In Re: Vestavia Hills, Ltd., No. 3:2020cv01308 - Document 27 (S.D. Cal. 2021)

Court Description: ORDER Vacating Bankruptcy Court's Order Granting Appellee's Motion for a Preliminary Injunction; and Granting the SBA's Motion for Withdrawal of the Reference. Signed by Judge Gonzalo P. Curiel on 3/26/2021. (Bankruptcy Court Case Number: 20-90073-LA)(jmr)

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In Re: Vestavia Hills, Ltd. Doc. 27 Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1333 Page 1 of 44 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 12 IN RE VESTAVIA HILLS, LTD, dba MOUNT ROYAL TOWERS, Case No.: 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Debtor, 13 ORDER: 14 (1) VACATING BANKRUPTCY COURT’S ORDER GRANTING APPELLEE’S MOTION FOR A PRELIMINARY INJUNCTION; AND 15 16 17 18 19 U.S. SMALL BUSINESS ADMINISTRATION, and JOVITA CORRANZA, solely as the Administrator of the U.S. SBA, 20 Appellant, 21 v. 22 VESTAVIA HILLS, LTD, dba MOUNT ROYAL TOWERS, 23 24 (2) GRANTING THE SBA’S MOTION FOR WITHDRAWAL OF THE REFERENCE Appellee. 25 26 Before the Court are (1) the appeal of Appellants U.S. Small Business 27 Administration (“SBA”) and Jovita Corranza, the SBA Administrator, of the June 26, 28 2020 bankruptcy court order granting the motion for a preliminary injunction filed by 1 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Dockets.Justia.com Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1334 Page 2 of 44 1 Appellee Vestavia Hills, Ltd. (“Vestavia”), in Case No. 20-cv-01308-GPC-LL; and (2) 2 the motion for withdrawal of the reference to the bankruptcy court filed by the SBA and 3 the SBA Administrator, in Case No. 20-cv-1824-GPC-LL. For the reasons set forth below, the Court (1) VACATES the bankruptcy court’s 4 5 order granting Vestavia’s motion for a preliminary injunction and (2) GRANTS the 6 SBA’s motion for withdrawal of the reference. 7 8 9 Background I. The CARES Act On March 27, 2020, in response to the rapidly worsening coronavirus pandemic, 10 Congress enacted the Coronavirus Aid, Relief, and Economic Stimulus Act (“CARES 11 Act”), which created the Paycheck Protection Program (“PPP”) to be administered by the 12 SBA. Pub. L. 116-136, 134 Stat. 281 (2020). Congress placed the PPP within 15 U.S.C. 13 § 636(a), the codification of Section 7(a) of the Small Business Act, which provides the 14 SBA’s existing authority to issue loans to small businesses. However, the CARES Act 15 modified certain requirements of Section 636(a) and greatly expanded eligibility beyond 16 the types of entities that would ordinarily be able to receive a small business loan. See 17 CARES Act § 1102, codified at 15 U.S.C. § 636(a)(36). The PPP enables the SBA to 18 guarantee loans to small businesses, non-profits, and other entities to allow them to keep 19 employees on their payroll and continue operations during the pandemic. The CARES 20 Act provides that a borrower can receive a covered loan in an amount not exceeding two 21 and a half times its average monthly payroll costs up to ten million dollars. 15 U.S.C. § 22 636(a)(36)(E). Subject to certain limitations, borrowers are eligible to have their PPP 23 loans forgiven to the extent they are used loans for payroll costs or covered mortgage 24 interest payments, rent, and utilities. 15 U.S.C. § 9005(b). 25 After the adoption of the CARES Act on March 27, 2020, the SBA adopted several 26 interim final rules (“IFRs”) in quick succession related to the administration of the PPP, 27 pursuant the emergency rulemaking authority granted by the CARES Act. 15 U.S.C. § 28 9012 (requiring SBA to issue regulations within 15 days without regard to the notice 2 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1335 Page 3 of 44 1 requirements of the APA). On April 3, 2020, the SBA posted its First IFR to the SBA 2 website, which was published in the Federal Register on April 15, 2020. Business Loan 3 Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811 (Apr. 4 15, 2020). The First IFR “outline[d] the key provisions of SBA’s implementation of 5 sections 1102 and 1106 of the Act in formal guidance and request[ed] public comment.” 6 Id. The First IFR directed applicants to submit the PPP borrower application form (Form 7 2483). Id. Form 2483 requires the applicant to state, among other things, whether the 8 applicant or its owner is presently involved in bankruptcy, and provides that the loan will 9 not be approved if the answer is “yes.” See SBA Form 2483: PPP First Draw Borrower 10 Application Form (Version 1), https://www.sba.gov/document/sba-form-2483-ppp-first- 11 draw-borrower-application-form. 12 The SBA thereafter issued two subsequent IFRs, neither of which had any 13 reference to the bankruptcy exclusion. See Business Loan Program Temporary Changes; 14 Paycheck Protection Program, 85 Fed. Reg. 20817 (Apr. 15, 2020); Business Loan 15 Program Temporary Changes; Paycheck Protection Program—Additional Eligibility 16 Criteria and Requirements for Certain Pledges of Loans, 85 Fed. Reg. 21747 (Apr. 20, 17 2020). The Third IFR notes that “the standard underwriting process does not apply 18 because no creditworthiness assessment is required for PPP Loans.” Id. On April 24, 19 2020, the SBA posted the Fourth IFR to its website, which was published in the Federal 20 Register on April 28, 2020. Business Loan Program Temporary Changes; Paycheck 21 Protection Program—Requirements—Promissory Notes, Authorizations, Affiliation, and 22 Eligibility, 85 Fed. Reg. 23450 (Apr. 28, 2020). The Fourth IFR explicitly states that 23 businesses presently involved in bankruptcy proceedings are not eligible for PPP loans. 24 Id. The Fourth IFR further explains that: 25 26 27 28 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 3 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1336 Page 4 of 44 1 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. 2 3 4 Id. 5 Through subsequent legislation, the PPP has been extended and altered several 6 times. E.g., Extending Authority for Commitments for the Paycheck Protection Program 7 & Separating Amounts Authorized, Pub. L. No. 116-147, 134 Stat. 660 (2020); Paycheck 8 Program Flexibility Act of 2020, Pub. L. No. 116-142, 134 Stat. 641 (2020); Paycheck 9 Protection Program & Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620 10 (2020); Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 11 (2020). 12 13 II. Appellant’s Bankruptcy Case and Adversary Proceeding Appellee Vestavia owns and operates Mount Royal Towers, a senior housing 14 community located at 300 Royal Tower Drive, Vestavia Hills, Alabama. Adv. No. 20- 15 90073-LA, ECF No. 1 (“Adv. Complaint”) ¶ 6. On January 3, 2020, Vestavia filed a 16 voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. 17 Bankruptcy Court for the Southern District of California. Bk. No. 20-00018-LA11. 18 Vestavia continued to operate its business while in bankruptcy. Adv. Complaint ¶ 7. In 19 April or May of 2020, Vestavia applied through a federally insured participating lender 20 for a loan through the PPP. Id. ¶¶ 21–22. On May 6, 2020, the lender declined to submit 21 Vestavia’s PPP application to the SBA because Vestavia did not meet the “SBA 22 eligibility criteria.” Id. ¶ 22. Vestavia asserts the sole reason it did not meet the “SBA 23 eligibility criteria” was its status as a Chapter 11 bankruptcy debtor. Id. ¶ 23. On May 24 27, 2020, Vestavia initiated an adversary proceeding against Appellants SBA and the 25 SBA Administrator (hereafter collectively referred to as “the SBA”). See Adv. No. 20- 26 90073-LA. In its adversary complaint, Vestavia alleged that the SBA violated the 27 Administrative Procedures Act (“APA”) and the non-discrimination provision of 11 28 4 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1337 Page 5 of 44 1 U.S.C. § 525(a) by prohibiting current bankruptcy debtors from being considered for PPP 2 loans. Adv. Complaint ¶¶ 33–45. 3 On May 29, 2020, Vestavia filed an emergency application for a temporary 4 restraining order and injunctive relief with the bankruptcy court, seeking to require the 5 SBA to consider Vestavia’s PPP loan application. Adv. No. 20-90073-LA, ECF No. 5. 6 The parties eventually stipulated to have the emergency application treated as a motion 7 for a preliminary injunction. Adv. No. 20-90073-LA, ECF No. 17. On June 26, 2020, 8 after a hearing and over the opposition of the SBA, the bankruptcy court granted 9 Vestavia’s motion and entered a preliminary injunction barring the SBA from 10 disqualifying or denying Vestavia’s PPP application on the basis of Vestavia’s status as a 11 bankruptcy debtor or refusing to guaranty a PPP loan sought by Vestavia on that basis. 12 Adv. No. 20-90073-LA, ECF No. 26. The bankruptcy court subsequently issued a 13 Memorandum of Decision. Adv. No. 20-90073-LA, ECF No. 27. On July 10, 2020, the 14 SBA appealed. ECF No. 1. On July 29, 2020, the SBA filed a motion for mandatory 15 withdrawal of the reference, which was transmitted to the district court on September 16, 16 2020. Case No. 20-cv-1824-GPC-LL, ECF No. 1; Adv. No. 20-90073-LA, ECF No. 45. 17 Appeal of Bankruptcy Court’s Preliminary Injunction Order 18 The Court will first consider the bankruptcy court’s order granting Vestavia’s 19 motion for a preliminary injunction before turning to the SBA’s motion to withdraw the 20 reference to the bankruptcy court. 21 22 I. Legal Standard The Court has jurisdiction to review a bankruptcy court’s final orders pursuant to 23 28 U.S.C. § 158(a). “[W]here the bankruptcy court issues a ‘preliminary’ injunction, but 24 contemplates no further hearings on the merits of the injunction . . . the injunction is a 25 final, appealable order.” In re Excel Innovations, Inc., 502 F.3d 1086, 1092–93 (9th Cir. 26 2007) (quoting In re Ionosphere Clubs, Inc., 139 B.R. 772, 778 (S.D.N.Y. 1992)). The 27 28 5 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1338 Page 6 of 44 1 Court also has discretion to hear appeals of interlocutory orders with leave of court.1 28 2 U.S.C. § 158(a)(3). On appeal, the district court reviews the bankruptcy court’s findings of fact for 3 4 clear error and its conclusions of law de novo. Havelock v. Taxel, 67 F.3d 187, 191 (9th 5 Cir. 1995); Fed. R. Bankr. Proc. 8013. Although the Court reviews de novo the legal 6 findings underlying an order granting a preliminary injunction, the decision to grant the 7 preliminary injunction is reviewed for an abuse of discretion. In re Focus Media Inc., 8 387 F.3d 1077, 1081 (9th Cir. 2004). “[A] plaintiff seeking a preliminary injunction must establish [(1)] that he is likely 9 10 to succeed on the merits, [(2)] that he is likely to suffer irreparable harm in the absence of 11 preliminary relief, [(3)] that the balance of equities tips in his favor, and [(4)] that an 12 injunction is in the public interest.” Coffman v. Queen of Valley Med. Ctr., 895 F.3d 717, 13 725 (9th Cir. 2018) (quoting Winter v. Natural Resources Defense Council, Inc., 555 U.S. 14 7, 20 (2008)). 15 II. Discussion In this appeal, the SBA challenges the bankruptcy court’s authority to issue a 16 17 preliminary injunction and the bankruptcy court’s finding that Vestavia was likely to 18 succeed on the merits of its APA claims. Vestavia claims that the appeal is moot and that 19 the bankruptcy court did not err in entering the preliminary injunction on the basis that 20 the SBA violated the APA, and that in the alternative the Court should affirm the 21 preliminary injunction on the basis that the SBA violated the non-discrimination 22 provision in 15 U.S.C. § 525(a). 23 \\\ 24 \\\ 25 26 27 28 1 Because the Court would exercise its discretion to permit appeal of the preliminary injunction, the Court therefore need not decide whether the preliminary injunction is a final order pursuant to 28 U.S.C. § 158(a). 6 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1339 Page 7 of 44 1 2 A. Mootness As a preliminary matter, Vestavia argues that the appeal is moot because the SBA 3 has disbursed the PPP funds in line with program requirements, and thus the Court cannot 4 grant effective relief. The SBA contends that the appeal is not mooted by its compliance 5 with the preliminary injunction order because resolution of the appeal would affect 6 whether Vestavia may qualify for forgiveness of the PPP loan. 7 Article III of the U.S. Constitution limits the jurisdiction of federal courts to actual 8 cases and controversies. U.S. Const., Art. III § 2, cl. 1. Federal courts cannot exercise 9 jurisdiction over a case if it is moot, but “[t]he burden of demonstrating mootness is a 10 heavy one.” West v. Sec’y of Dep't of Transp., 206 F.3d 920, 924 (9th Cir. 2000) 11 (quoting Northwest Envt’l Def. Ctr. v. Gordon, 849 F.2d 1241, 1244 (9th Cir. 1988)). An 12 appeal is moot and must be dismissed when “the appellate court can no longer grant ‘any 13 effectual relief whatever to the prevailing party,’” rendering “any resulting opinion . . . 