The federal government accused Hidalgo County EMS of fraud on Saturday, claiming the ambulance company obtained a nearly $2.6 million Paycheck Protection Program loan by making a false statement during the application process.

In May, when Hidalgo County EMS was locked in a legal battle with the U.S. Small Business Administration over whether or not businesses in bankruptcy had been improperly excluded from the Paycheck Protection Program, the ambulance company applied for a loan.

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 application, though, another judge had stayed the injunction.

In a motion filed Saturday, the U.S. Attorney’s Office for the Southern District of Texas claimed Hidalgo County EMS had committed fraud by submitting the loan application three days after the injunction had been stayed.

“People can dispute legal positions, factual assertions, the merits of claims, or even the wisdom of policy decisions—but there is no room to dispute that dishonesty by a debtor-in-possession threatens the integrity of the bankruptcy process,” according to the motion, which refers to Hidalgo County EMS as the debtor-in-possession.

Channel 5 News asked Hidalgo County EMS about the motion on Saturday. The company responded Monday afternoon with a statement.

“Hidalgo County EMS denies the government’s assertions of any dishonesty,” according to a statement released by Nathaniel Peter Holzer, an attorney who represents the ambulance company. “The government’s motion is clearly a vehicle 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 dispute is handled may dictate whether or not Hidalgo County EMS survives bankruptcy.

Hidalgo County EMS — a privately owned ambulance company that responds to 911 calls in Edinburg, Pharr, parts of rural Hidalgo County, Jim Hogg County, Jim Wells County, Peñitas, Sullivan City and Taft — filed for Chapter 11 bankruptcy last year.

Chapter 11 bankruptcy protects businesses from creditors while they attempt to restructure debt. During the restructuring process, the coronavirus pandemic struck South Texas.

Faced with a dramatic drop-off in 911 calls, Hidalgo County EMS wanted to apply for a Paycheck Protection Program loan. 

The Small Business Administration, however, excluded businesses in bankruptcy from the program with a long, complicated question: “Is the Business or any owner presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?”

Any business that answered “yes” would not receive a loan.

Hidalgo County EMS filed a lawsuit against the Small Business Administration, claiming the question illegally discriminated against businesses in bankruptcy.

David R. Jones, the chief bankruptcy judge for the Southern District of Texas, sided with Hidalgo County EMS. On May 8, he signed a preliminary injunction against the Small Business Administration, which allowed Hidalgo County EMS to submit a modified loan application.

Hidalgo County EMS, though, couldn’t find a local bank willing to accept the modified loan application. While the ambulance company searched for a bank, the Small Business Administration appealed.

U.S. District Judge David S. Morales stayed the preliminary injunction on May 11, which meant Hidalgo County EMS couldn’t submit a modified loan application.

On May 14, three days after the preliminary injunction had been stayed, Hidalgo County EMS submitted a loan application signed by owner Kenneth B. Ponce. When asked the question about bankruptcy, Hidalgo County EMS answered “No.”

“On that date, the Debtor could not rely on this Court’s preliminary injunction without violating the District Court’s order staying the injunction. It also could not answer the PPP loan application truthfully without risking denial of the application,” according to the motion. “Faced with these two problems, the Debtor-in-Possession under the control of Mr. Ponce chose to be dishonest.”

Hinton, Oklahoma-based Legacy Bank accepted the loan application. Hidalgo County EMS received $2,559,600.

The Small Business Administration won the appeal in June, when the 5th U.S. Circuit Court of Appeals determined the federal bankruptcy judge had overstepped his authority by issuing the preliminary injunction.

That left Hidalgo County EMS in an awkward position: It lost the lawsuit, but received the Paycheck Protection Program loan anyway.

In the motion filed Saturday, the U.S. Attorney’s Office accused Hidalgo County EMS of fraud.

“The debtor-in-possession made a material misrepresentation in order to obtain a PPP loan,” according to the motion. “That false statement may result in a $2.5 million administrative claim against the bankruptcy estate, which may jeopardize reorganization and the jobs of those employed by the Debtor.”

The motion asks Jones, the bankruptcy judge, to appoint a Chapter 11 trustee to supervise Hidalgo County EMS.

“The United States requests that the Court appoint a chapter 11 trustee to protect the bankruptcy process while still allowing the bankruptcy estate to pursue whatever claims it may or may not have—and hopefully confirm a plan of reorganization that will preserve jobs,” according to the motion.

Appointment of a Chapter 11 trustee is “a rarity,” according to a guide to bankruptcy published by the Administrative Office of the U.S. Courts. Reasons a judge may appoint a trustee include “fraud, dishonesty, incompetence, or gross mismanagement, or if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate.”

The Small Business Administration could also throw a wrench in the reorganization process by refusing to forgive the loan, which would saddle Hidalgo County EMS with a massive new debt.

“If SBA decides that the Debtor’s misrepresentation makes it ineligible for loan forgiveness, then Legacy Bank will have a large unsecured claim against the Debtor,” according to the motion. “If Legacy Bank demands payment of this loan in full on the effective date of a plan, as it is entitled to do under 11 U.S.C. § 1129(a)(9)(A), then this loan may prevent the Debtor from reorganizing.”