IN RE: PENOBSCOT VALLEY HOSPITAL and CALAIS REGIONAL HOSPITAL

Filing 15

ADDITIONAL PROPOSED FINDINGS AND CONCLUSIONS By JUDGE MICHAEL A. FAGONE. (Attachments: # 1 Transmittal Form, # 2 Plaintiffs' Objections to the Court's Additional Proposed Findings and Conclusions, # 3 United States' Response to Plaintiffs' Objections to the Court's Additional Proposed Findings & Conclusions)(jwr)

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MAINE
In re:
Penobscot Valley Hospital,

Chapter 11
Case No. 19-10034

Debtor
Penobscot Valley Hospital,
Plaintiff

v.

Adv. Proc. No. 20-1005

Jovita Carranza, in her capacity as Administrator for the
United States Small Business Administration,
Defendant

In re:

Chapter 11
Case No. 19-10486

Calais Regional Hospital,
Debtor
Calais Regional Hospital,
v.

Plaintiff

Adv. Proc. No. 20-1006

Jovita Carranza, in her capacity as Administrator for the
United States Small Business Administration,
Defendant
ADDITIONAL PROPOSED FINDINGS AND CONCLUSIONS
All litigation under the Administrative Procedures Act implicates separation of powers
questions, and these lawsuits provide no exception. The power to implement statutes is
delegated by Congress to agencies, not to courts, because agencies have several comparative

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advantages in making policy judgments. See Kisor v. Wilkie, 139 S. Ct. 2400, 2413 (2019).
Unlike courts, agencies are politically accountable: “they are subject to the supervision of the
President, who in turn answers to the public.” Id. Congress delegates legislative authority
explicitly in some circumstances and implicitly in others. United States v. Mead Corp., 533 U.S.
218, 229 (2001). Implicit delegation may occur, as it has here, where it is “apparent from the
agency’s generally conferred authority and other statutory circumstances that Congress would
expect the agency to be able to speak with the force of law when it . . . fills a space in the enacted
law[.]” Id.
These proceedings concern a rule adopted by the Small Business Administration (“SBA”)
excluding debtors in bankruptcy from participating in the Paycheck Protection Program (the
“PPP”). The plaintiffs—Penobscot Valley Hospital and Calais Regional Hospital (the
“Hospitals”)—have consistently asked this Court to cast aside the SBA’s rule and declare them
eligible to participate in the PPP. The arguments advanced in support of this remedy have
evolved over time. What began as a challenge to the SBA’s authority to implement the
bankruptcy exclusion, coupled with a claim of unlawful discrimination under 11 U.S.C. § 525,
has morphed into an argument that the SBA ran afoul of the procedures outlined in the
Administrative Procedures Act (“APA”). Although the Hospitals make detailed arguments under
the rubric of the APA on recommittal, their fundamental grievance is what it always has been:
they challenge the wisdom of the bankruptcy exclusion and ask the Court to substitute their
policy preference for the SBA’s. But it is not for the Judiciary to second-guess a reasonable rule
promulgated by an agency in the exercise of the authority delegated by Congress. As such, the
Hospitals’ challenge must fail. See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. 837, 866 (1984) (“When a challenge to an agency construction of a statutory provision,

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fairly conceptualized, really centers on the wisdom of the agency’s policy, rather than whether it
is a reasonable choice within a gap left open by Congress, the challenge must fail.”).
I.

PROCEDURAL BACKGROUND
These proceedings began on April 27, 2020. Due to the time-sensitive nature of the

relief sought by the Hospitals, the Court conducted an expedited trial on May 27 and issued
proposed findings and conclusions one week later. Following an objection from the Hospitals
under Fed. R. Bankr. P. 9033(b), proceedings commenced in the District Court. With its
response to that objection, the SBA filed a declaration that had not been offered in evidence
during the trial. The District Court adopted and accepted, in part, this Court’s proposed findings
and conclusions. The proceedings were then recommitted to this Court for consideration of
certain questions, including the significance of the declaration filed by the SBA.
After recommittal, the Hospitals were granted the opportunity to conduct limited
discovery. Based on representations from the Hospitals about the nature and extent of discovery
necessary, the Court allowed a discovery period of approximately six weeks. The parties were
instructed to contact the Court upon completion of discovery to schedule a further hearing. After
several months, the Court convened a status conference and learned that the parties were mired
in a discovery dispute. The Court then issued an order resolving that dispute and entertained oral
arguments from the parties.
The District Court recommitted a particular aspect of these proceedings to this Court for
further consideration—namely, the proposed conclusion that the bankruptcy exclusion is within
the bounds of a reasonable interpretation of the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”), Pub. L. No. 116-136, 134 Stat. 281 (2020). Specifically, this Court is
tasked with: (i) resolving the “possible discrepancy” [Dkt. No. 78, p. 6] between the declaration

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filed with the District Court (the “Maine Miller Declaration”) and another declaration filed in
similar litigation in Vermont (the “Vermont Miller Declaration”); (ii) determining whether the
bankruptcy exclusion is a reasonable construction of the CARES Act under the second step of
the analysis articulated in Chevron; and (iii) determining whether the bankruptcy exclusion is
“arbitrary and capricious” under the standard established in Motor Vehicle Mfrs. Ass’n of the
U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
II.

PROPOSED FINDINGS AND CONCLUSIONS
To the extent that the District Court adopted and accepted the proposed findings and

conclusions issued previously, those findings and conclusions are fully incorporated here.
Despite that incorporation, certain information contained in the initial findings and conclusions
may be reproduced here for the ease of the reader. Before completing the tasks assigned on
recommittal, an orientation is in order, starting with the authority conferred upon the SBA in
relation to loans under Section 7(a) of the Small Business Act, canvassing the pertinent
provisions of the PPP, tracking through the promulgation of the bankruptcy exclusion, and
concluding with a review of the two Miller declarations.1
A. The Small Business Administration and Section 7(a) Loans Generally
Because Congress tasked the SBA with administering the PPP under a loan program
that was in place long before the passage of the CARES Act, “understanding the SBA’s
functions and that pre-existing loan program helps put the issues in context.” USF Fed. Credit
Union v. Gateway Radiology Consultants, P.A. (In re Gateway Radiology Consultants, P.A.), ---

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On recommittal, the Hospitals asked this Court to make additional proposed findings, a number of
which straddle or even cross the (sometimes but not always blurry) line separating factual findings from
legal conclusions. To the extent that the factual record and the law permit, the Court has made the
findings and conclusions requested, and incorporated them below. To the extent that the requested
findings and conclusions do not appear below, they lack merit as a matter of law or lack support in the
record, as applicable, and the Court therefore declines to make them.