14 merely advisory.” Shell Offshore Inc. v. Greenpeace, Inc., 815 F.3d 623, 628 (9th Cir. 15 2016) (quoting City of Erie v. Pap’s A.M., 529 U.S. 277, 287 (2000)); see also In re 16 Dynamic Brokers, Inc., 293 B.R. 489, 493–94 (B.A.P. 9th Cir. 2003) (citation omitted) 17 (“An appeal is moot if events have occurred after the entry of the order being appealed 18 that prevent an appellate court from granting effective relief.”). 19 Vestavia has not demonstrated that the Court “can no longer grant ‘any effectual 20 relief whatever’” to the SBA. Shell Offshore, 815 F.3d at 628 (citation omitted). Even if 21 Vestavia no longer has the PPP funds because they have already been used for eligible 22 purposes, such as operations and payroll expenses, that does not mean the Court cannot 23 grant effective relief. See In re Gould, 401 B.R. 415, 422 (B.A.P. 9th Cir. 2009), aff’d, 24 603 F.3d 1100 (9th Cir. 2010) (“Simply because Debtor may have a present inability to 25 repay the government does not mean effective relief is unavailable.”). Regardless of 26 whether Vestavia has the ability to return the funds, a case is only constitutionally moot if 27 no meaningful relief could be granted. Cf. Church of Scientology of California v. United 28 States, 506 U.S. 9, 12 (1992) (noting that “[w]hile a court may not be able to return the 7 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1340 Page 8 of 44 1 parties to the status quo ante” following appellee’s compliance with district court’s order 2 that could not be fully undone, it could “fashion some form of meaningful relief” and 3 therefore appeal was not moot). A decision reversing the bankruptcy court would affect 4 the Parties’ rights going forward, as the SBA is still enjoined from refusing to guaranty 5 Vestavia’s PPP loan or from disqualifying Vestavia from participating in the PPP, see 6 Adv. No. 20-90073-LA, ECF No. 26, such that under the preliminary injunction, the SBA 7 is likely required to forgive the loan if Vestavia otherwise qualifies for forgiveness. 8 Accordingly, the Court finds that the appeal is not constitutionally moot. 9 In the bankruptcy context, an appeal may also be equitably moot even if a case or 10 controversy continues to exist for the purposes of Article III. An appeal of a bankruptcy 11 court order may be equitably moot if there has been a “comprehensive change of 12 circumstances . . . so as to render it inequitable for [the] court to consider the merits of 13 the appeal.” In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) (quoting In 14 re Roberts Farms, 652 F.2d 793, 798 (9th Cir. 1981). However, in the Ninth Circuit, the 15 equitable mootness doctrine has mostly been deployed in situations involving a 16 consummated plan of reorganization or similarly complex transactions ordered by or 17 approved of in an order of the bankruptcy court. See, e.g., In re Mortgages Ltd., 771 F.3d 18 1211, 1214 (9th Cir. 2014); Focus Media, 378 F.3d at 923–24 (applying equitable 19 mootness analysis to appeal seeking termination of bankruptcy proceedings and 20 disgorgement of attorneys’ fees paid to creditors’ attorneys); In re Kong, No. BAP CC- 21 15-1371-KITAL, 2016 WL 3267588, at *6–7(B.A.P. 9th Cir. June 6, 2016) (finding 22 Thorpe standard applicable to appeal of order approving compromise and sale order); In 23 re Isom, No. 4:15-BK-40763, 2020 WL 1950905, at *5–6 (B.A.P. 9th Cir. Apr. 22, 2020) 24 (applying Thorpe to determine whether substantial consummation of a settlement 25 rendered appeal moot). 26 Vestavia provides no authority supporting extension of the equitable mootness 27 doctrine to the present case. The reorganization process may be underway, but no 28 consummated reorganization plan is implicated here. Although third parties received the 8 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1341 Page 9 of 44 1 PPP funds at issue and the SBA did not seek a stay, Vestavia has not explained how “the 2 case presents transactions that are so complex or difficult to unwind that the doctrine of 3 equitable mootness would apply.” Thorpe, 677 F.3d at 880. 4 Even if equitable mootness did apply, the Court would find that Vestavia has not 5 borne its “heavy burden” in demonstrating the appeal is equitably moot. Id. (quoting 6 Jacobus v. Alaska, 338 F.3d 1095, 1103 (9th Cir. 2003)). In deciding whether to apply 7 the doctrine, courts must consider whether a stay was sought; “whether substantial 8 consummation of the plan has occurred,” “the effect a remedy may have on third parties 9 not before the court,” and “whether the bankruptcy court can fashion effective and 10 equitable relief without completely knocking the props out from under the plan and 11 thereby creating an uncontrollable situation for the bankruptcy court.” Id. at 880–81. 12 The parties do not dispute that the SBA did not seek a stay of the bankruptcy court’s 13 order. The Bankruptcy Appellate Panel of the Ninth Circuit has “recognized the ‘tension’ 14 in Ninth Circuit authority concerning the issue of an appellant’s failure to seek a stay and 15 whether that failure conclusively moots an appeal.” In re Kong, 2016 WL 3267588, at 16 *6. Other decisions have indicated that in addition to the failure to seek a stay, “there 17 must also be some subsequent event that would render consideration of the issues on 18 appeal inequitable, and thereby trigger an equitable mootness analysis.” In re Zuercher 19 Tr. of 1999, No. BAP NC-13-1299, 2014 WL 7191348, at *7 (B.A.P. 9th Cir. Dec. 17, 20 2014); see also In re Eliminator Custom Boats, Inc., No. BAP CC-19-1003-KUFL, 2019 21 WL 4733525, at *4 (B.A.P. 9th Cir. Sept. 23, 2019) (“[F]ailure to seek or obtain a stay 22 does not automatically result in equitable mootness.”). 23 The Court agrees that, at least in this case, the SBA’s failure to seek a stay alone 24 cannot render the appeal equitably moot. The preliminary injunction in this case was not 25 part of a reorganization plan, and it would be possible to fashion relief without throwing 26 Vestavia’s reorganization into turmoil. If Vestavia were required to repay the PPP loan, 27 it is likely that the SBA would merely become another creditor in Vestavia’s bankruptcy 28 case. And although the Court recognizes that third parties would be affected by a 9 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1342 Page 10 of 44 1 reversal of the bankruptcy court’s decision in this case, many of these effects—such as 2 reduced wages for employees, layoffs, or lower capacity for nursing home residents— 3 would not stem so much from the unwinding of complex transactions, but from the mere 4 fact of an adverse ruling; in other words, these externalities would exist even if the 5 bankruptcy court had denied the preliminary injunction outright. Such contemplated 6 negative effects on third parties are therefore not clearly related to their reliance on the 7 preliminary injunction order. Cf. Thorpe, 677 F.3d at 880 (noting that equitable 8 mootness derives from the public policy that “third parties are entitled to rely on a final 9 bankruptcy court order”). Thus, because this is not a circumstance in which resolving the 10 appeal would require an impractical unwinding of complex transactions, the Court does 11 not find that the appeal is equitably moot.2 See In re Transwest Resort Properties, Inc., 12 801 F.3d 1161, 1171 (9th Cir. 2015) (noting that “whether the bankruptcy court could 13 fashion equitable relief without completely undoing the plan” is “the most important[] 14 consideration in the equitable mootness test”). Accordingly, the Court finds the appeal is not moot.3 15 16 B. Sovereign Immunity 17 The SBA contends that the bankruptcy court lacked jurisdiction to enter a 18 preliminary injunction against it because the Administrator and the agency is entitled to 19 sovereign immunity under Section 634(b)(1) of the Small Business Act. Vestavia urges 20 the Court that a proper interpretation of Section 634(b)(1) does not prohibit all injunctive 21 relief against the agency. 22 “The United States, as sovereign, is immune from suit in state or federal court 23 except to the extent that Congress has expressly waived such sovereign immunity.” Tritz 24 25 26 27 28 Additionally, Vestavia’s reliance on In re Adams Apple, 829 F.2d 1484 (9th Cir. 1987) is misplaced. The Ninth Circuit in Adams Apple only considered statutory mootness under 11 U.S.C. § 364(e), which is not applicable here. 3 For the same reasons, the Court finds the motion for withdrawal of the reference is likewise not mooted by the SBA’s compliance with the preliminary injunction. 2 10 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1343 Page 11 of 44 1 v. U.S. Postal Serv., 721 F.3d 1133, 1136 (9th Cir. 2013) (quoting United States v. 2 Mitchell, 445 U.S. 535, 538 (1980)). Section 702 of the APA waives sovereign immunity 3 for certain claims, but not “if any other statute that grants consent to suit expressly or 4 impliedly forbids the relief which is sought.” 5 U.S.C. § 702. According to the SBA, 5 Section 634(b)(1) of the Small Business Act expressly provides that the waiver of the 6 SBA’s sovereign immunity does not extend to injunctions. That section states: 7 8 9 10 11 12 13 In the performance of, and with respect to, the functions, powers, and duties vested in him by this chapter the Administrator may 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. 15 U.S.C. § 634(b)(1). Several Courts of Appeals have held that Section 634(b)(1) operates as an absolute 14 bar on courts’ jurisdiction to enter any injunctive relief against the SBA, relying on the 15 plain language of the provision. See Mar v. Kleppe, 520 F.2d 867, 869 (10th Cir. 1975); 16 Valley Const. Co. v. Marsh, 714 F.2d 26, 29 (5th Cir. 1983); J.C. Driskill, Inc. v. Abdnor, 17 901 F.2d 383, 386 (4th Cir. 1990); In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d 18 838, 840 (5th Cir. 2020) (citation omitted) (“[T]his [c]ircuit has concluded that all 19 injunctive relief directed at the SBA is absolutely prohibited.”). Other courts have 20 interpreted Section 634(b)(1) to forbid injunctions in some, but not all, circumstances. In 21 the leading case taking this position, Ulstein Marine, Ltd. v. United States, the First 22 Circuit reasoned that legislative history required a more limited reading of the anti- 23 injunction language. Ulstein Mar., Ltd. v. United States, 833 F.2d 1052, 1056–57 (1st 24 Cir. 1987). The First Circuit noted that this “boilerplate” anti-injunction language started 25 appearing in statutes establishing agencies after the Supreme Court’s decision in Federal 26 Housing Administration v. Burr, which held that a general sue-and-be-sued clause 27 rendered agencies that participated in commerce subject to suit for garnishment and 28 attachment of the agency’s assets. Id. at 1056 (citing Fed. Housing Admin. v. Burr, 309 11 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1344 Page 12 of 44 1 U.S. 242 (1940). Although the legislative history of the Small Business Act itself did not 2 shed light on the purpose of this limitation on sovereign immunity, the First Circuit found 3 that “the legislative history of earlier statutes containing the identical wording indicates 4 that it was intended to keep creditors or others suing the government from hindering and 5 obstructing agency operations through mechanisms such as attachment of funds.” Id. at 6 1056–57. Agreeing with a previous decision from the Federal Circuit, the court in 7 Ulstein noted that the legislative history of the Small Business Act did not indicate 8 Congress intended the SBA to have greater immunity than other agencies, suggesting that 9 the language in Section 634(b)(1) should not be read broadly. Id. at 1057 (quoting 10 11 Cavalier Clothes v. United States, 810 F.2d 1108, 1112 (Fed. Cir. 1987)). Several district courts have followed Ulstein in fielding challenges to the SBA’s 12 implementation of the PPP. E.g., Camelot Banquet Rooms, Inc. v. U.S. Small Bus. 13 Admin., 458 F. Supp. 3d 1044, 1052 (E.D. Wis. 2020), appeal dismissed, No. 20-1729, 14 2020 WL 6481792 (7th Cir. Aug. 5, 2020); DV Diamond Club of Flint, LLC v. U.S. Small 15 Bus. Admin., 459 F. Supp. 3d 943, 954–55 (E.D. Mich. 2020); Defy Ventures, Inc. v. U.S. 16 Small Bus. Admin., 469 F. Supp. 3d 459, 471 (D. Md. 2020); Alaska Urological Inst., 17 P.C. v. U.S. Small Bus. Admin., 619 B.R. 689, 698–701 (D. Alaska 2020). Some of these 18 cases supply reasons beyond the legislative history for reading Section 634(b)(1)’s anti- 19 injunction language narrowly. Courts have referenced the “absurd result” that would 20 arise were they unable to enjoin the SBA from engaging in unconstitutional conduct. 