agency.107 “Nevertheless, the agency
must examine the relevant data and articulate a satisfactory explanation for its
action including a ‘rational connection between the facts found and the choice
made.’”108 As the Ninth Circuit explained:
[‘An] agency rule would be arbitrary and capricious if the agency has
relied on factors which Congress has not intended it to consider,
entirely failed to consider an important aspect of the problem, offered
an explanation for its decision that runs counter to the evidence before
the agency, or is so implausible that it could not be ascribed to a
difference in view or the product of agency expertise.’109
It is undisputed that “judicial review of agency action is limited to ‘the grounds that
the agency invoked when it took the action.’”110 As Defendants correctly note, the
relevant agency action here is the SBA’s promulgation of the First Interim Rule,
which implements the Bankruptcy Exclusion by reference to Form 2483, the PPP
106 Docket 9 at 45–46 (citing Fourth Interim Rule, 85 Fed. Reg. 23,450, 23,451 (Apr. 28, 2020)).
107 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
108 Id. (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S 156, 168 (1962)).
109 Ctr. for Biological Diversity v. Zinke, 900 F.3d 1053, 1067 (9th Cir. 2018) (alteration in original)
(quoting Greater Yellowstone Coal., Inc. v. Servheen, 665 F.3d 1015, 1023 (9th Cir. 2011)).
110 Regents of the Univ. of Cal., 140 S. Ct. at 1907 (quoting Michigan v. EPA, 576 U.S. 743, 758
(2015)).
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Application Form.111 The Fourth Interim Rule and the Miller Declaration may
elaborate on the Bankruptcy Exclusion, but they are not the agency actions under
consideration.
The Court begins its analysis with the First Interim Rule. Notably, the First
Interim Rule does not expressly mention the Bankruptcy Exclusion. Rather,
section 2(q) of the rule provides:
What forms do I need and how do I submit the application? The
applicant must submit SBA Form 2483 (Paycheck Protection Program
Application Form) and payroll documentation, as described above.
The lender must submit SBA Form 2484 (Paycheck Protection
Program Lender’s Application for 7(a) Loan Guaranty) electronically
in accordance with program requirements and maintain the forms and
supporting documentation in its files.112
In turn, Form 2483, published separately by the SBA, asks “[i]s the Applicant or
any owner of the Applicant . . . presently involved in any bankruptcy?”113 It instructs
that the loan will not be approved if the answer is yes.114 Thus, through reference
to the PPP Application Form 2483, the Bankruptcy Exclusion was promulgated as
part of the First Interim Rule.
111 Docket 16 at 14.
112 Id.
113 Docket 4-1 at 62 (AUI Completed Application Form 2483 dated May 22, 2020); Docket 4-1 at
70 (AUI Completed Application Form 2483 dated June 4, 2020).
114 Docket 4-1 at 62 (AUI Completed Application Form 2483 dated May 22, 2020); Docket 4-1 at
70 (AUI Completed Application Form 2483 dated June 4, 2020).
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The Court finds that neither the First Interim Rule nor Form 2483 purports to
explain the SBA’s decision to implement the Bankruptcy Exclusion. Indeed,
although the First Interim Rule contains a section on applicant eligibility and a
section on ineligibility, neither section makes mention of bankruptcy.115
Undeterred by this, Defendants contend that the First Interim Rule does in fact give
a reason for the Bankruptcy Exclusion: the SBA wanted to streamline the
requirements of the regular Section 7(a) loan program to deliver rapid relief, as
Congress intended.116 Defendants rely on the First Interim Rule’s language that
“[t]he intent of the Act is that SBA provide relief to America’s small businesses
expeditiously, which is expressed in the Act by giving all lenders delegated
authority and streamlining the requirements of the regular 7(a) loan program.”117
The Bankruptcy Exclusion purportedly aims to achieve this streamlining.
