Summary
The U.S. Supreme Court’s recent overturning of the Chevron Deference Doctrine calls into question several Chevron-based federal court rulings allowing the Small Business Administration (SBA) to exclude many categories of businesses from eligibility for Paycheck Protection Program (PPP) loans—contrary to the broad eligibility envisioned by the statute creating the PPP, which many companies relied on when they took the loans.
The Upshot
- Businesses whose PPP forgiveness applications have been denied pursuant to SBA eligibility criteria have a strong argument for reevaluation of their cases and the legal positions of the SBA and would-be private plaintiff relators seeking to sue businesses under the False Claims Act (FCA).
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the PPP loan initiative in 2020 as part of the SBA’s Section 7(a) loans, but, by its terms, seemingly expanded eligibility for such loans. However, the SBA has interpreted the CARES Act as incorporating preexisting rulemaking, including a rule, the Exclusion Rule, which restricts the eligibility of businesses in certain industries, such as those “primarily in the business of lending.”
- Many financial services businesses applied for and received PPP loans based on their understanding at the time that they were eligible—and in many cases, before the SBA passed the Exclusion Rule. Despite using the loans in covered ways, which should have entitled them to forgiveness, many businesses have had forgiveness applications denied as ineligible under the Exclusion Rule.
- In addition, whistleblowers under the FCA, relying on publicly available data identifying PPP borrowers by industry code, have brought FCA litigation against businesses “primarily in the business of lending” premised on the Exclusion Rule’s applicability.
- Prior to the overturning of Chevron, courts were divided on whether the Exclusion Rule was a permissible interpretation of the CARES Act. The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, nullifying required deference to agency interpretations, casts doubt on the viability of the vast majority of court rulings upholding the Exclusion Rule.
The Bottom Line
Financial services businesses denied PPP loan forgiveness based on the Exclusion Rule now have an even stronger argument that courts should require forgiveness. Additionally, for businesses facing an FCA investigation or litigation premised on PPP-loan ineligibility under the Exclusion Rule, Loper significantly undermines the premise that they were ineligible for their loans or, at the least, the ability to prove intent to defraud given the uncertainty and lack of clarity concerning the Exclusion Rule’s applicability.
This change creates an opportunity for businesses that have been denied PPP loan forgiveness under the Exclusion Rule to appeal and argue for forgiveness without the barrier of deference to the SBA. The attorneys in Ballard Spahr’s White Collar Defense/Internal Investigations Group represent clients in challenging PPP loan forgiveness denial.
The recent U.S. Supreme Court decision in Loper Bright Enterprises v. Raimondo overturning Chevron deference bolsters arguments that PPP borrowers operating in the lending industry were eligible for PPP loans they received. The ruling also strengthens challenges to PPP loan forgiveness denials and defenses against FCA investigations and litigation by calling into question case law upholding the SBA’s application of its general section 7(a) loan rules to the PPP, newly created in the CARES Act.
In the last few years, many financial services companies that were deemed eligible when they applied and used the loans in covered ways have nonetheless had their PPP loan forgiveness applications denied by the SBA. The SBA’s basis for this is the Exclusion Rule: a rule it enacted shortly after the CARES Act was passed that excluded businesses “primarily in the business of lending” (in addition to a number of other business types) from eligibility for PPP loans. This rule applied a pre-CARES Act regulation to loans made under the CARES Act, even though the Act explicitly expanded eligibility for loans.
Similarly, PPP borrowers arguably fitting into the “business of lending” category have faced FCA investigations and litigation initiated by relators relying, in part or in whole, on industry code classifications and the Exclusion Rule on the theory that such borrowers knew or should have known they were not eligible for a PPP loan pursuant to the Exclusion Rule and, therefore, falsely submitted claims for PPP payments.
Specifically, the CARES Act provides, in a section titled “increased eligibility for certain small businesses and organizations”:
During the covered period, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) shall be eligible to receive a covered loan if the business concern, nonprofit organization, veterans organization, or Tribal business concern employs not more than the greater of (I) 500 employees; or (II) if applicable, the size standard in numbers of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.
Despite this expansive definition of eligible businesses, the Exclusion Rule prohibits, inter alia, banks, life insurance companies, “[certain b]usinesses involved in gambling activities,” and political lobbying from receiving SBA-backed loans. 13 C.F.R. § 120.110(b), (d), (g), (r).