21 Defy Ventures, 469 F. Supp. 3d at 471; see also Camelot, 458 F. Supp. 3d at 1052 (noting 22 that if Section 634(b)(1) were an absolute bar on injunctive relief, courts could not enjoin 23 even “blatantly unconstitutional” policies). In Alaska Urological, the district court 24 reasoned that the sue-and-be-sued provision’s introductory clause limits the provision to 25 acts “[i]n the performance of, and with respect to, the functions, powers, and duties 26 vested in [the Administrator] by this chapter,” meaning that injunctions challenging 27 actions beyond the SBA’s authority are exempt from the prohibition. Alaska Urological, 28 12 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1345 Page 13 of 44 1 619 B.R. at 699 (citing Dubrow v. Small Bus. Admin., 345 F. Supp. 4, 7 n.5 (C.D. Cal. 2 1972)). 3 The Ninth Circuit has not squarely addressed the proper interpretation of the “no . . 4 . injunction” language in Section 634 or identically worded statutes. But see Am. Ass’n of 5 Cosmetology Sch. v. Riley, 170 F.3d 1250, 1255 (9th Cir. 1999) (finding identical “anti- 6 injunction” provision in Higher Education Act, 20 U.S.C. § 1082(a)(2), precluded 7 “coercive” declaratory judgment against Secretary of Education that would short-circuit 8 administrative appeals process, but noting that Ninth Circuit had entered permanent 9 injunction against agency in different context); Mashiri v. Dep’t of Educ., 724 F.3d 1028, 10 1031 (9th Cir. 2013) (citing id.) (“We have previously concluded that certain suits for 11 declaratory relief against the Secretary are barred by the anti-injunction clause. . . [and] 12 cannot rely on § 1082 to provide jurisdiction” over mandamus petition); see also 13 Valentino v. U.S. Dep’t of Educ., No. 09CV0006 JM(LSP), 2009 WL 2985686, at *4 14 (S.D. Cal. Sept. 16, 2009) (noting Higher Education Act’s sue-and-be-sued clause’s 15 sovereign immunity “waiver expressly does not extend to injunctive relief, as § 16 1082(a)(2) prohibits injunctions against the Secretary except where he exercises powers 17 that are clearly outside his statutory authority”). 18 Without any binding authority on the issue, the Court therefore turns to general 19 principles of statutory interpretation. The SBA contends that Ninth Circuit and Supreme 20 Court decisions prevent the Court from looking beyond the statutory text to broadly 21 construe a waiver of sovereign immunity. Vestavia argues that the bankruptcy court 22 correctly followed Ulstein in considering the legislative history and purpose of the statute 23 to determine the meaning of the “no . . . injunction” language. 24 The Court must “apply traditional tools of statutory construction to determine 25 whether the scope of Congress’ waiver is ‘clearly discernable from the statutory text.’” 26 Ordonez v. United States, 680 F.3d 1135, 1138 (9th Cir. 2012) (quoting F.A.A. v. Cooper, 27 566 U.S. 284, 290 (2012)). If so, then the Court must “abide by Congress’ instruction;” 28 otherwise, the Court must “construe any ambiguities in the scope of a waiver in favor of 13 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1346 Page 14 of 44 1 the sovereign.” Id. On its face, Section 634(b)(1) says “no . . . injunction . . . shall be 2 issued against the administrator.” 15 U.S.C. § 634(b)(1). However, “[s]tatutory language 3 ‘cannot be construed in a vacuum. It is a fundamental canon of statutory construction 4 that the words of a statute must be read in their context and with a view to their place in 5 the overall statutory scheme.’” Sturgeon v. Frost, 136 S. Ct. 1061, 1070 (2016) (quoting 6 Roberts v. Sea-Land Servs., Inc., 566 U.S. 93, 101 (2012)). One canon of statutory 7 interpretation, noscitur a sociis, provides that “a string of statutory terms raises the 8 implication that the words grouped in a list should be given related meaning.” S.D. 9 Warren Co. v. Maine Bd. of Envtl. Prot., 547 U.S. 370, 378 (2006) (citation omitted). 10 Similarly, as noted by the district court in Tradeways, Ltd. v. U.S. Department of the 11 Treasury, another fundamental doctrine of statutory construction known as ejusdem 12 generis provides that a general term in a list of more specific terms should be understood 13 to “embrace only objects similar in nature to those objects enumerated by the specific 14 terms.” Tradeways, Ltd. v. United States Dep’t of the Treasury, No. CV ELH-20-1324, 15 2020 WL 3447767, at *10 (D. Md. June 24, 2020) (citing Epic Sys. Corp. v. Lewis, 138 16 S. Ct. 1612, 1625 (2018)). Here, “injunction” is a broad term included in a list of more 17 specific forms of relief that are prohibited, alongside “attachment,” “garnishment,” and 18 “other similar process.” 15 U.S.C. § 634(b)(1). It is plausible, therefore, that the term 19 “injunction” in Section 634(b)(1) should be construed narrowly, in line with the remedies 20 of attachment and garnishment, to refer only to injunctions “interfering with the SBA’s 21 commercial operations or property.” Id. at 11. Tradeways, 2020 WL 3447767 at *11. 22 However, implementation of these canons of construction likely renders the 23 language of the sovereign immunity waiver, at best, ambiguous. It is also not clear that 24 the Court can look to the legislative history of the provision, as the First Circuit did in 25 Ulstein. See Ulstein, 833 F.2d at 1056–57. The Court can only consider the legislative 26 history of a statute when the text is ambiguous, but any ambiguities in the text of a 27 sovereign immunity waiver must be construed in favor of the sovereign. In re Del 28 Biaggio, 834 F.3d 1003, 1010 (9th Cir. 2016); Ordonez, 680 F.3d at 1138; see also Lane 14 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1347 Page 15 of 44 1 v. Pena, 518 U.S. 187, 192 (1996) (“A statute’s legislative history cannot supply a waiver 2 that does not appear clearly in any statutory text.”). Additionally, although several other 3 district courts have found it would be absurd to read the SBA’s waiver of sovereign 4 immunity to completely prohibit injunctive relief even in cases of a constitutional 5 dimension, e.g., Defy Ventures, 469 F. Supp. 3d at 471; Alaska Urological, 619 B.R. at 6 699, the doctrine of sovereign immunity at times imposes what many would regard as 7 unjust results by shielding the United States from suit. E.g., Donahue v. United States, 8 660 F.3d 523, 526 (1st Cir. 2011) (en banc) (Torruella, J., concerning the denial of en 9 banc review) (describing sovereign immunity as “an anachronistic judicially invented 10 legal theory that has no validity or place in American law”). Nevertheless, the Supreme 11 Court has embraced a broad conception of sovereign immunity by which this Court is 12 bound. See Lane, 518 U.S. at 192 (1996). 13 Therefore, the Court finds it likely that Section 634(b)(1) does not unambiguously 14 waive the SBA’s sovereign immunity for injunctive relief. However, because the Court 15 finds that Vestavia has not shown it is likely to succeed on the merits, the Court need not 16 definitively resolve the question of the SBA’s immunity. 4 17 C. Likelihood of Success on the Merits of the APA Claims 18 In its preliminary injunction order, the bankruptcy court held that Vestavia was 19 likely to succeed on the merits of its claims under Sections 706(2)(C) and 706(2)(A) of 20 the APA. Both types of APA claims “provide for related but distinct standards for 21 reviewing rules promulgated by administrative agencies,” and the Court accordingly 22 considers them in turn. Altera Corp. & Subsidiaries v. Comm’r of Internal Revenue, 926 23 24 25 26 27 28 Although the parties also dispute whether the adversary was a “core” or “non-core” proceeding and thus whether the bankruptcy court had jurisdiction to enter the preliminary injunction order, the Court finds it unnecessary to reach this issue because it finds Vestavia was not entitled to a preliminary injunction based on the merits of its APA and 15 U.S.C. § 525(a) claims. Likewise, because the parties only briefly address the question of whether 11 U.S.C. § 106(a) abrogates sovereign immunity with respect to Vestavia’s claims under 15 U.S.C. § 525(a), the Court does not reach this issue. 4 15 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1348 Page 16 of 44 1 F.3d 1061, 1075 (9th Cir. 2019), cert. denied, 141 S. Ct. 131 (2020) (quoting Catskill 2 Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 521 (2d Cir. 2017)). 3 1. Exceeding statutory authority granted by the CARES Act 4 The APA provides that a court may invalidate agency action if it exceeds the 5 statutory authority under which it was promulgated. 5 U.S.C. § 706(2)(C). To determine 6 whether the challenged agency action is consistent with Congress’s directive, courts 7 employ the familiar Chevron framework. See Chevron, U.S.A., Inc. v. Nat. Res. Def. 8 Council, Inc., 467 U.S. 837, 843–44 (1984); Montana Consumer Counsel v. F.E.R.C., 9 659 F.3d 910, 915 (9th Cir. 2011). “First, if Congress has directly spoken to the precise 10 question at issue, then the matter is capable of but one interpretation by which the court 11 and the agency must abide.” Bahr v. U.S. Envtl. Prot. Agency, 836 F.3d 1218, 1230 (9th 12 Cir. 2016) (citations omitted). Second, if “Congress was silent on the issue, or the statute 13 is subject to multiple interpretations,” a court must defer to the agency’s reasonable 14 interpretation if “the agency can demonstrate that it has the general power to make rules 15 carrying the force of law and that the challenged action was taken in the exercise of that 16 authority.” Id. (quoting Sierra Club v. EPA, 671 F.3d 955, 962 (9th Cir. 2012)). 17 There is no question that Congress delegated authority to the SBA to make rules in 18 implementing the CARES Act. See 15 U.S.C. § 9012 (directing the administrator to 19 “issue regulations to carry out this title and the amendments made by this title without 20 regard to the notice requirements under [the APA]”). However, the Parties dispute 21 whether the statute was unambiguous with respect to whether debtors in bankruptcy 22 proceedings are eligible for the PPP, and whether the SBA had the authority to 23 promulgate rules excluding them. Vestavia argues that the CARES Act unambiguously 24 did not exclude debtors in bankruptcy, and that the court cannot imply a delegation of 25 authority on an issue of such “deep economic and political significance.” King v. 26 Burwell, 135 S. Ct. 2480, 2485 (2015). The SBA counters that Congress did not address 27 whether debtors in bankruptcy are eligible for PPP loans, and that its eligibility rules 28 were consistent with a permissible construction of the CARES Act and the existing 16 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1349 Page 17 of 44 1 framework established by Section 7(a) of the Small Business Act. The bankruptcy court 2 agreed with Vestavia and stopped at step one of the Chevron framework, finding that the 3 language of the CARES Act unambiguously did not exclude debtors in bankruptcy 4 proceedings from receiving PPP loans, and thus that the SBA exceeded its authority in 5 promulgating the First and Fourth IFR and application form that excluded entities in 6 bankruptcy like Vestavia. Adv. No. 20-90073-LA, ECF No. 27 at 13. 7 i. Text of the CARES Act 8 There is no provision in the CARES Act that explicitly provides that debtors in 9 bankruptcy are eligible for the PPP, or that explicitly bars the SBA from imposing 10 eligibility requirements. Instead, Vestavia points to several provisions in the statute that 11 it argues clearly evince Congress’s intent to preclude the SBA from excluding bankruptcy 12 debtors. First, Vestavia highlights Section 636(a)(36)(D)(i), which provides: 13 14 15 16 17 18 19 20 During the covered period, in addition to small business concerns, any business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern described in section 657a(b)(2)(C) of this title shall be eligible to receive a covered loan if the business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern employs not more than the greater of-(I) 500 employees; or (II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern operates. 21 15 U.S.C. § 636(a)(36)(D)(i). Vestavia argues that Congress’s statement that “any 22 business concern . . . shall be eligible to receive a covered loan” if it meets the stated size 23 requirements means that the SBA was not delegated the authority to impose eligibility 24 requirements of its own. The Court recognizes that “any” typically is accorded an 25 “expansive meaning,” equivalent to the terms “all” or “every.” See United States v. 26 Gonzales, 520 U.S. 1, 5 (1997); SAS Inst., Inc. v. Iancu, 138 S. Ct. 1348, 1354 (2018). 