Three Maine companies in bankruptcy are suing the U.S. Small Business Administration for denying them federal Paycheck Protection Program loans, saying the SBA’s policy against issuing the forgivable loans to companies in bankruptcy unfairly discriminates against them.

The owner of the Camden Harbour Inn and its high-end restaurant, Natalie’s, is one of three Maine companies suing the Small Business Administration. Photo courtesy of Camden Harbour Inn

The companies include the owner of a hotel and restaurant in Camden and two related companies in Cornville that belong to the state’s forest products industry. All three are in Chapter 11 bankruptcy, in which a company seeks protection from creditors while it restructures its debts.

The three lawsuits were filed on behalf of M.G. Transport, a trucking firm with four employees in Cornville, A.S. & B.C. Gould & Sons, a logging company with five employees in Cornville, and Breda LLC, which operates the Camden Harbour Inn, a hotel in Camden that has between 17 and 41 employees depending on the season. The hotel also includes a high-end restaurant called Natalie’s.

The trucking firm and logging company share some administrative and management services, according to the court filings.

The plaintiffs say there is nothing in the federal CARES Act, which created the emergency loan program, that prohibits companies in bankruptcy from receiving the loans, and that SBA Administrator Jovita Carranza simply adopted a discriminatory policy on her own. Carranza is named as a defendant in all three lawsuits.

“Based on the plain language of the application form and the (rules devised by the SBA), the administrator intended to and is discriminating against bankruptcy debtors by refusing to permit debtors an opportunity to participate in the PPP solely because a company is presently a debtor in a case under Title 11,” says the complaint filed by Breda.

The lawsuits, filed in federal court in Portland, allege that the SBA, which oversees the loan program, exceeded its authority by making bankruptcy status a determining factor in funding approval. Each plaintiff is seeking to bar the SBA from prohibiting businesses in bankruptcy from receiving the emergency loans, along with monetary damages for the respective loan amount each plaintiff was seeking.

The Payroll Protection Program was adopted to provide loans to small businesses to help them cover payroll and other costs during a period of shutdown or reduced sales caused by the coronavirus pandemic this spring. If companies that received funding use most of the money to cover payroll and other specific expenses, the loans can be converted to grants and do not have to be repaid.

According to the lawsuits, the CARES Act does not specify bankruptcy as a disqualifying criterion for the loan program, and therefore the SBA exceeded its authority in adopting such a policy.

Not only did the law not mention bankruptcy as a consideration for loan approval, the lawsuits say, it also specifies that underwriting considerations such as the creditworthiness and financial condition of a company would not be used in determining which loan applicants received funding.

M.G. Transport and A.S. & B.C. Gould filed for Chapter 11 bankruptcy protection on Feb. 25, and Breda filed on March 28.

The lawsuits, all filed by the same group of attorneys at the Bernstein Shur law firm in Portland, ask for an injunction ordering the SBA to reconsider applications without bankruptcy as a determining factor, and to also set aside money for the three Maine plaintiffs to make sure funding is still available for them under the program.

M.G. Transport had sought $32,000 from the program, A.S. & B.C. Gould had sought $55,000 and Breda had sought $222,777.

The program was approved by Congress as one of a series of bills designed to provide relief to businesses impacted by the pandemic, which led many states, including Maine, to order nonessential businesses to close temporarily. After the initial program quickly ran out of money, Congress passed another measure in April with $320 billion in additional funding for the program.

But critics have said the programs tie the hands of many businesses with strict rules on how the funds can be used. And some larger businesses were able to get funding under the program because of how their businesses were structured, although many returned the funding after public criticism.

Adam Prescott, the lead attorney who filed the three lawsuits, declined an interview request Wednesday and said his clients also would not comment. Emails and phone calls to the Maine district director of the SBA seeking an interview were not returned.

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