False Claims Act and Other Potential Liability for Misuse of Paycheck Protection Program Loans

By Kathryn Doran posted 05-04-2020 04:29 PM

  

By Jonathan H. TalcottMichael F. RuggioE. Peter StrandMike BradshawNick GarifoKaylen Loflin of Nelson Mullins Riley & Scarborough LLP
Published April 28, 2020

In response to the economic crisis caused by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law and dedicated $349 billion to the Paycheck Protection Program, or PPP. After the entirety of the funds were exhausted in less than two weeks and Congress worked on passing an additional stimulus package to add an additional $310 billion to the PPP, public displeasure and dissatisfaction grew. While many struggling small businesses were unable to obtain loans in the first round of the PPP, some high profile public companies and large hotel and restaurant franchises received large PPP loans.

A renewed focus on who can and should receive PPP funds led to heightened scrutiny of the criteria for the PPP loans, including certain certifications that borrowers must make in order to receive the funds. Concerns have arisen about the False Claims Act, or FCA, and potential liability for businesses receiving loans under the PPP. Businesses are required to make certain certifications in order to receive funds, ultimately exposing the business to potential liability for submitting false claims to the government for payment if the business knowingly, recklessly or blindly makes false certifications in its application.

As the CARES Act’s cornerstone lending program, the PPP provides financial assistance in the form of forgivable loans to small businesses on a “first come, first served” basis in order to help small businesses continue operating during the COVID-19 crisis. A U.S. business is eligible to receive a PPP loan if the business, together with its affiliates, employs not more than the greater of (1) 500 employees, or (2) the size standard in number of employees established by the SBA for the industry in which it operates. Hotels and restaurants must have 500 or fewer employees per physical location. In addition to meeting the size criteria (including compliance with the SBA’s complicated affiliation rules), the business must certify certain facts for determination of eligibility to receive funds. The business must certify, in good faith, that:

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the business;
  • funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  • the business does not have another loan under the PPP and will not receive another loan under the PPP; and
  • for the period between February 15, 2020 and December 31, 2020, the business has not received amounts under Section 7(a) of the Small Business Act for the same purpose and duplicative of amounts applied for or received under a PPP loan. 


Economic Necessity Certification

A great deal of confusion and uncertainty has arisen in particular around the certification that “the uncertainty of current economic conditions make necessary the loan request to support the ongoing operations of the business.” This certification comes directly from the text of the CARES Act, and is open to a variety of interpretations. What level of economic need or harm is required or contemplated in order to justify this certification?

During the first round of the PPP, the SBA did not provide guidance directly on point. In response to complaints of how the PPP funds had been distributed, the SBA issued guidance, stating “[a]lthough the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere… borrowers must still certify in good faith that their PPP loan request is necessary…. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, 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 such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.” Elsewhere, the SBA specifically reminded private equity-backed companies that they would need to make the same representation, implying that access to additional private equity capital and financing should also be considered. Further, the guidance provides that borrowers who return first-round PPP funds by May 7, 2020 will be deemed to have made this certification in good faith.

While the guidance does little to explain what the certification means, it emphasizes the need to have a basis for the certification and back it up to the extent possible.  Board minutes should reflect discussions on point, and any relevant emails, correspondences, “burn-down” analyses or models should be kept on file. Backup for the good faith determination could include discussions of potential layoffs, closings, down-side projections, access to alternative capital or financing, and other adverse effects on operations.

Potential Liability

The CARES Act was signed into law on March 27, 2020 and SBA lenders began accepting applications for the PPP on April 3, 2020. The Small Business Administration did not issue an interim final rule until late Thursday, April 2, 2020. On April 3, 2020, the same day SBA lenders began accepting applications, the SBA issued and updated its form borrower application and lender application, provided guidance on affiliate issues, and issued another interim final rule on affiliation and faith-based organizations. Even after SBA lenders began accepting applications and loans began being funded, the SBA continued to issue additional guidance to clarify and refine the PPP.