27 However, in “making the threshold determination under Chevron, ‘a reviewing court 28 should not confine itself to examining a particular statutory provision in isolation,’” but 17 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1350 Page 18 of 44 1 instead should read the text in the context of the overall statutory scheme. Nat’l Ass’n of 2 Home Builders v. Defs. of Wildlife, 551 U.S. 644, 666 (2007) (quoting Brown & 3 Williamson Tobacco Corp., 529 U.S. 120, 132 (2000)); Defy Ventures, 469 F. Supp. 3d at 4 472 (quoting Small v. United States, 544 U.S. 385, 388 (2005)) (“[I]t is an error to place 5 dispositive weight on ‘any’ ‘without considering the rest of the statute.’”). First, the text 6 of the provision itself casts some doubt on Vestavia’s urged interpretation. The provision 7 states that “in addition to small business concerns, any business concern” meeting the 8 size requirement is eligible. 15 U.S.C. § 636(a)(36)(D)(i). Contrasting “any business 9 concern” with “small business concerns” suggests that the provision intended to expand 10 eligibility beyond those that qualify as small business concerns within the SBA’s size 11 standards, which vary by industry. 13 C.F.R. § 121.101. However, the Court does not 12 read the provision as unambiguously depriving the SBA of authority to impose any 13 eligibility requirements aside from the type of entity and size. See Diocese of Rochester 14 v. U.S. Small Bus. Admin., 466 F. Supp. 3d 363, 376 (W.D.N.Y. 2020) (“[T]he Court 15 disagrees with Plaintiffs that in expanding the size restrictions, Congress unambiguously 16 provided that there could be no other eligibility criteria.”). 17 If Congress’s inclusion of the language “any business concern” nullified all 18 preexisting requirements and eliminated the SBA’s ability to set other eligibility rules, a 19 number of more specific provisions in the CARES Act would be redundant. As the SBA 20 argues, the immediately following provision of the statute, which grants eligibility to 21 “sole proprietors” would be superfluous if the only contemplated eligibility requirement 22 for business concerns was the size requirement, as individual proprietors are already 23 included in the definition of “business concern.” 15 U.S.C. § 636(a)(36)(D)(i); 13 C.F.R. 24 § 121.105. Further, other parts of the statute explicitly waive certain preexisting rules 25 and statutory requirements in Section 636(a), which would be unnecessary if the “any 26 business concern” language was intended to be read as broadly as urged by Vestavia. 27 E.g., 15 U.S.C. §§ 636(a)(36)(D)(iii) (waiving affiliation rules); 636(a)(36)(I) (waiving 28 requirement that business is unable to obtain credit elsewhere); 636(a)(36)(J) (waiving 18 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1351 Page 19 of 44 1 requirement of personal guarantee and collateral). “In general, a statute should ‘be 2 construed so that effect is given to all its provisions, so that no part will be inoperative or 3 superfluous, void or insignificant.’” Stand Up for California! v. U.S. Dep’t of the 4 Interior, 959 F.3d 1154, 1159 (9th Cir. 2020) (quoting Corley v. United States, 556 U.S. 5 303, 314 (2009)). As other courts have noted, the other provisions eliminating standard 6 eligibility requirements would be meaningless if Section 636(a)(36)(D)(i) eliminated all 7 requirements aside from entity type and size. See Pharaohs GC, Inc. v. United States 8 Small Bus. Admin., --- F.3d. -----, No. 20-2170-CV, 2021 WL 821457, at *4 (2d Cir. Mar. 9 4, 2021) (“Reading subparagraph D in the context of the SBA’s 7(a) loan program, it is 10 clear that Pharaohs’s interpretation—i.e., “any business concern” means “every business 11 concern”—is not tenable”); Diocese of Rochester, 466 F. Supp. 3d at 376; Defy Ventures, 12 469 F. Supp. 3d at 473; Tradeways, 2020 WL 3447767, at *13. 13 Vestavia also argues that the explicit exclusion of bankruptcy debtors elsewhere in 14 the CARES Act indicates that the absence of any reference to bankruptcy debtors in 15 provisions related to the PPP reflects an intention not to exclude them from participation 16 in the PPP. Section 4003(c)(3)(D)(i) of the CARES Act, which relates to a loan program 17 for mid-sized businesses, provides that “[a]ny eligible borrower applying for a direct loan 18 under this program shall make a good-faith certification that,” among other things, “the 19 recipient is not a debtor in a bankruptcy proceeding.” 15 U.S.C. § 9042(c)(3)(D)(i). 20 Indeed, a principle of statutory construction known as the Russello presumption provides 21 “that where ‘Congress includes particular language in one section of a statute but omits it 22 in another section of the same Act, it is generally presumed that Congress acts 23 intentionally and purposefully in the disparate inclusion or exclusion.’” United States v. 24 Reed, 734 F.3d 881, 889 (9th Cir. 2013) (quoting Russello v. United States, 464 U.S. 16, 25 23 (1983)). The SBA argues this interpretive principle does not control here. According 26 to the SBA, the inclusion of a specific requirement that the applicant certify they are not 27 in bankruptcy in the section establishing the mid-sized business loan program, and not in 28 the section establishing the PPP, is unsurprising because Congress placed the PPP within 19 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1352 Page 20 of 44 1 the existing statutory scheme for the SBA’s loan programs, which already included a 2 “sound value” requirement pursuant to which the SBA has established loan criteria. In 3 contrast, the SBA argues, the mid-sized business loan program set out in Section 4 4003(c)(D) was established as a separate program to be administered by the U.S. 5 Department of the Treasury, for which there were no existing lending requirements. 6 The Court finds that the Russello presumption is not dispositive in this case, as 7 both interpretations of the statute are plausible. On the one hand, as Vestavia suggests, 8 Congress may have included a bankruptcy certification requirement for the mid-sized 9 business loan program, and not for the PPP, because the former is a “true” loan program 10 that anticipates repayment, whereas the latter anticipates loans used for specified 11 purposes will be forgiven. 15 U.S.C. § 9005(b); 15 U.S.C. § 9042(c)(3)(i). On the other 12 hand, Congress did recognize that it was situating the PPP within an existing statutory 13 scheme for loan issuance by the SBA, at points explicitly providing that other subsections 14 of Section 636 did not apply. E.g., 15 U.S.C. § 636(a)(36)(I) (“[T]he requirement that a 15 small business concern is unable to obtain credit elsewhere, as defined in section 632(h) 16 of this title, shall not apply to a covered loan.”). Congress therefore may have declined to 17 impose additional requirements, like a bankruptcy certification, because the statute 18 already contemplates that the SBA will impose its existing loan requirements to the 19 extent not modified by the CARES Act, whereas the mid-sized loan program was written 20 on a relative blank slate. Cf. Burns v. United States, 501 U.S. 129, 136 (1991), abrogated 21 on other grounds by United States v. Booker, 543 U.S. 220, 125 (2005)) (“In some cases, 22 Congress intends silence to rule out a particular statutory application, while in others 23 Congress’ silence signifies merely an expectation that nothing more need be said in order 24 to effectuate the relevant legislative objective.”). Accordingly, the Court does not find 25 that the exclusion of bankruptcy debtors elsewhere in the statute renders the silence in 26 Section 636(a)(36) an unambiguous command that bankruptcy debtors be included. 27 28 Lastly, Vestavia urges that Congress’s silence with respect to the exclusion of bankruptcy debtors, taken alongside the CARES Act’s overarching purpose to help 20 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1353 Page 21 of 44 1 struggling businesses during the pandemic, indicates that Congress did not intend for the 2 SBA to promulgate regulations barring bankruptcy debtors from participating in PPP. 3 Vestavia relies on King v. Burwell for the proposition that if Congress wishes to delegate 4 questions “of deep economic and political significance” to an agency, it does so 5 expressly. King, 576 U.S. at 485. The SBA contends that Congress’s silence means the 6 opposite: that Congress had no intent to implicitly abrogate the longstanding requirement 7 that “[a]ll loans made under this subsection shall be of such sound value or so secured as 8 reasonably to assure repayment,” 15 U.S.C. § 636(a)(6), pursuant to which the SBA sets 9 eligibility requirements. The question comes down to how to interpret Congressional 10 11 silence. While the Court recognizes that the broad purpose of the CARES Act and the PPP 12 was to quickly deliver funds to businesses struggling as a result of the pandemic so that 13 they could continue to operate and pay their employees, it does not follow that Congress 14 intended to implicitly nullify other parts of Section 636(a) and thus deprive the SBA of 15 the authority to set certain eligibility requirements as it does for other loans under Section 16 7(a). The PPP loan may be intended to be mostly forgiven, but forgiveness is not 17 automatic. See 15 U.S.C. § 9005(b). Thus, some borrowers will have to repay the funds, 18 just as they would for other loans guaranteed by the SBA. As noted above, the statutory 19 text does not reveal an intent to do away with all eligibility requirements, as evidenced by 20 Congress’s choice to explicitly eliminate specific ones. Congress recognized that the 21 sound value requirement existed, but it appears to have chosen not to prevent its 22 application to the PPP. Cf. Organic Cannabis Found., LLC v. Comm’r of Internal 23 Revenue, 962 F.3d 1082, 1095 (9th Cir. 2020) (quoting Parker Drilling Mgmt. Servs., 24 Ltd. v. Newton, 139 S. Ct. 1881, 1890 (2019)) (“Congress presumptively ‘legislates 25 against the backdrop of existing law.’”); see also Pharaohs GC, 2021 WL 821457 at *4; 26 Diocese of Rochester, 466 F. Supp. 3d at 376. Silence in this case does not 27 unambiguously signify an intent to preclude the SBA from adopting requirements related 28 to loan collectability. 21 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1354 Page 22 of 44 The Supreme Court’s decision in King does not compel a contrary conclusion. 1 2 The Court found that King presented an “extraordinary case” justifying departure from 3 the typical Chevron framework. King, 576 U.S. at 485. There, Congress was silent as to 4 whether the Affordable Care Act (“ACA”) authorized tax credits for individuals who 5 enrolled in healthcare coverage through a federal healthcare exchange. Id. In refusing to 6 read an implicit delegation of authority to the Internal Revenue Service (“IRS”) to fill the 7 ACA’s statutory gaps, the Court found it would be inconceivable that Congress had 8 intended to leave such a question so central to the functioning of the system established 9 by the ACA to an agency, especially the IRS, which had “no expertise in crafting health 10 insurance policy of this sort.” Id. at 485–86. Unlike King, Congress here legislated on an 11 existing backdrop that granted the SBA authority to impose loan eligibility requirements 12 pursuant to the “sound value” requirement. Under that statutory scheme, the SBA has 13 required lenders to consider creditworthiness, including by inquiring about the 14 applicant’s bankruptcy history. See SBA Form 1919: SBA 7(a) Borrower Information 15 Form, ECF No. 7-4 at 132 (“Form 1919”); 13 C.F.R. § 120.10 (making “forms applicable 16 to the 7(a) Loan Program” “Loan Program Requirements). It is not unreasonable to 17 conclude that Congress meant to delegate similar rulemaking authority to the SBA as it 18 had in the past. This is far different than presuming that through its silence, Congress 19 intended the IRS to make major substantive decisions about the meaning of key 20 provisions of a new healthcare policy.5 21 Although not specifically raised by Vestavia, the Court likewise finds the other 22 statutory provisions mentioned in the Florida bankruptcy court’s decision in Gateway 23 Radiology (“Gateway I”), upon which the bankruptcy court relied, unilluminating as to 24 whether or not the statute permits the SBA to impose additional eligibility requirements. 25 26 Although the question of whether debtors in bankruptcy are eligible for PPP loans has “economic and political significance” in a general sense, King, 576 U.S. at 485, the Court declines to read King as an invitation to disregard the Chevron framework any time an agency decision has a significant social or fiscal impact. 