By Jacob W. Scott and Daniel F. McLennon of Smith, Currie & Hancock LLP
Published May 6, 2020
The May 7, 2020, safe harbor provision allowing Paycheck Protection Act (“PPP”) borrowers to return loan funds and be deemed to have made their loan application representations of need in good faith has been extended until May 14, 2020.
The CARES Act requires PPP loan borrowers to certify, among other things, (1) “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient,” and (2) “acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments."
The Department of the Treasury has published and regularly updates Paycheck Protection Program Loans Frequently Asked Questions (“FAQs”), which provide guidance to borrowers regarding how the Small Business Administration interprets the provisions of the CARES Act that created the Paycheck Protection Program. On April 23, 2020, Treasury published FAQ No. 31:
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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 SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
(Emphasis added). On April 28, 2020, in FAQ No. 37, Treasury clarified that the same standards apply to privately-held borrowers. FAQs 31 and 37, as well as the corresponding Interim Final Rule published by SBA, were widely believed to be in response to published reports that some very large businesses received significant PPP loans they did not need, and to the public outcry that followed.
The seemingly new requirement introduced by FAQs 31 and 37 prompted fear of prosecution for fraud and false claims among borrowers who had until then understood only that they had to have represented in good faith that economic uncertainty made the loans necessary. As a result, many borrowers considered taking advantage of the safe harbor provision, which allows that “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
Unfortunately for worried borrowers, neither SBA nor Treasury has since provided any guidance on how it will determine whether a borrower had the ability to draw upon other sources of funding to maintain its employee and payroll levels “in a manner that is not significantly detrimental to the business.” In response to requests from the Associated General Contractors of America, the American Subcontractors Association, and dozens of other organizations, on May 5, 2020, Treasury published FAQ No. 43, extending the safe harbor deadline by one week, and promising additional guidance:
Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Because the extension is automatic, there is nothing further for borrowers to do but await the forthcoming guidance on how Treasury and SBA will review loans for compliance with the good faith certification requirements. We will continue to monitor developments and provide updates as they become available.
Jacob W. Scott is Of Counsel in Smith Currie’s Washington, D.C. office. In serving his extensive national client base, Jake practices government contract law and construction litigation, with a focus on federal construction law, where the intersection of his skill sets in litigation and contracts manifests. He can be reached at email@example.com or 202.452.2140.
Daniel F. McLennon is a Partner in the San Francisco office of Smith Currie. He represents public entities, general contractors, subcontractors, suppliers, premises owners, manufacturers, professionals, corporations, and individuals. He practices in the areas of commercial and construction litigation. He can be reached at firstname.lastname@example.org or 415.394.6688.