The Court is not persuaded that this streamlining language—nestled in the
general background section of the rule—can reasonably be understood as the
SBA’s explanation for the Bankruptcy Exclusion, which is created only by the
reference to Form 2483 in an entirely different section of the rule. Accordingly, the
Court agrees with AUI that the First Interim Rule does not contain any reason or
explanation for the Bankruptcy Exclusion and that on this basis alone, the Court
115 First Interim Rule, 85 Fed. Reg. at 20,812..
116 Docket 9 at 45.
117 Docket 9 at 45 (quoting First Interim Rule, 85 Fed. Reg. at 20,812.
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could conclude that the SBA did not engage in reasoned decision-making as
required by 5 U.S.C. § 706(2)(A).118
Defendants contend that the link between “streamlining” and the Bankruptcy
Exclusion is illuminated by the Fourth Interim Rule, which provides:
The Administrator, in consultation with the Secretary, 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. In addition, the Bankruptcy Code
does not require any person to make a loan or a financial
accommodation to a debtor in bankruptcy. The 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.
Lenders may rely on an applicant’s representation concerning the
applicant’s or an owner of the applicant’s involvement in a bankruptcy
proceeding.119
Defendants explain that the SBA was required under § 636(a)(6) to ensure that the
PPP loans were of sound value, but realized that traditional underwriting was not
feasible in light of Congress’s expeditious relief mandate; thus, the SBA opted for
the blunter but more efficient Bankruptcy Exclusion.120
Although this argument has surface appeal, it does not square with the
SBA’s contemporaneous statements. In the first instance, whereas the First
118 Cf. Dep’t of Homeland Sec. v. Regents of the Univ. of Cal., __ U.S. __, 140 S. Ct. 1891, 1905
(2020); see also Astria Health v. U.S. Small Bus. Admin., Adv. No. 20-0016-WHL, 2020 Bankr.
LEXIS 1720, at *21 (Bankr. E.D. Wash. June 10, 2020) (“A nonexistent record, by definition,
cannot be sufficient to support any conclusion.”).
119 Fourth Interim Rule, 85 Fed. Reg. 24,350, 23,451 (Apr. 28, 2020).
120 Docket 16 at 17–18 (“[T]he sound value rule remained, and so while underwriting did not apply
to the PPP, some requirements were necessary to ensure that loan proceeds were used properly
and would be repaid if not.”).
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Interim Rule mentions streamlining, but fails to connect it to the Bankruptcy
Exclusion, the Fourth Interim Rule presents the opposite problem: it mentions the
Bankruptcy Exclusion, but does not connect it to the SBA’s desire to streamline
the loan process. Indeed, in the Court’s view, the Fourth Interim Rule’s reasoning
“bears little relationship to that” of the First Interim Rule (assuming the Court
accepts Defendants’ contention that the First Interim Rule justifies the Bankruptcy
Exclusion on the basis of streamlining).121 Moreover, the Fourth Interim Rule does
not mention, much less rely on, the sound value requirement of § 636(a)(6). Thus,
while Defendants take as a given that the Bankruptcy Exclusion flows naturally
from the sound value requirement, the Fourth Interim Rule does not expressly state
as much. Even assuming it did, however, the First Interim Rule likewise does not
mention the sound value requirement or provide any indication that the SBA was
concerned with abiding by § 636(a)(6) while simultaneously striving for rapid
implementation. In fact, as part of the First Interim Rule, the SBA effectively waived
the sound value requirement by assuring lenders they need not abide by the SBA’s
lending criteria as set forth in 13 C.F.R. § 120.150.122 Those criteria appear to be
the SBA’s way of complying with § 636(a)(6), as that regulation specifies that
121 Regents of the Univ. of Cal., 140 S. Ct. at 1908 (concluding that although legal certainty is
related to illegality, the two justifications are meaningfully different).
122 First Interim Rule, 85 Fed. Reg. 20,811, 20,812 (Apr. 28, 2020) (“[F]or loans made under the
PPP, SBA will not require the lenders to comply with section 120.150.”).