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F.3d ---, 2020 WL 7579338, at *2 (11th Cir. Dec. 22, 2020). When it passed the Small Business
Act of 1953 (codified as amended at 15 U.S.C. §§ 631-657), Congress declared that “the
Government should aid, counsel, assist, and protect insofar as is possible the interests of smallbusiness concerns in order to preserve free competitive enterprise . . . and to maintain and
strengthen the overall economy of the Nation.” 15 U.S.C. § 631(a). To carry out these policies,
Congress created the SBA, an agency that would serve “under the general direction and
supervision of the President[,]” 15 U.S.C. § 633(a), and vested management of the SBA in a
single Administrator, to be “appointed from civilian life by the President, by and with the advice
and consent of the Senate,” id. § 633(b)(1). “The Administration was given extraordinarily
broad powers to accomplish [its] important objectives, including that of lending money to small
businesses whenever they could not get necessary loans on reasonable terms from private
lenders.” SBA v. McClellan, 364 U.S. 446, 447 (1960) (footnote omitted).
Section 7(a) of the Small Business Act empowers the SBA to make loans to small
businesses directly or indirectly—through loan guarantees—“to the extent and in such amounts
as provided . . . in appropriation Acts[.]” 15 U.S.C. § 636(a). When it comes to these loans,
commonly known as Section 7(a) loans, the Administrator has expansive rulemaking authority.
The Administrator is generally empowered to “make such rules and regulations as [she] deems
necessary to carry out the authority vested in [her,]” 15 U.S.C. § 634(b)(6), and to “take any and
all actions . . . when [she] determines such actions are necessary or desirable in making . . . or
otherwise dealing with or realizing on loans[,] id. § 634(b)(7). The Administrator also serves on
the Loan Policy Board of the SBA, along with the Secretary of Treasury and the Secretary of
Commerce, and in that capacity establishes:
general policies (particularly with reference to the public interest involved in the
granting and denial of applications for financial assistance by the Administration

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and with reference to the coordination of the functions of the Administration with
other activities and policies of the Government), which shall govern the granting
and denial of applications for financial assistance by the Administration.
15 U.S.C. § 633(d).
In the exercise of its authority to lend under Section 7(a) and to make rules and policies
for such lending, the SBA is constrained and guided by the terms of the statute. Among those
terms is the requirement that Section 7(a) loans “shall be of such sound value or so secured as
reasonably to assure repayment[.]” 15 U.S.C. § 636(a)(6). To ensure that a loan will be “so
sound as to reasonably assure repayment[,]” the SBA’s lending criteria involve consideration of
nine factors, including the applicant’s credit history. 13 C.F.R. § 120.150. For Section 7(a)
loans, the SBA also considers an applicant’s bankruptcy history; applicants are asked to disclose
prior bankruptcy filings on Form 1919, the loan application form.
B. The Paycheck Protection Program
The CARES Act became law on March 27, 2020, creating the PPP and nestling it
within the existing Section 7(a) framework. See Pub. L. No. 116-136, § 1102(a), 134 Stat. 281,
286. As its name suggests, the PPP was designed to keep American workers on payrolls despite
the economic impacts of COVID-19. To achieve this objective, the PPP authorized small
business loans that would qualify for forgiveness if used to fund specific expenses, including
payroll costs, during a defined period. See Pub. L. No. 116-136, § 1106(b), 134 Stat. 281, 298.
For PPP loans, the CARES Act amended Section 7(a) of the Small Business Act, 15
U.S.C. § 636(a), in a number of ways, but left other aspects of Section 7(a) in place. Most
provisions relating to the PPP were located in a new paragraph at the end of 15 U.S.C. § 636(a).
See Pub. L. No. 116-136, § 1102(a)(2), 134 Stat. 281, 286. Except as otherwise set forth in that
new paragraph—number (36)—Congress provided that “the Administrator may guarantee [PPP]

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loans under the same terms, conditions, and processes as a loan made under this subsection”—
i.e., subsection (a) of 15 U.S.C. § 636. See Pub. L. No. 116-136, § 1102(a)(2), 134. Stat. 281,
287 (codified at 15 U.S.C. § 636(a)(36)(B)). By enacting 15 U.S.C. § 636(a)(36), Congress
deviated from some of the terms applicable to other loans made under Section 7(a). See, e.g., 15
U.S.C. § 636(a)(36)(D), (J). But Congress did not suspend for PPP loans the “sound value”
requirement generally applicable to Section 7(a) loans under 15 U.S.C. § 636(a)(6).
Although PPP loans were designed to incentivize borrower behavior—i.e., use of the
loans to fund payroll and other specified expenses—Congress also contemplated that the loans
might not be so used, and might not be forgiven. Either way, the SBA would have some part to
play. To the extent that a PPP borrower qualifies for loan forgiveness, the SBA is on the hook to
the lender for the amount forgiven, plus accrued interest. See 15 U.S.C. § 9005(c)(3). Any
portion of a PPP loan not forgiven must be repaid, see 15 U.S.C. § 636(a)(36)(K)(ii)
(establishing, for unforgiven PPP loans, a minimum maturity of five years and a maximum
maturity of ten years from the date of an application for forgiveness), and if the borrower does
not pay the lender, the SBA remains on the hook because the SBA guarantees 100% of loans
issued under the PPP, see id. § 636(a)(2)(F) (providing that the SBA is to “participate in”—or
guarantee—100% of PPP loans); id. § 636(a)(36)(K)(i) (indicating that unforgiven PPP loan
balances “shall continue to be guaranteed by the Administration”).
Congress appropriated a very large, but not unlimited, amount of money for the PPP:
$349 billion. See Pub. L. No. 116-136, § 1107(a)(1), 134 Stat. 281, 301. The legislature
communicated a sense that these funds be disbursed quickly. The statute contained time
constraints relating to the loans themselves: only “covered loans” would be eligible for
forgiveness, and covered loans could only be obtained during the “covered period” ending on

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June 30, 2020. See Pub. L. 116-136, § 1102(a)(2), 134 Stat. 281, 286; Pub. L. 116-136, § 1106,
134 Stat. 281, 298.2 Congress also granted the SBA emergency rulemaking authority, providing:
“Not later than 15 days after March 27, 2020, the Administrator shall issue regulations to carry
out [Title I of the CARES Act] and the amendments made [thereby] without regard to the notice
requirements under [5 U.S.C. § 553(b)].” 15 U.S.C. § 9012.
PPP funds are generally processed on a first come, first served basis, and the funds were
exhausted quickly. On April 24, 2020, Congress appropriated an additional $310 billion for PPP
loan guarantees. See Paycheck Protection and Healthcare Enhancement Act, Pub. L. No. 116139, § 101(a), 134 Stat. 620 (2020).
C. The Bankruptcy Exclusion
In the meantime, the Administrator used the emergency rulemaking authority conferred
by Congress. On April 2, 2020, less than one week after the CARES Act was passed, the
Administrator posted an interim final rule regarding the PPP (the “First IFR”) to the SBA’s
website. The First IFR explains that in order to apply, an applicant must submit SBA Form
2483, the PPP Application Form, to a lender. Business Loan Program Temporary Changes;
Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,814 (Apr. 15, 2020) (to be codified at 13
C.F.R. pt. 120). Among the limited PPP underwriting requirements, the First IFR includes
lender review of the borrower certifications contained in Form 2483. Id. at 20,815. The
Administrator also posted Form 2483 to the SBA’s website on April 2, 2020. Form 2483 states
that “if questions (1) or (2) . . . are answered ‘Yes’ the loan will not be approved.” [Dkt. No. 49,

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The “covered period” during which a “covered loan” could be obtained was subsequently extended to
December 31, 2020. See Paycheck Protection Program Flexibility Act of 2020, Pub. L. 116-142, § 3(a),
134 Stat. 641, 641 (codified at 15 U.S.C. § 636(a)(36)(A)(iii)).

