The U.S. Small Business Administration lawfully rejected Tradeways Ltd.’s request for a paycheck protection loan because the Annapolis-based defense company’s owner is seeking bankruptcy protection, a federal judge ruled Wednesday.
U.S. District Judge Ellen L. Hollander called the SBA’s prohibition on Paycheck Protection Program loans to bankrupt entities a permissible regulation under the federal law that established the small-business safeguard amid the economic havoc wrought by the COVID-19 pandemic.
The SBA acted neither arbitrarily nor capriciously in establishing a bankruptcy ban as a “bright-line rule” for rejecting applicants for the emergency loan program established by the Coronavirus Aid, Relief, and Economic Security Act, Hollander wrote in a memorandum opinion. In distributing loans, the SBA is reasonably concerned that bankrupt recipients would be unable to repay them or that the money might be used in an unauthorized way, the judge added.
In her decision, Hollander denied Tradeways’ request for a preliminary injunction that would compel the SBA to process the company’s application for an $86,000 loan despite its owner, Joseph Gorski, having filed for personal bankruptcy.
“(T)he CARES Act was passed in the midst of an unprecedented global pandemic in order to stop the nation’s economic tailspin” and “time was of the essence,” wrote Hollander, who sits in the Baltimore federal courthouse.
“The SBA could have prioritized accessibility over efficiency and thus decided to adopt a totality-of-the-circumstances approach instead of a bright line rule,” Hollander added. “Or, the agency could have decided to exclude some bankruptcy debtors but not others from the PPP. But, the court cannot conclude that the SBA’s rule is an unreasonable interpretation of the priorities evinced in the CARES Act.”
Tradeways, with its six employees, applied for the $86,000 PPP loan on April 23.
The application was denied based on the company’s affirmative answer to the question of whether any of its owners was in bankruptcy. Gorski had filed for personal bankruptcy protection two months earlier and his case is pending.
Tradeways, which produces protective equipment against nuclear, biological and chemical fallout, does much of its business through export contracts with U.S. allies, including South Korea, Italy, Sweden and the United Arab Emirates, Gorski said in court filings.
This overseas business relies heavily on foreign travel and in-person meetings, which have virtually ended amid the pandemic, stated Gorski, adding that the company will likely go out of business in August without immediate financial support.
In its failed bid for a court order, Tradeways also argued that the SBA’s prohibition violates the federal law banning discrimination based on bankruptcy status in the awarding of “grants.”
The company said the PPP loans are essentially federal grants, or gifts, because the program’s forgiveness terms are generous. For example, borrowers are eligible for loan forgiveness if 60 percent of the loan is paid toward payroll.
Hollander, however, rejected the company’s coupling of grants and loans.
“The fact that PPP proceeds are forgivable does not make the money an outright gift,” Hollander wrote.