Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) was
signed into law by the President on March 27, 2020. Title I of the CARES Act, named “Keeping
American Workers Employed and Paid” by Congress, appropriated $659 billion for loans
guaranteed by the Small Business Administration (“SBA”) under the Paycheck
Protection Program (“PPP”).
Section 1114 of the CARES
Act instructs the SBA to issue regulations “to carry out this title and the
amendments made by this title” within fifteen days and without regard to the
usual notice requirements, which the SBA did in the form of Frequently Asked
Questions (the “FAQs”). 15 U.S.C. §§ 9001(1), 9012.
While ostensibly intended to
clarify uncertainty in the CARES Act, two recent federal lawsuits challenge certain
rulemaking and guidance promulgated by the SBA. The question before the courts
is whether such rulemaking and guidance is a lawful interpretation of the CARES
Act or, as the plaintiffs argue, amounts to illegal rulemaking.
are prohibited by the Administrative Procedures Act from taking action “in
excess of statutory jurisdiction, authority, or limitations, or short of
statutory right.” 5 U.S.C. § 706(2)(C). The validity of an agency’s interpretation of a statute is reviewed by a
court using the two-step framework outlined in the landmark case, Chevron, U.S.A., Inc. v. Natural Res.
Defense Council, Inc., 467 U.S. 837 (1984). The first question reviewed in
the Chevron analysis is, “whether
Congress has directly spoken to the precise question at issue. If the intent of
Congress is clear, that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43.
The plaintiffs argue that certain
elements of the SBA guidance did not give effect to the unambiguously expressed
intent of Congress and, as a result, are unlawful and unenforceable.
DV Diamond Club of Flint v. SBA
DV Diamond Club of Flint LLC (“DV Diamond”) is a
strip club in Flint, Michigan, which feared that it would be denied a PPP loan
by lenders as a result of guidance from the SBA that is not consistent with the
CARES Act. DV Diamond’s initial complaint, dated April 8, 2020, was amended on
April 17, 2020 to add forty-one new co-plaintiffs (collectively with DV
Diamond, the “Plaintiffs”), each of which claims to operate a legal
sexual oriented business which meets the eligibility requirements under the
CARES Act. The Plaintiffs argue that the CARES Act is unambiguous as to what businesses are
eligible for PPP loans and the SBA, therefore, has no right to assert
additional eligibility requirements or disqualifiers. See DV Diamond Club of Flint, LLC v. U.S. SBA, 20-cv-10899, 2020 U.S.
Dist. LEXIS 82213, at *27 (E.D. Mich. May 11, 2020).
The U.S. District Court
for the Eastern District of Michigan (the “District Court”) issued an
injunction in favor of the Plaintiffs, noting that Congress unambiguously
stated that the SBA may not exclude from eligibility for a PPP
loan guarantee a business that met the CARES Act’s size standard for
eligibility. Id. at *27.
The District Court agreed with the Plaintiffs that, “under step one of Chevron
that the PPP Ineligibility Rule conflicts with the PPP and is therefore
temporary paycheck support to all Americans employed by all small businesses
that satisfied the two eligibility requirements—even businesses that may have
been disfavored during normal times.” Id. at *4-5.
The Sixth Circuit Court of Appeals denied the
SBA’s motion for a stay of the injunction, holding that the relevant factors,
including the Plaintiff’s likelihood success, weighed in favor of the
Plaintiff. DV Diamond Club of Flint, LLC v. SBA, No. 20-1437, 2020 U.S. App.
LEXIS 15822, at *8 (6th Cir. May 15, 2020).
Inc. v. SBA
Zumasys and two affiliated companies
(collectively, “Zumasys”) received PPP loans but are concerned that they may
subsequently be deemed ineligible as a result of “improper, and legally
impermissible, underground regulation” promulgated by the SBA. (Zumasys, Inc. v. U.S. SBA et al.,
Dkt. No. 20-cv-008511, Dkt. 1 (the Zumasys Complaint) ¶ 58.)
Zumasys claims to have acted in reliance on the
CARES Act by obtaining—and spending—what they expected
to be forgivable PPP funds under the terms of the CARES Act rather than
furloughing or terminating their employees. Subsequently, guidance
set forth in questions 31 and 37 of the SBA’s Frequently Asked Questions,
according to Zumasys, might require their loans to be repaid. Zumasys claims that being forced to repay their loans will
place them in a worse financial position than had it
never sought the PPP funds.
The SBA’s “credit elsewhere” test, which requires a
borrower to demonstrate that the needed financing is not otherwise available on
reasonable terms from non-governmental sources, was expressly excluded as an
eligibility requirement to obtain a PPP loan by Congress. Zumasys alleges, however, that the FAQs “purport
to re-impose the “credit elsewhere” requirement in contravention of” the CARES
Act. (Id. ¶ 66.)
As a result, in an argument similar to that made by DV
Diamond and its co-plaintiffs, Zumasys asserts that the FAQs “are not in accordance with the law and exceed
Defendants’ authority under the CARES Act,” and asks that the SBA should be enjoined from
enforcing them by the court. (Id.)
Subsequent to the filing of the Zumasys lawsuit, on
May 13, 2020, the SBA issued guidance in question 46 in the FAQs that any borrower that, together with its affiliates, received PPP loans
with an original principal amount of less than $2 million will be deemed to
have made the required certification concerning the necessity of the loan
request in good faith.
While this development, on its face, would seem to alleviate
the concerns of Zumasys, a great deal of uncertainty remains for borrowers in connection
with the guidance that has been released by the SBA since the passing of the
CARES Act into law. Furthermore, there is no guarantee that subsequent guidance
from the SBA will not contradict the guidance currently being relied upon, and
in FAQ 39 the SBA noted that it will review all loans in excess of $2 million
and in subsequent rulemaking it noted that with respect to a PPP Loan of any
size, the “SBA may undertake a review at any time in [the] SBA’s discretion.”
The challenges by DV Diamond,
Zumasys and other plaintiffs will hinge on whether or not the applicable courts
determine that the guidance issued by the SBA is inconsistent with the
unambiguously expressed intent of Congress.
the extent that borrowers and applicants continue to believe that problematic
discrepancies exist between the law and guidance being delivered by the SBA,
and the SBA subsequently determines that a borrower is ineligible for a PPP
loan or forgiveness of such loan, the courts may in the future be called upon
again to apply the Chevron analysis
to the SBA’s actions in connection with the PPP.