Media Center

News Publications Articles Videos
Paycheck Protection Loan Amnesty Program Ends Soon – May 7 – Should You Return Your Loan?
May 04, 2020


All information in this COVID-19 Response Resource issue is effective as of May 4, 2020.

  • Paycheck Protection Program (PPP) loan forgiveness is not automatic. In addition, borrowers who misuse the PPP program may be subject to qui tam (whistleblower) actions potentially giving rise to treble (i.e., triple) damages and other government enforcement actions.
  • The SBA is allowing borrowers who have received PPP loan proceeds to reconsider their applications and certifications and repay their loan by May 7, 2020, no questions asked.
  • This alert identifies three basic questions you should be asking in deciding whether to return a PPP loan under the amnesty program.

Background

The CARES Act created the Paycheck Protection Program (PPP) lending program under Section 7(a) of the Small Business Act with a direct incentive (forgiveness) for participating businesses to keep their workers on their payroll. Businesses rushed to submit loan applications and be first in line, with many applications submitted to lenders before the SBA first began issuing guidance on the PPP program. That rush resulted in over 1.6 million loans being made with some of those loans being made to several well-known public companies including Shake Shack and the Los Angeles Lakers.

The disclosure that PPP loans had been made to several seemingly financially capable businesses resulted in considerable backlash from the media and public and is drawing a regulatory response. That regulatory response is now known to have taken a number of forms including the U.S. Small Business Administration (SBA) updating its “Frequently Asked Questions” (FAQs) document on April 23, 2020 to include FAQ 31 and an announcement that all loans in excess of $2 million will be audited before they are forgiven.

FAQ 31 focuses on the certification that each PPP borrower makes in its application for a PPP that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” and explains that, when making this certification, all borrowers must take “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.”

FAQ 31 also announces an amnesty program to the effect that “any borrower that applied for a PPP loan [prior to April 23] and repays the loan in full by May 7, 2020 will be deemed to have [complied with the PPP Loan Program].”

PPP loans are government contracts with significant strings attached. In addition to the three new law enforcement and oversight bodies created by the CARES Act and the SBA’s announced intention to audit certain requests for forgiveness, a borrower’s PPP loan application can give rise to liability under the U.S. False Claims Act (FCA).

The FCA authorizes the U.S. government, and private whistleblowers (often disgruntled employees), to bring lawsuits seeking treble damages, and the U.S. government to impose criminal liability, based on false or fraudulent statements made to the U.S. government: a PPP loan application and the certification of necessity included therein, is a statement for purposes of the FCA. Importantly, the FCA does not require proof of intent to make a false or fraudulent statement, instead, civil or criminal liability can result from a finding of deliberate ignorance or recklessness disregard of the truth or falsity of the information provided to the government. This standard is relatively low and imposes a real risk of civil or even criminal liability for companies who are reckless or willfully blind as to whether they are making a false or fraudulent statement.

Now is the time for PPP borrowers to reevaluate their participation in the PPP lending program in view of, among other considerations: (i) these recent regulatory developments, (ii) possible impacts, especially in view of the materiality of the size of the PPP loan, to a borrower’s brand and reputation should their participation become public knowledge and be misunderstood and (iii) the potential for expensive and damaging government investigation or litigation under the FCA. If your business is one of the fortunate few that hasn’t yet experienced significant adverse impact from the current economic uncertainty relative to its available financial resources, you may want to consider joining Shake Shack, the Los Angeles Lakers and other companies in returning your PPP Loan. Whether your organization’s situation is clear that it should return its PPP loan, or less than clear, we strongly advise that you consult counsel to assist in determining whether to take advantage of the SBA’s amnesty program, and then documenting your organization’s decision to repay, or to not repay, its PPP loan.

Below are three of the most basic questions you should ask as you evaluate whether to participate in the SBA’s amnesty program.