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¶ 17.] Question one asks whether the applicant is “presently involved in any bankruptcy[,]”
excluding such applicants from participating in the PPP. Id.
The agency action excluding debtors from the PPP occurred with the promulgation of the
First IFR and Form 2483, neither of which contain an explanation specifically addressing the
bankruptcy exclusion. In a prefatory section, the First IFR observes that the “intent of the Act is
that SBA provide relief to America’s small businesses expeditiously[.]” 85 Fed. Reg. 20,811,
20,812. That prefatory section goes on to provide that:
For . . . loans made under the PPP, SBA will not require the lenders to comply
with section 120.150 “What are SBA’s lending criteria?.” SBA will allow lenders
to rely on certifications of the borrower in order to determine eligibility of the
borrower . . . . Lenders must comply with the applicable lender obligations set
forth in this interim final rule, but will be held harmless for borrowers’ failure to
comply with program criteria; remedies for borrower violations or fraud are
separately addressed in this interim final rule. The program requirements of the
PPP identified in this rule temporarily supersede any conflicting Loan Program
Requirement (as defined in 13 C.F.R. 120.10).
85 Fed. Reg. 20,811, 20,812. Among the lending criteria and loan program requirements
suspended as to PPP loans, but applicable to other Section 7(a) loans, is the multi-factored
analysis identified in 13 C.F.R. § 120.150, including a consideration of the applicant’s credit
history, and an evaluation of any prior bankruptcy filings revealed on Form 1919. In place of
these considerations, the SBA imposed more streamlined requirements: lender review of the
borrower certifications on Form 2483, and disqualification of certain applicants, including those
involved in an ongoing bankruptcy.
On April 24, 2020, the Administrator posted a fourth interim final rule (the “Fourth IFR”)

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with respect to the PPP on its website.3 The Fourth IFR, which has since been published in the
Federal Register, “supplements the previously posted interim final rules with additional
guidance.” Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85
Fed. Reg. 23,450, 23,450 (Apr. 28, 2020) (to be codified at 13 C.F.R. pt. 120 & 121). The rule
provides the following guidance pertinent to the bankruptcy exclusion:
4. Eligibility of Businesses Presently Involved in Bankruptcy Proceedings
Will I be approved for a PPP loan if my business is in bankruptcy?
No. 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 of the applicant becomes the debtor in a bankruptcy proceeding after
submitting a 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 an
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. at 23,451.
D. The Miller Declarations
By May and June 2020, litigation was underway in this Court and in courts across the
country concerning the legality of the bankruptcy exclusion. In some of the cases, the

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The Administrator also promulgated second and third interim final rules, neither of which address the
bankruptcy exclusion. See Business Loan Program Temporary Changes; Paycheck Protection Program,
85 Fed. Reg. 20,817 (Apr. 15, 2020) (to be codified at 13 C.F.R. pt. 121); Additional Eligibility Criteria
and Requirements for Certain Pledges of Loans, 85 Fed. Reg. 21,747 (Apr. 20, 2020) (to be codified at 13
C.F.R. pt. 120).

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Administrator offered declarations of its Deputy Associate Administrator for Capital Access,
John A. Miller. See [Dkt. No. 90, Ex. 1 & 2]. In the Maine Miller Declaration—dated June 5,
2020—Mr. Miller explains that the CARES Act was enacted on March 27, 2020 “to provide
emergency assistance” to “businesses affected by the COVID-19 emergency.” [Dkt. No. 90, Ex.
1, ¶ 3.] He states that participating lenders began accepting PPP loan applications on April 3,
2020, one week after the CARES Act was passed. Id. ¶ 22. Mr. Miller also states that:
SBA determined that the intent of the Act is that SBA provide relief to America’s
small businesses expeditiously. This intent, along with the dramatic decrease in
economic activity nationwide, provided good cause for SBA to dispense with the
30-day delayed effective date provided in the Administrative Procedure Act.
Specifically, small businesses needed to be informed on how to apply for a loan
and the terms of the loan under section 1102 of the Act as soon as possible
because under the CARES Act as enacted the last day to apply for and receive a
loan was June 30, 2020. The Interim Final Rules were issue[d] to allow
immediate [implementation] of this program.
Id. ¶ 5. When discussing the bankruptcy exclusion specifically, Mr. Miller states:
The reason for including the bankruptcy exclusion in Form 2483 was that SBA in
consultation with Treasury determined that in order to meet the challenges of
rescuing the economy from the effects of the Covid-19 virus pandemic, loan
assistance authorized by the [CARES] Act had to be provided as expeditiously as
possible with as little as possible underwriting. Since a company in bankruptcy
required an inquiry into the state of the proceeding and possibly a court order for
DIP financing, as well [as] the possible resolution of a host of other issues and the
prospect of incurring fees by the lender in monitoring the bankruptcy proceeding,
it was determined that the wording of Form 2483 would be expeditious and less
likely to slow the administration of the program and less likely to require the
expenditure of additional time, effort and other resources. The purpose of a PPP
loan is to help small businesses pay their employees and maintain operations to
allow them to restart quickly over the next few months. SBA decided that this
purpose would not be served by including all bankruptcies. Certain creditors,
including administrative creditors, could assert claims to the PPP loan funds that
would interfere with its authorized uses and the requirements for PPP loan
forgiveness. SBA, in consultation with the Department of Treasury, determined
there should be one streamlined rule that applies to all debtors in bankruptcy to
avoid the need for case by case reviews.

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Id. ¶ 17 (emphasis added). Finally, Mr. Miller explains that other than the statute itself, the PPP
application form, and the First and Fourth IFRs, there “is no Administrative Record . . . because
this was an Interim Final Rule, prepared in order to deliver this much needed assistance to small
businesses as expeditiously as possible.” Id. ¶ 23.
The Vermont Miller Declaration—dated May 14, 2020—contains some of the same
statements as the Maine Miller Declaration. But in the Vermont Miller Declaration, Mr. Miller
offers the following explanation for the bankruptcy exclusion:
The purpose of a PPP loan is to help small businesses pay their employees and
maintain operations to allow them to restart quickly over the next few months.
This purpose would not be served in a chapter 11 liquidation or in a chapter 7
case. Certain creditors, including administrative creditors, could assert claims to
the PPP loan funds that would interfere with its authorized uses and the
requirements for PPP loan forgiveness. SBA, in consultation with the Department
of Treasury, determined there should be one streamlined rule that applies to all
debtors in bankruptcy to avoid the need for case by case reviews.
[Dkt. No. 90, Ex. 2, ¶ 21 (emphasis added).]
With these individual pieces of the puzzle laid on the table, the focus can shift to the
larger picture: an assessment of how the bankruptcy exclusion holds up under the second step of
the Chevron analysis and the arbitrary and capricious framework articulated in State Farm.
Before adjusting to that wider lens, however, the significance of the Miller declarations looms in
the foreground.
E. The Significance of the Miller Declarations vis-à-vis the Administrative Record
The Hospitals contend that the Miller declarations are post hoc rationalizations that
should be ignored. In the Hospitals’ view, this is warranted because the Miller declarations were
not generated at the same time as the bankruptcy exclusion or offered at trial, and the reasons
they advance in support of the bankruptcy exclusion do not qualify as contemporaneous
explanations. The Hospitals also contend that the reasoning in the Vermont Miller Declaration