5 27 28 22 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1355 Page 23 of 44 1 Adv. No. 20-90073-LA, ECF No. 27 at 12 (citing In re Gateway Radiology Consultants, 2 P.A., 616 B.R. 833 (Bankr. M.D. Fla. 2020), vacated in part, appeal dismissed in part, 3 983 F.3d 1239 (11th Cir. 2020) (“Gateway II”)). Section 636(a)(36)(G), which provides 4 that an “eligible recipient” shall make certain certifications, does not clarify whether the 5 SBA is permitted to impose requirements that determine whether an applicant is an 6 “eligible recipient” in the first place. 15 U.S.C. § 636(a)(36)(G); Gateway II, 983 F.3d at 7 1259. Gateway I’s interpretation of Section 636(a)(36)(F)(ii)(II), which states that a 8 lender must consider, “in evaluating the eligibility of a borrower,” whether the borrower 9 (1) was in operation on February 15, 2020 and (2) had either employees for which it paid 10 salary and payroll taxes or paid independent contractors, is unpersuasive for much the 11 same reason that the Court disagreed with Vestavia’s reading of Section 636(a)(36)(D)(i). 12 Reading these two “considerations” as the only conditions on PPP eligibility would 13 render many of the other provisions, even the size requirement in Section 14 636(a)(36)(D)(i) itself, superfluous or contradictory. See Gateway II, 983 F.3d at 1258– 15 59 (citing Corley, 556 U.S. at 314). 16 i. Subsequent Enactments 17 Both Vestavia and the SBA argue that developments after the bankruptcy court’s 18 entry of a preliminary injunction support their position. Congress recently enacted the 19 Consolidated Appropriations Act, 2021 (“Appropriations Act”), Pub. L. No. 116-260, 20 134 Stat. 1182 (2020), which established a third phase of the PPP. In relevant part, that 21 act amended the Bankruptcy Code to provide: 22 23 24 25 The [bankruptcy] court, after notice and a hearing, may 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 this title to obtain a loan under paragraph (36) or (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)). 26 134 Stat. 1182, 2015. The debtors or trustees referred to in the provision are those in the 27 streamlined bankruptcy process under subchapter V of Chapter 11 (11 U.S.C. §§ 1183, 28 1184); those in proceedings under Chapter 12, for “family farmers” and “family 23 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1356 Page 24 of 44 1 fisherman” (11 U.S.C. §§ 1203, 1204); and individuals in proceedings under Chapter 13 2 (11 U.S.C. § 1304). The Appropriations Act further provides that the above provision 3 shall: 4 8 take effect on the date on which the [SBA] Administrator 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 loan under paragraphs (36) and (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a))[.] 9 134 Stat. 1182, 2016. Vestavia contends that the provision’s language, included in an act 5 6 7 10 that narrowed eligibility for the third round of PPP loans, demonstrates that Congress 11 never intended to exclude bankruptcy debtors in the previous rounds of the program. The 12 SBA argues that Congress recognized the SBA previously determined all debtors in 13 bankruptcy to be ineligible for PPP loan guarantees, and in adopting this section in the 14 Appropriations Act, decided to render certain categories of debtors potentially eligible for 15 the PPP subject to the SBA’s written determination. The SBA also notes that in each of 16 the three previous amendments to the PPP,6 Congress declined to mandate eligibility for 17 debtors in bankruptcy proceedings despite the SBA’s rules excluding them. 18 The SBA presents the more logical interpretation of this provision of the 19 Appropriations Act. A condition precedent to the provision going into effect is the 20 SBA’s written determination that the debtors in bankruptcy or bankruptcy trustees under 21 the specified sections would be eligible to receive a PPP loan. The provision merely 22 23 24 25 26 27 28 6 See Extending Authority for Commitments for the Paycheck Protection Program & Separating Amounts Authorized, Pub. L. No. 116-147, 134 Stat. 660 (2020); Paycheck Program Flexibility Act of 2020, Pub. L. No. 116-142, 134 Stat. 641 (2020); Paycheck Protection Program & Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620 (2020). The fact that Congress did not make any effort to ‘correct’ the agency’s bankruptcy exclusion provides support for the SBA’s argument. See Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 45 (1983) (“[A]n agency’s interpretation of a statute may be confirmed or ratified by subsequent congressional failure to change that interpretation.”). 24 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1357 Page 25 of 44 1 permits the bankruptcy court to authorize such a debtor or trustee to obtain a loan, should 2 the SBA open up eligibility to them. As it is not directed at the SBA, it does not require 3 the SBA to expand or narrow PPP eligibility requirements with respect to debtors in 4 bankruptcy; at most, it acknowledges that the SBA is permitted to determine certain 5 categories of debtors in bankruptcy are eligible for the PPP. Had Congress presumed that 6 all debtors in bankruptcy were already eligible and intended only to limit the availability 7 of PPP loans to a smaller subset of debtors in bankruptcy for the third round of the 8 program, as Vestavia argues, there would have been no need to condition the effective 9 date of the provision on the SBA’s determination of their eligibility. Thus, the Court 10 finds that this provision of the Appropriations Act does not demonstrate that Congress 11 unambiguously intended to deprive the SBA of the authority to exclude debtors in 12 bankruptcy from receiving PPP loans. 13 iii. Chevron Step Two 14 Having found that Congress did not clearly answer the question of whether debtors 15 in bankruptcy could be excluded from the PPP, the Court turns to step two of the 16 Chevron framework: determining “whether the agency’s answer is based on a permissible 17 construction of the statute.” Chevron, 467 U.S. at 843. An agency’s interpretation of 18 statutory authority is examined “in light of the statute’s text, structure and purpose.” 19 Altera Corp., 926 F.3d at 1076 (quoting Miguel-Miguel v. Gonzales, 500 F.3d 941, 949 20 (9th Cir. 2007)). However, a court must uphold a reasonable interpretation under the 21 second step of Chevron “even if that construction is not necessarily the best interpretation 22 or the interpretation [the court] would adopt in the absence of an agency interpretation.” 23 Diaz-Quirazco v. Barr, 931 F.3d 830, 844 (9th Cir. 2019) (citing Chevron, 467 U.S. at 24 843 & n.11). 25 For similar reasons as those explained above, the Court finds that the agency’s 26 interpretation of Section 636(a)(36)—that it permits the agency to impose eligibility 27 requirements in line with Section 636(a)(6)’s “sound value” requirement—is a 28 permissible construction of the statute. Although the PPP is an emergency relief measure 25 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1358 Page 26 of 44 1 for businesses struggling as a result of the COVID-19 pandemic, the CARES Act can be 2 reasonably interpreted to eliminate some, but not all, of the eligibility requirements that 3 typically accompany a loan under Section 7(a). It was reasonable to interpret Congress’s 4 silence with respect to the sound value requirement as permitting the agency to exclude 5 businesses that would be potentially be unable to repay the loan should they not meet the 6 requirements for forgiveness. Based on that interpretation, the SBA adopted eligibility 7 requirements that, it contends, seek to ensure the collectability of the loan while 8 recognizing Congress’s intent to have the funds disbursed quickly. Further, as the SBA 9 had previously taken applicants’ bankruptcy history into account in determining 10 eligibility for a loan under Section 7(a), it was not unreasonable, as a matter of legal 11 interpretation, for the SBA to condition eligibility for PPP loans on not being in 12 bankruptcy. Cf. Gateway II, 983 F.3d at 1262 (quoting Sullivan v. Everhart, 494 U.S. 83, 13 93 (1990)) (“We do not say this is an inevitable interpretation of the statute; but it is 14 assuredly a permissible one.”); Tradeways, 2020 WL 3447767, at *14. 15 The Court therefore concludes that the bankruptcy court erred in finding that 16 Vestavia is likely to succeed in showing that the SBA acted outside its authority in 17 promulgating the regulations at issue. 18 2. Arbitrary and capricious under Section 706(2)(A) 19 The APA requires agencies to engage in “reasoned decisionmaking.” Michigan v. 20 E.P.A., 576 U.S. 743, 750 (2015) (citation omitted). Under Section 706(2)(A) of the 21 APA, the Court must “hold unlawful and set aside agency action, findings, and 22 conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not 23 in accordance with law.” 5 U.S.C. § 706(2). The arbitrary and capricious standard “is 24 used to evaluate whether a rule is procedurally defective as a result of flaws in the 25 agency’s decisionmaking process.” Altera Corp., 926 F.3d at 1075 (quoting Catskill 26 Mountain, 846 F.3d at 521). 27 28 Although a court may not substitute its own judgment for that of the agency, it should “consider whether the decision was based on a consideration of the relevant 26 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1359 Page 27 of 44 1 factors and whether there has been a clear error of judgment.” Motor Vehicle Mfrs. Ass’n 2 of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Bowman 3 Transp. Inc. v. Arkansas-Best Freight System, 419 U.S. 281, 285 (1974)). An agency 4 decision is arbitrary and capricious when the agency (1) “relied on factors which 5 Congress has not intended it to consider;” (2) “entirely failed to consider an important 6 aspect of the problem;” (3) “offered an explanation for its decision that runs counter to 7 the evidence before the agency;” or (4) offered an explanation “so implausible that it 8 could not be ascribed to a difference in view or the product of agency expertise.” Id. The 9 Court cannot supply its own basis for the decision in the absence of a reasoned one 10 provided by the agency, but the agency’s decision and explanation need not be a picture 11 of clarity to survive scrutiny under the arbitrary and capricious standard. Id. 12 Vestavia argues that the First and Fourth IFR excluding debtors in bankruptcy 13 proceedings from participating in the PPP are arbitrary and capricious because the rules 14 were hastily made, do not actually further the SBA’s purported goal because businesses 15 can apply for bankruptcy immediately after receiving a PPP loan, and failed to take into 16 account the protections of the bankruptcy process. In response, the SBA argues that its 17 rules properly balanced the need to ensure expeditious processing of loans with the sound 18 value requirement, resulting in a process that streamlined its typical Section 7(a) loan 19 program requirements but still allowed the agency to ensure collectability and the 20 authorized use of funds. The bankruptcy court ultimately found that the SBA’s decision 21 to exclude debtors in bankruptcy proceedings was arbitrary and capricious because the 22 SBA considered a factor that Congress did not intend it to consider—the collectability of 23 the loan—and failed to consider a factor it should have considered—the protections of 24 the Chapter 11 bankruptcy process. Adv. No. 20-90073-LA, ECF No. 27. The court also 25 noted that the SBA’s argument that its exclusion of bankruptcy debtors was premised on 26 15 U.S.C. § 636(a)(6)’s sound value requirement appeared to be a post hoc justification, 27 as the SBA’s First IFR eliminated typical underwriting requirements under Section 7(a). 28 Id. at 14–16. 27 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1360 Page 28 of 44 1 i. Timing of Agency Explanations 2 As a preliminary matter, the Court must address whether it can consider (1) the 3 explanation in the Fourth IFR in considering the agency’s decisionmaking process for the 4 First IFR and application form containing the bankruptcy certification; and (2) the 5 Declaration of John A. Miller, an SBA official, that the SBA presented with its 6 administrative record, ECF No. 7-4 at 126 (“Miller Decl.”). The First IFR and 7 application form were released on April 3, 2020, less than a week after the CARES Act 8 was signed into law, and effective April 16, 2020, while the Fourth IFR was released on 9 April 24, 2020 and became effective on April 28, 2020. See 85 Fed. Reg. 20811; 85 Fed. 10 Reg. 23450. The Miller Declaration was not before the bankruptcy court when it ruled 11 on Vestavia’s motion for a preliminary injunction. ECF No. 9 at 36 n.9. Vestavia argues 12 that the Fourth IFR and the Miller Declaration provide post hoc justifications for the 13 SBA’s decision to exclude debtors in bankruptcy proceedings and are not properly 14 considered. 