SMALL BUSINESS ADMINSTRATION v. ORGANIC POWER LLC (2025)

OPINION AND ORDER

Organic Power LLC (“Organic Power”) commenced an adversary proceeding against the Small Business Administration (“SBA” or “the agency”) on April 27, 2020, setting forth four causes of action. (Adv. Pro. 20-055, Docket No 1.)

Counts one and two seek injunctive and declaratory relief pursuant to the Administrative Procedure Act, 5 U.S.C. §§ 706(2)(A)-(C) (“APA”). Id. at pp. 12-20. The bankruptcy court issued a Report and Recommendation (“R&R”) on March 8, 2021, recommending that this Court “rule in favor of Organic Power” on both counts. (Adv. Pro. 20-055, Docket No. 123 at p. 24.) According to the R&R, the SBA violated the APA by disqualifying bankruptcy debtors from participating in the Paycheck Protection Program (“PPP”), Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 § 1102, 134 Stat. 281 (2020) (codified as amended 15 U.S.C. § 636(a)(36) (“CARES Act”)). Id. For the reasons set forth below, the R&R is REJECTED.

Counts three and four request that the bankruptcy court issue a declaratory judgment and writ of mandamus pursuant to Section 525(a) of the Bankruptcy Code, 11 U.S.C. § 525(a). (Adv. Pro. 20-055, Docket No. 1 at pp. 20-24.) The bankruptcy court granted this relief, holding that the SBA excluded bankruptcy debtors from the PPP in violation of Section 525(a). See Organic Power, LLC v. Small Business Admin., 619 B.R. 540, 551 (Bankr. D.P.R. 2020); Adv. Pro. 20-055, Docket No. 80. For the reasons set forth below, this Opinion and Order is REVERSED.

I. Background

The disposition of this litigation is contingent on the following inquiry: Are funds disbursed pursuant to the Paycheck Protection Program a loan, or another form of assistance such as a grant? The answer will determine whether PPP regulations conflict with the Bankruptcy Code. The Court sets forth the relevant statutory authorities for context.

A. Section 525(a) of the Bankruptcy Code

Section 525(a) of the Bankruptcy Code contains an “antidiscrimination provision,” providing 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, [or] discriminate with respect to such a grant against, ․ a person that is or has been a debtor under this title

11 U.S.C. § 525(a); see Vaca Brava Old San Juan, LLC v. Puerto Rico Treasury Dep't., 560 B.R. 376, 382 (Bankr. D.P.R. 2016) (“Section 525 of the Bankruptcy Code, also known as the ‘antidiscrimination provision,’ protects debtors under the Code from various forms of discrimination from governmental units.”) (Cabán-Flores, Bankr. J.). Discrimination based on insolvency “frustrates the ‘fresh start’ policy of the Bankruptcy Code by denying property interests not obtainable through the private sector.” Saunders v. Reeher, 105 B.R. 781, 788 (Bankr. E.D. Pa. 1989).

The parameters of Section 525(a) lack precision, requiring courts to assess whether “particular government program[s] or benefit[s] [constitute a] ‘license, permit, charter, franchise or other similar grant.” 4 Collier on Bankruptcy P. 525.02 (16th ed. 2024). For instance, government regulations precluding bankruptcy debtors from registering a motor vehicle or obtaining a liquor license based on past or current insolvency are impermissible. See Jessamey v. Town of Saugus, 330 B.R. 80 (Bankr. D. Mass 2005); Tell v. State of Illinois Liquor Control Comm'n, 38 B.R. 327 (N.D. Ill. 1983). In contrast, loan programs subsidized and guaranteed by government agencies generally fall beyond the purview of Section 525(a). See In re Goldrich, 771 F.2d 28, 30 (2d Cir. 1985) (holding that an extension of credit “is not a license, permit, charter or franchise; nor is it in any way similar to [a grant]”); Watts v. Pennsylvania Hous. Fin. Co., 876 F.2d 1090, 1093-94 (3rd Cir. 1989) (holding that a loan program administered by a state agency “to prevent imminent mortgage foreclosure” was not a “license, permit, charter, franchise or other similar grant”); Ayes v. United States VA, 473 F.3d 104, 111 (4th Cir. 2006) (holding that Section 525(a) did not apply to a veteran home loan guaranty program); Toth v. Michigan State Hous. Dev. Auth., 136 F.3d 477, 479 (6th Cir. 1998) (holding that an “agency's policy of requiring at least three years to lapse after the date of a bankruptcy discharge before [approving] a loan application” did not violate Section 525(a)).