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differs from the reasoning in the Maine Miller Declaration, and that the evolution in the
explanations offered over time renders them incredible.
When “reviewing agency action, a court is ordinarily limited to evaluating the agency’s
contemporaneous explanation in light of the existing administrative record.” Dep’t of
Commerce v. New York, 139 S. Ct. 2551, 2573 (2019). Like many rules, the administrative
record rule admits certain exceptions. For example, “[a] reviewing court may accept evidence
outside the administrative record where there is a strong showing of bad faith or improper
behavior by agency decisionmakers, or where there is a failure to explain administrative action
[so] as to frustrate effective judicial review.” Murphy v. Comm’r of Internal Revenue, 469 F.3d
27, 31 (1st Cir. 2006) (citations omitted) (quotation marks omitted). “The administrative record
may be supplemented, if necessary, by affidavits, depositions, or other proof of an explanatory
nature.” Sierra Club v. Marsh, 976 F.2d 763, 772 (1st Cir. 1992) (quotation marks omitted).
“The new material, however, should be explanatory of the decisionmakers’ action at the time it
occurred. No new rationalizations for the agency’s decision should be included, and if included
should be disregarded.” Id. at 772-73 (citations omitted).
Here, there has been no showing of bad faith or improper behavior on the part of the
SBA. However, given the exigencies of the Administrator’s rulemaking efforts in relation to the
PPP, the supplementary explanation contained in the Fourth IFR is appropriately included in the
administrative record. In the extraordinary circumstances surrounding the passage of the
CARES Act, and the congressional directive that the Administrator get the PPP off the ground
immediately to provide economic relief to struggling businesses and their employees, the lack of
a perfectly contemporaneous explanation is far from troubling. There is no suggestion that the
explanation offered in the Fourth IFR is simply a “convenient litigating position” and the time-

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lag between the promulgation of the bankruptcy exclusion and the Fourth IFR did not force the
Hospitals or the Court to chase a moving target. Cf. Dep’t of Homeland Sec. v. Regents of the
Univ. of Cal., 140 S. Ct. 1891, 1909 (2020) (“Permitting agencies to invoke belated justifications
. . . can upset the orderly functioning of the process of review, forcing both litigants and courts to
chase a moving target.” (quotation marks omitted)).
The District Court determined that the Maine Miller Declaration “elaborates on and helps
to explain the Administrator’s earlier stated reason for adopting the bankruptcy exclusion.”
[Dkt. No. 78, p. 5.] Specifically, the District Court observed:
[T]he reason provided by the Administrator for enacting the bankruptcy exclusion
rule was the need to establish a streamlined, expedited loan process reliant on
certifications by applicants, and her determination that “providing PPP loans to
debtors in bankruptcy would present an unacceptably high risk of an unauthorized
use of funds or non-repayment of unforgiven loans.” Business Loan Program
Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. at 23,451. The
[Maine] Miller Declaration is consistent with this view, explaining that “[c]ertain
creditors, including administrative creditors, could assert claims to the PPP loan
funds that would interfere with its authorized uses and the requirements for PPP
loan forgiveness.” ECF No. 1-14 at 44.
[Dkt. No. 78, p. 5] (footnote omitted). Because the explanation offered in the Maine Miller
Declaration is consistent with that included in the Fourth IFR, the Maine Miller Declaration
appropriately supplements the administrative record.4
Although the Maine Miller Declaration was not offered at trial, considerations of fairness
do not warrant exclusion here, where the Hospitals were granted a full opportunity to craft a
litigation response to the declaration on recommittal. Before trial, the primary thrust of the
Hospitals’ contentions under the APA concerned the Administrator’s authority to adopt the

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Even if the Maine Miller Declaration were excluded from consideration, the proposed disposition
would be unaffected. This Court would still conclude, on a record consisting solely of Form 2483 and the
First and Fourth IFRs, that the bankruptcy exclusion is a reasonable construction of the statute and is
neither arbitrary nor capricious.

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bankruptcy exclusion. See [Dkt. No. 1]. The closest the Hospitals came to developing a State
Farm style argument was in their pretrial memorandum where they asserted that the record was
“sufficient to determine that the Administrator has acted in an arbitrary and capricious manner,
in violation of 5 U.S.C. § 706(2)(A).” [Dkt. No. 43, ¶ 18.] They also urged the Court to use “all
of the tools necessary to address the concerns of the Administrator” (as expressed in the Fourth
IFR) and argued that the record would not show that the Administrator “engaged in a thoughtful,
deliberative process” with respect to the bankruptcy exclusion or in “any review whatsoever of
the financial health or viability of any company seeking PPP funds.” Id. In the proposed
findings and conclusions issued in June 2020, the Court attempted to address the arguments
developed by the parties. Since then, the Administrator has supplemented the administrative
record with the Maine Miller Declaration, and the Hospitals, in response to that declaration, have
made new, detailed arguments under the State Farm rubric.
Among other things, this Court is tasked with resolving the “possible discrepancy”
between the Maine Miller Declaration and the Vermont Miller Declaration. [Dkt. No. 78, p. 6.]
When discussing the bankruptcy exclusion in the Maine Miller Declaration, Mr. Miller states:
“The purpose of a PPP loan is to help small businesses pay their employees and maintain
operations to allow them to restart quickly over the next few months. SBA decided that this
purpose would not be served by including all bankruptcies.” [Dkt. No. 90, Ex. 1, ¶ 17.] In the
Vermont Miller Declaration, executed several weeks prior to the Maine Miller Declaration, Mr.
Miller states: “The purpose of a PPP loan is to help small businesses pay their employees and
maintain operations to allow them to restart quickly over the next few months. This purpose
would not be served in a chapter 11 liquidation or in a chapter 7 case.” [Dkt. No. 90, Ex. 2, ¶
21.] After these statements, both declarations state: “Certain creditors, including administrative

