Some Legal Clarity on PPP Loans?

With uncertainty around the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) and promised extra scrutiny by the Administration, some businesses are considering returning PPP funds they received. While AFSA does not offer legal advice, a recent decision out of a U.S. District Court in Michigan may shed some light on whether it’s necessary to return PPP funding.

The court issued a preliminary injunction barring the SBA from enforcing a rule to exclude businesses that present live performances or sell products of a “prurient sexual nature” from loans under the PPP. While that is obviously not the business that AFSA members are engaged in, the judge also said the SBA cannot exclude other businesses, i.e. banks, because Congress intended to support all qualified small businesses, including those it might have “disfavored” before the pandemic.

The ruling can be reviewed here. The district court noted that, “The COVID-19 pandemic has decimated the country’s economy, and the PPP is an unprecedented effort to undo that financial ruin. More importantly, the PPP is an effort to protect American workers … and Congress could rationally have concluded that those workers need protection no matter the line of business in which they work.”

The ruling goes on:  "[T]he text of the PPP makes clear that every business concern meeting the statutory criteria is eligible for a PPP loan during the covered period.  Congress identified in the PPP only two criteria that a business concern must satisfy in order to qualify for loan guarantee eligibility: (1) during the covered period (2) it must have less than 500 employees or less than the size standard in number of employees established by the Administration for the industry in which the business operates.” U.S. District Judge Matthew Leitman wrote, adding, “Simply put, Congress did not pick winners and losers in the PPP…. It would ordinarily be absurd to conclude that Congress meant to provide financial assistance to, among others, certain sexually oriented businesses and private clubs that discriminate. But these are no ordinary times, and the PPP is no ordinary legislation.”

The decision may be appealed, but if it is not, it could provide the clarity that has been lacking in the SBA’s interim rules and FAQs. In addition, we are awaiting a decision out of another U.S. District Court in California. Payday Loan LLC, which engages in lending and check cashing in 22 stores in California, sued the SBA on April 25 after its request for a $644,000 forgivable loan was denied. The application was rejected on the grounds that PPP funds can’t be distributed to companies that profit mostly from making loans. A decision is expected soon.

AFSA Staff is pressing the SBA to abandon the May 14 fund return deadline, or extend it, in light of the ongoing litigation and legislative efforts.