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In response to the economic crisis caused by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted and devoted $ 349 billion to the Paycheck Protection Program, or PPP. After all funds were used up in less than two weeks and Congress worked to pass an additional stimulus package to add an additional $ 310 billion to the PPP, public discontent and dissatisfaction have grown. increase. While many struggling small businesses were unable to secure loans in the first round of the PPP, some prominent state-owned enterprises and large hotel and restaurant franchises received large PPP loans.
A renewed focus on who can and should receive PPP funds has led to an in-depth review of the criteria for PPP loans, including some certifications borrowers must do to receive the funds. Concerns have arisen about the False Claims Act, or FCA, and the potential liability of companies receiving PPP loans. Businesses are required to make certain certifications in order to receive funds, ultimately exposing the business to potential liability for submitting false claims to the government for payment if the business knowingly, recklessly, or blindly makes false certifications in its application.
As the foundational loan program of the CARES Act, the PPP provides financial assistance in the form of forgivable loans to small businesses on a ‘first come, first served’ basis to help small businesses continue to operate for a while. the COVID-19 crisis. A U.S. business is eligible to receive a PPP loan if the business, along with its subsidiaries, employs no more than (1) 500 employees, or (2) the employee size standard established by the SBA for the industry in which it operates. Hotels and restaurants must have 500 or fewer employees per physical location. In addition to meeting size criteria (including meeting complex SBA membership rules), the business must certify certain facts to determine its eligibility to receive funds. The company must certify, in good faith, that:
- the uncertainty of current economic conditions makes the loan request necessary to support the day-to-day operations of the business;
- the funds will be used to retain workers and maintain the payroll or make mortgage payments, lease payments and utility payments;
- the company has no other loan under the PPP and will not receive another loan under the PPP; and
- for the period between February 15, 2020 and December 31, 2020, the business did not receive amounts under Section 7 (a) of the Small Business Act for the same purpose and duplicating amounts requested or received under a PPP loan.
Economic necessity certification
Much confusion and uncertainty has arisen in particular around the certification that “the uncertainty of current economic conditions makes it necessary to apply for a loan to support the ongoing operations of the business”. This certification derives directly from the text of the CARES law and is open to various interpretations. What level of need or economic harm is required or envisaged to justify this certification?
During the first round of the PPP, the SBA did not provide direct guidance on this point. In response to complaints about how P3 funds had been distributed, the SBA issued guidelines, stating “[a]Although the CARES Act suspends the ordinary requirement that borrowers be unable to obtain credit elsewhere… borrowers must still certify in good faith that their PPP loan application is necessary…. Borrowers should make this certification in good faith, taking into account their current business activity and their ability to access other sources of sufficient liquidity to support their ongoing operations in a manner that does not significantly harm the company. For example, a public enterprise with substantial market value and access to capital markets is unlikely to be able to perform the required certification in good faith, and such an enterprise should be prepared to demonstrate to the SBA, on request, the basis of its certification. Elsewhere, the SBA has specifically reminded privately-funded companies that they should make the same statement, implying that access to private capital and additional funding should also be considered. In addition, the guidelines provide that borrowers who return first-round PPP funds by May 7, 2020 will be deemed to have made this certification in good faith.
Although the guidelines do little to explain what certification means, they stress the need to have a basis for certification and to support it wherever possible. Board minutes should reflect the discussions on the item, and all relevant emails, correspondence, analysis or burn-down models should be kept on file. Safeguarding the good faith determination could include discussions of potential layoffs, closings, downside projections, access to capital or alternative financing, and other negative effects on operations.
Potential liability
The CARES Act was enacted on March 27, 2020, and SBA lenders began accepting PPP applications on April 3, 2020. The Small Business Administration did not issue a tentative final rule until late Thursday, April 2, 2020. The April 3. , 2020, on the same day that SBA lenders began accepting applications, the SBA released and updated its borrower and lender application form, provided advice on affiliate matters, and issued another provisional final rule on affiliation and faith-based organizations. Even after the SBA lenders started accepting applications and the loans started funding, the SBA continued to issue additional guidance to clarify and refine the PPP.