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creditors, could assert claims to the PPP loan funds that would interfere with its authorized uses
and the requirements for PPP loan forgiveness. SBA, in consultation with the Department of
Treasury, determined there should be one streamlined rule that applies to all debtors in
bankruptcy to avoid the need for case by case reviews.” [Dkt. No. 90, Ex. 1, ¶ 17 & Ex. 2, ¶ 21.]
A discrepancy may be a “difference” or an “inconsistency.” See Webster’s New World
College Dictionary 392 (3d ed.). There is no inconsistency between the Miller declarations; they
are not identical, but they are not in conflict either. Saying that the purpose of the PPP would not
be served in a chapter 11 liquidation or a chapter 7 case (as Mr. Miller states in the Vermont
Miller Declaration) does not imply or suggest that the purpose of the PPP would be served in
other types of bankruptcy cases. That is the inference upon which the Hospitals’ inconsistency
theory rests. The statement in the Vermont Miller Declaration—that the purpose of the PPP
would not be served in chapter 7 or a liquidating chapter 11—is merely a subset of the broader
statement in the Maine Miller Declaration—that the purpose of the PPP would not be served by
including all bankruptcies. The difference between these two statements does not cause the
Court to view the Miller declarations with any degree of skepticism. A person might say on a
Monday: “I am gluten sensitive. I have difficulty with marble rye, so I avoid that type of bread.”
Several days later, that person might say: “I am gluten sensitive. I have difficulty with bread,
and therefore avoid all bread.” A listener, hearing the more specific first statement and then the
more general second statement, would not question the person’s credibility simply because the
statements were not identical. In both cases, the person with the gluten sensitivity would be
tying a difficult decision—the decision to avoid bread—to the sensitivity. That same sort of
reasoning appears in the Miller declarations; the distinction between the two declarations is not
problematic in the way the Hospitals suggest.

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F. The Analysis Under the Second Step of Chevron and State Farm
The District Court previously adopted this Court’s proposed conclusion under the first
step of Chevron—namely, that Congress did not explicitly say whether debtors in bankruptcy
were eligible to participate in the PPP, delegating rulemaking authority on that issue to the SBA.
In the second step of the Chevron analysis, the court considers whether the challenged agency
decision “is based on a permissible construction of the statute.” Chevron, 467 U.S. at 843
(footnote omitted).
If Congress has explicitly left a gap for the agency to fill, there is an express
delegation of authority to the agency to elucidate a specific provision of the
statute by regulation. Such legislative regulations are given controlling weight
unless they are arbitrary, capricious, or manifestly contrary to the statute.
Sometimes the legislative delegation to an agency on a particular question is
implicit rather than explicit. In such a case, a court may not substitute its own
construction of a statutory provision for a reasonable interpretation made by the
administrator of an agency.
Id. at 843-44 (footnotes omitted).5
As the District Court stated, although the inquiry under the second step of Chevron may
overlap somewhat with the question of whether the agency decision was arbitrary or capricious
under the APA, the overlap is incomplete. [Dkt. No. 78, p. 6 (citing River St. Donuts, LLC v.
Napolitano, 558 F.3d 111, 117 (1st Cir. 2009)).] At oral argument, the Hospitals signaled
agreement with the District Court’s view, stressing certain aspects of the APA analysis, but

5

The Hospitals did not ask the Court to apply the less deferential framework supplied by Skidmore v.
Swift & Co., 323 U.S. 134 (1944). Had such a request been made, it would have been denied. “The
Chevron analysis applies because Congress delegated authority to the SBA to make rules carrying the
force of law and the SBA exercised that authority in issuing the [bankruptcy exclusion].” USF Fed.
Credit Union v. Gateway Radiology Consultants, P.A. (In re Gateway Radiology Consultants, P.A.), --F.3d ---, 2020 WL 7579338, at *8 n.8 (11th Cir. Dec. 22, 2020) (citing United States v. Mead Corp., 533
U.S. 218, 229-30 (2001)).

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indicating that their arguments under Chevron and the APA were basically one and the same.
For this reason, the discussion centers on the standard set forth in the text of the APA:
To the extent necessary to decision and when presented, the reviewing court shall
decide all relevant questions of law, interpret constitutional and statutory
provisions, and determine the meaning or applicability of the terms of an agency
action. The reviewing court shall—
(1) compel agency action unlawfully withheld or unreasonably delayed;
and
(2) hold unlawful and set aside agency action, findings, and conclusions
found to be—
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short
of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to sections
556 and 557 of [Title 5] or otherwise reviewed on the record of an
agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject to
trial de novo by the reviewing court.
5 U.S.C. § 706.
The standard prescribed by section 706(2)(E) cropped up at oral argument when the
Hospitals argued that the SBA is saddled with the burden of showing that the bankruptcy
exclusion is supported by “substantial evidence.” For this proposition, the Hospitals cited State
Farm and Allentown Mack Sales and Serv., Inc. v. Nat’l Labor Relations Bd., 522 U.S. 359
(1998). These decisions are not on point. In Allentown Mack, the agency decision was
governed by a statute separate from the APA indicating that the agency’s findings of fact, if
supported by substantial evidence, would be conclusive. See id. at 377 (referencing 29 U.S.C. §
160(e)). The agency decision also involved on-the-record factfinding, governed by 5 U.S.C. §
706(2)(E). Similarly, in State Farm, the substantial evidence standard applied where “Congress
required a record of the rulemaking proceedings to be compiled and submitted to a reviewing

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court, 15 U.S.C. § 1394, and intended that agency findings under the [applicable statute] would
be supported by substantial evidence on the record considered as a whole.” State Farm, 463 U.S.
at 43-44 (referencing the applicable legislative history). The bankruptcy exclusion, by contrast,
was not adopted pursuant to a statute requiring the SBA to conform to the substantial evidence
standard, and the rulemaking process did not involve on-the-record factfinding or a hearing
under 5 U.S.C. §§ 556 or 557. Cf. 5 U.S.C. § 706(2)(E).
The Hospitals have also invoked section 706(2)(A), asserting that the SBA acted in an
“arbitrary and capricious” manner in adopting the bankruptcy exclusion.6 In 1983, the Supreme
Court provided the following explication of this standard:
The scope of review under the arbitrary and capricious standard is narrow and a
court is not to substitute its judgment for that of the agency. Nevertheless, the
agency must examine the relevant data and articulate a satisfactory explanation
for its action, including a rational connection between the facts found and the
choice made. In reviewing that explanation, [the court] must consider whether the
decision was based on a consideration of the relevant factors and whether there
has been a clear error of judgment. Normally, an agency rule would be arbitrary
and capricious if the agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference
in view or the product of agency expertise. The reviewing court should not
attempt itself to make up for such deficiencies: [The court] may not supply a
reasoned basis for the agency’s action that the agency itself has not given. [The
court] will, however, uphold a decision of less than ideal clarity if the agency’s
path may reasonably be discerned.
State Farm, 463 U.S. at 43 (citations omitted) (quotation marks omitted).
How does the bankruptcy exclusion hold up when this standard is applied? In the First
IFR, the Administrator stressed that the CARES Act had been passed to provide “emergency

6

Countless courts, litigants, and commentators have referred to the “arbitrary and capricious”
standard. This Court will follow suit, even though a natural reading of the APA instructs the court to set
aside agency action that is either arbitrary or capricious. See 5 U.S.C. § 706(2)(A) (“arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with law”).