B. The Small Business Administration and Section 7(a) Loans

Congress enacted the Small Business Administration Act in 1953 to “aid, counsel, assist, and protect, insofar is possible, the interests of small business concerns.” Pub. L. No. 85-536, 72 Stat. 384 (1953) (codified as amended 15 U.S.C. §§ 631(a), et seq.). The SBA Administrator possesses the authority to “make such rules and regulations as he deems necessary” to accomplish these objectives. 15 U.S.C. §§ 634(b)(6), (b)(7) (providing that the SBA Administrator may create rules and “take any and all actions ․ when he determines such actions are necessary or desirable in making, servicing, ․ or otherwise dealing with [loans] made under the provisions of [the SBA Act]”).

Section 7(a) loans are the SBA's principal mechanism for advancing its legislative mandate. These loans may take one of three forms: (1) a direct loan by the SBA; (2) an immediate participation loan by a private lender and the SBA; or (3) a guaranteed loan (deferred participation) by which the SBA guarantees a portion of a loan made by a private lender. 13 C.F.R. § 120.2(a)(1). The agency prefers “to guarantee private loans rather than to disburse funds directly.” United States v. Kimbell Foods, 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979); USF Fed. Credit Union v. Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1248 (11th Cir. 2020).

SBA loans are subject to several requirements. For example, applicants must demonstrate that they attempted, but failed “to get necessary loans on reasonable terms from [private sector] lenders.” SBA v. McClellan, 364 U.S. 446, 447, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960) (citing 67 Stat. 235-236); see 15 U.S.C. § 636(a)(1)(A)(i) (“No financial assistance shall be extended pursuant to this subsection if the applicant can obtain credit elsewhere”). Section 7(a) loans are reserved exclusively for businesses that are organized for profit, located within the United States, and comply with industry specific size requirements. See 13 C.F.R. § 120.100(a)-(e).

Section 7(a) loans must be “of such sound value or so secure as reasonably to assure repayment.” 15 U.S.C. § 636(a)(7); see 13 C.F.R. § 120.2(c)(1) (1978). To further this end, SBA regulations mandate that applicants “must be creditworthy.” Id. § 120.15. Relevant criteria include: the credit score of the applicant and any guarantors, the earnings or cashflow of an applicant, “or where applicable any equity or collateral of the applicant.” Id. The SBA “also considers an applicant's bankruptcy history; [they] are asked to disclose prior bankruptcy filings on Form 1919, the loan application form.” In re Penobscot Valley Hosp., 626 B.R. 350, 357 (Bankr. D. Me. 2021); Springfield Hosp., Inc. v. Guzmán, 28 F.4th 403, 409 (2d Cir. 2022) (“[As] part of the creditworthiness inquiry, the SBA considers the bankruptcy status and history of each applicant, although a status or history of bankruptcy does not automatically render an applicant ineligible for a Section 7(a) loan.”) (citation omitted).

C. The Paycheck Protection Program

President Donald J. Trump declared a state of national emergency on March 13, 2020, noting that a “novel (new) coronavirus known as SARS-CoV-2 (“the virus”) was first detected in Wuhan, Hubei Province, People's Republic of China, causing outbreaks of the coronavirus COVID-19 that has now spread globally.” See Presidential Proclamation No. 9994, 85 Fed. Reg. 15337-15338 (2020). Covid-19 spread throughout the United States at an alarming rate during the early months of 2020, prompting state governments to issue a succession of “lockdown” orders. See Puerto Rico Gov. Wanda Vázquez-Garced Exec. Order No. 2020-023 (Mar. 15, 2020) (ordering the “closure of all governmental operations[, shopping centers] or any similar place or event that may promote the gathering of a group of citizens in the same place”). The pandemic was “particularly damaging for small businesses, which represent the majority of businesses in the United States and employ nearly half of all private sector workers.” MacKinac Ctr. for Pub. Policy v. United States Dep't of Educ., 741 F.Supp.3d 655, 659 (E.D. Mich. 2024) (citation omitted).

Congress established the PPP as a component of the CARES Act on March 27, 2020. Pub. L. No. 1160136, 134 Stat. 281 (2020) (Title I – Keeping Americans Paid and Employed”). The PPP is “aimed at helping businesses make payroll ․ in order to keep people employed through the economic downturn.” USF Fed. Credit Union, 983 F.3d at 1247. The PPP functions as a temporary amendment to Section 7(a) of the Small Business Administration Act. 15 U.S.C. § 636(a)(36)(B) (“Except as otherwise provided in this paragraph, the [SBA] Administrator may guarantee covered loans under the same conditions, and processes as loans made under [Section 7(a)]”); USF Fed. Credit Union, 983 F.3d at 1249 (noting that “the PPP was not created as a standalone program; instead, it was added to Section 7(a)”).

