Bankruptcy Debtors are not Precluded from PPP Loan Eligibility

Laura Chambers

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


            In In re Roman Catholic Church of the Archdiocese of Santa Fe, a bankruptcy court in New Mexico held that the Small Business Administration (“SBA”) acted “arbitrar[ily] and capricious[ly]” under the Administrative Procedure Act (“APA”) when it denied a Paycheck Protection Program (“PPP”) loan to a debtor in a bankruptcy case.[1] On April 20, 2020, the Roman Catholic Church of the Archdiocese of Santa Fe (the “Church”)—a debtor in a case under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”)— applied for a PPP loan for $900,000, and was denied by lender Wells Fargo Bank because the Church purportedly did not meet the eligibility provisions set forth by the SBA.[2] Previously, on April 2, 2020, the SBA declared on its application form that “applicants ‘presently involved in any bankruptcy’ [were] not eligible” for PPP loans.[3]  The SBA, however, did not reference this provision when it implemented the PPP through its First Rule publication in the Code of Federal Regulations on April 15, 2020.[4] The agency subsequently included the debtor disqualification provision in its Second Rule publication on April 28, 2020—almost one month after the Church applied for a PPP loan.[5] As a result of the coronavirus pandemic, “the New Mexico Department of Health issued a ‘stay at home’ order, prohibiting mass gatherings . . . .”[6] Consequently, the Church lost approximately $300,000 a month in revenue because it could no longer rely on weekly donations collected during mass.[7] On April 28, 2020, the Church filed a motion with the New Mexico bankruptcy court to approve the PPP loan as post-petition financing under 11 U.S.C. § 364.[8]

            The New Mexico bankruptcy court reasoned that under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which established the PPP, Congress intended to provide emergency financial assistance through its PPP loans to those organizations that “lost revenue caused by the government lockdowns.”[9] The loan’s terms were quite favorable in that “funds [were] available regardless of . . . creditworthiness . . . [and] the loans [were] fully forgiven if the funds [were] used as required.”[10] This differed greatly from “another CARES Act program . . . [which] specifically exclude[d] bankruptcy debtors.”[11] To verify whether “the agency’s regulations [were] valid,” the court applied a two-part test, known as the “Chevron-deference analysis.”[12] Generally, courts will grant the Chevron deference to the agency as long as Congress has delegated rulemaking authority to the agency, and the agency’s interpretation is not “manifestly contrary to the statute.”[13]

            In this instance, the New Mexico bankruptcy court concluded that because Congress’ intentions with implementing the PPP system were clear, and that the statutory terms were unambiguous,[14] the SBA had no authority to apply criteria for normal loan programs to the PPP eligibility criteria.[15] Specifically, the court explained that the Church’s bankruptcy status had no bearing on its eligibility for PPP assistance because “Congress did not intend to exclude bankruptcy debtors from the PPP.”[16] Thus, the court held that in addition to acting beyond its authority, the SBA violated the Bankruptcy Code prohibition against discriminatory treatment.[17] Thereafter, the court granted the Church entitlement to the PPP relief it requested, and concluded that if the Church could not obtain its much-needed funds, it could pursue remedies for compensatory and punitive damages.[18]


[1] See In re Roman Catholic Church of the Archdiocese of Santa Fe, 615 B.R. 644, 654 (Bankr. D.N.M. 2020).

[2] Id. at 651.

[3] Id.

[4] Id.

[5] Id.

[6] Id. at 652.

[7] Id.

[8] Id.

[9] See id. at 649–50 (citing Paycheck Protection Program § 1102, amending 15 U.S.C. 636(a)) (eligible PPP recipients included “any business concern, nonprofit organization, veterans organization, or Tribal business concern . . . [with] fewer than 500 employees . . . [in] operation on February 15, 2020; [that] have had employees to whom the applicant pays salaries and payroll taxes . . . .”).

[10] Id. at 650.

[11] Id. at 654.

[12] See id. at 655 (Under Chevron: (1) “If Congress has spoken directly to the issue . . .  the court . . . must give effect to Congress’s unambiguously expressed intent;” or (2) “[I]f the statute is silent or ambiguous as to the precise question at issue, a court must determine whether to [defer to] the agency’s interpretation.”).

[13] Id.

[14] Id. at 654–55.

[15] Id. at 657.

[16] Id. at 654.

[17] See id. at 656 (relying on 11 U.S.C. § 525(a)).

[18] Id. at 657.