Body Renew Alaska, LLC v. United States Small Business Administration

UNITED STATES BANKRUPTCY COURT

DISTRICT OF ALASKA

In re: )

)

BODY RENEW ALASKA, LLC, ) Case No.: 20-00075 GS

) Chapter 11

Debtor. )

)

BODY RENEW ALASKA, LLC, )

)

Plaintiff, )

v. ) Adv. Case No. 20-90005 GS

)

UNITED STATES SMALL BUSINESS )

ADMINISTRATION and JOVITA CARRANZA, )

in her capacity as Administrator for the United )

States Small Business Administration, )

)

Defendants. )

)

REPORT AND RECOMMENDATION REGARDING

THE DEFENDANTS’ MOTION TO WITHDRAW THE REFERENCE

To: the Clerk of the Bankruptcy Court to forward to the United States District Court

for the District of Alaska

Introduction

Plaintiff Body Renew Alaska, LLC (Body Renew) commenced the underlying

adversary action within its pending subchapter V chapter 11 bankruptcy on June 19,

2020. Body Renew challenges the United States Small Business Administration’s (SBA)

adoption and implementation of rules precluding bankruptcy debtors from qualifying for

loans made available under the Payroll Protection Program (PPP) created as part of the

Coronavirus Aid, Relief and Economic Security Act (CARES Act). Contemporaneous

with the filing of the adversary action, Body Renew also sought entry of a temporary

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restraining order (TRO) to enjoin the SBA from denying Body Renew’s qualification for

a PPP loan. The request for entry of a TRO was scheduled for the following Wednesday,

June 24, 2020 (ECF No. 8), and later moved to Friday, June 26, 2020 to accommodate

the SBA’s schedule (ECF No. 15).

Prior to the hearing on Body Renew’s motion for TRO, the court held a hearing

on June 22, 2020 on a motion for TRO filed in a substantially similar action, Alaska

Urological Institute, P.C. v. U.S. Small Business Administration (AUI v. SBA), Adv. Case

No. 20-90004, commenced by another Alaska chapter 11 debtor. Counsel for Body

Renew appeared at the June 22 hearing, and the parties agreed on the record that Body

Renew’s request for TRO and preliminary injunction would be collapsed into a single

hearing for the court’s consideration on June 26, 2020, and heard together with the

motion for a preliminary injunction in the AUI v. SBA case. Also at the June 22 hearing,

the parties agreed that the SBA would reserve funds in the amount stated within the

complaint until the June 26 hearing.

The court held the hearings for entry of the preliminary injunctions as scheduled

on June 26. At the conclusion of the hearings, the court entered its oral ruling granting

preliminary injunctions in both cases and enjoining the SBA from enforcing its current

rule that bankruptcy debtors do not qualify for PPP loans. An order granting the motion

for preliminary injunction was entered that same day (ECF No. 23).

Between the hearings on the TRO and preliminary injunctions, the SBA filed its

Motion to Withdraw the Reference (Motion to Withdraw) (ECF No. 14) in this

proceeding, and a similar motion the AUI v. SBA proceeding. At the conclusion of the

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hearings for preliminary injunction, the court continued the Motions to Withdraw for

status conferences on Monday, July 6, 2020. At the status conferences the SBA informed

the plaintiffs and the court that it was considering appealing the preliminary injunctions.

The parties agreed to continue the status conferences to that Friday, July 10, 2020, to

better understand how the SBA wanted to proceed. At the continued status conference,

the SBA advised that it intended to both (1) appeal entry of the preliminary injunctions

and (2) move forward with the Motion for Withdrawal.

The adversary proceeding is part of a wave of challenges to the SBA’s “no

bankruptcy” rule adopted in administering the PPP being raised in courts throughout the

country. However, Body Renew commenced its adversary proceeding with less than two

weeks remaining for the PPP. This was the cause for the highly expedited consideration

of the motions for temporary and preliminary injunctive relief. All parties were unclear

what the expiration of the program on June 30, 2020, would mean for these actions.

After the program expired, however, it was extended to August 8, 2020.

On Friday, July 10, 2020, the SBA appealed entry of the preliminary injunction to

this court. Thus, the SBA seeks to have both the underlying adversary proceeding and an

appeal from that adversary proceeding heard in the same court. The SBA advised that if

the reference is stayed, it intends to request that the appeals be held in abeyance pending

resolution of the adversary proceeding at the trial level.

In light of the SBA’s intent to continue with the pending Motion for Withdrawal

and simultaneously appeal, at the continued July 10 status conference the court

confirmed the July 17, 2020 deadline for Body Renew’s opposition to the Motion to

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Withdraw, and set a deadline for the SBA’s filing of a reply. Also at the July 10 status

conference, bankruptcy counsel for Body Renew appeared and advised the court that

getting an expedited decision on the merits remains critical to its efforts to process its

PPP application as it faces “meaningful rent problems” as well as a rapidly-approaching

deadline to file its subchapter V chapter 11 plan of reorganization. After the SBA filed

its notice of appeal, Body Renew filed its Conditional Statement of Non-Opposition to

Defendants’ Motion for Withdrawal of Reference (ECF No. 35), informing the court that

it did not object to the withdrawal of reference so long as the withdrawal did not affect its

ability to enforce the preliminary injunction.

