It’s no secret that nearly all the $800 billion in Paycheck Protection Program loans issued by the federal government have been forgiven. Now, some borrowers whose requests for forgiveness were denied are taking their cases to court.
The U.S. Small Business Administration is facing suits by businesses claiming that the agency wrongly withheld forgiveness of their PPP loans. But debtors could find that the SBA, whose administration of the PPP program was criticized as haphazard in the early days, may now be playing hardball as the program has matured.
Three years after the PPP loans were rolled out to keep the workforce on the job when COVID-19 struck, it has been reported that 92% of the loans have been fully or partly forgiven.
Those who are asking judges to step in include a small New England college, a New Jersey car dealership and a Midwest chain of health clubs.
In the New Jersey case, the operator of a BMW dealer in Springfield sued the SBA Tuesday seeking forgiveness of $936,963. The SBA said the company, known as Celebrity of Springfield, is part of a larger corporate group that received a loan of $5.06 million, which is far more than the $4 million corporate maximum. Therefore, Celebrity’s $2 million loan is ineligible for forgiveness, the SBA said in its final loan review decision.
After its $2 million loan forgiveness request was denied, Celebrity requested partial forgiveness of $936,963. In February, an administrative law judge in the SBA Office of Hearings and Appeals denied that request, prompting the lawsuit in U.S. District Court for the District of New Jersey, which claims violations of the Administrative Procedure Act.
Thomas Gentile of Wilson Elser in Madison, New Jersey, representing Celebrity, had no comment.
The SBA also faces a suit seeking forgiveness of a PPP loan to Gordon College in Wenham, Massachusetts. The school asked for and received $7.05 million based on its head count of a full-time equivalent of 495.67 employees. When it sought forgiveness of the loan, the college’s request was denied. The college said in court papers that the refund was denied because, if it counted each full- or part-time employee as one person, its head count would exceed 500 persons, which makes it ineligible for the PPP program. The college said in court papers that it counted its employees in the manner directed by the SBA at the time it submitted its loan application, but rules for counting employees later changed.
Gordon College filed its suit in U.S. District Court for the District of Columbia, where it is represented by Gammon & Grange of Vienna, Virginia. The firm did not return a call about the case.
Club Fitness Holdings, which filed its suit in the Eastern District of Missouri on March 10, was denied forgiveness of its$2.4 million loan because its company net worth exceeded SBA eligibility rules, according to its complaint. The company said in court papers that a one-time, $10 million life insurance payment it received on the death of its founder and former CEO, John Crocker, was wrongly counted by the SBA as corporate income.
Club Fitness is represented in the suit by Angela Kennedy of Armstrong Teasdale in St. Louis, who did not return a call about the case.
A spokesperson for the SBA did not respond to a request for comment on the suits.
‘Playing Hardball With Borrowers Now’
In the early days of the PPP program, the government emphasized getting money to businesses promptly, in order to minimize layoffs related to COVID-19 business interruptions, and rules for the program changed regularly, said Scott Borsack, who advises PPP borrowers at Szaferman, Lakind, Blumstein & Blader in Lawrenceville, New Jersey. But administration of the PPP program has become more strict, he said.
“I think the government may be playing hardball with borrowers now,” Borsack said.
Borsack said it’s impossible to predict how PPP borrower litigants will fare in court with the SBA because their circumstances vary widely.
“It’s hard to generalize because the facts of each case are very different. I would think that the disputes that attorneys actually take to court probably present the most egregious set of facts,” Borsack said.
Poor communications between the parties is a common thread in disputes between PPP borrowers and the SBA because initial communications passed through the bank that processed the loan, said David Roth of Munsch Hardt Kopf & Harr in Houston.
Roth represents PPP borrowers who were denied loan forgiveness, but has not filed any suits on their behalf. He said he is “winning more than losing” at administrative proceedings. In those cases where his client loses at the administrative level, Roth said, “we have to have a very frank conversation with our client, because district court litigation is so expensive,” he said. “If you’re a borrower that’s cash-strapped to begin with, incurring all those fees in the hope of getting your loan forgiven is a really tough decision to make. You might make the decision that it’s in your best interest to just repay the loan on the original terms, which are 1%, payable over five years,” Roth said.
Roth said his firm continues to hear from new clients who were denied forgiveness of their PPP loans. But that group is “a tiny fraction” of all PPP borrowers and those going to court are likewise “a tiny fraction of the ones that get appealed.”
Despite the headaches his clients are having, Roth said, PPP “was worthwhile for most borrowers. If you go back to 2020, these folks didn’t know if they were going to stay in business or not and were thinking of cutting their payrolls. The government consciously had a program where they were lending money with relatively low standards and low guidance. They got the money out there, which I think is a very good thing,” he said.
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