5-1-2020 Client alert - Potential Liability Under the False Claims Act for Making False Certifications in SBA PPP Loan Applications.
Any business applying for and receiving a Paycheck Protection Program (“PPP”) loan through the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) Small Business Administration (the “SBA”) loan program is required to make various certifications in its loan application to the federal government, including certifying to the veracity of the following:
- That current economic uncertainty makes the loan necessary to support the ongoing operations of the business;
- That the funds will be used to retain workers and maintain payroll, pay healthcare costs, and make mortgage, lease payments or utility payments; and
- That the business has not separately received or applied for funds from the CARES Act’s SBA PPP for the same amount and purpose.
These certifications are made upon submission of the PPP loan application and, in our view, made once again upon funding through the act of executing the loan documents and accepting funds. It is important for a business receiving a PPP loan to pay careful attention to these certifications and the potential consequences of making a false statement. The loan application states that any borrower who knowingly makes a false statement to obtain a guaranteed loan from the SBA is subject to the following penalties: (i) 18 U.S.C. §§ 1001 and 3571 including imprisonment of not more than five years and/or a fine of up to $250,000; (ii) 15 U.S.C. § 645 including imprisonment of not more than two years and/or a fine of not more than $5,000; and (iii) if submitted to a federally insured institution, 18 U.S.C. § 1014, imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
Further, borrower's making false claims in a PPP loan application face liability under the False Claims Act (the “FCA”), which makes it unlawful for any person to knowingly, recklessly or blindly submit a false claim for payment to the federal government if the funds are to be spent or used on the government’s behalf or to advance a government program or interest. The FCA has been applied in the context of various federal stimulus or bailout investment programs and was the basis for enforcement actions to recover funds issued under the Troubled Asset Relief Program (“TARP”), which was the federal government’s response to the 2008 financial crisis. Applicants who submit false information or certifications to the federal government could be held liable for civil monetary penalties and treble damages under the FCA.
This begs the following question: With little or no guidance available from the federal government in the absence of regulations, how can a business applying for a PPP loan ensure that it is lawfully making the certifications required in its loan application? In particular, the certification that “the uncertainty of current economic conditions make necessary the loan request to support the ongoing operations of the business” has raised significant confusion among borrowers, as businesses have struggled to determine what level of economic need is required in order to justify this certification.
To that end, the SBA issued guidance on April 23, 2020, 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.”[1] The SBA also stated that borrowers who return PPP loan funds by May 7, 2020, will be deemed to have made this certification in good faith. Based on the SBA's release of FAQ #31, subsequent release of FAQ #37 (which expanded the scope of FAQ #31 to private companies, and the issuance of the Interim Final Rule on Corporate Groups on April 30, 2020 (which limited funding to corporate groups to $20,000,000), it appears the current regulatory backlash is focused upon large corporate groups whose subsidiaries receive PPP loans.[2]
Because the FCA does not apply to borrowers who make the certification prudently and without knowledge that the certification was false, we believe borrowers should memorialize their basis for the certification and support that basis to the extent possible, it is important to document the process and analysis by which your business determined the PPP loan was necessary and appropriate. Board minutes should document any relevant discussions relating to the decision to apply for the loan, and any relevant emails, correspondences, and analyses should be kept on file. Supporting materials demonstrating the reasoning and process for the good faith decision to apply for the loan could include discussions regarding potential layoffs, furloughs, pay cuts, increased payables, covenant defaults, dilutive equity investments, closings, down-side projections, lack of access to alternative capital or financing, and other adverse effects on the business’s operations. Businesses should also document any advice received from their accountants, legal counsel, government, and news sources. Keep in mind the primary purposes of the PPP loan program: (1) to keep small businesses open and people employed; and (2) to ensure that businesses have the necessary liquidity to help restart the economy.
It is also noteworthy that many of the enforcement actions relating to TARP and the 2008 financial crisis stemmed from employee whistleblower complaints. Therefore, it is important that your businesses’ actions and decisions as they relate to the PPP loan will be perceived as reasonable by your employees (to the extent they are aware of the loan).
Lastly, keep in mind that if you have applied for a PPP loan but believe that your business can no longer lawfully certify as to the necessity of the loan, the SBA has held that any first-round PPP loan applicants may satisfy the certification requirement by returning funds on or before May 7, 2020.
Please contact your Woods Oviatt attorney or the attorneys listed below if you have any questions regarding the contents of this client alert or any questions related to COVID-19, generally.
[1] FAQ #31 Paycheck Protection Program Loans Frequently Asked Questions issued by the Small Business Administration in consultation with the Department of the Treasury (https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf).
[2] See III.1. https://home.treasury.gov/system/files/136/IFR--Corporate-Groups-and-Non-Bank-and-Non-Insured-Depository-Institution-Lenders.pdf
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