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Law360 (June 17, 2020, 5:15 PM EDT ) A bankrupt telecommunications company is eligible for COVID-19 relief loans after an Arizona federal judge said the U.S. Small Business Administration can't bar debtors from obtaining loans under the Paycheck Protection Program.
In the ruling, formalized Tuesday, U.S. Bankruptcy Judge Paul Sala said the SBA's rule prohibiting bankrupt entities from obtaining loans guaranteed by the administration under the PPP exceeded its authority and statutory jurisdiction, and that barring PCT International Inc. from obtaining such loans based on its status as a Chapter 11 debtor was unlawful.
The court agreed with PCT International, which argued in an adversary complaint that Congress did not include any limitation on eligibility for PPP funds based on a company's status as a debtor, and that implementing such a rule went beyond the SBA's authority.
Judge Sala said PCT International's application for a PPP loan should be scrubbed of any reference to its status as a debtor.
"The SBA, and anyone acting in concert with or at the direction of the SBA, including any lender from whom PCT International, Inc. seeks a PPP loan may not deny plaintiff a loan under the PPP based on plaintiff's status as a Chapter 11 debtor or based on the words 'or presently in bankruptcy' on plaintiff's PPP application or the PPP lender's application," Judge Sala's ruling said.
PCT International sued the SBA through a Chapter 11 adversary proceeding in early May seeking an injunction that would bar the agency from denying the PPP application based solely on the company's debtor status.
The PPP was adopted by Congress in late March as part of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, and was initially funded by nearly $350 billion to be distributed by third-party lenders. The loans are intended for small businesses struggling to meet payroll, utility and lease obligations during the COVID-19 outbreak and associated business restrictions. After the first round of funding was exhausted, Congress approved an additional $320 billion in PPP loans in late April.
Shortly after the CARES Act passed, the SBA adopted an interim rule barring bankrupt entities from receiving the loans, which convert to grants with no repayment obligations if the funds are used as intended. The application for the loans includes a question asking if an applicant is "presently involved in any bankruptcy."
"The court issued a thorough and well-reasoned opinion that fully supports the congressional intent behind the PPP to assist businesses like PCT impacted by COVID-19," the company's general counsel, Douglas Drury, said in a statement late Tuesday.
This issue has been making the rounds in bankruptcy courts across the country since the program began, with inconsistent rulings being handed down recently. A Wisconsin federal judge denied a similar injunction motion from the operator of a 3,500-seat arena and owner of a professional women's basketball team. In that ruling, the judge said Fox Valley Pro Basketball Inc. — whose bankruptcy case began in August 2019 and is unrelated to the COVID-19 outbreak — was not allowed to seek injunctive relief against the SBA under provisions of the Small Business Act.
A New York federal judge last week upheld the SBA's denial of PPP loans to the Catholic dioceses of Buffalo and Rochester, saying the administration was within its rights to impose rules that went beyond the limitations included in the CARES Act because it had a responsibility to ensure its loans were or sound value.
Three creditors of PCT International and its parent company, Andes Industries Inc., filed an involuntary Chapter 7 bankruptcy petition in November 2019, saying they were owed about $14 million by the debtors. PCT and Andes successfully petitioned the court to have the case converted to a Chapter 11 and took over the proceedings, listing about $60 million in creditor claims.
In March, as its restructuring was progressing, PCT and Andes asked the court to extend the time period during which the debtors had the exclusive right to file a Chapter 11 plan, saying the global spread of COVID-19 had made it difficult to complete work on the plan. The company, which provides "last-mile" telecom services that bridge trunk lines to end users, has manufacturing and assembly operations in China, Vietnam and Bulgaria, which were hampered by the coronavirus beginning in January, according to court filings.
When the PPP was adopted, PCT International applied with Comerica Bank for one of the loans, but was denied after answering that it was involved in a pending bankruptcy case.
Counsel and representatives for the parties did not respond to requests for comment Wednesday.
PCT International is represented by Wesley R. Ray and Philip R. Rudd of Sacks Tierney PA.
The SBA and administrator Jovita Carranza are represented by Kevin P. VanLandingham, Ruth A. Harvey and Margaret M. Newell of the U.S. Department of Justice's Civil Division.
The adversary case is PCT International Inc. v. Carranza, case number 2:20-ap-00118, in the U.S. Bankruptcy Court for the District of Arizona.
The bankruptcy case is In re: Andes Inc. et al., case number 2:19-bk-14585, in the U.S. Bankruptcy Court for the District of Arizona.
--Editing by Adam LoBelia.
For a reprint of this article, please contact reprints@law360.com.