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assistance” to businesses and determined that the legislature had intended “that SBA provide
relief to America’s small businesses expeditiously.” 85 Fed. Reg. 20,811, 20,811. To provide
that expeditious relief, the SBA streamlined its lending criteria and created an application
process that would allow lenders to underwrite PPP loans by relying on borrower certifications
on Form 2483, including the certification regarding bankruptcy status. Later, in the Fourth IFR,
the Administrator again emphasized the streamlined process that permitted lenders to “rely on an
applicant’s representation concerning the applicant’s . . . involvement in a bankruptcy
proceeding.” 85 Fed. Reg. 23,450, 23,451. The Administrator also supplemented this need-forspeed rationale with two other considerations: First, the Administrator stated that, after
consulting with the Secretary of the Treasury, she had determined “that providing PPP loans to
debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds
or non-repayment of unforgiven loans.” Id. Second, the Administrator observed that “the
Bankruptcy Code does not require any person to make a loan or a financial commitment to a
debtor in bankruptcy.” Id.
As previously noted, the Maine Miller Declaration is consistent with the Fourth IFR. In
that declaration, Mr. Miller reiterated that debtors were categorically excluded from the PPP in
order to streamline and expedite the underwriting and lending process:
Since a company in bankruptcy required an inquiry into the state of the
proceeding and possibly a court order for DIP financing, as well as the possible
resolution of a host of other issues and the prospect of the incurring of fees by the
lender in monitoring the bankruptcy proceeding, it was determined that the
wording of Form 2483 would be expeditious and less likely to slow the
administration of the program and less likely to require the expenditure of
additional time, effort and other resources.
[Dkt. No. 90, Ex. 1, ¶ 17.] Mr. Miller also elaborated on the Administrator’s concerns about the
risk of “unauthorized” use of the funds or non-repayment of unforgiven loans if debtors in

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bankruptcy were to participate in the PPP, explaining that “[c]ertain creditors, including
administrative creditors, could assert claims to the PPP loan funds that would interfere with its
authorized uses and the requirements for PPP loan forgiveness.” Id. Finally, Mr. Miller stated
that purpose of the PPP—helping small businesses pay employees and maintain operations—
would not be served by including all bankruptcies in the program, and that the Administrator had
decided to apply a bright-line rule “to avoid the need for case by case reviews.” Id.
The Fourth IFR and the Maine Miller Declaration reflect that the bankruptcy exclusion
was the product of reasoned decision making. When deciding whether to make PPP loans
available to debtors, the Administrator appropriately looked to the CARES Act as the source of
the relevant factors. See Brewer v. Madigan, 945 F.2d 449, 457 (1st Cir. 1991) (“The enabling
statute . . . is the principal source of relevant factors to be considered by the agency in
promulgating regulations.”); see also Judulang v. Holder, 565 U.S. 42, 55 (2011) (stating, in an
APA challenge to an action by the Board of Immigration Appeals, that the BIA, tasked with
considering “relevant factors,” was required to consider “the purposes of the immigration laws or
the appropriate operation of the immigration system”). These factors are identified in the
administrative record, as supplemented with the Maine Miller Declaration. The record also
contains an explanation that provides a rational connection between the factors the Administrator
considered and the decision to exclude all debtors in bankruptcy from the PPP.
The CARES Act and the circumstances surrounding its enactment were truly
extraordinary, and Congress clearly communicated the need for speedy action, granting the
Administrator only fifteen days to issue regulations, dispensing with the notice-and-comment
procedures that would otherwise apply to those regulations, and imposing a cut-off date for PPP
applications of June 30, 2020. The Administrator did not err in concluding that the legislature

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had tasked the SBA with administering the PPP expeditiously. To implement this directive, the
SBA decided to streamline the lending and underwriting process, allowing lenders to rely on
borrower certifications. The SBA further simplified the process by adopting a bright-line rule
rendering debtors in bankruptcy ineligible, obviating the need for a lender or the SBA to review
the circumstances of individual debtors and to monitor ongoing bankruptcy cases. The
bankruptcy exclusion was based, in part, on the need for speedy loan processing communicated
by Congress.
The Hospitals resist this conclusion, asserting that there is nothing in the administrative
record—no data, facts, or studies—that explains how the process of making or guaranteeing PPP
loans would be bogged down by permitting debtors to participate. In their view, the SBA should
have, within the fifteen-day rulemaking window, solicited input or sought an expert opinion
about how cumbersome it would have been to include debtors in bankruptcy in the PPP. The
Hospitals assert that the administrative record should stand on its own, without any assistance
from common sense or generalized conclusions about lending in bankruptcy. The Court
disagrees. Because Congress dispensed with the notice-and-comment procedures prescribed by
5 U.S.C. § 553 and required the Administrator to promulgate rules within fifteen days, the Court
does not fault the SBA for failing to seek expert opinions or to conduct hearings. These are the
sorts of activities normally undertaken during the notice-and-comment process. See 5 U.S.C. §
553(c). And, contrary to the Hospitals’ beliefs, common sense can appropriately play a role in
agency rulemaking. See, e.g., ABC Aerolineas, S.A. de C.V. v. U.S. Dep’t of Transp., 747 F.
App’x 856, 870 (D.C. Cir. 2018); Van Hollen v. Fed. Election Comm’n, 811 F.3d 486, 497 (D.C.
Cir. 2016). This is especially true here, where that commonsense insight—that lending may be
more complex and risky in the bankruptcy context—is bolstered by the Administrator’s apparent

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awareness of the content of the United States Bankruptcy Code, specifically 11 U.S.C. § 364
(concerning the terms under which the trustee, or a debtor with powers of a trustee, may obtain
postpetition credit) and 11 U.S.C. § 365(c)(2) (prohibiting the trustee from assuming a contract
to make a loan to or for the benefit of the debtor).
The SBA also tethered the bankruptcy exclusion to a determination that there was an
“unacceptably high risk” that a debtor in bankruptcy might use PPP funds for “unauthorized
purposes” or fail to repay an unforgiven loan. 85 Fed. Reg. 23,450, 23,451. The Maine Miller
Declaration provides further insight, explaining that the SBA perceived a risk that creditors in a
bankruptcy case, including administrative creditors, could assert claims to PPP funds, interfering
with the intended uses of those funds. [Dkt. No. 90, Ex. 1, ¶ 17.] Mr. Miller also stated that the
purpose of the PPP was “to help small businesses pay their employees and maintain operations”
and that the SBA “decided that this purpose would not be served by including all bankruptcies.”
Id. These statements each relate to the purpose of the PPP generally, and the intended uses of
PPP funds, more specifically. See 15 U.S.C. § 9005(b) (detailing the uses of PPP loan proceeds
that render the loan forgivable, in whole or in part). This line of reasoning also hinges on certain
generalizations about lending to debtors in bankruptcy.
The CARES Act requires all PPP applicants to certify that they are experiencing some
degree of financial distress related to the uncertainty created by COVID-19. See 15 U.S.C. §
636(a)(36)(G)(i)(I) (requiring PPP applicants to certify “that the uncertainty of current economic
conditions makes necessary the loan request to support the ongoing operations of the eligible
recipient”). This degree of financial distress is a PPP baseline. But, when it came to debtors in
bankruptcy, the SBA perceived an additional risk that PPP loan funds might not be used for their
intended purposes—e.g., to cover payroll—and might instead be gobbled up by administrative

