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The Paycheck Protection Program: Forgiveness May Come at a Lofty Price. Or Not at All.

The Paycheck Protection Program (“PPP”) fell short in keeping small businesses afloat during the pandemic.1 Congress made it a central provision to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in a move to emphasize both the vulnerability and the importance of small business. Congress had a plan: provide small businesses with a source of payroll funding to prevent layoffs, and thereby keep the economy afloat during the COVID-19 pandemic.2 If we have learned anything in 2020, however, it is that a plan, even the best-laid plan, is susceptible to failure.

Beginning as early as April, small businesses who were denied loans brought litigation alleging discrimination on the part of lenders.3 Courts have so far ruled in favor of lenders by denying businesses’ motions for preliminary injunction and temporary restraining orders (“TRO”) – finding a lack of success on the merits and granting deference to Congress’s need to act swiftly.

Perhaps the most critical aspect of the PPP to a small business’s ability to continue doing business is the ultimate forgiveness of the loan. As the loan forgiveness request process begins in fall 2020, courts should expect to see a second round of litigation concerning the PPP. The lack of accounting guidance, the stringent limitations on spending, and the changes to these limitations created a system under which small businesses depend on eventual forgiveness but the determination of that forgiveness is overly complex. The way courts have resolved application disputes signals that they will be hesitant to override denials of loan forgiveness. The result looks like a plan intended to boost small businesses in an emergency but that provides no recourse when further emergencies arise, or when all these loans expect to be paid.

The PPP Loan Basics

The CARES Act amended the Small Business Act as another means of putting money in the hands of workers. This was intentionally done through boosting small businesses – who were thought to be impacted most heavily by business closures – while making specific provisions for payroll spending.4

Any small business that meets the Small Business Administration’s (“SBA”) size standards, sole proprietors, independent contractors, self-employed persons, and businesses with multiple locations and fewer than 500 employees per location may apply for PPP loan funding.5 Businesses apply directly to lenders – such as JPMorgan and Bank of America – to receive PPP Loans.

The PPP loan terms are: an interest rate of 1%, a maturity of two years (for loans issued prior to June 5) or five years (for loans issued after June 5), no collateral or personal guarantees required, and no fees charged by the government or lender.6

The second phase of the PPP loan process is forgiveness of the loan. This is possible only “if all employee retention criteria are met, and the funds are used for eligible expenses.”7 There are two different covered periods for determining loan forgiveness – eight weeks or twenty-four weeks.8 When requesting forgiveness, the borrower reports all eligible payroll costs, interest costs, rent, and utility costs covered by the loan during their selected period.9 A borrower can apply only when it has used “all loan proceeds for which the borrower is requesting forgiveness.”10 Loan payments are deferred either until: (1) SBA remits the borrower’s loan forgiveness amount to the lender or, (2) if a borrower does not apply for forgiveness, ten months after the last day of the loan’s covered period (eight or twenty-four weeks).11

Small Businesses Lose in First-Round Litigation

In much of the initial litigation, plaintiff-businesses brought class action suits against defendant-lenders alleging, among other things, discrimination and unfair business practices.12 Most of these cases sought TROs or preliminary injunctions, on the basis that the first-come-first-served approach turns a lender’s denial of an application into a block on the business’s ability to access emergency funding.13Plaintiffs argued that, after being denied, an application to a different lender would put them at the back of the line, potentially foreclosing their access to available funding.14

This worry is depicted in Profiles, Inc. v. Bank of Am. Corp., where Plaintiffs alleged that Bank of America’s restriction of applications to customers with a preexisting borrowing relationship amounted to discrimination.15 Because of the urgency created by COVID-19, the businesses sought a preliminary injunction and TRO.16 The Court denied each of them.17

To survive their motion for preliminary injunction, Plaintiffs had to first demonstrate they would be likely to succeed on the merits.18 On the merits, the Court held that the CARES Act does not include an express private right of action, and the Plaintiffs did not meet their burden of proof on an implied right of action.19 The Court determined that the right to apply to a particular lender was not evident in the CARES Act.20 Not only that, but the Court held that the CARES Act does not provide applicants with an enforcement right – to seek a judgment from courts.21 Two other courts found this reasoning to be persuasive and similarly held that the CARES Act does not provide an implied private right of action.22

Though lack of success on the merits is sufficient to deny a preliminary injunction and TRO, the Profiles Court determined there was no irreparable harm to Plaintiffs and the balancing of the equities and public interest tipped in favor of the lenders.23 Among the factors considered in favor of Plaintiffs were their loss of time and legislators’ previous rejection of additional eligibility requirements.24 These did not outweigh the Court’s evaluation of the far-reaching effects of a decision for Plaintiffs – who, the Court determined, raised an issue more adequately assessed and addressed by Congress.25Further, according to BoA, the additional requirements expedited loan application processing – another valid interest according the Court.26Successive courts that concluded on the balance of equities and public interest also granted wide discretion to Congress’s need to act swiftly.27

As we will see, courts’ conclusions in refusing to grant injunctions to businesses seeking PPP loans will likely also apply to any denial of forgiveness of the PPP loan under the CARES Act.

