Bankrupt dioceses sue SBA for payroll loan access

Washington, D.C. Newsroom, Apr 22, 2020 / 04:30 pm (CNA).- Two Catholic dioceses have filed suit against the Small Business Administration (SBA), claiming they were wrongfully denied access to emergency loans during the pandemic because of their bankruptcy status.

The New York dioceses of Rochester and Buffalo said they “will suffer immediate and irreparable harm” from being disqualified from emergency loans under the Paycheck Protection Program (PPP), in a lawsuit filed in federal court on April 15.

The $349 billion in emergency loans were part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Trump on March 27.

The bill provided, among other things, short-term relief for small businesses and certain non-profits affected by the disruptions from the coronavirus (COVID-19) pandemic. The $349 billion in relief under the CARES Act included loans that become grants if recipient employers retain their current workforce and 75% or more of the loan is used for payroll.

An SBA rule, however, stipulated that the funds would not go to bankruptcy debtors. Both the dioceses of Rochester and Buffalo have filed for bankruptcy in the past several months, after being named in hundreds of clergy sex abuse lawsuits filed under New York’ Child Victims Protection Act.

The two dioceses sued in federal court, saying that the PPP loan funding was running out while they were being ruled ineligible for the critical emergency loans. On April 16, the SBA said it would not be accepting any more PPP loan applications.

Reached by email on Wednesday, the diocese of Rochester told CNA that it declined to comment on the lawsuit “Out of respect for the court process.” A spokeswoman for the Small Business Administration said that “We do not comment on pending litigation.”

Other dioceses and archdioceses, including St. Cloud and Winona-Rochester in Minnesota, Harrisburg in Pennsylvania, and Santa Fe in New Mexico, have either announced they would declare bankruptcy or have started the bankruptcy process.

The diocese of St. Cloud “has applied for a PPP loan” and is “currently not in bankruptcy,” communications director Joe Towalski told CNA on Wednesday, as its discussions with insurance companies and claimants’ attorneys are ongoing “to reach a consensual agreement on a plan before filing.”

In Winona-Rochester, the diocese “remains in Chapter 11 bankruptcy proceedings, and has therefore not applied for PPP loans,” communications director Matthew Willkom told CNA.

As the diocese of Harrisburg already filed for bankruptcy in February, it did not apply for a PPP loan, the diocese’s executive director of public relations Rachel Bryson told CNA on Wednesday. However, parishes, Catholic schools, Catholic Charities, and Harrisburg Catholic Administrative Services did apply for loans as they are separate lega entities from the diocese, she said, and several had already received funding.

The dioceses of Buffalo and Rochester allege in their lawsuit that the SBA implemented the PPP relief program “in a manner that unlawfully excludes debtors in bankruptcy,” violating the bankruptcy code by doing so. Furthermore, they said they “have been financially affected by the COVID-19 pandemic in ways that could not have been foreseen,” due to a precipitous drop in revenue from parishes whose donations dried up because public Masses were cancelled.

Without a PPP loan, they argue, they “will be forced to lay off or furlough essential employees,” which in turn could permanently affect their bankruptcy estates and the Chapter 11 process.

By late March, many parishes and dioceses were reporting a sudden drop in donations as public Masses were curtailed by bishops, and some diocesan and parish employees had already begun to be laid off or furloughed.

On March 19, the Buffalo diocese said it would be “accelerating” its previously-planned reorganization process for its Catholic Center, eliminating 21 positions and moving three more positions from full-time to part-time.

The dioceses announced they would be filing for bankruptcy after facing hundreds of sex abuse lawsuits in New York courts, starting in August.

New York’s Child Victims Act created a one-year “lookback” window, beginning in August, to allow abuse victims to file lawsuits after their statute of limitations had expired.

One lawsuit filed on August 14 against the Buffalo diocese and other Catholic entities cited federal anti-racketeering laws, or “RICO” statutes, and alleged “a pattern of racketeering activity” that enabled and covered up clerical sexual abuse.

In September of 2019, the Rochester diocese filed for bankruptcy, and on February 28, the diocese of Buffalo announced that it was filing for Chapter 11 reorganization after being the subject of more than 200 abuse lawsuits filed.