The CARES Act relaxed several Section 7(a) eligibility requirements, expanding the pool of potential loan applicants. For instance, pursuant to the CARES Act, the PPP permits the SBA to extend loans to certain non-profit organizations, veteran organizations, independent contractors, and self-employed individuals. See 15 U.S.C. § 636(a)(36)(D) (“Increased eligibility for certain small business and organizations”). Moreover, “the requirement that a small business concern is unable to obtain credit elsewhere ․ shall not apply to a [PPP] loan.” Id. § 636(a)(36)(I). “Allowable uses” of PPP funds include, inter alia, payroll costs, rent, utilities, and “interest on any other debt obligations that were incurred before [the Covid-19 pandemic].” Id. § 636(a)(36)(F)(i).

If a PPP application is approved, the private lender and loan recipient are required to execute a promissory note with the SBA as the guarantor. See Interim Rule on PPP Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23 (Apr. 28, 2020). No personal guarantee or collateral are required to obtain a PPP loan. 15 U.S.C. § 636(a)(36)(J). Moreover, the interest rate shall not exceed 4 percent. 15 U.S.C. § 363(a)(36)(L).

Loan forgiveness is available “in an amount equal to the sum of ․ payments made” to cover payroll costs, interest on mortgage payments, rent, and utilities.” 15 U.S.C. § 636(a)(36)(J). It is not, however, “automatic.” In re Destilería Nacional, Inc., Bankr. Pet. 20-1247, 2021 WL 415869, at *4, 2021 Bankr. LEXIS 281, at *11 (Bankr. D.P.R. Feb. 5, 2021) (Lamoutte, Bankr. J.). Loan recipients must first submit an application to the SBA specifying that funds were used for a permissible purpose (i.e. to retain employees and pay rent). 15 U.S.C. § 636(a)(36)(J).

The PPP is not “an outright gift.” Tradeways, Ltd. v. United States Dep't of the Treasury, Case No. 20-1324, 2020 WL 3447767, at *17, 2020 U.S. Dist. LEXIS 110737, at *45 (D. Md. June 24, 2020). The amount of forgiveness is reduced if the loan recipient decreased an employee's salary by more than 25 percent during the covered period. 15 U.S.C. § 626m(d)(3)(A). Congress contemplated that not all PPP funds would qualify for forgiveness. Indeed, the CARES Act specifies that the “remaining balance [of a PPP loan] shall continue to be guaranteed by the SBA.” 15 U.S.C. § 636(a)(36)(K)(i). Also, PPP loans “shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness.” Id. § 636(a)(36)(K)(ii).

1. The Bankruptcy Exclusion

The CARES Act does not specify whether debtors in bankruptcy qualify for PPP loans. Subsequent SBA regulations clarify, however, that these applicants are ineligible. On April 15, 2020, the SBA issued the First Interim Rule “for immediate implementation of [the PPP].” 85 Fed. Reg. 20811 (Apr. 15, 2020). This rule instructs applicants to “submit SBA Form 2483 (Paycheck Protection Application Form) and payroll documentation.” Id. Form 2483 provides that PPP loans will not be approved if the applicant answers “yes” to the following question:

Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?1

The SBA then issued the Fourth Interim Rule on April 28, 2020, setting forth guidance regarding the “Eligibility of Businesses Presently Involved in Bankruptcy Proceedings.” 85 Fed. Reg. 24 (Apr. 28, 2020).² According to the Fourth Interim Rule:

If 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. If the applicant or the owner becomes the debtor in a bankruptcy proceeding after submitting the PPP application but before the loan is disbursed, it is the applicant's obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.

The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of 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 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.

Id. Together, the First and Fourth Interim Rules constitute the bankruptcy exclusion of the PPP, the regulations challenged by Organic Power.

D. Organic Power Received a PPP Loan

Organic Power filed a Chapter 11 petition on April 1, 2020, requesting the “confirmation of a plan for the reorganization of [its] financial dilemma.” Bankr. Pet. 19-1789, Docket No. 1 at p. 3; see Hotel Airport, Inc. v. Best Western Int'l Inc., Case No. 11-6620, 2014 WL 4661943, at *20, 2014 Bankr. LEXIS 3990, at *54 (Bankr. D.P.R. Sept. 18, 2014) (Lamoutte, Bankr. J.). According to the petition, Organic Power owes more than $10,000,000.00 to at least 50 creditors. Id.

