Treasury Shoos Bigger Cos. Away From Virus Relief Loans

By Jon Hill
Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.

Sign up for our Banking newsletter

You must correct or enter the following before you can sign up:

Select more newsletters to receive for free [+] Show less [-]

Thank You!

Law360 (April 23, 2020, 10:53 PM EDT) -- The U.S. Treasury Department issued guidance Thursday cautioning deep-pocketed companies about borrowing money through a federal coronavirus relief program for small businesses, a move that comes as some national chains have sparked controversy by obtaining loans through the program.

In an updated guidance document, Treasury said that companies considering applying for the Small Business Administration's Paycheck Protection Program should think carefully about their "economic need" for the funds, including by reviewing whether they have other sources of financing to support their operations.

Although eligibility for the program isn't conditioned on being unable to get loans anywhere else, borrowers must still confirm that "current economic uncertainty makes this loan request necessary," according to the guidance.

"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," Treasury said.

And if the guidance gives companies second thoughts about their eligibility for a PPP loan they've already applied for, they will have two weeks to return the money.

"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," Treasury said.

The guidance comes as a string of restaurant chains and other companies have announced that they are giving back millions of dollars in PPP loans following widespread criticism that high-powered brands and well-connected firms managed access the program before it exhausted its initial $349 billion in funding last week.

Created to provide stop-gap financing to help small businesses avoid layoffs during the COVID-19 pandemic, the loan program is generally meant for firms with 500 or fewer employees, but the eligibility rules include exceptions allowing some companies with larger overall workforces to participate.

Still, with numerous mom-and-pop businesses having complained about being turned down for the program and encountering other application difficulties, policymakers have been keen to prioritize smaller firms as the program gears up for a more than $300 billion expansion approved by Congress this week.

"The intent was not for companies that have access to plenty of liquidity and other sources," Treasury Secretary Steven Mnuchin said at a White House briefing Tuesday. "To the extent these companies didn't understand this and they repay the loans that will be okay. And if not, there'll be potentially other consequences."

Thursday's guidance does not elaborate on those potential consequences, but Scott Pearson, a financial services partner at Manatt Phelps & Phillips LLP, told Law360 that False Claims Act liability could be on the table, along with the loss of one of the program's marquee benefits, PPP loan forgiveness.

More broadly, Pearson said that the document makes it "crystal clear" that companies could face future government scrutiny over how much they really needed their PPP loans, a reversal from the initial messaging around the program that emphasized how broadly available the loans would be.

"Basically, what they're doing is they're retreating from earlier statements that were intended to make companies comfortable applying for the money," Pearson said.

Indeed, given how fuzzy a determination of economic need could be, the risk of being second-guessed by the government or a private plaintiff angling to bring a qui tam suit could actually discourage many companies from participating in the program, according to Pearson.

"There's no question that there are lots of companies that are going to hesitate to take this money now, and perhaps they'll lay off their employees because of it," Pearson said. "They may decide there's less risk laying off employees than taking one of these loans and getting sued down the road."

--Editing by Breda Lund.

For a reprint of this article, please contact

Hello! I'm Law360's automated support bot.

How can I help you today?

For example, you can type:
  • I forgot my password
  • I took a free trial but didn't get a verification email
  • How do I sign up for a newsletter?
Ask a question!