PPP guarantees loans for small businesses of a sexual nature
The effects of the coronavirus pandemic continue to play out in unexpected ways, as this blog did covered at many occasions. Now the Sixth Circuit has ruled on loan guarantees as part of the Paycheck Protection Program for Sexual Businesses. Can the Small Business Administration, consistent with long-standing agency policy, prohibit small, sexually-oriented businesses from being eligible for federally guaranteed payday loans under the P3? The Sixth Circuit and the Eastern District of Michigan both said “no”.
SBA judges sexually-oriented businesses ‘ineligible’ to participate in PPPs
The PPP – part of Congress’ efforts under the March 2020 CARES Act “to alleviate the economic devastation caused by the COVID-19 pandemic” – allows the SBA to guarantee billions in private loans to small businesses. Loans made by SBA participating banks to small businesses to meet their salary obligations (among others) are eligible for the remission. The SBA, rather than the small business, pays the lender the loan amount plus interest.
The SBA has “extraordinarily broad powers” to help, advise, assist and protect the interests of small businesses, including by guaranteeing loans made by private lenders to small businesses. As part of these broad powers, since at least January 1996, the SBA has ruled certain sexually-oriented businesses “ineligible” to participate in SBA loan programs. This ban continues today.
Shortly after the enactment of the CARES Act, the SBA adopted a set of rules to implement PPP loan guarantees. These rules incorporated the SBA’s ban on sexually-oriented businesses from participating in SBA loan programs. A consortium of adult entertainment and fantasy stores filed an emergency motion for a preliminary injunction, imploring the district court to prohibit the SBA from denying PPP loans on the basis of the “sexual nature” of their businesses .
District court adheres to SBA PPP implementation rules
Apply the Chevron doctrine, the district court ruled the CARES Act unambiguously prohibits the SBA from excluding sexually-oriented businesses from PPP. Under the familiar Chevron “In two stages”, the tribunal first asks if “Congress has ruled directly on the precise question in dispute”. If the law is unambiguous, that is the end of the question; the court applies the law as written. “However, if the statute is ambiguous, then (and only then)” does the court proceed to the second stage of the Chevron analysis – respect for the agency’s reasonable legal interpretation.
Stressing that Chevron the first step is not a toothless formality, the court explained that Congress identified “only two criteria” for a company to be eligible for PPP loans: (1) the company must have less than 500 employees (2 ) during the “covered period” of the PPP. As long as a company has fewer than 500 employees during the period covered, Congress has provided that “any business. . . must be eligible to receive an SBA secured loan. Congress’ use of “everything” and “must” in PPP, court said, “forces SBA to deem eligible for PPP loan guarantee all company ”which employed less than 500 people during the period covered. Thus, according to the clear terms of the statute, the SBA could not exclude sexual enterprises from the PPP.
Sixth circuit rejects SBA emergency maintenance move
Last Friday a Sixth Circuit Panel (Stranch, J., Donald, J.) agrees. The Court explained that the term “everything” has a broad meaning, makes no distinction or limitation and therefore implies “all member of the class or group. This “broad interpretation” was also appropriate given “the intention of Congress to provide support to as many displaced American workers as possible.” Or as the district court said, “Congress didn’t pick the winners and losers of the PPP. Instead, through the PPP, Congress provided a temporary paycheck to all Americans employed by all small businesses that met both eligibility conditions, even businesses that may have been disadvantaged in normal times. Because the district court’s decision was reasonable, the Sixth Circuit denied the SBA’s emergency petition to stay the injunction order.
Judge Siler dissented, saying the PPP is indeed ambiguous. Returning to an argument raised by the SBA, the dissent argues that the PPP says that it “must be administered” under the same terms, conditions and processes “as the others. [SBA] loans, which exclude private clubs and adult entertainment businesses from eligibility. This additional wording, according to the dissent and the SBA, creates ambiguity as to whether the SBA’s long-standing policy of excluding sexually-oriented businesses from loan eligibility is permitted under the PPP.
On one key point, the Siler dissent – a concise effort drafted under unusual time pressure – says aloud what we’ve all thought at one point or another:
It’s also a weekend and time is running out.
© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 149