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“[l]oans must be so sound as to reasonably assure repayment.”123 And yet in the
First Interim Rule, the SBA expressly waived those criteria for PPP loans.124
Consistent with this approach, the Third Interim Rule explains that “[t]he
Administrator recognizes that, unlike other SBA loan programs, the financial terms
for PPP Loans are uniform for all borrowers, and the standard underwriting process
does not apply because no creditworthiness assessment is required for PPP
Loans.”125 The SBA affirmatively represented that it was unconcerned with
creditworthiness, without caveat or other indication that it was striving to balance
§ 636(a)(6) with its streamlining goal.
Defendants also rely on the Miller Declaration to bolster the link between the
First Interim Rule’s “streamlining” language and the Bankruptcy Exclusion.
Specifically, the Miller Declaration explains that the SBA decided to exclude
debtors in bankruptcy because a case-by-case inquiry into the state of their
proceedings and the necessary court orders would delay disbursement of funds
123 13 C.F.R. 120.150’s criteria include: “(a) Character, reputation, and credit history of the
applicant (and the Operating Company, if applicable), its Associates, and guarantors; (b)
Experience and depth of management; (c) Strength of the business; (d) Past earnings, projected
cash flow, and future prospects; (e) Ability to repay the loan with earnings from the business; (f)
Sufficient invested equity to operate on a sound financial basis; (g) Potential for long-term
success; (h) Nature and value of collateral (although inadequate collateral will not be the sole
reason for denial of a loan request); and (i) The effect any affiliates (as defined in part 121 of this
chapter) may have on the ultimate repayment ability of the applicant.”
124 See First Interim Rule, 85 Fed. Reg. 20,811, 20,812 (Apr. 15, 2020) (“[F]or loans made under
the PPP, SBA will not require the lenders to comply with section 120.150.”). Defendants also
characterize the “creditworthy requirement” as “flow[ing] from 15 U.S.C. § 636(a)(6).” Docket 10
at 12.
125 Third Interim Rule, 85 Fed. Reg. 21,747, 21,751 (Apr. 20, 2020).
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and frustrate Congress’s mandate to provide assistance expeditiously.126 Mr.
Miller also posited that the loans might not be used to “pay . . . employees and
maintain operations” if given to debtors because “creditors . . . could assert claims
to the PPP loan funds” and interfere with those authorized uses.127
Be that as it may, the Court does not consider the Miller Declaration to be
part of the administrative record. In Clifford v. Pena, the case cited by Defendants
in support of their use of the Miller Declaration, the D.C. Circuit affirmed the district
court’s decision to supplement the record with a declaration by the director of an
agency that was offered “to provide the court with background information about
the subsidy program and the current state of American shipping industry,
information underlying the . . . Administration’s decision and well known to the
agency and to the parties.”128 In contrast, the Miller Declaration is primarily offered
to introduce justifications for the Bankruptcy Exclusion; it is not background
information and its assertions are not well known. Indeed, for all the same reasons
that the Court finds it implausible that the Fourth Interim Rule purports only to
provide additional detail to the reasoning of the First Interim Rule, so too it finds
for the Miller Declaration. However, because the Fourth Interim Rule is clearly part
of the administrative record, the Court reviews it as part of its analysis, whereas
126 Docket 13-3 at 5, ¶ 17.
127 Docket 13-3 at 5, ¶ 17.
128 Clifford v. Pena, 77 F.3d 1414, 1418 (D.C. Cir. 1996).
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the Miller Declaration is not part of the administrative record.129 Regardless,
because the Court concludes that both the Fourth Interim Rule and the Miller
Declaration provide post-hoc rationalizations for the Bankruptcy Exclusion,
unconnected to the First Interim Rule’s language, it cannot consider either in
evaluating whether the disputed agency action is arbitrary and capricious.