Businesses and lenders moved quickly to submit PPP loan applications, even as critical terms and advice were still being worked out by the SBA. The overwhelming demand for PPP loans, the program’s limited up-front funding, and the “first-come, first-served” nature of the application process have contributed to an environment of heightened liability risk for companies rushing to submit applications.
Even though the eligibility criteria and certifications in the PPP loan application require additional guidance and interpretation to clarify the requirements, businesses and individual applicants are still exposed to criminal liability for misrepresentation in their applications. In fact, PPP’s request states that “knowingly making a false statement to obtain a secured loan from the SBA is punishable under the law, including under 18 USC 1001 and 3571 with a maximum prison term of five years. and / or a fine of up to $ 250,000; less than 15 USC 645 to a jail term of not more than two years and / or a fine of not more than $ 5,000; and, if subjected to a federally insured institution, under 18 USC 1014 by imprisonment for not more than thirty years and / or a fine not exceeding $ 1,000,000. In addition, businesses and individual claimants will be liable under the False Claims Act.
In addition, the provisional final rule of April 2 states “[i]If you use PPP funds for unauthorized purposes, the SBA will require you to repay those amounts. If you knowingly use the funds for any unauthorized purpose, you will be subject to additional liability such as fraud charges. If any of your shareholders, members or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member or partner for the unauthorized use. As mentioned earlier, the SBA has also stated that if a borrower returns PPP funds by May 7, 2020, they will be deemed to have made the “economic necessity” certification in good faith.
Even in the absence of any legal liability, borrowers should also consider the potential negative reaction of the public to obtaining the loan. For some companies, the risk of public reaction may outweigh the need for PPP funds.
Misrepresentation Act
Enforcement actions related to PPP funds are likely to reflect enforcement actions taken to recover funds issued under the Troubled Asset Relief Program, or TARP, which was also instituted in the heat of the moment in response. to the 2008 financial crisis. If enforcement actions are similar, PPP claims will not be considered today, but will likely be the subject of future legal actions under the False Claims Act, or FCA, 31 USC § 3729 et seq. In the aftermath of 2008, the US Department of Justice, or DOJ, and the qui tam relators (whistleblowers) pursued FCA claims targeting entities that benefited from government spending, raising nearly $ 40 billion. of dollars. As the DOJ has previously announced that it will “prioritize the investigation and prosecution of coronavirus-related fraud schemes” and established a national whistleblower hotline to report suspected fraud, it is It follows that any company receiving funds under the PPP will have to minimize its risk of exposure. Under the FCA, the DOJ and the FCA Bar will take action to recover PPP funds allegedly obtained from the government in a false or fraudulent manner.
As described above, the PPP application makes it clear that it is the company’s responsibility to ensure that it meets the eligibility criteria, including the required certifications. These certifications can create significant FCA risk as guidelines continue to change and there is relatively little guidance available for companies to determine how the government defines and interprets many terms in funding applications. The ASB maintains that “[b]the runners. . . can be based on the indications provided in this [FAQ] as the SBA’s interpretation of the CARES Act and the [PPP Interim Final Rule]. The United States Government will not challenge any PPP actions of lenders that comply with these guidelines, as well as the PPP Interim Final Rule and any subsequent regulations in effect at that time. However, this so-called safe haven is unlikely to provide meaningful FCA protection, as the question of whether actions “comply” with guidelines or regulations is a factual question in FCA actions and the DOJ or whistleblowers could argue that any perceived small deviation from guidelines creates grounds for liability. Further, under the FCA, “knowingly” making a false certification may consist of actual knowledge, reckless disregard of the truth, or false certification through willful ignorance.
While PPP enforcement actions mirror enforcement actions for the recovery of TARP funds, businesses should keep in mind that small technical or even logical errors on claims during an emergency period can be interpreted as a fraud years after the crisis. Companies should therefore exercise extreme caution to ensure the accuracy of their requests and subsequent documentation of their use of the PPP loan proceeds.