Organic Power submitted PPP applications to Banco Popular de Puerto Rico and Oriental Bank in April 2020. Organic Power LLC, 619 B.R. at 543. The SBA and private lenders denied both applications. Id. On April 27, 2020, Organic Power commenced an adversary proceeding against the SBA and Jovita Carranza in her official capacity as the SBA Administrator. (Adv. Pro. 20-055, Docket No. 1.). The complaint is based on the Administrative Procedure Act and Section 525(a) of the Bankruptcy Code. Id. at p. 4. The SBA purportedly violated the APA by implementing the PPP “in a manner that unlawfully excludes debtors in bankruptcy.” Id. at p. 14. Organic Power requested a preliminary injunction and declaratory judgment stating the bankruptcy exclusion is “arbitrary, capricious, or an abuse of discretion” by the SBA. Id. at p. 19. Moreover, Organic Power alleged that the SBA “discriminated against Chapter 11 debtors generally, and Plaintiff in particular, in violation of Section 525(a).” Id. at p. 22. Organic Power moved for injunctive relief to prelude the SBA from implementing the bankruptcy exclusion. Id. at p. 25

The SBA answered the complaint, asserting that the bankruptcy court lacked jurisdiction to adjudicate the APA claims (non-core matters). (Adv. Pro. 20-055, Docket No. 19 at p, 2.)³ Alternatively, the SBA argued that it “acted wholly within its delegated authority in implementing the PPP.” Id. It also maintained that Organic Power's “anti-discrimination claim [fails] because Section 525(a) of the Bankruptcy Code does not apply to loans.” Id. at p. 14.

The bankruptcy court held a hearing on May 6, 2020 regarding Organic Power's motion for injunctive relief. (Adv. Pro. 20-055, Docket No. 27.) Two days later, it issued a temporary restraining order (TRO) enjoining the SBA, Banco Popular de Puerto Rico, and Oriental Bank from denying Organic Power's PPP application “solely on the basis that [it] is a debtor in bankruptcy.” Organic Power, LLC, 2020 Bankr LEXIS 1721, at *11. The bankruptcy court also held that PPP loans are “best characterized as ‘other similar grants’ ” because “100% of the any PPP money received” by Organic Power will be forgiven. Id. at *6 (citing Roman Catholic Church of the Archdiocese of Santa Fe v. Carranza, 615 B.R. 644, 657 (Bankr. D.N.M. 2020)) (“[T]he PPP is not a loan program. It is a grant or support program”), contra United States SBA v. Roman Catholic Church of the Archdiocese of Santa Fe, 632 B.R. 816, 835 (D.N.M. 2021) (recommending that the district court reverse the bankruptcy court's disposition because the PPP “is a loan [and] does not run afoul of 11 U.S.C. section 525(a)”) (Wormuth, Mag. J.).⁴

Banco Popular de Puerto Rico subsequently disbursed $129,500.00 to Organic Power pursuant to the PPP and in accordance with the bankruptcy court's TRO. (Adv. Pro. 20-055, Docket No. 33.) The SBA moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Id. Docket No. 44. It emphasized that “at least eighteen [courts] have refused to grant” injunctive relief in cases involving challenges to the bankruptcy exclusion. Id. at p. 4 (citing cases). Organic Power filed a response. (Adv. Pro. 20-055, Docket No. 51.)

The bankruptcy court consolidated the preliminary injunction hearing and trial without adjudicating the SBA's motion to dismiss. Trial occurred on June 29, 2020. Id. Docket No. 72. The bankruptcy court subsequently issued an Opinion and Order on July 24, 2020. Organic Power, LLC, 619 B.R. 540.

1. Organic Power Prevailed on the Section 525(a) Causes of Action

In its Opinion and Order, the bankruptcy court “[considered] many judicial opinions on both sides of the controversy,” but “[remained] of the opinion that the PPP should be treated as a grant program for purposes of Section 525(a).” Id. at 548. Indeed, the bankruptcy court adopted the reasoning articulated in In re Springfield Hosp., Inc. v. Carranza, emphasizing that PPP funds constitute a grant because “private lenders do not offer free money.” 618 B.R. 70, 91 (Bankr. D. Vt. 2020) rev'd Springfield Hosp., 28 F.4th at 408 (“[Based] upon the plain language of Section 525(a), [the] PPP is a loan guaranty program and not an ‘other similar grant.’ ”). The bankruptcy court entered a partial judgment, “declaring that the exclusion of Organic Power from the Paycheck Protection Program ․ solely because it is in bankruptcy violates section 525(a) of the Bankruptcy Code.” Organic Power, LLC., 619 B.R. at 551; Adv. Pro. 20-055, Docket No. 81.)

2. The Administrative Procedure Act Claims

In the May 8, 2020 temporary restraining order, the bankruptcy court initially held that the APA claims were non-core matters “under Section 525 of the Bankruptcy Code.” Organic Power, LLC., 2020 Bankr. LEXIS 1721, at *6. It subsequently refrained from adjudicating these causes of action, however, because “both parties agree[d] that the claims under sections 706(2)(A) and (C) of the APA are non-core matters.” Organic Power LLC., 619 B.R. at 544. Instead, the bankruptcy court offered to “issue a report and recommendation to the district court on the APA claims” if either party appealed its disposition. Id. at 551.

