Paycheck Protection Program Loans to Brewers: Risks and False Claims Act Liability
May 14, 2020
By: Jennifer L. Tsyn
One of the key programs under the CARES Act is the forgivable Paycheck Protection Program (PPP) loan fund. Many brewers may have applied for and received a PPP loan.
Since the inception of the program, the PPP loan application has required businesses to certify that the “current economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.” However, this certification is now being viewed in a new light. When news broke that companies such as Shake Shack and Ruth’s Chris had received PPP loan funds, Treasury Secretary Mnuchin said that businesses need to look carefully at their applications to be sure they can certify that the forgivable loan is necessary. The secretary has also announced that “for any [PPP] loan over $2 million, the SBA will be doing a full review of that loan before there is loan forgiveness.”
What is “Economic Uncertainty”?
The definition of “economic uncertainty” is still by no means clear and is a highly discretionary matter. The department issued the following guidance on April 24, 2020, which was then updated on May 5: “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…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.”
The guidance also states that any business that applied for a PPP loan prior to April 28, 2020 and repays the loan in full by May 14, 2020 will be deemed to have made the required certification in good faith.
What’s Your Risk?
So, what is the risk to a brewer that receives a PPP loan if the SBA or the Justice Department determines they didn’t need the loan because “current economic uncertainty” didn’t make the PPP loan “necessary to support the ongoing operations” of the brewer, or that the brewer had access to “other sources of liquidity sufficient to support… ongoing operations in a manner that is not significantly detrimental to the business”? One risk is a potential False Claims Act (“FCA”) claim.
The FCA provides that a claim for federal funds (here, a PPP loan) is false when it rests on a false representation of compliance with the program’s requirements. The FCA allows the government or a whistleblower to bring an action against the organization for making a false representation. Liability under the FCA can include a payback of the federal funds plus substantial penalties and fines, and possibly treble damages. The FCA’s unique enforcement provisions create a strong incentive for individuals to bring suit against current or former employers, or competitors, alleging fraud against the government by means of false certifications. The substantial damages and penalties available under the FCA can give rise to significant exposure for breweries.
What Should You Do?
So, what should you do if you have received a PPP loan, have an application pending for a PPP loan or are considering applying for a PPP loan? Pay close attention to the information provided and certifications made in an application. Read the language carefully and be sure you know everything necessary to make the certification. In some cases, the certification is also made by owners of 20% or more of the organization. The same care should be taken for those certifications. You should also:
- Document, as necessary, the basis behind certifications and calculations.
- Make sure there are personnel charged with understanding the requirements of the program. The regulations are complex and additional regulations may be added. Your organization is responsible for understanding and following these rules.
- Develop a compliance protocol. There are detailed requirements for the use of the funds. You should develop a process to track when the funds were received and how they were used. This documentation should be retained in a safe manner so that it can be accessed in case you face an audit in the future.
- Check with your professional partners – lawyers and/or accountants – if you have any questions about the program’s rules and how they apply to you.
If you have questions about this information memo, please contact Jennifer Tsyn or the attorney at the firm with whom you are regularly in contact.