New Mexico Court Holds that Bankrupt Entities are Eligible for the Paycheck Protection Program

Joining three other bankruptcy courts, Judge Thuma of the District of New Mexico recently held that the rules issued by the Small Business Administration (“SBA“) that restrict bankrupt entities from participating in the Paycheck Protection Program (“PPP“) violated the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, P.L. 115-136 (the “CARES Act”), as well as section 525(a) of the Bankruptcy Code. See Roman Catholic Church of the Archdiocese of Santa Fe v. United States of America Small Business Administration (In re Roman Catholic Church of the Archdiocese of Santa Fe), Adv. No. 20-1026, No. 18-13027 (D.N.M. May 1, 2020) [D.I. 15]; see also In re Hidalgo County Emergency Service Foundation, Case No. 19-20497, Adv. P. No. 20-2006 (Bankr. S.D. Tex. April 25, 2020) (Jones, J.) [D.I. 18]; In re Penobscot Valley Hospital, Adv. No. 20-01005, Case No. 19-10034 (Bankr. D. Me. May 1, 2020) (Fagone, J.) [D.I. 21]; In re Calais Regional Hospital, Adv. No. 20-1006, Case No. 19-10486 (Bankr. D. Me. May 1, 2020) (Fagone, J.) [D.I. 21]; In re Springfield Hospital, Inc., Adv. No. 20-01003, Case No. 19-10283 (Bankr. D. Vt. May 4, 2020) (Brown, J.) [D.I. 20].

Unlike the other cases, the Archdiocese of Sante Fe case was not a case involving a healthcare business and did not turn on the essential nature of the services provided by the debtor.  The Opinion is no doubt welcomed news to distressed small  businesses who are desperately seeking relief from the federal government due to the coronavirus pandemic that has swept the country.


The Debtor, which has been in bankruptcy since December 2018, is the catholic archdiocese in New Mexico.  It employs 70 individuals and is operating as a debtor in possession.

Like many New Mexico businesses, the Debtor has been severely impacted financially by the federal, state, and local government “lockdown” orders issued in response to the coronavirus pandemic. Like many cities and states, New Mexico cities have issued “stay at home” orders, prohibiting mass gatherings and requiring all non-essential businesses to cease in-person operations.

Because the major source of the Debtor’s income comes from parish assessments, which, in large part, are funded by collections during masses–which have been curtailed–the Debtor is losing about $300,000 per month in revenue.

As such, on April 20, 2020, the Debtor filed a loan application for a $900,000 loan under the Paycheck Protection Program (“PPP“), sponsored by the U.S. government.  The lender, Wells Fargo, did not act on the application because of the bankruptcy ineligibility provision adopted by the SBA, the government agency in charge of administering the loans.

On April 30, 2020, the Debtor commenced an adversary proceeding against the SBA, seeking, pursuant to the Administrative Procedures Act, 5 U.S.C. § 701 et seq. (the “APA“),  a preliminary injunction prohibiting the SBA from automatically denying eligibility  under the CARES Act because the Debtor is in bankruptcy.

The Bankruptcy Court converted the preliminary injunction hearing into a trial on the merits and ruled in favor of the Debtor, holding that the SBA could not restrict PPP funds from bankrupt entities.


On or about March 27, 2020, the President signed the CARES Act, which is intended, among other things, to provide stimulus to the economy by distributing approximately $2.3 trillion to various industries, programs, and individuals.

The CARES Act temporarily added the new Paycheck Protection Program to be administered by the SBA.  As drafted the PPP appears to have extremely favorable terms, including:

• No collateral or personal guarantees are required;
• Funds are available regardless of the applicant’s creditworthiness;
• No fees are charged;
• The loans mature in 2 years;
• The interest rate is 1%; and
• The loans are fully forgiven if the funds are used as required.

In addition, the PPP appears to have very few eligibility requirements:

  1. Applicant must be a small business concern or any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act;
  2. Applicant must have fewer than 500 employees or, if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates;
  3. Applicant must have been in operation on February 15, 2020; and
  4. Applicant must have had employees to whom the applicant pays salaries and payroll.

Funds available under the PPP, however, are limited and administered on a first-come, first-served basis. The demand for the PPP funds has been so overwhelming that the funds were already exhausted once, but, on April 24, 2020, were replenished by Congress.

On April 2, 2020, the SBA issued Official SBA Form 2484, which is the form applicants must use to apply for a PPP loan. The form states that the applicants “presently are involved in any bankruptcy” are not eligible.

On April 15, 2020, the SBA published in the Code of Federal Regulations an “interim final rule” implementing the PPP (the “First Rule”).  The First Rule adopts the ineligibility standards in section 120.110, title 13 of the Code of Federal Regulations (“CFR 120.110”), as further described in SBA’s Standard Operating Procedure 50-10, Subpart B, Chapter 2 (“SOP 50-10“). See First Interim Rule, 2(c) (“Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and further described in SBA’s Standard Operating Procedure”).  The SOP 50-10 provides that a “Small Business Applicant” must, among other things: be an operating business; be located in the United States; be “small” (as defined by the SBA); and demonstrate the need for the desired credit. See SOP 50-10, pg. 85.  The SOP 50-10 also provides that the businesses listed in CFR 120.110 are not eligible for an SBA loan.  Bankruptcy debtors are not among the listed ineligible businesses. Indeed, nothing in the SOP 50-10 makes the  debtor ineligible for a PPP loan.