Moreover, even if the Court considers the justifications given in the Fourth
Interim Rule as the contemporaneous explanation for the Bankruptcy Exclusion, it
still concludes that the exclusion is arbitrary and capricious. The SBA does not
disclose what data or factors it considered in reaching the conclusions it offers in
the Fourth Interim Rule, making it difficult to determine whether the SBA offers a
“satisfactory explanation for its action including a ‘rational connection between the
facts found and the choice made.’”130 Nevertheless, the SBA’s cursory explanation
therein reveals that it failed to consider important aspects of the problem, and that
129 See PCT Int’l v. Carranza, Adv. No. 2-20-00118 (Bankr. D. Ariz. June 12, 2020), in this record
at Docket 4-1 at 368 (concluding that the Miller declaration “looks like an after-the-fact attempt to
explain why that no bankruptcy provision was put in the loan agreement in the first place) and
Tradeways, Ltd. v. U.S. Dept. of the Treasury, Case No. ELH-20-1324, 2020 WL 3447767, at *15,
n.8 (D. Md. June 24, 2020) (reasoning that “‘the focal point for judicial review’ under the APA
‘should be the administrative record already in existence, not some new record made initially in
the reviewing court,’” and concluding that “[f]or this reason, the Court does not rely on the
Declaration of John A. Miller”) (quoting Camps v. Pitts, 411 U.S. 138, 142 (1973)).
130 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting
Burlington Truck Lines, Inc. v. United States, 371 U.S 156, 168 (1962)).
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its decision is counter to the evidence before the agency and entirely
implausible.131
First, the SBA failed to consider the protections afforded by the bankruptcy
process.132 For example:
A debtor in chapter 11 bankruptcy must give notice to interested
parties where it intends to borrow money outside the ordinary course
of business. If the bankruptcy court permits the debtor to borrow
money, the court can impose conditions on the debtor’s doing so such
as restricting use of the loan proceeds. Moreover, debtors are
required to file monthly operating reports detailing the debtor’s
receipts and disbursements.133
Accordingly, debtors are more closely monitored in their use of funds than other
businesses, underscoring the arbitrariness of the SBA’s decision to exclude them
for posing a high risk of misusing the PPP loan funds.134 Likewise, the SBA failed
to consider that in the unlikely event that the debtor did misuse funds, the
131 As Judge Holt stated in Astria Health v. U.S. Small Bus. Admin., the SBA fails to “show [its]
work,” as there is “basically nothing explaining or developing how the SBA’s conclusion was
reached, let alone anything supporting it is a substantive policy matter.” Adv. No. 20-0016-WHL,
2020 Bankr. LEXIS 1720, at *21–22 (Bankr. E.D. Wash. June 10, 2020).
132 Astria, 2020 Bankr. LEXIS 1720, at *25. (“[T]his conclusion flies in the face of the expansive
and persistent supervision of such debtors by the bankruptcy court, the United States Trustee
Program via the Department of Justice, creditors. . . . The bankruptcy code contains an array of
tools that can make repayment more likely . . . .”).
133 In re Vestavia Hills, Ltd., Adv. No. 20-90073-LA, 2020 WL 3581019, at *9 (Bankr. S.D. Cal.
June 26, 2020).
134 Mr. Miller represents that debtors are never afforded Section 7(a) loans, thus confirming that
the agency does not have special expertise or knowledge about the risk of loaning to debtors.
Docket 13-3 at 4, ¶ 13.
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Bankruptcy Code would give priority to repayment of PPP Loans made to Chapter
11 debtors:
If a bankruptcy court approves a debtor’s postpetition financing
motion, the lender is entitled to an administrative expense claim under
Bankruptcy Code § 503(b)(1). Administrative expense claims—such
as one for a PPP loan—must be paid in full by the effective date of
the confirmation.135
These protections of the bankruptcy process “are part of the law that every person
in the country, including the SBA and everyone who works there is presumed to
know, but there was nothing indicating any consideration of these tools by the
SBA.”136
Second, the SBA failed to consider the fact that Congress was not
concerned with the risk of non-repayment. Notwithstanding that the PPP is grafted
onto Section 7(a), which includes a sound value requirement, the overarching
purpose and tenor of the PPP indicates that its loans were intended to be forgiven:
“Congress requires no collateral or personal guarantee to obtain a PPP loan, and
Congress structured the PPP loans to be completely forgivable so long as the
borrower uses the loan proceeds for covered expenses and provides
documentation of such to its lender.”137 Simply put, the “PPP loans are designed
135 In re Gateway Radiology Consultants, Adv. No. 8:20-ap-00330-MGW, 2020 WL 3048197, at
*15 (Bankr. M.D. Fla. June 8, 2020).