3. Commencement of the Bankruptcy Appeal

Consequently, the Court stayed the bankruptcy appeal pending publication of the appurtenant report and recommendation. (Docket No. 15.) The bankruptcy court issued the R&R on March 8, 2021, recommending that this Court “rule in favor of Organic Power.” (Adv. Pro. 20-055, Docket No. 123 at p. 24.) Accordingly, this Opinion and Order will adjudicate both the bankruptcy appeal (i.e. the Section 525(a) claims) and the R&R (i.e. the APA causes of action).

The parties submitted their respective briefs. (Docket Nos. 21, 26, 28, 29 and 32.) Organic Power then moved to dismiss the bankruptcy appeal as moot, alleging that the SBA granted its loan forgiveness application. (Docket No. 33.) The SBA has not, however, “granted forgiveness on Organic Power's PPP loan.” (Docket No. 35 at p. 2.) In fact, Banco Popular de Puerto Rico filed an unsecured claim for $130,590.26 in the bankruptcy proceeding. (Docket No. 35, Ex. 1 at p. 1.) Pursuant to the Chapter 11 Plan of Reorganization, Organic Power is required to pay 50% of the PPP loan balance ($65,295.13) in 60 equal installments ($1,088.25 monthly). Id. Consequently, the Court denied Organic Power's motion to dismiss. (Docket No. 38.)

4. Jurisdiction and Waiver of Sovereign Immunity

This Court possesses jurisdiction to adjudicate the Section 525(a) and APA causes of action. See Stern v. Marshall, 564 U.S. 462, 473, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (noting that federal courts have “original and exclusive jurisdiction of all cases under [Title 11 of the Bankruptcy Code], 11 U.S.C. §§ 101-1532”) (quoting 28 U.S.C. § 1334(a)); 28 U.S.C. § 1331 (Federal question jurisdiction exists if the action arises “under the Constitution, laws, or treatises of the United States”).

The federal government and its agencies are immune from suit in the absence of a waiver. Dep't of the Army v. Blue Fox, Inc., 525 U.S. 255, 260, 119 S.Ct. 687, 142 L.Ed.2d 718 (1999). Congress waived sovereign immunity “as a governmental unit ․ with respect to” section 525 of the Bankruptcy Code. 11 U.S.C. § 106(a)(1). Accordingly, sovereign immunity does not preclude this Court for adjudicating the Section 525(a) causes of action.

Section 634(b)(1) of the Small Business Administration Act sets forth a limited waiver of sovereign immunity, providing that the SBA Administrator may:

sue and be sued in any court or 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) (emphasis added). Counts one and two seek injunctive and declaratory relief pursuant to the APA, suggesting that these claims are barred by sovereign immunity. (Adv. Pro. 20-055, Docket No. 1 at pp. 12-20.) In Ulstein v. Maritime, Ltd. v. United States, 833 F.2d 1052, 1057 (1st Cir. 1987), the First Circuit Court of Appeals held that Section 634(b)(1) “should not be interpreted as a bar to judicial review of agency actions that exceed agency authority where the remedies would not interfere with internal agency operations.” Because the APA claims are moot for the reasons stated in this Opinion and Order, the Court need not address whether the SBA is immune from suit on the APA causes of action.

II. Appellate Standard of Review

Federal courts are courts of limited jurisdiction. Destek Grp. v. State of N.H. Pub. Utils. Comm'n, 318 F.3d 32, 38 (1st Cir. 2003); Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) (“The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.”). Jurisdiction to adjudicate this action derives from 28 U.S.C. § 158(a). On appeal, this Court may affirm, modify, or reverse a bankruptcy court's judgment, or remand with instructions for further proceedings. Fed. R. Bankr. P. 8013; see, e.g., HSBC Bank USA v. Bank of N.Y. Mellon Tr. Co., 646 F.3d 90, 94 (1st Cir. 2011) (“Finding the phrase ambiguous, we remanded to the bankruptcy court to conduct a ‘contextual examination of the parties’ intent, taking full account of the surrounding facts and circumstances’.”) (citation omitted).

The factual findings established by the bankruptcy court “shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.” Fed. R. Bankr. P. 8013; see also Fed. R. Civ. P. 52(a)(6). Pursuant to the clearly erroneous standard, reversal is proper only if the appellate court possesses a “definite and firm conviction that a mistake has been committed.” In re the Bible Speaks, 869 F.2d 628, 630 (1st Cir. 1989) (citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (finding no clear error where the record supported the bankruptcy court's conclusion and the facts underlying it)). “This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently.” Anderson, 470 U.S. at 573, 105 S.Ct. 1504.

