The United States Court of Appeals for the Fifth Circuit has dealt a blow to debtors seeking Paycheck Protection Program (“PPP”) loans under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In a decision entered on Monday, June 22, Judge Jerry Smith issued a short, three-page opinion in the case Hidalgo County Emergency Service Foundation v. Jovita Carranza (In re Hidalgo County Emergency Service Foundation) that could have long-lasting ramifications for many debtors, both in and outside of the Fifth Circuit.
On April 25, 2020, the United States District Court for the Southern District of Texas entered a preliminary injunction that prohibited the Small Business Administration (“SBA”) from refusing to provide a PPP loan to debtor Hidalgo County Emergency Service Foundation. The bankruptcy court’s ruling focused on section 525(a) of the Bankruptcy Code and its prohibition on governmental entities discriminating against debtors in bankruptcy solely based on their status as a debtor. Unsurprisingly, the SBA appealed.
At the first-level appeal, the Southern District of Texas stayed the preliminary injunction and certified the case for immediate circuit court review. After accelerated briefing, the Fifth Circuit entered its order. Rather than addressing the merits of the debtor’s arguments in favor of the injunction — the arguments that won the day before the bankruptcy court—the Fifth Circuit found one issue dispositive: under 15 U.S.C. § 634(b)(1), injunctions directed toward the SBA are absolutely prohibited. Following Fifth Circuit precedent, and refusing to create an exception thereto, the Fifth Circuit panel followed its rule of orderliness in refusing to ignore the binding precedent of the Circuit.
Because the issue was decided on narrow, precedential grounds, a request for en banc review is likely to follow. And given unique and pressing nature of this issue, the Fifth Circuit may, indeed, decide to address the issue en banc. If they do not, this decision could have significant consequences. The bankruptcy court’s decision was quickly cited across the country, to varying success, by other debtors seeking PPP loans. If the Fifth Circuit’s holding remains, the trail-blazing decision on this issue could be proven toothless.
COVID-19 and the CARES Act are raising new and unique issues in bankruptcy courts across the country on a daily basis.