Biz Owners Barred For Criminal Past Win PPP Extension

By Reenat Sinay
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Law360 (June 30, 2020, 10:07 PM EDT) -- Three small-business owners with criminal records will have three extra weeks to apply for coronavirus relief under the Paycheck Protection Program after a Maryland federal judge found that previous versions of a Small Business Administration rule that excluded them were "arbitrary and capricious."

In an order addressing two similar suits on Monday, U.S. District Judge Catherine C. Blake extended the June 30 deadline to July 21 to give the business owners enough time to apply for PPP funds after the SBA eased restrictions based on criminal history last week, making them newly eligible. The extension applies only to the specific plaintiffs in the suits, according to the order.

"The court notes that the late revision of the rule on June 24, 2020, has put the plaintiffs in a difficult situation and based on the record before the court, is likely to cause the individual plaintiffs irreparable harm since they may not be able to obtain PPP funding," Judge Blake said. "Extending the deadline would also serve the public interest."

The suits, filed in June with representation from organizations including the New Civil Liberties Alliance and the American Civil Liberties Union, accuse the SBA of acting "arbitrarily and capriciously" with its exclusion of borrowers with criminal history from the $660 billion PPP, which was first launched in April as a way to avert mass layoffs among small businesses during the COVID-19 pandemic.

Created by the Coronavirus Aid, Relief and Economic Security Act, the PPP offers federally guaranteed loans of up to $10 million each that can be forgiven if small businesses use the money for payroll and other overhead expenses.

The first suit was filed by Altimont Mark Wilks, who owns a convenience store and a logistics company for automotive products in western Maryland, the second by the nonprofit Defy Ventures, Maryland electrician Sekwan Merritt and New York print shop owner John Garland. Defy Ventures helps formerly incarcerated individuals start their own businesses, according to the filing.

On Monday, Judge Blake sided with the plaintiffs on their argument that the first two versions of the criminal record exemption rule in April and in mid-June were "arbitrary and capricious" because they provided no explanation for the exclusion.

The rule, which has been revised multiple times since its inception, initially excluded a broad range of individuals who owned at least 20% of a small business and had any pending criminal charges, were on probation or parole, or had been convicted of any felony within the last five years.

But Judge Blake found that the most recent update to the rule, on June 24, "provides a reasoned explanation for a more limited criminal history exclusion."

The current version narrows the restrictions to business owners who are currently facing felony charges and those who were paroled within the last five years on money-related crimes or within one year for other felonies, among other changes.

The judge said that the rule now properly explains that owners with pending felony charges or more recently out on parole could put the creditworthiness of their companies in question if they became incarcerated or were reincarcerated, and that a history of money-related crimes speaks to the SBA's concerns over the potential misuse of funds.

Beyond finding earlier versions of the criminal history rule unlawful, Judge Blake also rejected the SBA's argument that the case is now irrelevant, finding that the business owners now face additional challenges due to the lost time.

"The court declines to find the case moot as to the individual plaintiffs and their businesses, even though they are now eligible to apply for PPP loans," Judge Blake said. "As discussed above, the individual plaintiffs still face difficulties in applying at the last minute either because banks are no longer accepting applications or because banks are still using old forms with the criminal history exclusion. Therefore, the plaintiffs continue to face ongoing harm because of the allegedly unlawful prior iterations of the rule."

The judge disagreed with Wilks' claim that the criminal history exclusion violates the CARES Act, finding that Congress had presumed eligibility restrictions when delegating PPP authority to the SBA, and that the SBA is within its rights to consider borrowers' ability to repay the loans.

"While the court agrees that the PPP functions differently than the SBA's other loan programs, it is not unreasonable to consider ability to repay, because if the loans are not used for specified purposes, then they are not forgivable," she said.

Judge Blake also denied Defy Ventures' request to extend the PPP application deadline to all newly eligible individuals who were previously excluded under older versions of the criminal history rule, holding that "past harm cannot justify an injunction" and that future harm to unspecified individuals was unclear.

Wilks told Law360 through his NCLA attorneys Tuesday that he was grateful the situation had been righted.

"SBA was wrong to deny business owners like myself much-needed loans as intended by Congress during this time of crisis," he said. "This lifeline will allow me to keep the doors of my business open to continue to service my community and keep my employees employed."

NCLA attorney Jared McClain told Law360 that the SBA's rules were changed so often that it became impossible for banks and businesses to keep pace.

"We're happy that Judge Blake's ruling recognized the real-world cost that our clients have had to endure due to SBA's lawless and erratic rulemaking," he said.

ReNika Moore, director of the ACLU's Racial Justice Program and an attorney for the Defy Ventures plaintiffs, implied in a statement Tuesday that the SBA's earlier versions of the rule disproportionately affected people of color, such as Garland and Merritt, both of whom are Black.

"Our clients are now able to apply for and access this much needed financial relief," she said. "The ruling rightly calls the SBA's previously broad exclusions of business owners with criminal records unlawful. The SBA must do away with policies that exclude Black and brown entrepreneurs."

An SBA spokeswoman declined to comment Tuesday.

Wilks is represented by Jared McLain and John Vecchione of the New Civil Liberties Alliance; and Ronald S. Canter of The Law Offices of Ronald S. Canter LLC.

Defy Ventures, Garland and Merritt are represented by ReNika C. Moore, Alejandro A. Ortiz and Jennesa Calvo-Friedman of the American Civil Liberties Union Foundation; Joanna K. Wasik and Hannah E. M. Lieberman of the Washington Lawyers' Committee for Civil Rights & Urban Affairs; Claudia De Palma of the Public Interest Law Center; Kali N. Bracey, Elizabeth B. Deutsch and Jacob D. Alderdice of Jenner & Block LLP; and Zachary D. Tripp, Lauren E. Morris and Robert B. Niles-Weed of Weil Gotshal & Manges LLP.

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

The cases are Carmen's Corner Store et al. v. Small Business Administration et al. and Defy Ventures Inc. et al v. Small Business Administration et al., case numbers 1:20-cv-01736 and 1:20-cv-01838, both in the U.S. District Court for the District of Maryland.

--Additional reporting by Jon Hill. Editing by Peter Rozovsky.

For a reprint of this article, please contact reprints@law360.com.

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Case Information

Case Title

Carmen's Corner Store et al v. Small Business Administration et al


Case Number

1:20-cv-01736

Court

Maryland

Nature of Suit

Other Statutory Actions

Judge

Catherine C. Blake

Date Filed

June 10, 2020


Case Title

Defy Ventures, Inc. et al v. United States Small Business Administration et al


Case Number

1:20-cv-01838

Court

Maryland

Nature of Suit

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

Judge

Catherine C. Blake

Date Filed

June 16, 2020

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