Moving Forward: The Forgiveness Dilemma

The SBA announced only in late September that it would begin the loan forgiveness process.28 The Treasury Department expects these to be approved quickly.29Indeed, the ultimate success of the program in the eyes of small businesses depends on this second step – forgiveness of the loan.30 If loans are not forgiven, however, we will see a second wave of litigation. The outcome of these second-round suits will almost certainly be the same as the first.

Businesses face multiple issues applying for forgiveness. First, the lack of accounting guidance provided to businesses created an understanding that these loans were more appropriately categorized as a government grant. This has been reinforced by the overwhelming indication that PPP Loans are “loans in name only.”31 Guidance produced by Deloitte only suggested it is “acceptable for borrowers to account for PPPLs as debt” because “[t]here is no guidance in U.S. GAAP that specifically addresses the accounting by an entity that obtains a forgivable loan from a government entity.”32 At the start of the PPP loan program, there were two options for recording the cash inflow from a PPP loan: as a loan or as a government grant.33 From a small business’s perspective, recording this transaction – the dispersal of loan funds – as a loan indicates a plan to pay it back in the future. If it will not be paid back in the future, recording a grant seems proper. The grant, however, would not require a plan to make loan payments in the future.

Second, to keep the loan eligible for forgiveness, a business must meet stringent spending limitations. Many financial service corporations have rolled out strategies for realizing full loan forgiveness.34 The primary allowable expense is payroll but rent and utilities may account for up to forty percent of a business’s reported expenses.35 Forgiveness will be reduced for staff reductions and pay cuts over twenty-five percent of employee wages.36

Finally, the biggest issue is that these limitations are changing. As recently as October 8th, the SBA removed the employment restrictions on businesses who borrowed $50,000 or less.37 These businesses are now “exempt from the PPP requirements for maintaining the number of ‘Full Time Equivalent’ employees and not reducing employee wages.”38 While this change appears to help borrowers, any indication of change creates uncertainty and incites uneasiness. An unintended consequence of this change is that small businesses are now left to wonder about the best time to apply for loan forgiveness. A business’s decision to apply subjects them to the law in effect at that time and determines the deferral period for loan payments.

In other words, by loosening the requirements for forgiveness, Congress creates an expectation of impending legislation that eases spending restrictions and favors small businesses. This legislation would expand eligibility for loan forgiveness based on businesses’ historical spending and employment decisions – those made during the eight- or twenty-four-week covered period. This causes many borrowers to take “a ‘wait and see’ approach before submitting their claims in the event Congress changes the rules.”39 However, borrowers cannot wait too long, or they will risk hitting the end of their deferral period – ten months plus either eight or twenty-four weeks from the date of dispersal.40 If only a claim for confusion were justiciable, borrowers would have a smooth path to recourse.

To illustrate, imagine a business – perhaps Maura’s Café – that applied for and received PPP loan funding on May 1st. For simplicity, her covered period is eight weeks – May 1st to July 26th. She depends on the loan being forgiven, exhausts the funds as required to apply for forgiveness, but delays applying. Her expenses were $75,000, and she had to reduce pay by a third during her covered period, so she is hoping for changes to the current forgiveness requirements. She cannot delay her forgiveness application past May 26th, 2021 (ten months after the last day of her covered period) without making loan payments to her lender, which she cannot afford. Congress does not change the requirements affecting her, so on May 26th she applies for forgiveness. That summer, Maura hears of new legislation that loosens the requirements for loans up to $100,000. To make matters worse, her loan was not fully forgiven because she did not meet payroll requirements. If Maura’s loan payment exceeds the monthly income of her café, she is poised to go out of business. At what point would a court be willing to conclude that an injunction is warranted because payments on a PPP loan results in irreparable harm to a business owner? Would a court ever look beyond a finding that the CARES Act does not grant a private right of action?

Small Businesses to Lose (Again) in Second-Round Litigation

Though this expected second round of litigation raises forgiveness disputes (rather than rejection of loan applications disputed in the first round), courts have already determined there is no private right of action under the CARES Act.41 This determination then led to courts finding a lack of success on the merits and dismissing the cases.42 Extending this reasoning to the second wave of litigation, because there is no private right of action under the CARES Act, a court will not grant an injunction regardless of whether the harm alleged results from an application dispute or from a forgiveness dispute.

The court could dismiss the case quickly if it finds the reasoning in Profiles persuasive. Courts broadly applied this reasoning to other cases disputing the application process.43 The factors assessed in those cases would likely lead a court to find reason to apply it in subsequent CARES Act litigation, even if it raises distinct claims surrounding the forgiveness process. A court would not look to a business’s urgent need to cease making loan payments. It would not conclude on the harm to the business caused by lack of timely forgiveness.

