Bankrupt hospitals sue federal government over paycheck protection program loans

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The small, bankrupt hospitals are suing the Small Business Administration, arguing that it is illegal for the federal government to deny them loans under the Paycheck Protection Program.

Why is this important: Allowing bankrupt hospitals to access P3 loans could keep their doors open and force the federal government to reverse its position and allow other bankrupt businesses to obtain P3 loans.

Driving the news: Faith Community Health System, a small rural hospital in Texas that filed for bankruptcy in February, sued the SBA on Thursday.

  • The hospital wants to apply for a $ 2.4 million PPP loan to pay staff and stay open while it goes bankrupt and deals with the coronavirus pandemic.
  • However, the SBA says bankrupt companies will not be approved for the bailout money because of their “high risk.”
  • Faith Community argues that the government agency does not have the power to exclude bankrupt companies from PPP funding because the law does not specify these eligibility conditions.

The big picture: The courts are starting to side with the hospitals.

  • A Maine bankruptcy judge said the funding was an “aid allowance necessitated by a public health crisis,” and that two hospitals that sued the federal government are eligible for P3 loans.
  • A separate bankrupt hospital in Vermont is also expected to be eligible for PPP funds, a judge said this week.

The bottom line: Rural hospitals have been in dire straits for years, and for those on the brink or on the verge of bankruptcy, they may be eligible for this bailout funding despite SBA exclusions.

  • But bankrupt companies could still find themselves in a bind if the government tries to “run out of time” on these kinds of legal battles while waiting for the PPP funding pool to dry up.

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