On April 28, 2020, the SBA issued another interim final rule (the “Second Rule”), which  purports to disqualify bankrupt borrowers from the PPP by instructing that “[i]f the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan . . . ”  The admitted rationale behind this Second Rule is that providing PPP loans to current or former debtors in bankruptcy would present an unacceptably high risk for an unauthorized use of funds or non-repayment of unforgiven loans.


The Court held that bankrupt entities, like the Debtor, are eligible for PPP loans, assuming they could meet the other requirements under the CARES Act.  Here, the Court ultimately found that the Debtor clearly could meet the other requirements and therefore should be offered a PPP loan.

Specifically, the Court found that the Debtor has the financial and accounting ability to follow the PPP rules about use of the funds and it is careful in its accounting, it files complete and detailed monthly operating reports, and it is more than willing to separately account for how it would use PPP funds.

The APA authorizes a district court (and maybe a bankruptcy court) to act as an appellate court over any federal agency action, allowing such reviewing court to set aside any agency action that is, among other things, (a) “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law” or (b) “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. §706(2)(A), (C).  The Court held that the SBA’s bankruptcy ineligibility requirements violated both of these statutory provisions.

Arbitrary and Capricious

Under the arbitrary and capricious standard, a court generally considers whether the government agency “considered all factors and whether there has been a clear error of judgment.”  IMC Kalium Carlsbad Inc. v. Interior Bd. of Land Appeals, 206 F.3d 1003, 1012 (10th Cir. 2000).  An agency rule is ” “arbitrary and capricious if the agency has relied on factors [that] Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Motor Vehicles Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

Here, Judge Thuma found that excluding bankrupt debtors from the PPP program was arbitrary and capricious, because the PPP’s eligibility requirements do not include creditworthiness and, in fact, financial distress of recipients was presumed when Congress enacted the PPP.

The Court also found that the circumstances surrounding the enactment of the PPP–the coronavirus pandemic– as well as other provisions in the Act provide no reason to assume that Congress simply intended to cede to the SBA discretion to exclude bankrupt debtors from the PPP.

Furthermore, the Court found that the SBA’s standard for excluding bankrupt entities  did not adequately gauge a borrower’s likelihood of complying with the PPP.  Indeed,  given the extensive oversight over a chapter 11 debtor, such a borrower stands a better chance of complying with the statute than an unsupervised non-debtor.

Exceeding Statutory Authority

The Court also found that the SBA exceeded its authority under the CARES Act, by changing the PPP’s eligibility requirements.

In determining whether an agency’s regulations are valid under a particular statute, a court begins with the question of whether the statute unambiguously addresses the “precise question at issue.”  Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, 467 U.S. 837, 842, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).  If Congress spoke directly to an issue, then the court as well as the agency must give effect to Congress’ intent. See United Keetoowah Band of Cherokee Indians of Okla. v. U.S. Dep’t of Hous. & Urban Dev., 567 F.3d 1235, 1239–40 (10th Cir. 2009).  However, if the statute is silent or ambiguous as to the precise question at issue, a court must determine whether to afford the agency’s interpretation the Chevron deference.  Id.  Such deference is appropriate if “‘Congress delegated authority to the agency generally to make rules carrying the force of law’ and the agency’s interpretation of the statute was issued pursuant to that authority.” Carpio v. Holder, 592 F.3d 1091, 1096–97 (10th Cir. 2010) (quoting United States v. Mead Corp., 533 U.S. 218, 226–27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001)).

According to the Court, the SBA’s wrongful interpretation is made clear by the CARES Act § 4003(c)(3)(D), which relates to other loans to “mid-sized businesses.”  Unlike PPP loans, the loans to mid-size businesses are intended to be repaid.  For that reason, Congress specified in the statute that bankruptcy debtors are not eligible for such other loan.  Judge Thuma felt that the SBA should have understood the fundamental differences between the mid-size business loan program (real loans) and the PPP (grants or support payments), and the SBA’s refusal to consider this simple distinction constitutes a usurpation of Congressional authority to determine which businesses are eligible for PPP funds.

Violation of Section 525

The Court did not stop with the APA violation, however.  It also found that the SBA violated section 525(a) of the Bankruptcy Code, which provides that:

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 [the Bankruptcy Code] . . .

The common qualities of the property interests protected under section 525(a), i.e., “license[s], permit[s], charter[s], franchise[s], and other similar grants,” are that these property interests are unobtainable from the private sector and essential to a debtor’s fresh start.”  Stoltz v. Brattleboro Housing Auth. (In re Stoltz), 315 F.3d 80 (2d Cir. 2002).

Here, the Court found that the PPP, which the Court considered a grant or support program, fell within the “other similar grant” language in section 525(a), as such program was “only be[ing] offered by the government,” was “unobtainable from the private sector” and was “essential to the [Debtor’s] fresh start,”  as described in Stoltz. Therefore, the Court held that the SBA’s exclusion of debtors from such program is proscribed by section 525(a) of the Code, as well as the APA.

As if trying to send a clear message, the Court concluded by stating that if the “[SBA’s] actions result in [the Debtor] not obtaining the $900,000 it requested, [the Debtor] may file an adversary proceeding for compensatory and, if appropriate, punitive damages.”


Judge Thuma’s opinion is thorough and well-reasoned and certainly represents a victory for small businesses of any nature.  But, while Judge Thuma’s opinion does not focus on the type of business that a debtor is engaged in, decisions, like the Archdiocese of Sante Fe, are still very recent.  It is uncertain whether other courts will be willing to extend similar emergency relief to small businesses that are not considered essential to the public, like healthcare, or nonprofit organizations that provide an important public service.  Stay tuned, as the coronavirus pandemic is truly changing laws and society daily.