Treasury, SBA Sued Over PPP Loan Eligibility Guidance

By Jon Hill
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Law360 (May 5, 2020, 7:55 PM EDT) -- Three tech businesses have filed suit in California federal court to block recent regulatory guidance that was meant to turn large companies away from the Paycheck Protection Program, arguing that the guidance overreaches and risks undermining the program's mission of keeping workers employed.

In a complaint dated Monday, the California-based Zumasys Inc. and two subsidiaries challenged the legality of the April guidance warning that public and private companies with other means of financing themselves probably don't qualify for the PPP, which offers forgivable loans of up to $10 million each for small businesses struggling amid the COVID-19 pandemic.

The guidance was issued by the Small Business Administration and U.S. Treasury Department after reports of national restaurant chains and other publicly traded companies qualifying for the program prompted a backlash, and it set a May 7 deadline for companies like these to repay their PPP loans or else face possible government scrutiny.

But Zumasys and its subsidiaries jBASE International Inc. and Total Computing Solutions LLC, all of which are privately held, told the court on Monday that this guidance contradicts the law and spirit of the PPP by importing an eligibility standard that Congress specifically waived for the coronavirus relief loans when it authorized them in the CARES Act.

The result, according to the suit, is something of a bait-and-switch for companies that previously applied to the program.  

"Employers that acted in reliance on the CARES Act by obtaining funding and not furloughing or terminating their employees, with the expectation the loans would be forgiven, now face the prospect of having to repay the PPP funds with money they either do not have or now must borrow, placing them in a worse financial position than had they never sought the CARES Act funds," Zumasys and its subsidiaries said.

"The 'guidance' is the opposite of what the law intended; that is, to help businesses employ American workers and keep businesses afloat during this pandemic," the trio added, naming the SBA, Treasury and their respective leaders as defendants.

Although other SBA loan programs require that prospective borrowers must be unable to get credit elsewhere before they can qualify, the CARES Act includes a provision stating that this requirement "shall not apply" to PPP loans.

But the guidance at the center of Monday's complaint is alleged to "re-impose" this requirement by suggesting that companies may be ineligible for PPP loans if they can tap "other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business."

According to the suit, that not only is contrary to the CARES Act, but it also poses a problem for companies like Zumasys, jBASE and TCS, which said they applied for and received a total of around $750,000 in PPP loans in April despite having access to other sources of credit.

The three companies said they pursued the program because they didn't want to lay off employees but didn't want to go into debt with all the current economic uncertainty, either. Given that PPP loans can be forgiven if they are used to keep and pay workers, the program offered the only way for the companies to "access liquidity necessary to retain employees in a manner that is not significantly detrimental to their business, that is, not incurring debt," the trio said.

Yet the companies said the recent SBA guidance threatens to upend this bargain by subjecting them to a "credit elsewhere" requirement that should have no bearing on their eligibility for the program under the CARES Act.

"Contrary to the law, a consequence to Plaintiffs is that since some of the PPP funds have already been used to retain employees, and if they are now required to repay those funds pursuant to the guidance, they will have to go into debt, thereby damaging their financial stability," the companies said.

The trio, which have about 70 employees between them, are seeking a court order that would bar the SBA and Treasury from enforcing the guidance, found in questions 31 and 37 of a PPP "Frequently Asked Questions" list maintained by the agencies. In addition to setting it aside as unlawful, the companies have asked that lenders be instructed to ignore the guidance when processing PPP loan applications.

In an email to Law360, Mona Hanna of Michelman & Robinson LLP, counsel for Zumasys and its two subsidiaries, criticized the SBA and Treasury's "underground regulation."

"The guidance is demanding that PPP loans be returned if there is 'credit elsewhere,'" Hanna said. "The problem is that funds have already been spent, and to give it back now would require our clients to use debt. That puts them in a worse position than had they furloughed the employees in the first place."

Monday's lawsuit is the latest in a number of PPP-related cases that have been filed in courts across the country since the program's April launch. Although many of the cases have been brought by small businesses upset with how banks have handled PPP loan applications, the SBA is also facing other litigation over its implementation of the program.

As of the end of last week, the SBA approved nearly $176 billion in new PPP loans with the $310 billion in additional funding that the program received in late April, according to federal officials. That's on top of the program's initial $349 billion in lending capacity, which was drained within two weeks after lenders started accepting PPP loan applications at the beginning of April.

Representatives for the SBA and Treasury did not immediately return requests for comment on Tuesday.

Zumasys, jBASE and TCS are represented by Mona Z. Hanna, Todd H. Stitt, Reuben A. Ginsburg and Jesse J. Contreras for Michelman & Robinson LLP.

Counsel information for the SBA and Treasury was not immediately available.

The case is Zumasys Inc. et al. vs. U.S. Small Business Administration et al., case number 8:20-cv-00851, in the U.S. District Court for the Central District of California.

--Editing by Amy Rowe.

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Case Information

Case Title

Zumasys, Inc. et al v. United States Small Business Administration et al

Case Number



California Central

Nature of Suit

Other Statutes: Administrative Procedures Act/Review or Appeal of Agency Decision


Josephine L. Staton

Date Filed

May 04, 2020

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