A federal appeals court said Wednesday that the Small Business Administration was within its rights to refuse pandemic relief to a not-for-profit hospital due to its bankruptcy.
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Government entities are not permitted to file for bankruptcy under bankruptcy legislation from denying a debtor a permit, license, or “other similar grant” due to its bankruptcy status, the SBA’s Paycheck Protection Program, The assistance granted to small companies damaged by the COVID-19 outbreak did not qualify as a grant since it was in the form of a loan.
Though other courts have ruled on whether PPP financing qualifies as a grant, the 2nd Circuit is the first appellate court to do so.
The three-judge bench reversed a June 2020 decision by United States Bankruptcy Judge Colleen Brown in Vermont, which concluded that the SBA could not deny Springfield Hospital Inc’s PPP financing application.
The hospital’s attorneys and an SBA representative did not immediately reply to requests for comment.
Springfield Hospital and Springfield Medical Care Systems Inc, a critical access hospital and supplier of medical services in Vermont, filed for Chapter 11 bankruptcy protection in June 2019 but maintained operations throughout the process. While in bankruptcy, it sought $3.6 million in PPP money.
Springfield sued the SBA in April 2020 after the agency denied the hospital’s financing request. The SBA responded that the money given via the PPP were loans, not grants protected under bankruptcy law.
The hospital has been granted permission to emerge from Chapter 11 in December 2020
In Wednesday’s judgment, the panel decided, authored by United States Circuit Judge Joseph Bianco, that simply because the SBA forgives many of the loans does not automatically qualify them as grants. Rather than that, it said, enterprises must achieve specific financial conditions to be eligible for debt forgiveness.
“In summary, the presence of a forgiveness option does not transform the PPP into a gift of ‘free money,’ as the bankruptcy court put it,” Bianco said.
Springfield Hospital Inc v. Guzman, United States Circuit Court of Appeals.
Acting Assistant Attorney General Brian Boynton, Deputy U. S. Lawyer for the Central of Vermont Jonathan Ophardt, and US Department of Justice lawyers Joseph Salzman, Mark Stern, and Lindsay Powell represented the SBA.