Businesses and lenders moved quickly to submit applications for PPP loans, even as critical terms and guidance were still being developed by the SBA. The overwhelming demand for PPP loans, limited initial funding for the program, and “first come, first served” nature of the application process contributed to an environment of heightened risk of liability for businesses rushing to submit applications.

Even though the eligibility criteria and certifications in the PPP loan application require additional guidance and interpretation to make requirements clear, businesses and individual applicants are still exposed to criminal liability for false statements in their applications. In fact, the PPP application states that “knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.” In addition, businesses and individual applicants will have liability under the False Claims Act.

Further, the April 2 interim final rule states “[i]f you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.” As previously mentioned, the SBA has also stated that if a borrower returns PPP funds by May 7, 2020, they will be deemed to have made the “economic necessity” certification in good faith.

Even in the absence of any legal liability, borrowers must also consider the potential negative public reaction to receiving the loan. For some companies, the risk of public backlash may outweigh the need for the PPP funds.

False Claims Act

Enforcement action related to PPP funds is likely to mirror enforcement actions taken to recover funds issued under the Troubled Asset Relief Program, or TARP, which was similarly instituted in the heat of the moment in response to the 2008 financial crisis. If the enforcement actions are similar, PPP applications will not be scrutinized today, but will likely be the subject of future legal action under the False Claims Act, or FCA, 31 U.S.C. § 3729 et seq. In the aftermath of 2008, the U.S. Department of Justice, or DOJ, and qui tam relators (whistleblowers) pursued FCA claims targeting entities that benefited from government spending, which has resulted in almost $40 billion recovered. As DOJ has already announced it will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes” and established a national hotline for whistleblowers to report suspected fraud, it follows that any business receiving funds under the PPP will need to minimize its risk of exposure under the FCA as DOJ and the FCA relator’s bar will initiate actions to recover PPP funds allegedly obtained from the government in a false or fraudulent manner.

As described above, the PPP application makes clear that it is the responsibility of the business to ensure that it meets the eligibility requirements, including the required certifications. These certifications can create significant FCA risk as the guidance continues to change and there is relatively little guidance available to businesses to determine how the government defines and interprets many of the terms in the applications for funds. The SBA maintains that “[b]orrowers . . . may rely on the guidance provided in this [FAQ] as SBA’s interpretation of the CARES Act and of the [PPP Interim Final Rule]. The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time.” This supposed safe-harbor, however, is unlikely to provide meaningful FCA protection because whether actions “conform” to guidance or rulemaking is a fact-intensive question in FCA actions and the DOJ or whistleblowers could argue that any small, perceived deviation from the guidance creates grounds for liability. In addition, under the FCA, “knowingly” making a false certification can consist of actual knowledge, reckless disregard of the truth, or making a false certification in deliberate ignorance. 

If PPP enforcement action mirrors the enforcement actions for recoveries of TARP funds, businesses must keep in mind that small, technical, or even logical mistakes on applications during an emergency period can be interpreted as fraud years after the crisis. Businesses therefore should exercise extreme precaution to ensure the accuracy of both their applications and subsequent documentation of their use of the PPP loan proceeds.

These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.

 

 

Jon TalcottJon Talcott is a Partner in the Washington, DC office of Nelson Mullins. He can be reached at jon.talcott@nelsonmullins.com or (202) 689-2806. 









Mike RuggioMike Ruggio is a Partner in the Washington, DC office of Nelson Mullins. He can be reached at mike.ruggio@nelsonmullins.com or (202) 689-2868.








Peter StrandPeter Strand is a Partner in the Washington, DC office of Nelson Mullins. He can be reached at peter.strand@nelsonmullins.com  or (202) 689-2983.








mike BradshawMike Bradshaw is an Associate in the Washington, DC office of Nelson Mullins. He can be reached at mike.bradshaw@nelsonmullins.com or (202) 689-2808.








Nick GarifoNick Garifo is an Associate in the Washington, DC office of Nelson Mullins. He can be reached at nick.garifo@nelsonmullins.com or (202) 689-2925.








loflin.jpegKaylen Loflin is an Associate in the Washington, DC office of Nelson Mullins. She can be reached at kaylen.loflin@nelsonmullins.com or (202) 689-2785.






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