Based on the mandatory language in the CARES Act expanding eligibility to all small business concerns that meet the size requirements, excluded businesses have argued that the SBA’s Exclusion Rule is contrary to law and must be set aside.
To date, courts have been divided as to whether the SBA exceeded its authority under the CARES Act when it enacted the Exclusion Rule. Numerous courts have held that the Exclusion Rule exceeds the SBA’s statutory authority. See, e.g., DV Diamond Club v. Small Business Administration, 960 F.3d 743, 746-47 (6th Cir. 2020); Camelot Banquet Rooms, Inc. v. U.S. Small Bus. Admin., No. 20-1729 (7th Cir. May 20, 2020); In re Roman Catholic Church of Archdiocese of Santa Fe, No. 18-13027 T11, 2020 WL 2096113, at *7 (Bankr. D.N.M. May 1, 2020).
Other courts have resolved these challenges in the SBA’s favor, often relying on Chevron deference to find that the Exclusion Rule was a reasonable exercise of authority. See, e.g., In re Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1262 (11th Cir. 2020); Diocese of Rochester v. United States SBA, 466 F. Supp. 3d 363 (W.D.N.Y. 2020) (same); Defy Ventures, Inc. v. United States SBA, 469 F. Supp. 3d 459, 474 (D. Md. 2020) (same). Now that Chevron has been overturned, litigants have a strong argument that this latter set of decisions have been overruled.
Under Chevron, courts evaluating an agency’s construction of a statute it administers were required to defer to the agency’s interpretation as long as (1) the statute did not directly speak to the question at issue, and (2) the agency’s interpretation was “permissible.” Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 842-43 (1984). This is a highly deferential standard.
In cases upholding the Exclusion Rule, courts almost uniformly have held that the CARES Act is ambiguous as to whether the excluded businesses, such as those primarily in the business of lending, are eligible for PPP loans. As Chevron instructed, they deferred to the SBA’s interpretation, and upheld the rule. See, e.g., DACO Invs., LLC v. United States SBA, No. 6:22-CV-01444, 2024 U.S. Dist. LEXIS 33763 (W.D. La. Feb. 22, 2024); In re Gateway Radiology Consultants, P.A., 983 F.3d 1239 (11th Cir. 2020); Diocese of Rochester v. United States SBA, 466 F. Supp. 3d 363 (W.D.N.Y. 2020).
This analysis is no longer viable. In Loper, the Supreme Court overturned Chevron deference, holding that it violates the essential principle that courts have the obligation and responsibility of interpreting the law, both under the constitution and the Administrative Procedure Act. “When the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits.” Id. at *37. The Supreme Court thus clearly instructed that courts can no longer defer to agencies in statutory interpretation.
Because courts may no longer defer to agencies’ interpretations, every case that has upheld the Exclusion Rule after finding that the CARES Act was ambiguous—which consists of nearly every case finding in the SBA’s favor—should be viewed with heavy scrutiny. Rather than evaluating whether the Exclusion Rule aligned with the best interpretation of the CARES Act, courts were conducting a highly deferential review of whether it was “permissible.” Now courts must start at square one and evaluate whether the best reading of the CARES Act is that all businesses that met the size and other requirements of the Act were eligible, including those businesses disqualified by the Exclusion Rule. Further, this renewed analysis must consider the many cases that already have held, despite Chevron, that the Exclusion Rule directly contradicts the clear language of the statute and therefore must be rejected.
This change creates an opportunity for businesses that have been denied PPP loan forgiveness under the Exclusion Rule to appeal and argue for forgiveness—without the barrier of deference to the SBA and with the unfavorable case law functionally overruled—that their loans should be forgiven because the Exclusion Rule violated the terms of the CARES Act.
And those businesses facing FCA investigations and litigation premised on the notion that businesses “primarily in the business of lending” are categorically excluded from PPP participation can now point to the dearth of valid case law supporting the exclusion. At the very least, that courts have consistently found the CARES Act ambiguous and the new uncertainty of how the circuits will interpret it puts in serious doubt whether intent to defraud can be established with respect to knowledge of eligibility standards.
The attorneys of Ballard Spahr’s White Collar Defense/Internal Investigations Group defend corporate and individual clients in responding to government investigations, administrative rulings, and agency enforcement, as well as litigation by relators and other private plaintiffs. This includes representing businesses denied PPP loan forgiveness and other challenges to government action under the CARES Act.
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