In contrast, a district court considers the bankruptcy court's conclusions of law de novo. Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997). It must therefore analyze and solve issues from the same perspective of the bankruptcy court, as if the issues were to be decided for the first time. Segarra-Miranda v. Perez-Padro, 482 B.R. 59, 67 (D. Puerto Rico 2012) (citing Water Keeper Alliance v. U.S. Dept. of Defense, 271 F.3d 21, 31 (1st Cir. 2001)). “The bankruptcy court's interpretation of particular statutes is a question of law.” United States v. Sterling Consulting Corp., 261 B.R. 800, 805 (B.A.P. 1st Cir. 2001) (citation omitted). The Court need not determine which standard of review is applicable, however, because the bankruptcy court opinion is clearly erroneous.

III. The PPP Does Not Violate Section 525(a) of the Bankruptcy Code

The bankruptcy court erred in determining that PPP funds constitute a “grant” within the meaning of Section 525(a). For the following reasons, this Court adopts the majority view and holds that PPP funds are a loan.⁵ Accordingly, the bankruptcy court's July 24, 2020 Opinion and Order is REVERSED, and the appurtenant partial judgment is VACATED.

The Court begins its analysis with the statutory text. Penobscot Nation v. Frey, 3 F.4th 484, 490 (1st Cir. 2021) (“When interpreting a statute, we look first and foremost to its text.”) (quoting United States v. Álvarez-Sánchez, 511 U.S. 350, 356, 114 S.Ct. 1599, 128 L.Ed.2d 319 (1994)). The bankruptcy court disregarded this threshold inquiry, declining the “[SBA's invitation] to examine how Congress consistently characterizes PPP money as loans throughout the CARES Act.” Organic Power, LLC., 619 B.R. at 547. Instead, it surveyed precedent from sister jurisdictions regarding the creditworthiness and forgiveness provisions of the PPP. Id. (quoting Roman Catholic Church of Archdiocese of Santa Fe, 615 B.R. at 654).

Congress repeatedly refers to PPP funds as “loans” throughout the statute. 15 U.S.C. § 636. In fact, the “word ‘loan’ appears some 75 times in the CARES Act provisions establishing the PPP. The takeaway is clear: the $659 billion disbursed to borrowers through the PPP are loans, not grants.” Tradeways, Ltd., 2020 WL 3447767, at *17, 2020 U.S. Dist. LEXIS 110737, at *45. The statute defines “covered loan” as “a loan made under this paragraph during the covered period.” 15 U.S.C. § 636(a)(36)(A)(ii) (emphasis added). The SBA Administrator is authorized to guarantee loans pursuant to Section 7(a), the agency's long-standing loan program for small business concerns. Id. § 636(a)(36)(B). The PPP refers to loan recipients as “borrowers,” and the banks as “lenders.” See Id. §§ 636(a)(36)(G), 636(a)(36)(M). The judiciary “must avoid reading into statutes concepts or exceptions absent from the text.” Zucker v. Rodríguez, 919 F.3d 649, 657 (1st Cir. 2019). This Court “[presumes] Congress says what it means and means what it says.” Simmons v. Himmelreich, 578 U.S. 621, 627, 136 S.Ct. 1843, 195 L.Ed.2d 106 (2016). The statutory text is clear: Congress enacted the PPP to extend credit in the form of loans.

Because the Court's textual analysis is conclusive, it need not go further. See United States v. Godin, 534 F.3d 51, 56 (1st Cir. 2008) (“If the meaning of the text is unambiguous our task ends there as well.”). The Court will not, however, place form above substance. PPP funds are loans in name and in nature. For instance, loan recipients must pay interest and sign a promissory note, both features indicating that the funds are a loan. 15 U.S.C. § 636(a)(36)(l); Paycheck Protection Program Requirements – Promissory Notes, Authorization, Affiliation, and Eligibility, 85 Fed. Reg. 23 (Small Bus. Admin. Apr. 28, 2020). PPP loans also have a maturity date. 15 U.S.C. § 636(a)(36)(K). Construing PPP funds as “grants” would render this provision meaningless – there would be no unpaid balances to satisfy on the date of maturity. See City of Providence v. Barr, 954 F.3d 23, 37 (1st Cir. 2020) (“The canon against surplusage teaches that we must read statutes, whenever possible, to give effect to every word and phrase.”) (citation and quotation omitted).

