PPP Loan Forgiveness: SBA Issues More Guidance

Notable developments involving eligibility under the Paycheck Protection Program and the PPP’s loan forgiveness process have occurred in recent days. First, litigation has progressed in federal court over whether the interim final rules concerning eligibility for a PPP loan are lawful. Second, the Small Business Administration (SBA) and the Treasury Department have fulfilled their promise to provide additional guidance to companies preparing for the PPP loan forgiveness process.

Litigation

On May 11, 2020, a federal court in Michigan issued a preliminary injunction against the SBA regarding several rejected PPP loan applications.[1] Here, several companies failed to obtain PPP loans from lenders on the basis that they fell within a long-standing ineligibility rule promulgated by the SBA in 1996.[2] While the companies ordinarily would have been ineligible for an SBA loan pursuant to that rule, they filed a lawsuit contending that the CARES Act did not include the same limitations in the PPP. Rather, the only eligibility restrictions for obtaining a PPP loan concern a company’s size.[3] The court agreed with the companies, concluding that the SBA’s creation of additional limitations on PPP loan eligibility within its interim final rules[4] was invalid.

While the Michigan case involves a fairly specific set of facts, the decision exemplifies that courts may be willing to flexibly interpret the PPP’s provisions given the current state of the nation.[5] For example, the SBA’s previous statement – that companies with access to capital markets and liquidity are likely unable to show the necessity for a PPP loan – is potentially vulnerable to a similar legal challenge, because the CARES Act simply did not exclude companies meeting that description from lawfully obtaining a PPP loan. Accordingly, further litigation concerning the PPP’s provisions and scope is all but certain and should be monitored closely.

Additional Guidance on the Necessity Certification

On May 13, 2020, Treasury updated its PPP FAQs with preliminary guidance on the loan forgiveness process and how companies can comply with mandatory audits.[6] First, in Question 46, the $2 million cutoff for loans subject to audit was solidified, with the SBA stating that loans under $2 million will be presumed to contain the requisite good faith certification that the loan was necessary. Describing the cutoff as a “safe harbor,” the SBA based its decision on the assumption that companies that sought smaller loans are typically unable to access liquidity sources, and thus, likely to have a valid, pressing need for financing. As a practical matter, the SBA stated that its hope is that these companies will stimulate the economy by resuming their business operations as opposed to responding to an audit.[7]

Regarding companies that received loans above $2 million, which will be subject to audit, the SBA stated that if it concludes that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will give the borrower an opportunity to repay the PPP loan, and it will notify the lender that the borrower is ineligible for loan forgiveness. The SBA further stated that if the borrower repays the PPP loan, the SBA “will not pursue administrative enforcement or referrals to other agencies…”.[8] The SBA’s FAQ, however, stops short of saying that all borrowers that return money will be absolved of liability (e.g., borrowers that have been determined to have not acted in good faith). Accordingly, PPP borrowers are encouraged to continue to examine their need determination and to document the basis for their determination in a contemporaneous document as advised in Arent Fox’s initial client alert on Question 31 found here.

Additionally, in Question 47, the SBA extended the “safe harbor” filing deadline from May 14, 2020, to May 18, 2020, in order to provide borrowers adequate time to implement the updated guidance in Question 46.[9]

Conclusion

This recent guidance provides some helpful breathing room for companies, creating the opportunity for a company to rectify an adverse finding before an audit potentially morphs into a costly and time-consuming investigation. But many questions remain unanswered and additional details must be addressed regarding the loan forgiveness process. We expect the SBA and Treasury to release additional guidance in the coming days and will continue to monitor this ever-evolving landscape.

[1] DV Diamond Club of Flint, LLC v. United States Small Business Admin., No. 20-cv-10899, *2 (E.D. Mich. May 11, 2020).

[2] See 13 C.F.R. § 120.110 (stating that entities including banks, gambling establishments, and private clubs are ineligible for SBA loans).

[3] See 15 U.S.C. § 636(a)(36)(D)(i) (providing that a business is eligible for a PPP loan so long as it either employs fewer than 500 employees or is the standard size typical for its industry).

[4] See 85 Fed. Reg. 20812 (adopting 13 C.F.R. § 120.110).

[5] See DV Diamond, at *353 (noting that “the PPP is an unprecedented effort to undo [the country’s] financial ruin” and “is an effort to protect American workers”).

[6] See FAQ, Question 46, available here.

[7] See id., Question 46 (stating that “the safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees”).

[8] Id.

[9] Id., Question 47.