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Arizona Bankruptcy Debtor Wins Dispute Against SBA Over PPP Loans

Arizona Bankruptcy Debtor Wins Dispute Against SBA Over PPP Loans
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If this is your first visit to my website, welcome! My name is Christine Springer and I'm the founder of Desert Edge Legal Services and the author of the content on this site.

Disclaimer: I’m a paralegal, not an attorney and cannot give you legal advice. This is not meant to be legal advice, and there is no guarantee that the information in this post will work for your individual situation. Please consult with an attorney if you have questions about your individual situation.

There are quite a few government institutions that need to be reformed, and the SBA is one of them. By reform, I mean the institution needs to undergo some massive changes in order to actually serve small businesses. I can think of several government agencies that need to be made over so that they actually serve the needs of the people instead of making it harder to access money and services.

This decision is several months old, but I think it could trigger some changes within the SBA and how it handles future disasters and public health emergencies.

The SBA's rollout of the CARES Act and subsequent stimulus programs for small business were terrible. The agency was inefficient at getting these funds out the door, even when the new administration appointed someone new.

Aside from that, the agency knew or should have known that businesses that were in need of CARES Act funds during the pandemic would potentially be in bankruptcy. The government shut down businesses and told everyone to stay home and many of these people had no way to pay their bills.

The SBA did the same thing with EIDL loans and the grants. Bankruptcy debtors were not permitted access to those funds, either.  

The CARES Act was silent on the issue of whether bankruptcy debtors were eligible for Paycheck Protection Act funds, and the SBA made the decision to exclude them from eligibility.

You can read the details in a very good legal discussion and analysis on Snell & Wilmer's website (free).

An Arizona company called PCT International sued the SBA, arguing that the SBA improperly denied PCT a PPP loan because PCT was in bankruptcy.

The bankruptcy court agreed with PCT and found that the SBA exceeded its authority in issuing the Fourth Interim Rule that barred debtors from obtaining PPP loans.

The SBA appealed, but because the program ended, we don't know whether the Ninth Circuit will issue a ruling. There are many other debtors who sued the SBA, but in the end, their rules prevented a lot of small businesses from getting access to CARES Act funds.

Ultimately, what difference did it make if someone was in bankrupcty? The loans were fully forgivable.

The SBA botched the administration of these funds at a time when people really needed them and although the debtors won, they probably didn't get anything out of the SBA because the program is over.

You can also read the case on Google Scholar (free).

Special thank you to Snell and Wilmer for the very good case summary and legal analysis.