By Kelly Zegers

Law360 (May 18, 2020, 9:46 PM EDT) -- The Sixth Circuit has refused to pause a Michigan federal judge's order blocking the U.S. Small Business Administration from withholding Paycheck Protection Program loans from strip clubs and other sexually oriented businesses, although one panelist sharply dissented.

A three-judge panel majority denied the agency's emergency motion for a stay Friday, saying its ban on loans for strip clubs, adult novelty stores and the businesses that serve them goes against the broad reach of PPP loans under the Coronavirus Aid, Relief and Economic Security Act.

DV Diamond Club of Flint LLC, which operates as Little Darlings, and a slew of other businesses sued the SBA last month, claiming the agency violated the Constitution by implementing regulations barring PPP loans for establishments that have "live performances of a prurient sexual nature."

Last Monday, U.S. District Judge Matthew F. Leitman granted the club a temporary restraining order preventing the agency from enforcing its ineligibility rule, saying Congress provided temporary paycheck support to all Americans employed by small businesses that meet the program's size standards, "even businesses that may have been disfavored during normal times."

The district court and Sixth Circuit did not focus on the First and Fifth Amendment issues raised by the businesses, but applied Chevron deference, or deferring to agencies' reasonable interpretations of law. Judge Leitman concluded the CARES Act unambiguously barred the SBA from precluding sexually oriented businesses from receiving PPP loan guarantees during the pandemic.

The appeals court majority noted that the CARES Act carries an expansive meaning because it says that "any business concern" is eligible for a loan if it has no more than 500 employees or meets industry-based size standards. 

"That broad interpretation also comports with Congress's intent to provide support to as many displaced American workers as possible and, in doing so, does not lead to an 'absurd result' as the SBA claims," the majority said.

Harm to the SBA in the absence of a stay is "far outweighed" by harm to the businesses if a stay is granted, the majority said, adding that "the public interest is served in guaranteeing that any business, including plaintiffs', receive loans to protect and support their employees during the pandemic which, we can all agree, constitutes extraordinary circumstances."

In his dissent, U.S. Circuit Judge Eugene E. Siler Jr. said the relevant language in the CARES Act seems to be ambiguous and the district court's injunction should be stayed to give time to decide on the merits.

He said if Congress intended for any business entity to be eligible for PPP loans, it could have simply said so without providing the additional language contained in the text that noted the loans are to be handled under the same terms as the SBA's 7(a) loans, which exclude private clubs and adult entertainment businesses from eligibility.

"They should not be allowed to ride the gravy train without a careful analysis of this law more than we can give them on short notice," Judge Siler said.

Bradley J. Shafer, representing DV and others, said they believe the Sixth Circuit majority reached the correct decision, noting that they had hoped to get a full ruling that included the constitutional issues they raised.

"Congress was very specific in regard to how this money can be used," Shafer said.  

The PPP loans must be used for payroll, rent, mortgage interest and utilities to get loan forgiveness, he continued, "so these are not loans that are going to these companies for these companies to keep or use however they want. The employees of these businesses have to buy food just like everybody else out there and they're going to put that money into the stream of commerce to keep our economy going."

Representatives for the SBA declined to comment.

According to the suit, DV and the other businesses have been closed since March 23, when Michigan Gov. Gretchen Whitmer issued an order suspending "activities that are not necessary to sustain or protect life" and ordering all employees not designated as critical infrastructure workers to stay home.

The strip club said it applied for a loan from the $349 billion Paycheck Protection Program created by the $2 trillion CARES Act, signed into law in March. 

The SBA filed its emergency motion for a stay pending appeal Wednesday, two days after the district judge's order, noting that it was required by the judge to notify lending institutions by the end of Friday, May 15, that its regulation does not preclude the adult entertainment businesses from receiving PPP loans. 

The SBA is fighting similar lawsuits in other courts. Earlier this month, the Seventh Circuit stayed a preliminary injunction that a Wisconsin federal judge granted to strip clubs also challenging the SBA's ineligibility rule on First Amendment grounds pending appeal. 

The SBA, in consultation with the U.S. Treasury Department, released applications for PPP loan forgiveness on Friday.

U.S. Circuit Judges Eugene E. Siler Jr., Jane Branstetter Stranch and Bernice B. Donald sat on the panel for the Sixth Circuit.

The businesses are represented by Bradley J. Shafer and Matthew J. Hoffer of Shafer & Associates PC.

The SBA and Treasury Department are represented by Courtney L. Dixon, Peter A. Caplan and James J. Gilligan of the U.S. Department of Justice's Civil Division.

The case is DV Diamond Club of Flint LLC et al. v. Small Business Administration et al., case number 20-1437, in the U.S. Court of Appeals for the Sixth Circuit.

--Additional reporting by Hailey Konnath, Mike LaSusa and Lauraann Wood. Editing by Breda Lund.

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