Two federal courts find SBA “ineligibility rules” inapplicable to PPP loans

If your business was deemed “ineligible” for a Paycheck Protection Program (PPP) loan by your lender or the Small Business Administration (SBA) or you didn’t apply for a PPP loan for your business, because you believed your business was ineligible under the SBA’s guidance, it may be time to reconsider.

The benefits of PPP loans have become well-known, including, subject to certain limitations, loan proceeds that may be forgiven up to an amount equal to the total spent on the following items during the first eight weeks of the loan term: (i) payroll costs, (ii) interest on a mortgages, (iii) rent and (iv) utilities. Additionally, principal and interest payments are deferred for 12 months after funding. As a result, there is significant demand for these loans among small businesses. 

However, some businesses have been denied (or believe that they are unable to obtain) PPP loans based on the SBA’s eligibility rules codified in 13 C.F.R. 120.110 (Ineligibility Rules) (and as further described in the SBA’s Standard Operating Procedures (SOP)), which were adopted prior to the creation of the PPP program. Ineligibility Rules addressed financial businesses primarily engaged in lending, political lobbying firms and businesses engaged in certain adult entertainment.

Interestingly, at least two federal courts have recently issued decisions addressing challenges to portions of the Ineligibility Rules, primarily with respect to legal adult entertainment. Businesses in Wisconsin and Michigan successfully obtained preliminary injunctions in federal court requiring that their PPP loans be approved and funded by SBA lenders and that the SBA guarantee such loans (provided that the applicants meet the other applicable requirements for PPP loans). The plaintiffs in DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, et al., decided on May 11, 2020, by the U.S. District Court in Michigan, and in Camelot Banquet Rooms, Inc. v. United States Small Business Administration, decided on May 1, 2020, by the U.S. District Court in Wisconsin, successfully argued that the CARES Act broadened eligibility for PPP loans by providing that “any business concern… shall be eligible…if the business employs less than 500 employees…” (See 15 U.S.C. § 636(a)(36)(D)). The Michigan court further found that administrative rules and guidance promulgated by the SBA, such as the Ineligibility Rules or the SOP, are not applicable or controlling with respect to the clear intent of Congress to broaden eligibility requirements for PPP loans. 

There have also been federal and bankruptcy court decisions looking at other aspects of PPP, and additional cases are pending. In addition, the SBA has issued five interim final rules since April 2, 2020, and has promised additional rules. The SBA has also published a “Frequently Asked Questions” document that has been updated multiple times since it was initially issued in early April. All of this activity bears continual monitoring by businesses that have received or are still considering PPP loan assistance.