15 “An agency must defend its actions based on the reasons it gave when it acted.” 16 Dep’t of Homeland Sec. v. Regents of the Univ. of California, 140 S. Ct. 1891, 1909 17 (2020). Thus, in “reviewing agency action, a court is ordinarily limited to evaluating the 18 agency’s contemporaneous explanation in light of the existing administrative record.” 19 Dep’t of Commerce v. New York, 139 S. Ct. 2551, 2573 (2019). Courts may not consider 20 post hoc rationalizations for agency action, whether articulated after-the-fact in court 21 proceedings or in belated agency explanations. See Regents, 140 S. Ct. at 1909. 22 However, an agency may “provide an ‘amplified articulation’ of a prior ‘conclusory’ 23 observation” as long as its explanation is limited to the original reasons offered. See id. 24 at 1908 (citing Alpharma, Inc. v. Leavitt, 460 F.3d 1, 6 (D.C. Cir. 2006)). 25 The Court finds that the gap in time between the First IFR accompanying Form 26 2483 and the Fourth IFR’s specific explanation of the bankruptcy exclusion to be 27 relatively immaterial. Although the administrative record is admittedly sparse, the Fourth 28 IFR’s explanation—that “debtors in bankruptcy would present an unacceptably high risk 28 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1361 Page 29 of 44 1 of an unauthorized use of funds or non-repayment of unforgiven loans” and continued 2 recognition of the need to provide relief expeditiously—is consistent with the more 3 general explanation of the process in the First IFR, even if the First IFR does not 4 explicitly mention the bankruptcy exclusion. 85 Fed. Reg. 20811. Given that the First 5 IFR explained how it viewed the CARES Act as “streamlining of the regular 7(a) loan 6 requirements” and the preexisting Section 7(a) loan application form included questions 7 related to bankruptcy, see Form 1919, the Court does not conclude that the explanation 8 for the bankruptcy exclusion detailed in the Fourth IFR, released a few weeks later, was a 9 post-hoc rationalization.7 Cf. In re Penobscot Valley Hosp., No. 19-10034, 2021 WL 10 150412, at *7 (Bankr. D. Me. Jan. 12, 2021) (“In the extraordinary circumstances 11 surrounding the passage of the CARES Act, and the congressional directive that the 12 Administrator get the PPP off the ground immediately to provide economic relief to 13 struggling businesses and their employees, the lack of a perfectly contemporaneous 14 explanation is far from troubling.”). The information in the Fourth IFR is therefore 15 properly regarded as an “amplified articulation” of the First IFR’s reasoning, however 16 sparse or conclusory, Alpharma, 460 F.3d at 6, and the Court can consider the Fourth 17 IFR’s explanation in determining whether the decision to exclude debtors in bankruptcy 18 proceedings was arbitrary and capricious. “Judicial review of an agency decision typically focuses on the administrative 19 20 record in existence at the time of the decision and does not encompass any part of the 21 22 23 24 25 26 27 28 7 Other courts have taken issue with the fact that the First IFR does not explicitly reference the bankruptcy exclusion. See, e.g., Alaska Urological, 619 B.R. at 706. The Court agrees that the SBA’s lack of clarity at the start was far from ideal and notes that much of the litigation spawned by the bankruptcy exclusion could have been avoided had the SBA provided a detailed accounting of its reasoning up front. Cf. San Luis & Delta-Mendota Water Auth. v. United States, 672 F.3d 676, 714 (9th Cir. 2012). However, the absence of a clearly articulated explanation in the initial IFR and application form does not convince the Court that the explanation in the Fourth IFR, promulgated mere weeks later and fully consistent with the more generalized discussion of the process in the First IFR, was developed after the fact as a post hoc rationalization of the action. Cf. State Farm, 463 U.S. at 4 (noting “a decision of less than ideal clarity” must be upheld “if the agency’s path may reasonably be discerned”). 29 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1362 Page 30 of 44 1 record that is made initially in the reviewing court.” Sw. Ctr. for Biological Diversity v. 2 U.S. Forest Serv., 100 F.3d 1443, 1450 (9th Cir. 1996). However, an agency may be 3 permitted to supplement the administrative record when the existing record is not 4 sufficient to explain the agency’s decision. Midwater Trawlers Coop. v. Dep’t of 5 Commerce, 393 F.3d 994, 1007 (9th Cir. 2004). The reviewing court may accept 6 affidavits or testimony to provide additional explanation of the agency’s reasoning if 7 necessary to permit judicial review. Id. (citing Sw. Ctr. for Biological Diversity, 100 F.3d 8 at 1450; Camp v. Pitts, 411 U.S. 138, 142–43 (1973) (per curiam)). However, the agency 9 is limited to offering “‘a fuller explanation of the agency’s reasoning at the time of the 10 agency action’ . . . the agency may elaborate later on that reason (or reasons) but may not 11 provide new ones.” Regents, 140 S. Ct. at 1907 (citation omitted) (emphasis in original). 12 Here, the Miller Declaration provides an explanation for the bankruptcy exclusion 13 in Form 2483. Miller Decl. ¶ 17. The explanation highlights several reasons for the 14 exclusion, including the need to provide loan assistance expeditiously with as little as 15 possible underwriting; the issues involved in approving companies in bankruptcy for 16 loans that would slow the administration of the PPP; and the potential risk for 17 interference with the authorized use of PPP funds caused by bankruptcy. Id. The Court 18 finds that the declaration merely provides “a fuller explanation of the agency’s reasoning 19 at the time of the agency action[s],” Regents, 140 S. Ct. at 1907, that is, the issuance of 20 the IFRs and application form excluding debtors in bankruptcy proceedings. 21 Accordingly, the Court finds it can consider the Miller Declaration, although given 22 the limited additional information provided in the declaration, it is not dispositive to the 23 Court’s conclusion. 24 ii. Arbitrary and Capricious Review 25 The Court first considers Vestavia’s arguments relating to the decisionmaking 26 process. Vestavia appears to take issue with the SBA’s procedure for adopting the rules, 27 noting that they were “hastily made up” without a notice and comment period. However, 28 Congress explicitly instructed the SBA to forgo the standard notice and comment 30 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1363 Page 31 of 44 1 rulemaking process provided in the APA and to issue the first regulations within 15 days. 2 15 U.S.C. § 9012. Although this fact does not absolve the agency of its responsibility to 3 consider relevant factors and make sound judgments, the expedited rulemaking process in 4 this case does not, on its own, suggest that the SBA’s decision was arbitrary or 5 capricious. Cf. Penobscot Valley Hosp., 2021 WL 150412, at *12 (“Because Congress 6 dispensed with the notice-and-comment procedures prescribed by 5 U.S.C. § 553 and 7 required the Administrator to promulgate rules within fifteen days, the Court does not 8 fault the SBA for failing to seek expert opinions or to conduct hearings.”). 9 Next, the Court turns to whether the SBA considered a factor Congress did not 10 intend it to consider. The agency’s decision must be tied to the purposes of the law it 11 seeks to implement. See Judulang v. Holder, 565 U.S. 42, 55 (2011). Consistent with 12 the Court’s findings above, the relevant purposes here include not only those purposes 13 explicitly championed in the CARES Act but also those underlying the Section 7(a) 14 statutory scheme for small business loans that Congress modified, but left partially intact, 15 in creating the PPP. Therefore, as the Court disagrees with the bankruptcy court’s 16 conclusion that the CARES Act discontinued the sound value requirement for PPP loans, 17 the Court also departs from its reasoning with respect to whether the SBA was permitted 18 to consider collectability. Although the CARES Act structured the PPP so that all 19 businesses could receive loan forgiveness if they use the funds for specified purposes, the 20 statute presumes that not all loans will ultimately be fully forgiven. See 15 U.S.C. § 21 636(a)(36)(K) (setting minimum and maximum maturity for loans that have “a remaining 22 balance after reduction based on the loan forgiveness amount”); compare 15 U.S.C. § 23 636(a)(36)(F)(i) (listing eleven ‘allowable’ uses) with 15 U.S.C. § 9005(b) (listing four 24 types of forgivable costs). Congress likely did not intend the SBA to consider 25 collectability as a primary factor in implementing the PPP, given that it relaxed several 26 other requirements that relate to a borrower’s creditworthiness and that most loans would 27 not need to be repaid absent widespread use of funds for non-forgivable purposes. 28 However, as Congress still situated the PPP as a loan program within an existing 31 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1364 Page 32 of 44 1 statutory structure that required the SBA to ensure loans were of sound value, the Court 2 does not find that Congress intended the SBA to ignore collectability altogether. 3 However, that does not end the analysis of the first State Farm factor. The 4 bankruptcy court’s opinion suggests that based on the SBA’s own statements in the First 5 IFR, the SBA did not appear to genuinely consider collectability at all, making its 6 explanation for the decision to exclude bankruptcy debtors unconvincing. Adv. No. 20- 7 90073-LA, ECF No. 27 at 15. As the bankruptcy court explained, the SBA eliminated 8 typical underwriting requirements by excusing lenders from complying with 13 C.F.R. § 9 120.150, which requires the loan applicant to be creditworthy and sets out a number of 10 qualitative factors that the SBA will consider, and instead allowed lenders to rely on 11 certifications of the borrower. 85 FR 20811-01. The Court does not interpret the SBA’s 12 decision to forgo its typical lending criteria as inconsistent with its assertion that it 13 continued to consider collectability in promulgating rules for the PPP. As the First IFR 14 recognized, the intent of the CARES Act was to provide relief expeditiously. 85 FR 15 20811-01. The considerations in 13 C.F.R. § 120.150 require a detailed individualized 16 evaluation of the applicant’s business and finances. 13 C.F.R. § 120.150. That the SBA 17 allowed lenders to rely on the applicants’ certifications and made the eligibility 18 requirements less stringent than they would be for typical SBA loans does not suggest 19 that the SBA viewed collectability as irrelevant, but rather reflects an accommodation of 20 competing policy concerns. See Ass’n of Am. Railroads v. Surface Transp. Bd., 161 F.3d 21 58, 66 (D.C. Cir. 1998) (citing FCC v. WNCN Listeners Guild, 450 U.S. 582, 596 (1981)) 22 (noting that an “agency has discretion to weigh competing policies under its statute”) 23 Vestavia also contends that the SBA did not consider the protections provided by 24 bankruptcy proceedings, and thus failed to consider an important aspect of the problem. 25 The SBA counters that it did take bankruptcy protections into consideration in 26 promulgating its rules and simply determined that the risks of non-repayment and 27 unauthorized use of funds outweighed those protections. Given that the SBA decided to 28 exclude bankruptcy debtors because of concerns about the potential misuse of funds and 32 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1365 Page 33 of 44 1 inability to repay, the protections of the bankruptcy process were undoubtedly important; 2 after all, if these protections eliminated the risks of lending to debtors in bankruptcy, the 3 SBA’s exclusion would be illogical. However, the administrative record does not reflect 4 that the SBA failed to consider bankruptcy procedures. For other Section 7(a) loans, the 5 SBA intends lenders to consider a borrower’s bankruptcy history in determining whether 6 to extend an SBA loan, but lenders have discretion over what weight to give that factor, 7 presumably based on the particular risks presented by each case. See Form 1919; Miller 8 Decl. ¶ 11–13. In adopting the bankruptcy exclusion for the PPP, the SBA eliminated 9 much of the nuance from its normal process, which would have allowed the SBA or 10 lenders to balance risks posed by bankruptcy generally against procedural protections of 11 the bankruptcy case. That the SBA ultimately chose to prioritize processing applications 12 quickly over a more accurate accounting of the risks presented by particular bankruptcy 13 cases does not mean that the SBA did not consider the protections of the bankruptcy 14 process. 