1. Was your business “per-se” ineligible for the PPP lending program?

The PPP lending program is subject to the requirements of the SBA’s 7(a) lending program, unless specifically exempted under the CARES Act (“Applicable 7(a) Requirements”). Your organization certified compliance with, among other things, the Applicable 7(a) Requirements when it submitted its PPP loan application, including regarding the type of business that it operates, the number of employees computed in accordance with the SBA’s rules for affiliated companies for full and part time employees, ongoing or past criminal conduct of your business and each of its owners, and involvement by any owner of the business in a business that failed to fully repay any credit extended or guaranteed by the SBA. In addition, the SBA has recently issued guidance disqualifying certain types of businesses from participation in the PPP lending program. If those certifications were not fully understood and their accuracy confirmed, now is the time to fully understand the requirements and confirm the accuracy of the certifications made.

2. Did your business qualify for the amount of the PPP loan that it received?

Only after many PPP loans were funded did the SBA provide guidance regarding various questions that had arisen regarding the computation of PPP loan amounts. That guidance is expressed in five interim final regulations which were issued on or after April 13, by which time, many PPP loans had already funded, and the SBA’s ever evolving FAQ. In addition, an organization’s rush to be in the first wave of applicants may have resulted in an inadvertent failure to correctly apply all then-available guidance regarding the computation of loan amount to the organization’s circumstances. Now is the time to review your computation of loan amount to confirm it complies with applicable requirements.

3. Did current economic uncertainty make your PPP Loan request necessary to support ongoing operations?

Your organization certified in its PPP loan application that the then-current economic uncertainty made its PPP Loan request necessary to support ongoing operations. For many (and likely most PPP borrowers), the current economic conditions have had a massive impact, and there is little doubt about the necessity of the economic lifeline that their PPP loan represented.

However, for a fortunate few PPP borrowers with significant resources relative to the impacts of the current economic uncertainty they have experienced, or continue to anticipate they will experience in future, their PPP loan may not be an economic necessity. For those borrowers, FAQ #31 should serve as a wake-up call that the word “necessary” will not be overlooked by the SBA when PPP loans are evaluated for possible forgiveness. It is the SBA’s view that PPP loans should only be available to borrowers who avoid a significant detriment as a result of receiving funding. Unfortunately, there is almost no guidance from the SBA regarding the standards it will apply when it evaluates applications for forgiveness or how the SBA, in considering the necessity requirement, will take into account resources available to PPP borrowers and whether utilizing those resources would result in a significant determinant to the borrower. Examples of resources the SBA could take into account could include: the borrower’s ability to operate at either a lower level of profitability for a period of time or after a reduction-in-force; the borrower’s ability to absorb losses by consuming working capital and other reserves; and the availability to the borrower of debt and equity financing from its owners and the capital markets generally within the relevant time frame.

At this point, it is very difficult to predict how forgiveness of PPP loans will ultimately play-out for well-heeled PPP borrowers and the fortunate few PPP borrowers who continue to do well under current conditions. Those borrowers would be well advised to take note of the media, public and governmental reaction to the Shake Shack and the Los Angeles Lakers PPP loans and evaluate carefully the materiality of their PPP loan to their current circumstances. If such a borrower determines that it will not repay its PPP loan, it should memorialize with the assistance of counsel why it believes its PPP loan was appropriate. Borrowers that so proceed will be in a better position than those that don’t when it comes time to seek forgiveness or should an FCA or other enforcement action be brought against them.

Even if your business is neither well-heeled nor one of the fortunate few continuing to do well under current conditions, it should now review its application in view of all currently available SBA guidance. It is critical that any PPP borrower that thinks it may have made incorrect certifications in its PPP loan application, and thereby have improperly received its PPP loan or the wrong loan amount, consult legal counsel to determine whether it should repay its PPP loan in advance of the May 7, deadline.

For additional questions, contact:

George Flint at (801) 536.6915 or send an email to gflint@parsonsbehle.com;

Matthew Cook at (801) 536.6819 or send an email to mcook@parsonsbehle.com; or

Ross Keogh at (406) 206.9710 or send an email to rkeogh@parsonsbehle.com.