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creditors. The SBA apparently perceived that debtors, as a group, were more likely than nondebtors to be suffering from financial distress unrelated to COVID-19 and teetering on the verge
of ceasing operations. This is a fair, commonsense generalization.
The Hospitals counter this generalization with specificity, asserting that they are, in fact,
attempting to reorganize. That is all very well, but the SBA simply did not have the luxury of
considering the particulars of individual bankruptcy cases. And many reorganizations do fail
despite the debtors’ best efforts. The Bankruptcy Code provides a mechanism by which a
chapter 11 reorganization may be converted to a liquidation, see 11 U.S.C. § 1112, in which any
unencumbered assets would be distributed in accordance with the waterfall contained in 11
U.S.C. § 726. Any PPP funds remaining with the estate upon conversion might not be used to
fund payroll or other operating expenses that would render the loan forgivable, but instead could
be paid to the trustee, professionals employed by the trustee, or a host of other chapter 7
administrative expenses. Although a PPP loan might qualify for priority if obtained pursuant to
an order under 11 U.S.C. § 364(b) or (c), the loan would only be repaid in a liquidation to the
extent that any funds remaining with the estate were (i) unencumbered and (ii) not subject to a
claim of higher priority. Even if a PPP loan obtained administrative expense status during the
chapter 11 case, if the case later converted to a chapter 7 case, the administrative expenses of the
chapter 7 case would take priority over the administrative expenses of the chapter 11 case. See
11 U.S.C. §§ 507(a)(2), 726(b). The reality is that the Hospitals pose a false dichotomy: lending
to debtors who are reorganizing in chapter 11 is relatively safe and simple (and therefore those
debtors should not have been excluded from the PPP) whereas lending to chapter 7 debtors and
debtors liquidating in chapter 11 cases would not promote the purposes of the PPP (and therefore
the SBA could have properly excluded only those debtors). The Court does not perceive that the

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distinction is quite so stark.7 If PPP funds were not used for their intended purposes and were
instead used to cover the expenses of a liquidation, the PPP loan would not be forgiven, and the
SBA would be liable on its guarantee of the unforgiven loan balance in the event of nonpayment. The Bankruptcy Code gives rise to the prospect that a reorganization may, at any time,
become a liquidation, and liquidation would not further the purposes of the PPP.8 The SBA did
not err in determining that there was a risk that PPP loan proceeds might be diverted to purposes
not intended by the CARES Act in a bankruptcy case, and that the loan, if not forgiven, might
not be repaid. The SBA did not act arbitrarily or capriciously in deciding that debtors should be
excluded from the program due to that risk.
The Hospitals resist this conclusion too, asserting that the SBA relied on factors that
Congress did not intend the agency to consider. The Hospitals aver that Congress removed all
underwriting criteria for the PPP, pointing to the part of the statute requiring a PPP applicant to
certify that the loan is necessary to sustain continued operations. See 15 U.S.C. §
636(a)(36)(G)(i)(I). The Hospitals further assert that Congress did not intend the SBA to

7

This conclusion is bolstered, to a limited extent, by the recent amendments to the PPP included in the
Consolidated Appropriations Act of 2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020). In that
legislation, Congress amended 11 U.S.C. § 364 by adding a new subsection (g). Pub. L. No. 116-620, §
320, 134 Stat. 1182, 2015. Under that subsection, a bankruptcy court may authorize a trustee or a debtor
in possession in three types of cases to obtain a loan under 15 U.S.C. § 636(a)(36), with such a loan to be
treated as a debt to the extent the loan is not forgiven, with priority equal to a claim of the kind specified
in 11 U.S.C. § 364(c)(1). Pub. L. No. 116-620, § 320, 134 Stat. 1182, 2015. Notably, however, this
amendment is only to take effect if and when the Administrator submits to the Director of the Executive
Office for the United States Trustee a determination that any such debtor would be eligible for a loan
under section 636(a)(36). Pub. L. No. 116-620, § 320, 134 Stat. 1182, 2016. This discretion now
expressly conferred on the Administrator does not extend to chapter 11 debtors generally; it applies only
to subchapter V cases (which are a subset of chapter 11 cases), chapter 12 cases, and chapter 13 cases.
8

Although the Hospitals’ chapter 11 cases could not be converted to chapter 7 without their consent,
see 11 U.S.C. § 1112(c), the risk of reorganizational failure is not entirely obviated by their nonprofit
status. Even a chapter 11 case commenced by a nonprofit remains subject to dismissal under 11 U.S.C. §
1112(b). The point is, not all chapter 11 reorganizations are successful.

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consider an applicant’s ability to repay an unforgiven PPP loan, pointing to the section of the
statute that eliminated the requirements of collateral and a personal guarantee. See 15 U.S.C. §
636(a)(36)(J). In the Court’s view, the Hospitals read too much into these specific provisions
and too little into the other provisions of the PPP. Congress did not suspend for PPP loans the
sound value requirement generally applicable to Section 7(a) loans, and it authorized the SBA to
guarantee PPP loans on the same terms and conditions as other Section 7(a) loans, except as
otherwise provided in 15 U.S.C. § 636(a)(36). See id. § 636(a)(36)(B). Yes, there are
indications that the loans were to be used for forgivable purposes, but there were also statutory
provisions for unforgiven loan balances. The SBA dutifully complied with the parts of the
statute cited by the Hospitals, while continuing to impose a minimal, streamlined underwriting
standard—a targeted effort to ensure that the loans would either be forgiven or repaid. In doing
so, the SBA did not rely on factors which Congress did not intend the agency to consider.
The SBA asserts that the bankruptcy exclusion was justified as an effort to fulfill the
statutory sound value requirement. The Hospitals urge the Court to disregard this assertion for
two reasons. First, they point out that the Administrator stipulated that the SBA does not analyze
PPP applications to determine whether a loan to a particular applicant would be of sound value.
Second, the Hospitals note that the sound value requirement does not expressly surface as part of
the rationale offered in the Fourth IFR or the Maine Miller Declaration. The stipulation raised
by the Hospitals does not have the significance they ascribe to it. Instead, the stipulation simply
underscores that the SBA decided to streamline PPP loan processing. As for the Hospitals’
timeliness complaints, the Court cannot disregard the fact that sound value is a component of the
statutory PPP calculus. Stated differently, the sound value requirement is hard-wired in the
statute such that it cannot be brushed aside. When evaluating whether the SBA acted arbitrarily

