By Khorri Atkinson

Law360 (May 18, 2020, 10:17 PM EDT) -- A D.C. federal judge on Monday pushed commercial cleaning franchiser Jani-King to agree to temporarily freeze a suit since three of the company's franchises that sued the Trump administration last month over COVID-19 relief loans have since then received funding.

U.S. District Judge Trevor N. McFadden said during an afternoon teleconference that he's inclined to issue a stay because the plaintiffs are no longer suffering any denial of access to the $349 billion Paycheck Protection Program included in the $2 trillion Coronavirus Aid, Relief and Economic Security, or CARES, Act, which the president signed into law in late March.

The judge told a company attorney the U.S. Small Business Administration will soon issue new guidance to address PPP loan forgiveness for various categories of businesses, including holding companies such as Jani-King that don't produce goods or services itself and would not otherwise eligible for SBA funding. 

"I feel like I'm shooting at a moving target right now," Judge McFadden told Foley & Lardner LLP partner Michael J. Lockerby, who's representing the franchiser. "It strikes me that it makes sense to stay this case until we see what sort of regulations are being promulgated by the SBA and or to see what decision it may make specifically relating to the loans your clients were able to obtain."

Jani-King's April 15 complaint specifically challenged the administration's practice of denying COVID-19 relief loans for small businesses that are part of a "franchise" unless their agreement was approved for listing in the SBA Franchise Directory. According to court documents, the agency has long-established eligibility and affiliation rules used to preclude SBA financing for those not included in its directory. 

Jani-King argued that the CARES Act does not permit the SBA to deny loans to any franchised business that does not have its franchise agreement or "brand" listed in the directory. The SBA walked back its decision but noted in court filings that the business structure of companies such as Jani-King prohibits them from benefiting from agency funds. 

Lockerby, before agreeing to stay the case, had insisted the judge should rule on his client's summary judgment motion. He argued that the SBA's official position that because Jani-King's business model is ineligible for SBA financing, the agency may later decide to demand immediate repayment of the loan. 

But Judge McFadden rebutted that if he rules in favor of the company at this time, the SBA will certainly appeal to the D.C. Circuit and the matter would take about a year to get resolved.

"In the meantime, it strikes me that you're asking me to rule in a situation where there's a real question of standing," the judge added, again noting that the plaintiffs have received the loans sought and that the SBA has added Jani-King to the directory to obtain PPE loans.

"The SBA is trying to implement the CARES Act," he said. "They may well decide it makes sense to keep the loans. I imagine that is going to be your fastest route through comfort here." 

It's unclear when the SBA will issue new guidance on the issue but the government and Jani-King have both agreed to file a proposed stay order by Wednesday. Judge McFadden also did not say when he will issue the order. 

Jani-King is represented by Michael J. Lockerby, Peter Loh and Jack G. Haake of Foley & Lardner LLP.

The government is represented by Indraneel Sur and James J. Gilligan of the U.S. Department of Justice's Civil Division, Federal Programs Branch.

The case is Jani-King International Inc. et al. v. U.S. Small Business Administration, case number 1:20-cv-00989, in the U.S District Court for the District of Columbia.

--Editing by Jay Jackson Jr.

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