Businesses sue over Paycheck Protection Program guidelines

Guidelines the U.S. Small Business Administration issued to block large or wealthy corporations from taking advantage of the Paycheck Protection Program loans left many deserving companies in a situation where they might have to take on more debt, according to a federal lawsuit.

The purpose of the Coronavirus Aid, Relief and Economic Security Act was to eliminate an SBA requirement that blocks businesses from getting government loans if they can get money from a non-governmental source, according to the plaintiffs' lawyers, Mona A. Hanna and Todd Stitt of Michelman and Robinson LLP.

They are representing technology company Zumasys Inc. and its subsidiaries jBase and TCS, all of which received a combined $750,000 in loans they might have to return by Thursday if they are found to have access to other credit lines, according to the lawsuit.

The lawsuit, filed Monday in Santa Ana, questions the new Frequently Asked Question Guidelines 31 and 37 issued Sunday. The plaintiffs say the guidelines contradict the loan program's intent to waive the pre-existing "credit elsewhere" requirement. It's unclear whether the new guidelines affect those who already received funding.

Dylan Ruga, a partner at Stalwart Law Group who has challenged banks for discriminating against smaller businesses, said Tuesday the new guidelines explicitly state "they do not carry the force and effect of the law."

That means, "even if they were interpreted to be a change in the law, the next question would be whether the new law applies retroactively to people who applied for PPP loans prior to the effective date of the change," said Ruga, who is not involved in Hanna's case.

"That's a complex question for a court to decide," Ruga said. "The specific version plaintiffs are challenging was issued May 3. I suppose lenders and applicants would be aware of them after they were issued, but not before."

The CARES Act passed March 27 and was intended to keep American workers paid and employed, and also established the Paycheck Protection Program. However, after plaintiffs kept the PPP funds, new guidelines were issued Sunday that "places employers in a worse financial position than if they furloughed or terminated their employees," the lawsuit states. Zumasys Inc. et al v. U.S. Treasury Department, Small Business Administration 8:20CV00851 (C.D. Cal., filed May 4, 2020)

Inquiries sent to the SBA and Treasury Department were not returned Tuesday.

Attorneys speculate the new guidelines were an effort at damage control after large corporations like Shake Shack, Ruth Chris' Steakhouse and the Los Angeles Lakers qualified for PPP loans. Lawyers also questioned what the term "other sources of liquidity" meant, which could cause small business owners confusion and fear.

"Does it mean bankruptcy?" Hanna asked. "Do I have to go and empty my bank account, and get loans from other banks?"

Tax attorney Christopher A. Karachale of Hanson Bridgett LLP, said the big question is the liquidity language, which is an important point raised in Hanna's case.

"There are no parameters or variables. What if you have a line of credit you have access to? Does that mean you aren't eligible for a loan? What if you saved a lot of money over the years?" asked Karachale. "These are questions the guidelines don't answer."

Karachale predicted the government would release more clarifications sometime this week to help businesses that have to return the money by Thursday make decisions.

Phil Jelsma, partner at Crosbie Gliner Schiffman Southard & Swanson LLP, said there is an ongoing problem with the SBA issuing and changing rules daily. For example, Jelsma said he had a client who was approved for a $28 million PPP loan only to discover later the SBA decided the maximum loan was $20 million. "As a result, they can't bring back all of the employees who were furloughed when their business closed," Jelsma said.