Courts’ previous decisions also make clear that any balance of equities and public interest will be resolved in favor of the defendant in these cases. Courts have determined that Congress’s urgency and the number of other businesses relying on the PPP loan program plainly outweigh any interest a single plaintiff could raise.44

Small businesses now face a potentially fatal combination. The forgiveness system is likely to lead borrowers, who anticipated loan forgiveness or relied on changes to the current forgiveness framework, to make decisions that make their loan ineligible for forgiveness. Courts decisions thus far lend to a framework that provides no recourse to these borrowers. It is ironic that the speedy enactment of the PPP, while intended to help, has resulted in large barriers to relief for small businesses.

  1. See, e.g., Anna Radelat, Some CT Businesses, But Not All, Receiving Stimulus Loans in Second Round This Week, The CT Mirror (May 1, 2020), 

  2. See U.S. Small Bus. Admin., Coronavirus Relief Options: Paycheck Protection Program, [hereinafter SBA, Coronavirus Relief] 

  3. See Profiles, Inc. v. Bank of Am. Corp., 453 F. Supp. 3d 742, 745 (D. Md. 2020), appeal dismissed, No. 20-1438, 2020 WL 6042036 (4th Cir. May 28, 2020). 

  4. See SBA, Coronavirus Relief (explaining that “[t]he Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.”). 

  5. Id. 

  6. SBA, Coronavirus Relief. 

  7. Id. 

  8. Id. 

  9. Ashley Carpenter et al., Highlights of the CARES Act, Heads Up (Deloitte & Touche LLP) Sept. 18, 2020 at 1, 5, 

  10. U.S. Small Bus. Admin., Paycheck Protection Program Loan Forgiveness, 

  11. Id. 

  12. James Murphy & Daniel Payne, What to Know About the First Wave of CARES Act Litigation, Law360 (Oct. 15, 2020, 6:03 PM), 

  13. See, e.g., Outlet Tile Ctr. v. JPMorgan Chase & Co., No. CV 20-3603-GW-MAAX, 2020 WL 4258648, at *2 (C.D. Cal. Apr. 23, 2020). 

  14. Id. 

  15. Profiles, Inc., 453 F. Supp. 3d at 745. 

  16. Id

  17. Id. at 758. 

  18. Id. at 746 (quoting Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008 

  19. Id. at 751. 

  20. Id. at 751–52. 

  21. Id. 

  22. See McRae v. Hope Props., No. 20-1194-KHV-KGG, 2020 WL 6134273, at *2 (D. Kan. Oct. 19, 2020) (holding that “the Court has serious concerns as to whether the CARES Act provides a private cause of action”); Steven L. Steward & Assocs., P.A. v. Truist Bank, No. 620CV1083ORL40GJK, 2020 WL 5939150, at *3 (M.D. Fla. Oct. 6, 2020) (holding that “[t]he Court remains doubtful that the CARES Act provides a private right of action”). 

  23. Profiles, Inc., 453 F. Supp. 3d at 753. 

  24. Id. at 757. 

  25. Id. 

  26. Id. 

  27. See, e.g., Outlet Tile Ctr., 2020 WL 4258648, at *2 (giving weight to “the situation the nation faces with the Coronavirus pandemic and the perceived need from Congress to act both quickly, and substantially”). 

  28. Yuka Hayashi, U.S. to Start Forgiving PPP Loans After Borrowers Complained, Wall St. J. (Oct. 1, 2020, 11:37 AM), 

  29. Id. 

  30. Id. 

  31. Radelat, supra; Tony Nitti, Was Your PPP Loan Less Than $50,000? Life Just Got (A Little Bit) Easier, Forbes (Oct. 8, 2020, 10:20 PM), 

  32. Carpenter et al., supra at 6. 

  33. See Ken Tysiac, AICPA Issues Guidance on Accounting for Forgivable PPP Loans, J. Acct. (Jun. 10, 2020), 

  34. See You Belong in Business, 7 Ways Small Businesses Can Maximize PPP Loan Forgiveness, Principal, 

  35. Id. 

  36. Id. 

  37. Nitti, supra

  38. Erin Stackley, New PPP Forgiveness Form for Small Loans, Nat’l Ass’n of Realtors: Wash. Rep. (Oct. 9, 2020), 

  39. Dan O’Brien, PPP Loan Forgiveness: Will Election Bring New Rules?, Bus. J. Daily (Oct. 31, 2020), 

  40. See SBA, Coronavirus Relief. 

  41. See Profiles, Inc., 453 F. Supp. 3d at 751–52. 

  42. Id. at 752. 

  43. See, e.g., McRae, 2020 WL 6134273, at *2. 

  44. See, e.g., Profiles, Inc., 453 F. Supp. 3d at 757.