Judge: Buffalo, Rochester Not Entitled to PPP Funds

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ROCHESTER, N.Y. (ChurchMilitant.com) - A federal judge is upholding the Small Business Administration's (SBA's) denial of Wuhan virus payroll assistance to two bankrupt Catholic dioceses in New York.

United States District Judge Elizabeth Wolford is agreeing with the SBA that bankrupt organizations should not be allowed to take on new debt.

Facing a tidal wave of sex abuse lawsuits, both dioceses are chapter 11 bankruptcy debtors. The diocese of Rochester filed for bankruptcy in September 2019 and Buffalo followed in February 2020. The Buffalo diocese, in particular, has suffered recurring waves of scandal involving clerical sex abuse cover-up. It filed for bankruptcy to shelter money from sex abuse victims.

Catholic Groups Rush for Aid

As of late May, 160 dioceses had applied for pandemic relief funds. This includes some 8,000 parishes, 1,400 elementary schools, 700 high schools, 104 chanceries and 185 Catholic Charities agencies, as well as an additional 200 other diocesan organizations. The diocese of Buffalo applied for $1.7 million in loans and Rochester applied for approximately $1 million. In the diocese of Buffalo, the payroll loan application is of particular note since it eliminated 21 positions in late March.

On March 27, President Trump signed into law the CARES Act which, among other things, established the Paycheck Protection Program (PPP), a loan program to help businesses make payroll. The CARES Act granted the SBA emergency rule-making authority to issue regulations to administer the PPP.

From the outset, the dioceses were aware that their applications might be denied. The loan application requires applicants to certify that they are not in bankruptcy. Furthermore, SBA issued rules specifically excluding debtors in bankruptcy from receiving a PPP loan. In case it was not obvious, the SBA noted that 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."

When the two bankrupt dioceses were denied PPP loans, they engaged the New York-based law firm of Bond, Schoeneck and King to sue the SBA. With eleven offices in four states, the firm employs more than 250 lawyers.

The lawsuit argued that the SBA exceeded its statutory authority under the CARES Act by excluding debtors in bankruptcy from participation in the PPP and that it violated federal law [11 U.S.C. § 525(a)] by excluding debtors in bankruptcy from participation in the PPP.

A Grant or a Loan?

The dioceses tried to argue that a PPP loan is not a true loan, but should instead be understood as a grant. The court responded:

While it is true that a loan issued as part of the PPP is eligible for forgiveness if certain criteria are met, the record is clear that Congress created the PPP as an amendment to the SBA's pre-existing loan program and both the statute and agency regulations refer to the funds distributed as 'loans.'

With regard to the dioceses' request for a preliminary injunction, the court ruled they failed to demonstrate that they will suffer irreparable harm if they aren't granted a preliminary injunction. Proof of "irreparable harm" is foundational for a preliminary injunction.

Judge Wolford pointed out the weakness of the dioceses' case. She wrote:

Plaintiffs' [the dioceses] submissions regarding the financial impact of the COVID-19 pandemic and concomitant ban on church gatherings are vague. Plaintiffs point out that offerings have dropped off precipitously, but they do not state what percentage of their funding comes from parish assessments versus other sources. Plaintiffs further have not claimed that they need PPP funds in order to make payroll — indeed, there is no indication in Plaintiffs' papers that they have not paid their employees' salaries or that failure to obtain PPP funds would somehow cause Plaintiffs to cease to operate.

The two dioceses now find themselves in bankruptcy, with steeply declining weekly donations and a large legal bill.

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