May 1, 2020

 

By David Warner,

One of the key provisions of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the Paycheck Protection Program (PPP). As explained in a prior Centre Blog Post the cornerstone of the PPP is a loan program under which small businesses can borrow the equivalent of two months’ worth of payroll costs. Most importantly, the PPP loan will be forgiven if used for appropriate purposes – i.e., 75% used for payroll costs and 25% available to pay rent and utilities.

It would be a massive understatement to refer to the PPP as merely “popular” given the firehose of applications received and the fact that Congress had to add an additional $310 billion to the initial funding of $349 billion. As of April 14, the Small Business Administration (SBA) indicated that a total of 1,680,000 loans for an aggregate total of $268,000,000,000 had been approved.

But behind the rush for effectively “free money,” always lurked the specter of abuse and the twin hammers of the federal False Claims Act and False Statements Act. And recently, the federal government has indicated that scrutiny regarding PPP borrowers is coming in the near future.

From a compliance perspective, the key issue under PPP is the borrower’s certification that the loan was actually needed. In that regard, the PPP required a prospective borrower to certify that it has “current economic uncertainty that makes this loan request necessary to support the ongoing operations of the applicant.”

There was no guidance as to the contours of “economic uncertainty” or “necessary” when the PPP commenced. On April 23, 2020 – twenty (20) days after applications for PPP loans could first be submitted – the SBA and U.S. Department of Treasury finally addressed the issue of “need”. Specifically Question
#31 of the Agencies’ Frequently Asked Questions (FAQ) states in relevant part:

Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

(Emphasis added.) While the FAQ’s example was a large, publicly traded company, on April 28, 2020 Treasury issued FAQ #37 which provides:

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

In other words, SBA and Treasury have now clarified that all companies with the ability to access other sources of money sufficient for their operations likely do not meet the standard of necessity required for a PPP loan. Underscoring the regulatory scrutiny on the horizon, the same day FAQ #37 was released, Secretary of Treasury Steven Mnuchin announced that the SBA intended to conduct a “full review” of every PPP loan of $2,000,000 or more to confirm that borrowers of such amounts met program requirements before the loan would be forgiven.

Perhaps in recognition that more than 1.6 million loans had issued before the standard of necessity was established, the current FAQ also provides that the government will deem a borrower’s certification to have been made in “good faith” if two criteria are met. First, the borrower must have applied for loan before April 23, 2020; AND, the borrower must repay the loan in full by May 7, 2020.

Unfortunately, it is unlikely that SBA or Treasury will further refine the concepts of “adequate sources of liquidity” or “significantly detrimental to the business” in the next seven days. As a practical matter, the May 7 date provides an effective off-ramp for PPP borrowers that may have been “coloring a bit outside the lines” with their declaration of need and those who simply favored “free money” over other viable financing options available to them.

Given the potential for civil or criminal liability for false certifications, PPP borrowers who believe they may be on the horns of this particular dilemma are well advised to seek counsel.

 

About the Author:

David Warner | Centre Law & Consulting David Warner
Partner

David Warner is a seasoned legal counselor with extensive experience in the resolution and litigation of complex employment and business disputes. His practice is focused on the government contractor, nonprofit, and hospitality industries. David leads Centre’s audit, investigation, and litigation practices.

 

 

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