Updated: Feb 24, 2021
Federal judge says SBA followed its lending criteria
Federal Judge Frances Tydingco-Gatewood has upheld the U.S. Small Business Administration's decision to disqualify the Archdiocese of Agana from the Paycheck Protection Program due to its bankruptcy status.
The court said SBA simply abided by its own lending criteria and "did not act arbitrarily or capriciously when it excluded bankruptcy debtors in the PPP."
The PPP, a component of the Coronavirus Assistance and Rehabilitation Act signed in March last year, provides loans to help businesses keep their workforce employed during the Covid crisis. Under the program, borrowers may be eligible for PPP loan forgiveness.
Ford Elsaesser, attorney for the archdiocese, said church officials are reviewing the district court's decision thoroughly to determine whether or not to appeal the ruling.
"There are other appeals pending in the Ninth Circuit and elsewhere on the same subject matter," Elsaesser said in a statement.
On June 2, 2020, Archbishop Michael Byrnes sued SBA after the archdiocese's PPP application was denied by a bank the month before.
The court noted that PPP under the CARES Act and its implementation were under extraordinary and unusual circumstances amid the Covid-19 crisis. Its goal was to alleviate the economic devastation caused by the pandemic and Congress expected speedy action.
SBA was mandated to develop and implement rules and regulations for the implementation of the PPP, in a very short amount of time of 15 days.
"The factual basis of the complaint is that SBA has set a criteria that excludes those in bankruptcy from qualifying for the Paycheck Protection Program," the court said.
Faced with the huge liability resulting from more than 200 clergy sexual abuse claims, the archdiocese filed a Chapter 11 petition in the District Court of Guam in January 2019. The 143-page legal briefs spelled out real property assets of the diocese, estimated at $22.96 million and liabilities estimated to be $45.6 million.
The archdiocese argued that the only eligibility requirements for PPP under the CARES Act are as follows: the loan is for the “covered period”; the applicant meets the definition of an eligible entity, e.g., nonprofit; and the applicant employs no more than 500 employees.
The court, however, clarified that the CARES Act simply expanded the general eligibility requirements but did not drop SBA's existing loan criteria.
"Among the statutory requirements of an SBA loan is that all loans 'shall be of such sound value or so secured as reasonably to assure repayment considering whether a loan applicant is 'creditworthy,'" the court said.
"SBA established a criteria that includes, among other things, the applicant’s character, reputation, credit history, strength of the business, and ability to repay the loan with earnings from the business."
Elsaesser disagreed with the ruling, noting that the archdiocese had previously prevailed in obtaining injunctive relief, allowing the PPP loans to go forward.
The archdiocese argued that since PPP loans "could be forgiven," they are therefore “grants” and not “loans.”
The court, however, maintained PPP loans fall under SBA's lending practices.
“The record is clear that Congress created the PPP as an amendment to the SBA’s pre-existing loan program and both the statute and agency regulations refer to the funds distributed as ‘loans,'" the court said.
"The PPP loans are made through private lenders and participants sign promissory notes, subject to SBA guarantees. While the loan may be forgiven, it is not an automatic forgiveness. The borrower would have to apply for forgiveness, and the loan is only or given if certain criteria are met."
Elsaesser said the archdiocese will be able to continue operations and remains optimistic about mediating an overall resolution to the pending Chapter 11 case.
"The financial impact of the adverse decision will not materially affect the archdiocese in its attempt to resolve the current Chapter 11 matter with the committee of abuse survivors and other creditors of the archdiocese," he said.