PPP Loans: Borrowers Beware

 In Firm News

So far, prosecutions concerning the Paycheck Protection Program funds or “PPP Loans” have focused on extreme instances of fraud – borrowers using funds to buy exotic cars and luxury items or claimed employees or businesses that don’t exist.  But could you—a good faith business owner—also be prosecuted for taking a PPP loan?

Vague laws cannot provide a valid basis for criminal prosecution.  Yet, borrowers who applied for PPP loans provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made certifications with unclear language that may open them up to scrutiny by government agencies and potential criminal prosecution or brand-damaging publicity.

The CARES Act was designed to provide emergency financial assistance to millions of Americans suffering the economic effects of the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of over $525 billion in forgivable loans to businesses for job retention and certain other expenses, through the PPP.

Under the PPP, businesses applied for loans of two-and-a-half times their monthly payroll costs, or up to $10 million.  The loans could be forgiven if businesses spend the proceeds on certain payroll expenses, rent and utilities within eight weeks of receipt and use at least 75% of the forgiven amount for payroll. Applicants had to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The required certification is vague, especially in the terms “necessary,” “support,” and “ongoing operations.”  What do these terms mean?  Bankers advised clients that they may take the money even if the business will survive without the loan; even if layoffs would not otherwise occur; or even if the business has sufficient cash to cover costs for months.

Not until after releasing billions in approved funds did the government provide additional guidance that borrowers should take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a matter that is not significantly detrimental to the business” when assessing their loan need.  The guidance stated that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith” and provided a May 7 deadline to repay funds if the company did not qualify under the new guidelines.

In light of that guidance, many companies that qualified for and received loans paid them back.  The national media wrote articles shaming recipients with highly paid executives, or with other sources of funding.  If a company has another source of funding, does that make a PPP loan “unnecessary”?  If the business owners are highly paid, is the loan supporting “ongoing operations”?   If a “large” business did not repay its PPP loan by the May 7 safe harbor deadline, is it assumed to have acted in bad faith?

The CARES Act provided approximately $100 million for enforcement activity—funding for additional agents and attorneys to investigate and prosecute related fraud.  Policing stimulus abuse will be a high priority for the DOJ and others for years to come.  In fact, it has already begun. Since early May 2020, the Department of Justice’s Fraud Section as well as various United States Attorney’s Offices around the country have brought over 40 cases against nearly 60 borrowers from Rhode Island to California alleging fraud in PPP loan applications.  While these enforcement efforts have alleged serious instances of fraud, it’s not hard to imagine business owners in more nuanced cases also confronting enforcement inquiries.

The Fifth Amendment provides that the government should not bring criminal charges based on after-the-fact interpretations of a vague or ambiguous law.   A law is “vague” when it fails to give ordinary people fair notice in advance of the conduct it punishes, or is so standardless that it invites arbitrary enforcement.  Kolender v. Lawson, 461 U. S. 352, 358 (1983).  For some borrowers, the vagueness of the certifications may present a defense if they are charged criminally.  But inevitably, some businesses, that had been acting in good faith, will find themselves facing government investigators for whom the PPP certification has always been crystal clear.