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and capriciously by adopting the bankruptcy exclusion, the Court is tasked with considering
whether the SBA relied on factors that Congress did not intend the agency to consider. The
SBA’s sound value argument properly arises in this context, in response to the Hospitals’
contention that Congress eliminated all underwriting requirements and did not intend the SBA to
consider how PPP loan funds would be used or whether the loans would be repaid.
The Hospitals’ next argument fares no better. They say that the SBA failed to consider
the protections that the Bankruptcy Code might have offered to accommodate the SBA’s
concerns about extending PPP loans to debtors. In the Hospitals’ view, these bankruptcy
protections include: (a) the requirement that the debtor provide notice to interested parties prior
to a hearing under 11 U.S.C. § 364; (b) a chapter 11 debtor’s obligation to file monthly operating
reports on the docket, thereby providing transparency about the use of PPP funds; (c) the
bankruptcy court’s ability to order the debtor to segregate PPP funds from other funds; (d) the
court’s ability to hold a debtor in contempt for unauthorized uses of PPP funds; and (e) the
SBA’s ability to secure a priority claim under 11 U.S.C. § 507. Perhaps these protections might
have ameliorated some of the SBA’s concerns about PPP lending in the bankruptcy setting. It is
possible that some other rational choice might have been made in light of the SBA’s concerns.
But an agency is not generally required to “consider all policy alternatives in reaching a
decision.” State Farm, 463 U.S. at 51. The Court’s task is not to second-guess, but rather to
determine whether the bankruptcy exclusion was supported by adequate reasoning. See
Chevron, 467 U.S. at 843 n.11 (“The court need not conclude that the agency construction was
the only one it permissibly could have adopted to uphold the construction, or even the reading
the court would have reached if the question initially had arisen in a judicial proceeding.”). The
SBA did not act arbitrarily or capriciously by failing to consider the ways in which a PPP loan to

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a debtor could have been structured. There was nothing in the CARES Act requiring the agency
to consider these aspects of the Bankruptcy Code. And, for the reasons already discussed, the
SBA was pursuing a streamlined process. Invoking these bankruptcy protections would have
been far from streamlined, requiring involvement on the part of the SBA or the lender in
thousands of individual bankruptcy cases.
Finally, the Hospitals insist that there may be some (or even many) cases where a PPP
recipient outside of bankruptcy is less creditworthy than a debtor in a bankruptcy case. They
make sweeping arguments about the how the statute should operate based on the Hospitals’ own
circumstances, as if all debtors attempting to reorganize under chapter 11 have similar
circumstances. That is simply not the case. Yes, one could find a recipient of a PPP loan outside
of bankruptcy that is less creditworthy than the Hospitals. That does not mean that the SBA
acted arbitrarily or capriciously when it acted quickly based on a commonsense generalization
about lending to debtors in cases under Title 11. The Hospitals identify the problem with
generalizations: they are not universally true. Some PPP borrowers outside of bankruptcy likely
posed greater credit risks than some debtors in bankruptcy. But because of the pressure to
promulgate a rule that would result in expeditious lending, and because of the permissibility of
discriminating against debtors in lending under 11 U.S.C. § 525, a universal, one-size-fits-all rule
was justified, notwithstanding the shortcomings of generalized risk assessment.
III.

FINAL CONSIDERATIONS
Although the rules promulgated by executive agencies are not immune from judicial

review, some amount of deference is generally warranted. But how much? Where, as here, the
challenged rule does not represent a departure from prior practice and where the agency

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promulgated the challenged rule under enormous pressure and statutory deadlines, the amount of
deference should be at its zenith.
The Hospitals assert that the bankruptcy exclusion does not pass the State Farm test
because it is not supported by any facts, data, or evidence. They read too much into State Farm
without accounting for the significant distinctions between the rulemaking process that Congress
prescribed in that case and the process prescribed here. In State Farm, the regulation at issue was
a rule requiring manufacturers to install passive restraints in vehicles to protect vehicle occupants
in the event of a collision. 463 U.S. at 34. The regulation, adopted after lengthy proceedings,
required vehicle manufacturers to install either of two passive restraint devices: airbags or
automatic seatbelts. Id. at 34-37. After the regulation was adopted, the agency determined that
seatbelts would not accomplish the anticipated safety benefits because many individuals would
detach them. Id. at 38. Based on this determination, and while continuing to acknowledge the
effectiveness of airbags, the agency entirely rescinded the passive restraint requirement without
considering an amendment to the regulation that would have required vehicle manufacturers to
install airbags. See id. at 46-48. Under the circumstances, the Supreme Court deemed the
rescission arbitrary and capricious, concluding that the mandatory passive restraint rule could not
be abandoned without any consideration of an airbag-only requirement given the agency’s
determination that airbags remained cost-beneficial, life-saving technology. Id. at 48.
Although State Farm articulates the applicable test, its holding is largely inapposite. In
State Farm, the agency action at issue was the rescission of a preexisting rule. The statute
governing the agency specifically required it to compile a record of its rulemaking proceedings,
and the applicable legislative history manifested congressional intent that the agency’s findings
be supported by “substantial evidence.” The bankruptcy exclusion, by contrast, appeared in the

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promulgation of a new rule and the statute authorizing the rule manifested the legislature’s intent
that the SBA dispense with ordinary rulemaking processes and act with alacrity.
The SBA did not engage in factfinding in any typical sense. No hearings were convened,
and no studies were conducted. No statements from the public or subject matter experts were
solicited or considered. One can easily imagine the outcry that would have ensued if, following
the adoption of the CARES Act, the SBA had conducted studies or gathered statements before
promulgating the PPP application form. Under the circumstances, the Court is not troubled that
the SBA did not marshal the type of information one might ordinarily classify as “evidence”
before adopting the bankruptcy exclusion.
The Hospitals do not contest the need for the SBA to have acted quickly. They do nitpick
the manner in which the SBA reached its decision. But their real quarrel relates to the SBA’s
decision on the merits, which they view as unfair and discriminatory. As for discrimination, the
Court has already determined that 11 U.S.C. § 525 does not protect the Hospitals from the sort of
discrimination that occurred here. In other words, from a bankruptcy perspective, the exclusion
of debtors from the PPP was a lawful choice. That conclusion—that section 525 is not
applicable here—bears, to a certain extent, on the fairness of the SBA’s decision. Other aspects
of Title 11 also bear on the fairness of the bankruptcy exclusion. As the SBA observed, lending
to debtors (in any type of bankruptcy case) is purely voluntary: no debtor can force a lender to
make a postpetition loan. That reality reflects the nuances of lending to debtors in bankruptcy.
The viability of the bankruptcy exclusion under the APA has been extensively litigated in
bankruptcy and district courts across the country. Some courts have upheld the exclusion; others
have struck it down. In this Court’s view, the bankruptcy exclusion was a reasonable choice that
cannot be fairly depicted as arbitrary or capricious. The decisions that reach the contrary

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conclusion suffer from a fatal flaw; they ultimately substitute a judicial determination for that of
the SBA. That is precisely what the Hospitals are asking the Court to do here; the ask is revealed
by the nature of the remedy requested. For the alleged violation of the APA, the Hospitals do not
seek the ordinary remedy of remand to the agency for further investigation or new rulemaking.
Instead, they ask the Court to compel the SBA to pay to the Hospitals the full amount of the PPP
loans they were denied.
Although this Court would likely have crafted a different rule if asked to write on a blank
slate, that is not the task at hand. Because the SBA engaged in reasoned decision making and the
bankruptcy exclusion is a permissible construction of the enabling legislation, the Court must
defer to that decision.

Date: January 12, 2021

___________________________
Michael A. Fagone
United States Bankruptcy Judge
District of Maine

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