15 That said, even if the SBA considered the factors Congress intended, the 16 bankruptcy exclusion rules must be invalidated if the agency’s explanation is inconsistent 17 with the evidence before it or otherwise “so implausible that it could not be ascribed to a 18 difference in view or the product of agency expertise.” State Farm, 463 U.S. at 43. 19 Vestavia argues that the rule excluding debtors in bankruptcy proceedings is illogical or 20 counter to the evidence for a number of reasons. Vestavia points to the fact that the SBA 21 chose to exclude all current debtors in bankruptcy proceedings, which it does not do for 22 other loans under Section 7(a), while eliminating a number of other creditworthiness 23 requirements. As the bankruptcy court agreed, bankruptcy debtors receive more 24 oversight than other struggling businesses, so excluding them runs counter to the SBA’s 25 argument that it wanted to exclude businesses that were likely to misuse funds. 26 Additionally, Vestavia notes, nothing stops businesses from declaring bankruptcy 27 immediately after getting a loan, or from debtors in an active bankruptcy proceeding from 28 dismissing their bankruptcy case, obtaining a PPP loan, and refiling. Vestavia also 33 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1366 Page 34 of 44 1 contends that the PPP rollout has been characterized by rampant fraud and misdirection 2 of funds, so the SBA’s exclusion of bankruptcy debtors was clearly ill-suited to meet its 3 goals.8 Vestavia makes compelling points as to the shortcomings of the SBA’s rules, but 4 5 the Court cannot “substitute its judgment for that of the agency.” State Farm, 463 U.S. at 6 43. The SBA, in administering other loans under Section 7(a), has lenders consider an 7 applicant’s creditworthiness, including by requesting information related to an applicant’s 8 bankruptcy history. See Form 1919. This reflects the SBA’s position that extending 9 loans to some debtors in bankruptcy proceedings would run counter to the requirement 10 that all loans be of sound value as to reasonably assure repayment. 85 Fed. Reg. 23450; 11 Miller Decl. ¶¶ 11–13. In implementing the PPP, the SBA considered the need to 12 disburse loans quickly to a much larger group of applicants, all of which faced financial 13 difficulties as a result of the coronavirus pandemic. 85 Fed. Reg. 20811; 85 Fed. Reg. 14 23450. The SBA also took into account the baseline sound value requirement and the 15 fact that although the loans were intended to be forgiven, not all would be, given that 16 businesses may end up using for unauthorized purposes or allowable, but not forgivable, 17 uses. Id. The SBA therefore considered the risks companies in bankruptcy would pose 18 to the authorized use of PPP loans and collectability, including the fact that some 19 creditors in bankruptcy may be able to assert claims to PPP loan funds, and the 20 challenges of inquiring into the state of individual bankruptcy proceedings in a timely 21 manner. Miller Decl. ¶ 17. The result—an easing of some creditworthiness requirements 22 but adoption of a bright-line rule excluding bankruptcy debtors—was, according to the 23 SBA, an accommodation of these competing considerations. 24 25 26 Although the Court may consider post-rulemaking developments, “[a] reviewing court must tread cautiously in considering events occurring subsequent to promulgation of a rule” because such events could not have directly informed the decisionmaking process. Amoco Oil Co. v. Envtl. Prot. Agency, 501 F.2d 722, 729 n.10 (D.C. Cir. 1974). 8 27 28 34 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1367 Page 35 of 44 The Court cannot conclude that the SBA made a “clear error of judgment” in 1 2 adopting the bankruptcy exclusion. Judulang, 565 U.S. at 53. The SBA’s explanation 3 that it decided to adopt the bright-line rule to maintain some its sound value requirements 4 while allowing for efficient administration is not implausible or contrary to the evidence. 5 See Gateway II, 983 F.3d at 1263. While some PPP loans were ultimately granted to 6 businesses that had more potential to misuse the funds than those in bankruptcy, this 7 demonstrates that the SBA’s decision to forgo stricter lending requirements in favor of a 8 streamlined application process was, in hindsight, ineffective at achieving its goal of 9 ensuring that funds be put towards authorized purposes. But the agency’s decision that 10 businesses in bankruptcy, on the whole, should be considered loan risks is not counter to 11 evidence or implausible merely because other applicants also should have been 12 considered loan risks. The SBA potentially could have developed a rule that better 13 balanced the need to proceed quickly with the need to discern, on a more targeted basis, 14 which businesses were likely to misuse funds or be unable to repay. However, an agency 15 working on a compressed timeline and with limited opportunity for factfinding cannot be 16 expected to promulgate a rule with the same level of nuance as one developed as a result 17 of a full notice-and-comment rulemaking process.9 See Diocese of Rochester, 466 F. 18 Supp. 3d at 381; Penobscot Valley Hosp., No. 19-10034, 2021 WL 150412, at *12. The 19 Court does not “rubber stamp” agency action under State Farm, but it cannot substitute 20 its own judgment for that of the agency—for the Court’s purposes, it is enough that the 21 agency made relevant considerations and and came to a reasoned decision. City of Los 22 Angeles v. Barr, 929 F.3d 1163, 1181 (9th Cir. 2019). Vestavia has not shown the SBA 23 failed to do so here. 24 25 26 27 28 9 Although interpreting an emergency rulemaking provision in the context of the Endangered Species Act, admittedly a very different statutory context, the Court finds apt the D.C. Circuit’s observation that “scrutiny of such emergency regulations is . . . less exacting on the Secretary than it would be if he enacted precisely the same regulation and gave the same explanation after normal rulemaking.” City of Las Vegas v. Lujan, 891 F.2d 927, 932 (D.C. Cir. 1989). 35 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1368 Page 36 of 44 1 Accordingly, the Court finds that the bankruptcy court erred in determining that 2 Vestavia was likely to succeed on its claim that the SBA’s decisions were arbitrary or 3 capricious under Section 706(2)(A). 4 D. Likelihood of Success on the Merits of the 11 U.S.C. § 525(a) Claim 5 Vestavia argues that in the alternative, the Court should uphold the bankruptcy 6 court’s preliminary injunction order on the grounds that the bankruptcy exclusion violates 7 the non-discrimination provision in 11 U.S.C. § 525(a). In relevant part, Section 525(a) 8 provides: 9 [A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against . . . a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act . . . solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act[.] 10 11 12 13 14 11 U.S.C. § 525(a). Vestavia contends that the PPP loans should be considered a “grant” under this 15 16 section, and therefore that the SBA violated the non-discrimination provision by denying 17 such a grant to Vestavia on account of its bankruptcy status. The SBA argues that a PPP 18 loan is not a “grant” under the provision. The SBA asserts that its position is confirmed 19 by the Appropriation Act’s inclusion of a new subsection that extends the non- 20 discrimination rule to certain portions of the CARES Act, but not the PPP. 11 U.S.C. § 21 525(d). The bankruptcy court concluded that the SBA did not violate Section 525(a), 22 finding that the word “grant” in Section 525(a) did not encompass economic grants like 23 PPP loans. The Court agrees with the bankruptcy court’s reasoning. Even if the Court agreed 24 25 with Vestavia’s characterization of the PPP funds as a grant rather than a loan,10 the 26 27 But as the court in Tradeways explains, “the mere existence of favorable forgiveness terms in the CARES Act does not transform a PPP loan into a grant.” Tradeways, 2020 WL 3447767, at *17. 10 28 36 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1369 Page 37 of 44 1 language “other similar grant” requires that the term “grant’ be limited only to grants that 2 are similar to licenses, permits, charters, or franchises. 11 U.S.C. § 525(a). A license, 3 permit, charter, or franchise generally enables the grantee to conduct or engage in a 4 certain type of business. See Ayes v. U.S. Department of Veterans Affairs, 473 F.3d 104 5 (4th Cir. 2006) (citation omitted) (licenses, permits, charters, and franchises all 6 “implicate government’s role as a gatekeeper in determining who may pursue certain 7 livelihoods.”). Vestavia has not explained how the PPP is grant “similar” to the other 8 grants listed in Section 525(a). Although PPP funds would undoubtedly affect a 9 business’s operations, the inability to receive one does not foreclose the person or entity 10 from engaging their chosen livelihood, as the inability to obtain a license to operate or a 11 business charter would. See Tradeways, 2020 WL 3447767, at *18–19 (citing Ayes, 473 12 F.3d at 109). While some courts have read the provision to include any grants that are 13 only obtainable from the government and are essential to a debtor’s fresh start, extending 14 this interpretation to a forgivable loan would seem to create a broad standard unmoored 15 from the text of the statute, stretching the term “similar” too far. See In re Springfield 16 Hosp., Inc., 618 B.R. 70, 90–91 (Bankr. D. Vt. 2020), motion to certify appeal granted, 17 618 B.R. 109 (Bankr. D. Vt. 2020) (citing In re Stoltz, 315 F.3d 80, 90 (2d Cir. 2002)). 18 The Court’s reading is confirmed by the fact that there is a parallel non-discrimination 19 provision prohibiting a governmental unit from denying “a student grant, loan, loan 20 guarantee, or loan insurance to a person that is or has been a debtor.” 11 U.S.C. § 21 525(c)(1). If 11 U.S.C. § 525(a) extended to all economic grants, the reference to 22 “student grant” in Section 525(c)(1) would be superfluous. 23 24 25 26 27 The Court thus finds that the bankruptcy court did not err in determining that Vestavia was unlikely to succeed on the merits of its claim under 11 U.S.C § 525(a). E. Resolution of Appeal The Court therefore finds that Vestavia has not shown it is likely to succeed on the merits of its claims under the APA or 11 U.S.C. § 525(a). Accordingly the Court finds 28 37 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1370 Page 38 of 44 1 that the bankruptcy court erred in entering the preliminary injunction against the SBA. 2 The Court accordingly VACATES the preliminary injunction order. 3 4 5 6 7 Withdrawal of the Reference Having resolved the appeal, the Court considers the SBA’s motion to withdraw the reference to the bankruptcy court. III. Legal Standard District courts have original jurisdiction over “all civil proceedings arising under 8 title 11,” which is the Bankruptcy Code, as well as over cases “arising in or related to 9 cases under title 11.” 28 U.S.C. § 1334(a)–(b). However, a district court may refer such 10 proceedings to a bankruptcy judge. 28 U.S.C. § 157(a); see also Sec. Farms v. Int’l Bhd. 11 of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997). 12 “In the Southern District of California, all bankruptcy cases are automatically referred to 13 the bankruptcy court.” In re We Ins. Servs., Inc., No. 3:19-CV-1007-CAB, 2019 WL 14 2436428, at *1 (S.D. Cal. June 11, 2019). Reference to the bankruptcy court may be 15 withdrawn in certain circumstances. Under 28 U.S.C. § 157(d): 16 17 18 19 20 21 22 The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. 