The bankruptcy court also held that PPP funds are grants because “repayment is not a significant part of the program.” Organic Power, LLC., 619 B.R. at 548. This determination is based, in part, on the favorable loan forgiveness provisions in the PPP. Not all PPP funds are forgivable, however, suggesting that certain loan recipients will carry unpaid balances on the date of maturity. For example, costs relating to group health care benefits will not be forgiven. 15 U.S.C. § 636(a)(36)(F)(i)(I)(VII); see USF Fed. Credit Union, 983 F.3d at 1247 (“The statutory list of allowable uses of loan funds is longer than the list of uses that qualify for loan forgiveness; all forgivable uses are allowable, but not all allowable uses are forgivable.”). Whether repayment is a “significant part of the program” is not an assessment this Court is required to make. The inclusion of loan forgiveness and repayment procedures in the PPP is sufficient for this Court to conclude that these funds are loans without weighing the significance of certain provisions.

Post-CARES Act legislation solidifies this Court's disposition. On December 27, 2020, Congress enacted the Consolidated Appropriations Act, Pub. L. No. 116-260, 134 Stat. 1182 (2020), entitled “Continuing the Paycheck Protection Program and Other Small Business Support.” Pursuant to Section 320 of this statute, certain bankruptcy debtors are eligible for PPP loans subject to the SBA Administrator's advance authorization. 134 Stat. at 2015. This section is applicable only if “the [SBA] submits to the Director of the Executive Office for the 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 a business would be eligible for a [PPP] loan.” Id. § 320(f)(1)(A). The SBA Administrator declined to issue this authorization. (Docket No. 21 at p. 21.) Accordingly, bankruptcy debtors remain ineligible for PPP loans. (Docket No. 21 at p. 21.) By establishing a path for bankruptcy debtors to obtain loans, Congress recognized that these funds were previously unavailable to insolvent applicants. The PPP omitted debtors in bankruptcy by design.

Because PPP funds are a loan, Section 525(a) of the Bankruptcy Code is inapplicable. Consequently, the bankruptcy court's disposition regarding counts three and four of the complaint is REVERSED. (Adv. No. 20-055, Docket No. 80.) The partial judgment issued on July 24, 2020 is VACATED. Id. Docket No. 81.

IV. The APA Causes of Action are Moot

The United States Constitution grants jurisdiction to federal courts to adjudicate live cases or controversies. U.S. Const., art. III, § 2, cl. 1. The case or controversy must exist at all stages of litigation: When circumstances change removing any possibility of the Court providing effective relief, “the case or controversy is no longer justiciable.” See Matos v. Clinton Sch. Dist., 367 F.3d 68, 71-72 (1st Cir. 2004). “Jurisdictional mootness (also known as Article III mootness) occurs when a court can no longer provide any meaningful relief.” Sundaram v. Briry, LLC, 9 F.4th 16, 20-21 (1st Cir. 2021). This Court must “inquire sua sponte whether an appeal has been rendered moot by subsequent events.” Overseas Military Sales Corp v. Giralt-Armada, 503 F.3d 12, 16 (1st Cir. 2007).

The bankruptcy court issued an R&R on March 8, 2021, recommending that this Court find that the bankruptcy exclusion to the PPP violated the Administrative Procedure Act. (Adv. Pro. 20-055, Docket No. 123.) The PPP ended on May 31, 2021. See Stanford Tukwila Hotel Corp. v. GBC Int'l Bank, Case No. 21-1486, 2022 WL 279321, 2022 U.S. Dist. LEXIS 22637, at *6 (W.D. Wash. Jan. 31, 2022) (“Per the SBA's website: “Notice: PPP ended May 31, 2021 ․ Existing borrowers may be eligible for PPP loan forgiveness”). The Court need not adjudicate the APA claims set forth in counts one and two because the PPP and relevant SBA regulations have expired.

In May 2020, Organic Power obtained a $129,500.00 PPP loan pursuant to the bankruptcy court's temporary restraining order. (Adv. Pro. 20-055, Docket No 33.) By August 14, 2020, just $331.49 of this amount remained in a separate account for Organic Power's PPP loan. Id. Docket No. 94 at p. 2. The linchpin of this litigation is whether Organic Power is entitled to these funds. It is not. The anti-discrimination provision set forth in Section 525(a) does not invalidate the First and Fourth Interim Rules barring debtors in bankruptcy from obtaining PPP loans. The ultra vires disbursement of funds also precludes Organic Power from applying for PPP loan forgiveness. Whether the SBA regulations violate the APA is now moot. See New England Reg'l Council of Carpenters v. Kinton, 284 F.3d 9, 18 (1st Cir. 2022) (“Challenges to government regulatory schemes which have expired or been effectively repealed are generally moot”); Aaron Private Clinic Mgmt. LLC v. Berry, 912 F.3d 1330, 1335 (11th Cir. 2019); Nat'l Parks Conservation Ass'n v. United States Army Corps of Eng'rs, 574 F. Supp. 2d 1314, 1324 (S.D. Fla. 2008) (holding that the plaintiffs’ APA “claims have been rendered moot and no longer present a live case or controversy for which effective relief can be granted because the basis of their challenge, the Section 404 permit, has expired”). Accordingly, counts one and two of the complaint are DISMISSED AS MOOT. The Court REJECTS the R&R recommending that the Court grant Organic Power relief pursuant to the APA because counts one and two are no longer viable.