Discussion

The SBA argues that withdrawal of the reference is mandatory under 28 U.S.C.

§ 157(d), which provides: “The district court shall, on timely notice of a party, so

withdraw a proceeding if the court determines that resolution of the proceeding requires

consideration of both title 11 and other laws of the United States regulating organizations

or activities affecting interstate commerce.” In this instance, the request for withdrawal of

the reference is timely.

The SBA contends that withdrawal is mandatory because Body Renew’s claims

depend upon construction of the SBA’s rulemaking authority. It contends that removal is

required because the action calls for the court to interpret, rather than merely apply, a

statute other than the Bankruptcy Code. See Sec. Farms v. Int’l Bhd. of Teamsters,

Chauffeurs, Warehousemen & Helpers, 124 F.3d 999,(9th Cir. 1997); In re Tamalpais

Bancorp, 451 B.R. 6, 8-9 (N.D. Cal. 2011).

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The court notes several points. First, Body Renew’s actual challenge largely rests

in application of the Administrative Procedures Act, under well established precedent.

Thus, it appears that the court is merely applying the APA to the PPP. Second, in the

multitude of cases that have exploded from the SBA’s “no bankruptcy” rule, it has failed

to raise similar challenges. Given the exigent circumstances attendant to these

challenges, there is now a considerable number decisions on the subject, though there

remains a dearth of appellate decisions, presumably simply due to the timing of the cases

working their way through the process.1 Third, and finally, Body Renew also includes a

claim that the SBA’s administration of the PPP violates 11 U.S.C. § 525. This claim

arises from the Bankruptcy Code and does not raise similar concerns for mandatory

withdrawal.

While the court is skeptical whether this case must be withdrawn, it agrees that

withdrawal is in the best interests of the parties given the continuing time pressures. 28

U.S.C. § 157(d) also permits permissive withdrawal of the reference. Whatever the basis

for withdrawal of the reference, it is clear that it is in the best interests of the parties and

1 Between the hearings on the TRO and preliminary injuction, the Fifth Circuit rejected a

bankruptcy debtor’s challenge to the SBA’s “no bankruptcy” rule in Hidalgo County

Emergency Service Foundation v. Carranza, ––– F.3d. ––––, 2020 WL 3411190 (5th Cir.

June 22, 2020) (quoting Enplanar, Inc. v. Marsh, 11 F.3d 1284, 1290 n.6 (5th Cir. 1994))

[emphasis in original], based on its long standing precedent that “‘all injunctive relief

directed at the SBA is absolutely prohibited.’” The court is unaware of any similar

precedent in the Ninth Circuit. See generally California Cosmetology Coal. v. Riley, 110

F.3d 1454, 1457 (9th Cir. 1997)(permitting injuctive relief without discussion despite

similar anti-injunctive relief in the Higher Education Act, 20 U.S.C. § 1091b); Am. Ass’n

of Cosmetology Sch. v. Riley, 170 F.3d 1250, 1257 (9th Cir. 1999)(Rheinhardt, J.

dissenting)(“This court recently held that where the plaintiff alleges that the Secretary

has clearly exceeded his statutory authority in the execution of his duties, the court may

grant injunctive relief notwithstanding § 1082(a)(2).”).

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the courts.” The PPP loan that Body Renew seeks significantly affects its pending efforts

to reorganize under chapter 11 during a pandemic. Withdrawal of the reference will

eliminate costly time and attention to jurisdictional and procedural disputes that threaten

the bankruptcy court’s ability to provide meaningful relief to the litigants. This is further

complicated by the pending appeal of the preliminary injunction to this court, and the

possible duplication of efforts. Indeed, this appears to be the very reasons that Body

Renew has filed its non-opposition to the Motion to Withdraw.

The court has truncated its withdrawal analysis in light of Body Renew’s non-

opposition to the Motion to Withdraw, and in light of the paramount need for an

expeditious consideration of the merits.’ For these reasons, the bankruptcy court

respectfully recommends that the reference filed by the SBA (ECF No. 14) be withdrawn

so that the underlying litigation may be heard by the district court in a timely manner.

Dated this July 14, 2020.

By: _/s/ Gary Spraker

GARY SPRAKER

United States Bankruptcy Judge

Serve: Clerk of Court

T. Buford, Esq.

* The parties also dispute whether the bankruptcy court has the subject matter jurisdiction

and constitutional authority to enter final judgment on Body Renew’s claims.

* Even in matters where the bankruptcy court cannot enter final judgment, district courts

often delay withdrawal of the reference so a bankruptcy court may retain jurisdiction

over all pretrial matters, including summary judgment. See Catholic Bishop of N. Alaska

v. Continental Ins. Co., Adv. Case No. 08-90019-DMD, 2008 WL 8657847 (Bankr. D.

Alaska Sept. 16, 2008). Again, this case presents a unique situation where the

bankruptcy court’s decision on the motion for preliminary injunction may be viewed as

the conclusion of the pre-trial matters as Body Renew has stated an intention to convert

the preliminary injunction into a permanent injunction. See ECF No. 1, passim.

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D. Martin, Esq.

ECF Participants via NEF

Case Manager

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