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Lawsuit Challenges PPP Questionnaire for High-Dollar Borrowers

Posted on Dec. 14, 2020

A leading construction industry group claims the Small Business Administration’s questionnaire for borrowers of millions in coronavirus relief loans should be put on hold because it focuses on an irrelevant time period.

In a complaint filed December 8 in Associated General Contractors of America v. U.S. Small Business Administration, the group said that although the SBA claims to be interested in evaluating the borrower’s certification in the spring when the economic viability of many businesses was uncertain, the questionnaire focuses on the events that occurred after the loan was received.

“This contradiction is deeply troubling to many borrowers because their success or failure over the balance of 2020 could not possibly have been knowable in those early days of the pandemic when the economy was headed into a tailspin,” the complaint says.

The lawsuit challenges the SBA and Treasury’s forms for recipients of Paycheck Protection Program loans of more than $2 million. The PPP was enacted in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and has provided over $500 billion in loans to businesses that can be forgiven tax free if a portion of the loans is spent on items such as payroll and rent.

Immediately after the loans became available, reports emerged of big businesses taking loans that arguably didn’t need them. That prompted the SBA and Treasury to encourage those businesses to return the loans, but reports of abuse and outright fraud have continued to materialize.

The government indicated that it would look at businesses that received more than $2 million in PPP loans, and in early November forms for for-profit and nonprofit businesses began circulating. Those forms included questions that put the spotlight on whether businesses that took millions in loans really needed them.

Practitioners noted that when businesses applied for loans in early April, they just had to make a certification in good faith that they needed them because of economic uncertainty. Now, the forms ask probing questions that weren’t relevant in April, according to many.

The complaint filed in the U.S. District Court for the District of Columbia seeks both declaratory and injunctive relief against the SBA and the Office of Management and Budget under the Administrative Procedure Act, among other claims.

Notably, the complaint says, the questionnaire doesn’t ask borrowers to describe the status of their operations or the levels of anxiety surrounding business operations at the time they applied for the loans. Instead, the forms examine what came after the loan application and focus on the ensuing months of 2020, the complaint says.

Eric J. Kodesch of Lane Powell, who agrees with the plaintiff’s position in the lawsuit, said a key flaw in the SBA’s approach boils down to wording. The certification language at issue is: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

“We refer to this as the ‘uncertainty certification’ because the focus is on uncertainty,” Kodesch said. “Accordingly, in determining whether a borrower made the certification in good faith, the SBA should be looking into whether the borrower had a good faith basis for having uncertainty.” 

But the SBA refers to the “necessity certification.” In an FAQ on the questionnaire released a day after the lawsuit was filed, the SBA called the questionnaire the “Loan Necessity Questionnaire” and not the “Economic Uncertainty Questionnaire,” Kodesch said.

“The title indicates that the SBA will focus on necessity, rather than uncertainty,” he said. “Once the SBA changed the focus from uncertainty to necessity, it became easier to justify looking at facts after the PPP loan application.”

Adam Sweet of Eide Bailly LLP agrees that borrowers basically had to certify that they need the loan because of economic uncertainty caused by the coronavirus pandemic and that they would use the proceeds to maintain payroll.

“Our clients, along with many other borrowers, maintained full payroll precisely because of the loan, and would not have done so otherwise, due to the economic uncertainty caused by COVID (especially in March and April 2020),” Sweet said in an email.

Sweet added that there seems to be a fair bit of retroactive rulemaking that doesn’t comply with the CARES Act language. He said he is watching the lawsuit with great interest, although any results from it may be too late for most clients, who have 10 days to return the questionnaire upon receipt.

The complaint also says the forms weren’t readily available to the public, a point of frustration for practitioners in early November when the forms were being quietly passed around.

“Worse, SBA intentionally hid, and is still hiding, the Questionnaire from public view, even after SBA released the form into circulation for use,” the group said.

Just one day after the complaint was filed, the forms were readily available on government websites, practitioners noted.

The complaint says the questionnaires are arbitrary and capricious and that the SBA should be enjoined from basing a decision to deny an application for PPP loan forgiveness solely on the information a borrower provides to the SBA in response to the questionnaire. It also says the questionnaires should be available for public comment for at least 60 days.

The plaintiff in Associated General Contractors of America Inc. v. U.S. Small Business Administration, No. 1:20-cv-03567 (D.D.C. 2020), is represented by lawyers at Crowell & Moring LLP

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