V. Conclusion

For the reasons set forth above, the bankruptcy court's Opinion and Order granting Organic Power relief pursuant to Section 525(a) is REVERSED. (Adv. Pro. 20-055, Docket No. 80.) The partial judgment entered on July, 24, 2020 is VACATED.

The Court REJECTS the bankruptcy court's March 8, 2021 Report and Recommendation. (Adv. Pro. 20-055, Docket No. 123.) Counts one and two of the complaint are DISMISSED AS MOOT.

This case is REMANDED to the bankruptcy court for further proceedings consistent with this Opinion and Order.

Judgment shall be entered accordingly.

IT IS SO ORDERED.

FOOTNOTES

1.   See SBA Form PPP First Draw Borrower Application Form, U.S. Small Bus Admin., https://www.sba.gov/document/sba-form-2483-ppp-first-draw-borrower-application-form (last visited February 13, 2025) (emphasis added).

2.   The Second and Third Interim Rules contain no provisions regarding the bankruptcy exclusion. See 85 Fed. Reg. 20 (Apr. 15, 2020); 85 Fed. Reg. 21 (Apr. 20, 2020).

3.   Congress authorized bankruptcy courts to “hear and determine ․ all core proceedings arising under title 11, or arising in a case under title 11.” 28 U.S.C. § 157(b)(1); see Gupta v. Quincy Med. Ctr., 858 F.3d 657, 662 n. 5 (1st Cir. 2017) (“Proceedings ‘arising under title 11, or arising in a case under title 11’ are both considered ‘core proceedings’ in which the bankruptcy court may enter final orders and judgments.”). Organic Power's Section 525(a) claims are core proceeding. See iThrive Health, LLC v. Carranza, 623 B.R. 392, 395 (Bankr. D. Md. 2020) (“Debtor's claim that the defendant violated 11 U.S.C. section 525(a) is one arising under title 11 and is a core proceeding.”) (citation and quotation omitted). In contrast, non-core proceedings are “related to” the bankruptcy petition, “potentially [having] some effect on the bankruptcy estate, such as altering debtor's rights, liabilities, options, or freedom of action, or otherwise [having] an impact upon the handling and administration of the bankruptcy estate.” Gupta, 858 F.3d at 663. The claims set forth pursuant to the APA in counts one and two are noncore matters.

4.   The partes in United States SBA v. Roman Catholic Church of the Archdiocese of Santa Fe, Case No. 20-473, filed a joint stipulation of voluntary dismissal of the bankruptcy appeal without the district having adopted, rejected, or modified the magistrate judge's R&R. Id. Docket No. 54.

5.   The First Circuit Court of Appeals has not addressed whether the bankruptcy exclusion in the First and Fourth Interim Rules violates the anti-discrimination provision in Section 525(a). The Second and Eleventh Circuit Courts of Appeals have, however, held that Section 525(a) is inapplicable because PPP funds are a loan. See Springfield Hosp., Inc., 28 F.4th 403, 423 (2d Cir. 2022) (holding that “the PPP is, in substance and in form, a loan program that is not covered under Section 525(a)”); USF Fed. Credit Union, 983 F.3d at 1260 (rejected the defendant's argument that “PPP functions more like a grant a loan because PPP loans are designed to be forgiven”). Every district and bankruptcy court within the First Circuit, other than the court in Organic Power, LLC, has held that PPP funds are loans. See In re Destilería Nacional, Inc., 2021 WL 415869, at *5, 2021 Bankr. LEXIS 281, at *15 (holding that “a PPP Loan under the CARES Act is a loan and not a grant”) (Lamoutte, Bankr. J.); Penobscot Valley Hosp., 2020 Bankr. LEXIS 1464, at *26 (holding that “the PPP is a loan program; it is not merely a grant of aid”) (Fagone, Mag. J.) (this consolidated R&R also recommended that the district court vacate the TRO issued against the SBA in Calais Reg'l Hosp. v. Carranza, 615 B.R. 354, 357 (Bankr. D. Me. 2020), in part because the bankruptcy exclusion did not violate Section 525(a)). Moreover, the United States District Court for the District of Maine cited and rejected the reasoning set forth by the bankruptcy judge in this case. See Penobscot Valley Hosp. v. Carranza, 620 B.R. 1, 6 (D.Me. 2020) (rejecting the arguments set forth in Organic Power, LLC., (Adv. Pro. 20-055, Docket No. 80), holding that PPP funds are a loan).

BESOSA, District Judge.