01 May 2020

Does My Business Need to Repay its PPP Loan by May 7?

***Information and guidance in client updates was up to date at time of publication. During the pandemic, information and guidance has been changing rapidly. If you have any questions about the information contained in a client update, please contact the author(s) or your Miller Johnson attorney.***

***This client alert has been updated. The updated version Safe Harbor for PPP “Need” Certification Extended to May 14 can be found here.***

There was little guidance from Congress, the Department of the Treasury, or the Small Business Administration (SBA) when businesses first applied for Paycheck Protection Program (PPP) loans under the CARES Act.  Now, the SBA and the Treasury are applying guidance retroactively in an attempt to force the return of millions of dollars of funds that have already been distributed.  What options do businesses that received PPP loans have now?

Here are the facts:

  • Under the CARES Act, an eligible PPP loan recipient must, among other things, “make a good faith certification . . . that the uncertainty of economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” 15 U.S.C. 636(a)(36)(G)(i)(I).
  • A “Paycheck Protection Program (PPP) Information Sheet” released by the Treasury on April 3, 2020, reiterated that eligibility requirement, advising borrowers that they needed to certify in good faith that “[c]urrent economic uncertainty makes the loan necessary to support your ongoing operations,” and explaining that the PPP “waiv[ed] the usual SBA requirement that you try to obtain some or all of the loan funds from other sources.”
  • A “Top Line Overview of PPP” posted by the Treasury shortly before banks began accepting PPP loan applications stated that, “We encourage you to apply as quickly as you can because there is a funding cap.”
  • The SBA, in consultation with the Treasury, seemingly set forth a different—and more stringent—standard of certification in its FAQs updated on April 23, 2020. FAQ 31 implies that for a borrower’s certification to be made in good faith, the borrower must lack an “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”  This was not a consideration when borrowers were applying for PPP loans, yet borrowers that do not meet this revised standard are instructed to return any funds they received by May 7, 2020, or risk their certification being deemed in bad faith or otherwise deficient.
  • FAQ 39, added on April 29, 2020, further states that all loans greater than $2 million will be subject to review by the Treasury Department under the revised standard set forth in FAQ 31.

The recent guidance from the SBA and the Treasury Department leave businesses who do have other sources of liquidity with essentially two options:

  1. Return the funds by May 7, 2020.
  2. Have their certifications reviewed under a more stringent standard than the standard that existed at the time that the businesses made the certifications.

The first option, while likely the safest route, may be unattractive or downright unfeasible.  The funds from your PPP loan have likely already been distributed or at least earmarked.  Plus, businesses obtained these loans with the understanding that the loans would be forgiven, or at least that the business would have two years to repay the loans at a low interest rate.  One week is a short turn-around and may present particularly significant hurdles for those borrowers that would need to convene formal meetings of directors or shareholders to reverse an earlier decision to seek a PPP loan.

While the second option may seem daunting, businesses would have a number of defenses to any subsequent enforcement action—including arguments that the statutory language was unconstitutionally vague and that the attempted retroactive application of a more stringent standard violates due process and ex post facto principles, among others.  Businesses choosing the second option would be wise to keep thorough records of their loan applications and the support for their certifications.

The Miller Johnson team is here to assist you in evaluating these options while giving due consideration to your legal and business concerns.  Please contact your Miller Johnson lawyer to discuss these options and develop the best plan for your business.