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Judge rules Springfield Hospital can apply for SBA loan

Springfield Hospital
Springfield Hospital in June 2019. Photo by Mike Dougherty/VTDigger

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After Springfield Hospital was told it couldn’t get a Small Business Administration loan, a judge ruled Monday that the organization can apply for the federal funds despite bankruptcy proceedings.

U.S. Bankruptcy Court Judge Colleen Brown granted a temporary restraining order on Monday, prohibiting any lender from denying Springfield Medical Care Systems a loan because of its bankruptcy status. 

The hospital is seeking about $3 million through the Paycheck Protection Program, which allows small businesses to pay employees during the pandemic.  

Springfield Hospital CEO Josh Dufrense applied for an SBA loan through Mascoma Bank, but was told the SBA’s office was denying funds to bankrupt institutions. 

The suit against the SBA was filed by Andrew Helman, a Maine-based attorney who represents the hospital. 

Helman said the inability to obtain PPP funds could cause “immediate and irreparable harm” to the organization, forcing the hospital to liquidate and close by early June, according to the lawsuit. 

Springfield, like other hospitals, is facing severe revenue shortfalls due to the pandemic, which has forced delays in elective and outpatient procedures.  

Springfield Hospital Interim CEO Mike Halstead said by phone Wednesday that outpatient revenue is down about 60%.

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“Visits to the emergency room are about half of what we typically see,” he said.

Halstead said 23 surgeries were scheduled this week afer Gov. Phil Scott announced that elective procedures could gradually resume starting Monday. Despite the lifted mandate, Halstead anticipated future revenue shortfalls with people opting to stay home instead of going to doctor visits.

“It’s hard to tell how people will react,” Haltstead said.

The organization laid off or furloughed about 40 employees due to the Covid-19 pandemic. Halstead said those employees would be rehired if the hospital receives PPP funding.

Springfield Hospital was one of at least a dozen bankrupt organizations across the country that were denied loans, the Wall Street journal reported last month.

The denials was due in part to an SBA rule that says if the debtor is in a bankruptcy proceeding, the applicant is ineligible for a loan. Small Business Loan administrator Jovita Carranza, who was named in the suit, said “providing loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans,” according to court documents. 

The CARES Act was signed into law on March 27, bringing with it stimulus funds, including the PPP program, to help businesses make it through the Covid-19 pandemic. 

Hospitals and various companies have argued in court documents that though the PPP program is called a “loan,” the funds are technically grants because there are no repayment obligations if 75% of the funds are used for payroll and wage expenses. The SBA, however, argues in court documents that the PPP is still a loan and that a section of Bankruptcy Code, which says institutions facing bankruptcy are still eligible for federal grants, doesn’t apply.

“It is only at a later date that all or part of the loan would become forgivable,” officials from the United States Attorney’s office said in court documents. “No decision on whether to forgive these loans will be made until there is a subsequent determination that the loan recipient complied with PPP requirements to make all or part of the loan forgivable.” 

Sens. Bernie Sanders, I-Vt., and Patrick Leahy, D-Vt., and Rep. Peter Welch, D-Vt., wrote a letter to the Small Business Administration April 24 arguing that the loan eligibility criteria didn’t exclude entities undergoing Chapter 11 bankruptcy.

“If Vermont were to lose any of our critical access hospitals during this uncertain time, it would have a devastating effect on the state’s COVID response and rural economy,” they said. 

The American Hospital Association also wrote a letter to federal officials April 2. 

“These organizations are the backbone of the health care and workforce infrastructure in many communities, and the Paycheck Protection Program could be the difference between solvency and insolvency,” the association said.

Two rural hospitals in Maine facing bankruptcy —  Penobscot Valley Hospital and Calais Regional Hospital — were awarded similar restraining orders by a Maine judge last week.

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Halstead expected it would take at least a week to hear if the hospital’s application for PPP funds was accepted and another month to get the funds.

“(The application) can still  be denied, but it can’t be denied because we’re in bankruptcy,” he said.

Halstead said the hospital will be sustainable for the foreseeable future with the help of a $1.3 million loan from the state. On Tuesday the hospital also received $4 million in CARES Act funds, which is part of a larger pool of money earmarked for rural hospitals.

“That $4 million helps us continue our operations if we don’t get the PPP loan,” Halstead said.

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