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As discussed in our blog post dated May 4, 2020, individuals and businesses that received PPP loans and did not qualify by having the loan be “necessary to support the ongoing operations of the business” now have until May 14 to return the monies in order to receive full amnesty for all civil and criminal exposures associated therewith.
It is noteworthy that at least two separate lawsuits have been filed which seek to have this “necessity” requirement not apply in the manner that has been described by the SBA, as discussed in the above-referenced blog post.
In the case of Hidalgo County Emergency Service Foundation v. Jovita Carranza, in Her Capacity as Administrator for the U.S. Small Business Association, the Bankruptcy Court for the Southern District of Texas issued a Temporary Restraining Order, finding that the plaintiff had shown a substantial likelihood of success on the merits on both of its claims. The first claim is that the SBA has exceeded its statutory authority, and the court did not go into detail as to how. The second claim is that the SBA imposed requirement that a business or individual applying for or receiving the loan should not be in bankruptcy will not apply, because this directly violates the Federal Bankruptcy Code provision which prevents governmental agencies from imposing separate requirements on individuals or businesses in bankruptcy.
Specifically, Bankruptcy Code Section 525(a) reads as follows:
(a) Except as provided in the Perishable Agricultural Commodities Act, 1930, the Packers and Stockyards Act, 1921, and section 1 of the Act entitled “An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes,” approved July 12, 1943, a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
The second case, Zumasys, Inc. et al v. United States Small Business Administration et al, was filed to request that the U.S. District Court for the Central District of California enjoin the SBA from denying loans to individuals or businesses who do not have the need for additional capital.
The complaint, which can be found by clicking here, does a good job of describing the limited authority given to the SBA under the CARES Act, and that the CARES Act specifically prevents the SBA from following Section 3(h) of the Small Business Act, which requires all non-CARES Act SBA loans to be given only if the borrower can prove that they are not able to get credit elsewhere.
The complaint highlights the following:
The “credit elsewhere” restriction imposed by the Small Business Act is specifically made inapplicable to PPP loans. The CARES Act specifically provides “[d]uring the covered period, the requirement that a small business concern is unable to obtain credit elsewhere as defined in section 3(h), shall not apply to a covered loan.” 15 U.S.C. § 636(a)(36)(I) (emphasis added).
The fact that Congress deleted the “cannot obtain credit elsewhere” requirement and did not give the SBA the authority to issue legislative regulations is evidence that Congress did not intend for the SBA to restrict PPP loans from being available to large or small companies that have availability of capital, although this continues to be a murky area.
While we hope that there will be further guidance soon, there is a good chance that there will be few, if any, additional tea leaves for businesses and some proprietors who have to decide whether to risk running out of money to stay open in the coming weeks or months during the worst economic crisis seen since the Great Depression, or to risk possible fines and penalties, or even criminal prosecution for trying in good faith to save their businesses and the jobs of those who work for them.
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