A federal bankruptcy judge had signed an injunction against the Small Business Administration, which allowed Hidalgo County EMS to apply. By the time Hidalgo County EMS actually submitted the request, another judge had stayed the injunction.
In a petition filed on Saturday, the South Texas District Attorney’s Office claimed that Hidalgo County EMS committed fraud by submitting the loan application three days after the injunction was stayed.
“People can challenge legal positions, factual assertions, the merits of claims, or even the wisdom of political decisions, but there is no question that the dishonesty of a debtor in possession threatens the integrity of the bankruptcy process, ”according to the petition, which refers to Hidalgo County EMS as a debtor in possession.
Channel 5 News asked Hidalgo County EMS on Saturday about the motion. The company responded on Monday afternoon with a statement.
“Hidalgo County EMS denies the government’s claims of any dishonesty,” according to a statement issued by Nathaniel Peter Holzer, a lawyer who represents the ambulance company. “The government motion is clearly a way for the government to punish the debtor for having the temerity to sue the Small Business Administration. Any further response to these allegations will be directed to the government in court. ”
How the litigation is handled can dictate whether or not Hidalgo County EMS survives bankruptcy.
Hidalgo County EMS – a private ambulance company that answers 911 calls in Edinburg, Pharr, parts of rural Hidalgo County, Jim Hogg County, Jim Wells County, Peñitas, Sullivan City and Taft – has filed for bankruptcy l ‘last year.
Chapter 11 bankruptcy protects companies from creditors when they try to restructure debt. During the restructuring process, the coronavirus pandemic hit South Texas.
Faced with a dramatic drop in 911 calls, Hidalgo County EMS wanted to apply for a Paycheck Protection Program loan.
The Small Business Administration, however, excluded bankrupt businesses from the program with a long and complicated question: “Is the business or owner currently suspended, kicked out, offered for exclusion, declared ineligible, voluntarily excluded from participating in this transaction by a federal government? department or agency, or currently involved in bankruptcy? ”
Any business that answered “yes” would not receive a loan.
Hidalgo County EMS filed a lawsuit against the Small Business Administration, claiming the issue was illegally discriminated against against bankrupt businesses.
David R. Jones, the chief bankruptcy judge for the Southern District of Texas, sided with the Hidalgo County EMS. On May 8, he signed a preliminary injunction against the Small Business Administration, which allowed Hidalgo County EMS to submit an amended loan application.
However, Hidalgo County EMS could not find a local bank willing to accept the amended loan application. As the ambulance company searched for a bank, the Small Business Administration appealed.
U.S. District Judge David S. Morales suspended the preliminary injunction on May 11, which prevented Hidalgo County EMS from submitting an amended loan application.
On May 14, three days after the preliminary injunction was suspended, Hidalgo County EMS submitted a loan application signed by owner Kenneth B. Ponce. When asked about bankruptcy, Hidalgo County EMS answered “No”.
“On that date, the debtor could not invoke the preliminary injunction of this Court without violating the order of the district court staying the injunction. He also could not honestly respond to the PPP loan request without risking rejection of the request, ”according to the petition. “Faced with these two problems, the debtor in possession under the control of Mr. Ponce chose to be dishonest.
Legacy Bank, based in Hinton, Oklahoma, accepted the loan request. The Hidalgo County EMS service received $ 2,559,600.
The Small Business Administration won the appeal in June, when the U.S. 5th Circuit Court of Appeals ruled that the federal bankruptcy judge had exceeded his authority by issuing a preliminary injunction.
This left Hidalgo County EMS in a sticky position: it lost the lawsuit, but still received the paycheck protection program loan.
In the petition filed on Saturday, the US attorney’s office charged Hidalgo County EMS with fraud.
“The debtor in possession made a material misrepresentation in order to obtain a PPP loan,” according to the petition. “This misrepresentation may result in an administrative claim of $ 2.5 million against the assets of the bankruptcy, which may jeopardize the reorganization and the jobs of those employed by the debtor.”
The petition asks Jones, the bankruptcy judge, to appoint a Chapter 11 trustee to oversee Hidalgo County’s EMS.
“The United States requests that the Court appoint a Chapter 11 trustee to protect the bankruptcy process while allowing the bankruptcy estate to pursue any claims it may or may not have – and hopefully uphold a reorganization plan that will preserve jobs, ”according to the movement.
The appointment of a Chapter 11 trustee is “a rarity,” according to a guide to bankruptcy published by the Administrative Office of the United States Courts. Reasons why a judge may appoint a trustee include “fraud, dishonesty, incompetence or gross mismanagement, or whether such an appointment is in the best interests of creditors, equity holders and others. interests of the estate ”.
The Small Business Administration could also throw a wrench into the reorganization process by refusing to cancel the loan, which would burden Hidalgo EMS County with massive new debt.
“If the SBA decides that the debtor’s misrepresentation renders it ineligible for loan cancellation, then Legacy Bank will have a significant unsecured claim against the debtor,” according to the motion. “If Legacy Bank requires payment in full for this loan on the effective date of a plan, as it is entitled to do under 11 USC § 1129 (a) (9) (A), then this loan can prevent the debtor from reorganizing. “