Nathaniel Peter Holzer,  Jordan, Holzer & Ortiz in Texas, and Michael I. Goldberg, Akerman in Fort Lauderdale. 

Chapter 11 debtors are challenging the Small Business Administration instead of dismissing their bankruptcy filings to qualify for the Paycheck Protection Program.

Texas attorney Nathaniel Peter Holzer, a partner at Jordan Holzer & Ortiz, represents Hidalgo County Emergency Service Foundation. He successfully challenged the U.S. Small Business Administration by filing an action in the U.S. Bankruptcy Court for the Southern District of Texas.

Holzer filed a complaint seeking a temporary restraining order and a preliminary injunction against the SBA, which prohibited borrowers from being in bankruptcy when seeking Paycheck Protection Program loans under the CARES Act.

But Holzer argued that this requirement does not appear in the CARES Act legislation.

The court agreed, entering a temporary restraining order Friday, and setting a hearing on the preliminary injunction two weeks later.

Other litigants are also raising challenges.

In the U.S. District Court for the District of Columbia, five attorneys from Ballard Spahr represent Payday Money Centers. The Ballard Spahr lawyers assert the payday lending company is barred from applying for a cash infusion under the Paycheck Protection Program. In the court filing, the lawyers quote from the legislation, which does not permit borrowers to be "financial businesses primarily engaged in the business of lending."

Attorneys not involved in the lawsuits say the SBA made the correct decision to restrict bankrupt companies from obtaining more money, and instead disburse the funds elsewhere.

For instance, Michael Goldberg, who is the chair of the fraud and recovery practice at Akerman in Fort Lauderdale, says there should not be an overall rule that if a company is in bankruptcy, it cannot borrow under the CARES Act loan program.

Instead, Goldberg says, it should depend on whether the economic shutdown resulting from the coronavirus and social distancing restrictions caused the company to file bankruptcy, or if the company previously had underlying issues prior to the pandemic.

"The congressional attempt by the loan package was to help companies devastated by COVID," Goldberg said. "If the company was already in a poor enough shape to go into bankruptcy, it goes against the purpose of the loan."

The Paycheck Protection Program provides $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis, according to the United States Department of the Treasury. Due to the demand, it has been increased by an additional $320 billion. The loans can be fully forgiven if the money is allocated to payroll or other delineated expenses.

But the litigant, Payday Money Centers, says if it does not get about $654,000 from the program, it would be forced to close a minimum of 70% of its business locations. Payday Money Centers says this closure would cause "an injury to society as a whole."

Meanwhile Hidalgo County Emergency Service argued in part the services it provides are in the public interest. It provides patients with transportation services in its ambulances and plane to hospitals throughout the county.

While Judge David R. Jones of the U.S. Bankruptcy Court for the Southern District of Texas said his ruling only applies to Hidalgo County Emergency Service, attorney Holzer expects other attorneys to look at the argument he made in this case.

Holzer's argued that some requirements are waived under 7(a) of the Small Business Act, and that there is no statutory provision in the CARES Act and the Small Business Act that prohibits extending the Paycheck Protection Loans to a debtor in chapter 11 of the Bankruptcy Code.

"Once you win all these things, other lawyers all over the country are looking at it and looking at the arguments," Holzer said. "Even if it's not binding, they will take the arguments and try to convince their judges in other parts of the country that this is the right answer."