136 Astria Health v. U.S. Small Bus. Admin., Adv. No. 20-0016-WHL, 2020 Bankr. LEXIS 1720, at
*25 (Bankr. E.D. Wash. June 10, 2020).
137 In re Vestavia Hills, Ltd., Adv. No. 20-90073-LA, 2020 WL 3581019, at *8 (Bankr. S.D. Cal.
June 26, 2020).
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to be forgiven,” and thus, “Congress did not intend for the SBA Administrator to
focus on collectability.”138 The SBA’s later justification for the Bankruptcy
Exclusion—that it was concerned with a high risk of non-repayment—ignores the
fact that Congress did not want the SBA to so concern itself. The SBA itself
seemingly understood as much when, in the First Interim Rule, it waived its criteria
for assuring that “[l]oans must be so sound as to reasonably assure repayment.”139
Lastly, having reviewed the administrative record such as it exists, the Court
finds that the SBA’s explanations for implementing the Bankruptcy Exclusion are
entirely implausible. The statement provided in the Fourth Interim Rule is not an
explanation of the agency’s reasoning; it is a conclusory statement that the SBA
did not try to justify or support with facts or citations. The record is devoid of
evidence that debtors are likely to misuse funds or that they pose a heightened
risk of non-repayment of those misused funds; in fact, everything about the
bankruptcy process makes these concerns far less likely. Moreover, the SBA
made no effort to connect these conclusory statements to either of the driving
forces repeatedly asserted by Defendants: the sound value requirement or the
mandate to streamline the process. The Court cannot conclude that the SBA
examined the relevant data or that it articulated a satisfactory explanation for its
138 In re Gateway Radiology Consultants, 2020 WL 3048197, at *14.
139 See First Interim Rule, 85 Fed. Reg. 20811, 20,812 (Apr. 28, 2020) (“[F]or loans made under
the PPP, SBA will not require the lenders to comply with section 120.150.”).
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action; there is no “‘rational connection between the facts found and the choice
made.’”140
In light of the foregoing, the Court finds the Bankruptcy Exclusion is unlawful
as arbitrary and capricious under 5 U.S.C. § 706(2)(A).
B. 5 U.S.C. § 706(2)(C)
AUI also contends that the Bankruptcy Exclusion is unlawful as exceeding
the SBA’s statutory jurisdiction. The APA, at 5 U.S.C. § 706(2)(C), provides that
a “reviewing court shall . . . hold unlawful and set aside agency action, findings,
and conclusions found to be . . . in excess of statutory jurisdiction, authority, or
limitations, or short of statutory right.”
Because the Court concludes that the Bankruptcy Exclusion is unlawful
under 15 U.S.C. § 706(2)(A), it need not decide the additional question of whether
the SBA exceeded its authority under 15 U.S.C. § 706(2)(C).
140 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting
Burlington Truck Lines, Inc. v. United States, 371 U.S 156, 168 (1962)).
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CONCLUSION
In light of the foregoing, IT IS ORDERED as follows: Plaintiff AUI’s Motion
for Summary Judgment at Docket 6 is GRANTED pursuant to 5 U.S.C. § 706(2)(A).
Defendants’ Motion for Summary Judgment at Docket 10 is DENIED.
DATED this 20th day of August, 2020 at Anchorage, Alaska.
/s/ Sharon L. Gleason
UNITED STATES DISTRICT JUDGE
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