Menu
Tax Notes logo

Wisconsin Strip Clubs Win PPP Eligibility After Initial Denial

Posted on May 5, 2020

A district court deemed five Wisconsin erotic-nightclub owners eligible for loans under the Paycheck Protection Program (PPP) after they were initially denied because of the sexual nature of the performances in their clubs.

The plaintiffs were granted a motion for a preliminary injunction against the Small Business Administration, SBA Administrator Jovita Carranza, and Treasury Secretary Steven Mnuchin by the U.S. District Court for the Eastern District of Wisconsin. The May 1 decision further bars the SBA — which is administering the PPP loans — and Treasury from using a regulation pertaining to sexual live performances to determine PPP loan eligibility.

Each of the five plaintiffs — who run nightclubs that before the Wisconsin “safer at home” order, featured nude or semi-nude erotic dancers — applied for PPP loans, but they were denied based on a 1996 SBA regulation that restricts from eligibility for any loan program small businesses that “present live performances of a prurient sexual nature.”

The court also approved a temporary restraining order for the plaintiffs against the defendants so the plaintiffs could reserve their spots in the application queue for the PPP, whose funds are limited and distributed on a first-come, first-served basis.

The PPP, established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), is a tax-free, forgivable loan program that aims to encourage small businesses to keep their workers on the payroll. An alternative CARES Act incentive, the employee retention tax credit, has the same goal.

The plaintiffs argued that the SBA’s “prurient sexual nature” regulation violates their First Amendment free speech rights and the equal-protection component of the Fifth Amendment’s due process clause.

In the ruling, District Judge Lynn Adelman stated that it’s likely the specific SBA regulation violates the First and Fifth amendments, and that the plaintiffs’ inability to obtain a loan through the PPP prevents them from exercising their First Amendment right to present erotic dance entertainment.

While both parties had agreed that the nightclub owners’ applications for the PPP funds had been denied because of the “prurient sexual nature” regulation, the federal government as defendant stated in a court brief that it took no position regarding whether the performances offered by the nightclubs were obscene or prurient.

“If the government takes no position on whether the plaintiffs’ entertainment is ‘prurient,’ then it cannot take the position that the regulation disqualifies them from participation in the PPP. Unless their entertainment is prurient, the regulation does not apply,” wrote Adelman.

In the decision, Adelman stated that the nightclub owners are experiencing hardships, and that the broad purposes of the CARES Act and the Small Business Act — which created the SBA in 1953 — would both be served by allowing the nightclub owners to participate in the PPP on the same terms as any other small business.

Congress did not single out any industry for ineligibility under the PPP, much less specify that sexually oriented businesses are ineligible for PPP loans,” Adelman wrote, adding that those businesses must also make payroll and pay rent and utility bills.

The case is Camelot Banquet Rooms LLC v. U.S. Small Business Administration, No. 2:20-cv-00601, (E.D. Wis. 2020).

Copy RID