Lawsuit Calls into Question SBA’s Review of PPP Loan Forgiveness
The Associated General Contractors of America, a trade group made up of commercial general contractors, recently filed a lawsuit in federal court calling into question the Small Business Administration's questionnaires used to aid in determining whether loans made under the Coronavirus Aid, Relief, and Economic Security Act’s (CARES Act) Paycheck Protection Program (PPP) are subject to forgiveness. The lawsuit can be found here.
For anyone who obtained a PPP loan, they know that during the application process they had to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” If the loans were then used as provided for in the Act (i.e. payroll, business costs, rent, etc.), the loans would be forgiven. Now that businesses are starting to apply for forgiveness, questions have arisen as to how those forgiveness determinations will be made.
The AGC lawsuit focusses on the SBA’s recent utilization of two “Loan Necessity Questionnaires.” The first, Form 3509, applies to for-profit businesses. The second, Form 3510, applies to non-profit borrowers. According to the lawsuit, the SBA requires lenders to forward the Questionnaire to borrowers within five days of receipt, and borrowers then have ten days to return the completed form back to the lenders. The crux of the problem, at least in the eyes of the AGC, is that
the substance of the Questionnaire goes far beyond the relevant business affairs of PPP loan borrowers about which SBA may legitimately inquire as part of its evaluation of those borrowers’ eligibility for loan forgiveness and for the loan in the first instance, [by focusing on] the wrong timeframe for evaluating a borrower’s need for a PPP loan and the borrower’s good-faith certification that economic uncertainty at the time of the application necessitated the business need for the loan. The questions posed and supporting documentation sought by the Questionnaire focus on the borrower’s success or failure in the ensuing months of 2020, not on the environment and the borrower’s contemporaneous understanding of the economic environment it faced at the time of loan application. (italics added)
Essentially, the lawsuit seeks to disallow any examination of the borrower’s financial condition after applying for the PPP loan because the required certification is limited to the time the certification was executed. Put another way, hindsight should not be allowed. The AGC also takes issue with the procedure by which the government implemented the Questionnaires.
The SBA’s examinations come in a time of uncertainty with the entire PPP loan process, especially regarding the availability of other liquidity at the time of application. As highlighted in the lawsuit, the SBA addressed some of these concerns in FAQs promulgated after disbursing the initial tranche of loans. The SBA noted (in FAQ #31) that it is unlikely a large company with access to capital markets could make the required certification. That led to a safe-harbor period for repayment, and (in FAQ #46) a presumption for borrowers of under $2 million that the certification was made in good faith.
Going forward, large borrowers will want to keep a close eye on how the government scrutinizes the larger loans, especially considering (a) the anticipated deluge of loan forgiveness applications, (b) the general increase in value of the stock markets since March 2020 and general availability of credit throughout 2020, and (c) the new Administration.One can easily speculate that the government will look to the borrower’s overall profitability (or not) during the remainder of 2020 and whether it really needed the loan to maintain operations. Leading Democrats have spoken out against Wall Street during the past couple of years.It remains to be seen what President-Elect Biden’s stance will be.
