Bankruptcy Court Not Permitted to Issue Injunction Against SBA Administrator
Article courtesy of Andrew Thomison (of Baker Botts)
In In re: Hidalgo County Emergency Service Foundation v. Carranza, 962 F.3d 838 (5th Cir. 2020), the 5th Circuit Court of Appeals (the “Court“) was called upon to determine whether the bankruptcy court exceeded its authority when it issued a preliminary injunction mandating that the SBA handle a bankrupt debtor’s PPP application without consideration of the debtor’s ongoing bankruptcy.
Hidalgo County Emergency Services Foundation (“Hidalgo”) was an entity going through Chapter 11 bankruptcy. Hidalgo applied to the Small Business Administration (the “SBA”) for a loan pursuant to the Paycheck Protection Program (the “PPP”). Hidalgo’s application was rejected, and Hidalgo filed suit against the SBA contending that the SBA’s decision to deny PPP loans to bankrupt entities (1) violated 11 U.S.C. §525(a), which prohibits discrimination based on bankruptcy status under certain circumstances, (2) was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” and (3) was “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.”
The bankruptcy court found in favor of Hidalgo and issued a preliminary injunction against the SBA, mandating that the SBA handle Hidalgo’s PPP application without consideration of Hidalgo’s ongoing bankruptcy. The district court stayed the preliminary injunction and certified the case for direct appeal to the 5th Circuit. On appeal, the SBA contended that the Small Business Act foreclosed injunctive relief by providing that “no… injunction… shall be issued against the Administrator or his property” (15 U.S.C. §634(b)(1)). The SBA also noted that the 5th Circuit had previously concluded that injunctive relief directed at the SBA is absolutely prohibited. The Court agreed with the SBA, noting that “under well-established Fifth Circuit law, the bankruptcy court exceeded its authority when it issued an injunction against the SBA Administrator”, and therefore the Court vacated the bankruptcy court’s preliminary injunction.