28 U.S.C. § 157(d). The second sentence of Section 157 “mandates withdrawal in cases requiring 23 material consideration of non-bankruptcy federal law.” Sec. Farms, 124 F.3d at 1008 24 (emphasis in original). The Ninth Circuit has not clearly addressed the application of the 25 mandatory withdrawal provision, see In re Tamalpais Bancorp, 451 B.R. 6, 8 (N.D. Cal. 26 2011), but “[o]verwhelmingly courts and commentators agree that the mandatory 27 withdrawal provision cannot be given its broadest literal reading, for sending every 28 proceeding that required passing ‘consideration’ of non-bankruptcy law back to the 38 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1371 Page 39 of 44 1 district court would ‘eviscerate much of the work of the bankruptcy courts.’” In re 2 Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7th Cir. 1996) (quoting In re Adelphi Inst., 3 Inc., 112 B.R. 534, 536 (S.D.N.Y. 1990)). Most district courts in California have 4 followed the standard set out by the Seventh Circuit in Vicars. See Tamalpais, 451 B.R. 5 at 8 (collecting cases). That case set forth the “substantial and material consideration” 6 test, holding that “mandatory withdrawal is required only when [non-title 11] issues 7 require the interpretation, as opposed to mere application, of the non-title 11 statute, or 8 when the court must undertake analysis of significant open and unresolved issues 9 regarding the non-title 11 law.” Vicars, 96 F.3d at 954. “The legal questions involved 10 need not be of ‘cosmic proportions,’ but must involve more than mere application of 11 existing law to new facts.” Id. (internal citation omitted). “Withdrawal is not mandated 12 when the case involves the ‘straightforward application of a federal statute to a particular 13 set of facts. It is issues requiring significant interpretation of federal laws that Congress 14 would have intended to have decided by a district judge rather than a bankruptcy judge.’” 15 In re 3dfx Interactive, Inc., No. C 05-00427 JW, 2005 WL 1074407, at *3 (N.D. Cal. 16 May 6, 2005) (quoting Vicars, 96 F.3d at 953 n.5); see also One Longhorn Land I, L.P. v. 17 Presley, 529 B.R. 755, 760 (C.D. Cal. 2015) (“[T]he consideration of non-bankruptcy 18 federal law must entail more than ‘routine application’ to warrant mandatory 19 withdrawal.”). The party seeking withdrawal bears the burden of persuasion. In re First 20 All. Mortg. Co., 282 B.R. 894, 902 (C.D. Cal. 2001). 21 22 IV. Discussion The SBA argues that withdrawal of the reference of the adversary proceeding is 23 mandatory under 28 U.S.C. § 157(d), and that withdrawal of the reference is also required 24 because the bankruptcy court exceeded its constitutional authority. Vestavia opposes, 25 and counters that the SBA’s motion for withdrawal of reference is untimely. 26 27 28 A. Timeliness of Filing As a preliminary matter, the Court considers whether the motion for mandatory withdrawal of the reference was timely filed. Vestavia argues that the motion is untimely 39 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1372 Page 40 of 44 1 and that withdrawal of the reference is improper because the preliminary injunction order 2 was appealed. The SBA argues that there was no material delay before its filing of the 3 motion for withdrawal of the reference, and that the filing of this appeal does not affect 4 the motion. 5 Section 157(d) requires that motions to withdraw be “timely.” 28 U.S.C. § 157(d). 6 “A motion to withdraw is timely if it was made as promptly as possible in light of the 7 developments in the bankruptcy proceeding.” Sec. Farms, at 1007 n.3. As one court has 8 put it, “[t]he fair intendment of the statute in question is to insure that the request for 9 withdrawal be filed as soon as practicable after it has become clear that ‘other laws’ of 10 the genre described in 28 U.S.C. § 157(d) are implicated, so as to protect the court and 11 the parties in interest from useless costs and disarrangement of the calendar, and to 12 prevent unnecessary delay and the use of stalling tactics. Once it becomes apparent, such 13 an issue is in the case, a party has a plain duty to act diligently—or else, to forever hold 14 his peace.” In re Gen. Teamsters Warehousemen & Helpers Union Local 890, No. 5-90- 15 03823 ASW, 1994 WL 665288, at *4 (N.D. Cal. Nov. 8, 1994) (quoting In re Baldwin- 16 United Corp., 57 B.R. 751 (S.D. Ohio 1985)). “Courts have found a motion to withdraw 17 the reference untimely when a significant amount of time has passed since the moving 18 party had notice of the grounds for withdrawing the reference or where withdrawal would 19 have an adverse effect on judicial economy.” Hupp v. Educ. Credit Mgmt. Corp., No. 20 07CV1232WQH(NLS), 2007 WL 2703151, at *3 (S.D. Cal. Sept. 13, 2007) (citing 21 cases). 22 In interpreting the timeliness requirement, courts have focused not just on the 23 absolute amount of time that has passed, but the extent of the proceedings that have 24 already occurred in the case. See In re Grace Miles, No. C 10-0940 SBA, 2010 WL 25 3719174, at *2 (N.D. Cal. Sept. 17, 2010) (finding delay of “close to a year” before filing 26 motion to withdraw not timely because “withdrawing the reference at this juncture, after 27 extensive proceedings already have taken place, would likely have an adverse [effect] on 28 judicial economy and the administration of justice”); In re Woodside Grp., LLC, No. CV 40 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1373 Page 41 of 44 1 10-222-VBF(X), 2010 WL 11596179, at *2 (C.D. Cal. May 21, 2010) (finding that 2 motion filed eight months after complaint not timely “[c]onsidering the substantial 3 activity and progress in the bankruptcy proceeding” and fact that “[b]ecause Defendants 4 did not move to withdraw the reference until after the resolution of the preliminary 5 injunction matter against them, there are also concerns that their request is motivated by 6 forum shopping”). 7 Here, the complaint was filed on May 27, 2020, and the motion for withdrawal of 8 reference was filed in the bankruptcy court on July 29, 2020. Adv. Case No. 20-90073, 9 ECF Nos. 1, 45. The non-bankruptcy issues were apparent from the face of the 10 complaint. The SBA’s delay was therefore at most two months, which is not a 11 particularly long period of time. This Court has identified only one case in which a 12 similar delay rendered a motion to withdraw the reference untimely. See In re Great N. 13 Paper, Inc., 323 B.R. 7, 10 (D. Me. 2005) (finding that motion to withdraw filed less than 14 three months after complaint was untimely, and noting that movant “should have raised 15 the section 157(d) motion in response to that complaint, rather than waste the bankruptcy 16 court’s time with other issues and engender unnecessary delay”). Despite the dearth of 17 case law suggesting a two-month delay may cause the motion to be untimely, the Court 18 recognizes that during those two months, significant proceedings occurred in the 19 bankruptcy court. Indeed, Vestavia obtained essentially all of the relief it sought in the 20 adversary proceeding when the bankruptcy court granted the preliminary injunction. 21 However, by their nature, proceedings on a motion for a temporary restraining order or 22 preliminary injunction tend to occur extremely soon after the filing of a complaint. The 23 situation at hand does not suggest that the SBA let proceedings drag on, such that the July 24 filing of the motion for withdrawal of the reference reflects a lack of diligence. 25 Additionally, the case has not proceeded so far in bankruptcy court that withdrawal of the 26 reference at this stage would impair judicial economy, as most of the issues dealt with by 27 the bankruptcy court were before this Court on appeal. 28 The Court notes Vestavia’s argument that a court cannot serve as both the trial 41 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1374 Page 42 of 44 1 court and appellate court in the same case. However, the Court disagrees that the 2 authorities cited by Vestavia stand for a categorical rule that the reference cannot be 3 withdrawn once appeal of an order for interim relief has been taken. In re Powelson, 878 4 F.2d 976 (7th Cir. 1989), dealt with the permissive withdrawal standard, which has the 5 same timeliness standard, but also commits to the district court more discretion in 6 determining whether withdrawal of the reference is appropriate. Powelson, 878 F.2d at 7 983. No such discretion exists when the case meets the standard for mandatory 8 withdrawal. See Sec. Farms, 124 F.3d at 1008; 28 U.S.C. § 157(d). 9 10 The Court therefore concludes that the motion for withdrawal of the reference is timely. 11 B. Mandatory Withdrawal 12 The SBA argues that the reference must be withdrawn because the case requires 13 material consideration of non-bankruptcy law, given the complex issues of statutory 14 interpretation involved. Vestavia argues that the APA analysis is straightforward and 15 thus mandatory withdrawal of the reference not required.11 16 As the forgoing discussion of the issues on appeal demonstrates, the adversary 17 proceeding arising in part under the APA does, by necessity, call for interpretation of the 18 non-bankruptcy law—most significantly, the CARES Act. Vestavia’s argument, that the 19 CARES Act “requires no interpretation,” Case No. 20-cv-1824-GPC-LL, ECF No. 1-2 at 20 14, is not particularly convincing because APA analysis always requires the court to 21 consider Congressional intent by interpreting the statute. 5 U.S.C. §§ 706(2)(A)(i), 22 706(2)(C). Additionally, Vestavia’s argument that the case centers on the rules passed by 23 the SBA, rather than the CARES Act, does not square with the fact that the Court must 24 determine whether the CARES Act authorizes the rules at issue. This is not a case 25 26 27 28 11 Vestavia presents a number of other arguments that pertain to the permissive withdrawal of the reference standard. The Court does not find these arguments relevant to its adjudication of the motion for mandatory withdrawal of the reference. 42 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1375 Page 43 of 44 1 involving the application of settled law to new facts, but rather the application of the 2 APA to the interpretation of a new law. It would artificially confine the statutory 3 language of Section 157(d) to build in a requirement that the proceedings involve not 4 only substantial and material federal law issues and interpretation of non-title 11 statutes, 5 Vicars, 96 F.3d at 954, but that those issues be unusually difficult to resolve. See In re 6 ComUnity Lending, Inc., No. C 08-00201 JW, 2008 WL 11410087, at *2 (N.D. Cal. June 7 5, 2008) (“Mandatory withdrawal does not turn on the amount of judicial efforts involved 8 but on whether the issue to be decided involve significant and material questions of non- 9 bankruptcy federal law.”). Although the Chevron and State Farm inquiry into the 10 CARES Act is not a federal law issue “of cosmic proportions,” it does require substantial 11 analysis of non-bankruptcy law.12 Vicars, 96 F.3d at 954. 12 Vestavia cites one bankruptcy court decision that suggested mandatory withdrawal 13 of the reference is not appropriate in this context. In In re Body Renew, the bankruptcy 14 court noted that “the court is merely applying the APA to the PPP,” that there are a 15 “considerable number [of] decisions on the subject,” and that the proceeding “also 16 includes a claim that the SBA’s administration of the PPP violates 11 U.S.C. § 525,” and 17 thus the court was “skeptical whether this case must be withdrawn.” In re Body Renew 18 Alaska, LLC, Nos. 20-00075 GS, 20-90005 GS, 2020 Bankr. LEXIS 1899, at *6–7 19 (Bankr. D. Alaska July 14, 2020). As to the court’s first point, this reading of the 20 “substantial and material consideration” test seems to conflate the “application of existing 21 law to new facts” with the application of a legal standard to the interpretation of another 22 law. Vicars, 96 F.3d at 954. Further, although a number of bankruptcy court and district 23 court decisions have dealt with the PPP, the law is far from settled enough to render the 24 complex issues in this case a “straightforward application.” Id. at 953 n.5. With respect 25 26 27 28 Additionally, Vestavia’s suggestion that a bankruptcy court is better equipped to evaluate whether the SBA’s rulemaking was arbitrary and capricious runs counter to State Farm’s mandate that courts not substitute their own policy judgment for that of the agency. State Farm, 463 U.S. at 43. 12 43 20-cv-01308-GPC-LL Adv. No. 20-90073-LA Case 3:20-cv-01308-GPC-LL Document 27 Filed 03/26/21 PageID.1376 Page 44 of 44 1 to the Body Renew court’s last point, the inclusion of a claim arising in bankruptcy law is 2 explicitly contemplated by the mandatory withdrawal standard. 28 U.S.C. § 157(d) 3 (withdrawal is mandatory if the “proceeding requires consideration of both title 11 and 4 other laws.”) (emphasis added). The Court therefore declines to adopt the reasoning of 5 the Body Renew court. 6 Accordingly, the Court GRANTS the motion to withdraw the reference. 7 Conclusion 8 For the reasoning set forth above, the Court hereby: 9 1. VACATES the bankruptcy court’s order granting the motion for a preliminary 10 injunction; 11 2. GRANTS the motion for withdrawal of the reference. 12 IT IS SO ORDERED. 13 Dated: March 26, 2021 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 44 20-cv-01308-GPC-LL Adv. No. 20-90073-LA

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