SBA Sued Over Criminal History Bar For Biz Relief Loans

By Jon Hill
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Law360 (June 11, 2020, 9:18 PM EDT) -- A Maryland business owner is suing to force the Small Business Administration to open the Paycheck Protection Program to borrowers with a criminal past, claiming the agency can't pick and choose "who is and is not morally worthy" of aid from the coronavirus relief loan program.  

In a complaint filed in Baltimore federal court, Altimont Mark Wilks challenged the legality of the SBA's decision to make the PPP off-limits to businesses whose owners have criminal histories, a restriction he claimed conflicts with the law that authorized the program and is preventing him from securing aid for his two businesses.

Wilks, who runs a convenience store and a logistics company for automotive products in western Maryland, said he can't get the $31,500 in PPP loans needed for businesses because he is still on probation after serving time for a 2004 felony conviction in a drug-and-weapons case.

"Plaintiffs ask this court to reject SBA's unlawful administrative action and ensure that PPP loans are available to all small businesses as Congress intended, including the plaintiffs' businesses," Wilks said in his complaint, which also names his two businesses, Carmen's Corner Store and Retail4Real, as plaintiffs.

The suit, which is being brought with representation from the New Civil Liberties Alliance, accuses the SBA of acting "arbitrarily and capriciously" with its exclusion of borrowers like Wilks from the $660 billion Paycheck Protection Program, 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.

Although the PPP is more broadly accessible than other SBA loan programs, the rules written for the program do import some standard SBA eligibility restrictions that disqualify certain groups of companies, including banks, lobbying firms, cannabis dispensaries and businesses that host "live performances of a prurient sexual nature."

Also ineligible are businesses whose owners have been convicted of a felony in the past five years or are currently facing criminal charges. Having an owner who is in prison, on probation or on parole can similarly disqualify a business.

Since the PPP's rollout, a number of these eligibility restrictions have been criticized as counterproductive and at odds with the spirit and letter of the CARES Act. Several strip clubs, for example, have sued over the "prurient nature" ban, which a Michigan federal judge ruled in May exceeded what Congress allowed for the program.

Wilks' suit follows in those footsteps, arguing that the CARES Act opened the program to "any business concern" with 500 or fewer workers and authorized the SBA to require only that these businesses predate the pandemic and have paid employees. As a result, the agency has overstepped by adding a rule that keeps business owners with a criminal history out of the program, the suit contends.

"Through its passage of the CARES Act, Congress did not delegate to SBA the authority to determine who is and is not morally worthy of a PPP loan," Wilks said.

The complaint also said that the criminal history restriction has drawn bipartisan opposition from federal lawmakers, who have tied the issue to larger concerns about equal access and racial disparities in the justice system.

And while the SBA has seen fit to waive certain other eligibility restrictions that typically apply to its business loans — such as a requirement that borrowers can't be "principally engaged in teaching … religion or religious beliefs" — the agency hasn't explained why it won't similarly lift the criminal history rule for the PPP, Wilks said.  

"No compelling interest exists to treat differently businesses owned by persons with criminal records," said Wilks, who was released from prison in 2018 and will remain under supervision until 2021. "There is simply no compelling interest in denying emergency assistance to a business owner who has turned his life around and faces the same economic hardship as other small businesses, regardless of whether the business owner remains on probation or parole."

U.S. Treasury Secretary Steve Mnuchin has indicated that some changes to this criminal history restriction may soon be on the way. At a Senate hearing Wednesday, Mnuchin told lawmakers he wants to "fix this, and fix this really quickly," saying guidance could be released as early as this week to allow for business owners with more recent convictions.

But Jared McClain, a staff attorney at NCLA who is helping represent Wilks, told Law360 this wouldn't cut it.

"Secretary Mnuchin misunderstands the problem if he thinks that relaxing the criminal history rule from five years to three will resolve this issue," McClain said in an email on Thursday. "Congress did not give any authority to SBA or Secretary Mnuchin to deny PPP loans to Carmen's Corner Store — or any other business — based on an owner's criminal history. We will not be satisfied until SBA repeals its unlawful criminal history rule entirely."

An SBA representative declined to comment Thursday.

Wilks and his businesses are represented by Jared McLain, John Vecchione of the New Civil Liberties Alliance as well as Ronald S. Canter of The Law Offices of Ronald S. Canter LLC.

Counsel information for the SBA was not immediately available.

The case is Wilks et al. v. Small Business Administration et al., case number 1:20-cv-01736, in the U.S. District Court for the District of Maryland.

--Editing by Amy Rowe.

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

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