The PPP Litigation Wave Is Coming Anticipated “Qui Tam” Lawsuits Under the False Claims Act by Phillip S. Bixby
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any businesses and other borrowers, such as nonprofit organizations, that received Paycheck Protection Program (PPP) loans are now several weeks into disbursing their PPP loans for payroll, mortgage or lease payments, and utility payments. Businesses submitted applications to obtain their PPP loans in which a representative of the business made several certifications, including a certification that the loan was “necessary to support ongoing operations.” At some point in the future, many of these businesses will attempt to have some, or all, of the loans forgiven. Throughout this process, these businesses face exposure, including exposure to their own employees, some of whom may file “Qui Tam” lawsuits against their employers alleging violations of the False Claims Act. Each business participating in the PPP should be aware of the risk and take steps to prevent or prepare for such potential lawsuits.
The PPP and the Certifications Made by Small Businesses to Secure Loans In response to the COVID-19 pandemic, congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is the largest emergency stimulus package in history, devoting trillions of dollars’ worth of government funds to address the devastating impact of COVID-19 on the U.S. economy through direct impacts of the disease itself as well as self-induced damage to the U.S. economy caused by shutdowns, shelter-in-place restrictions, and quarantines. The CARES Act includes a myriad of provisions to boost the economy, including the PPP, which offers billions of dollars of loans forgivable under certain conditions. To secure PPP loans, businesses were required to submit “Borrower Application Forms.” These forms included various “Certifications and Authorizations” on the second page of the application packet. It is certainly likely that many applicants, in the rush to secure PPP loans, glossed over these certifications. However, several of these certifications may expose those businesses to litigation exposure for possible allegations of fraud or false claims.
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Attorney Journals San Diego | Volume 202, 2020
Relevant Certifications under the PPP Applicants for PPP loans certified, among other things, that: • the applicant is eligible to receive a PPP loan. • the loans will be used only for the business-related purposes set forth by the PPP. • “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant;” • and the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments as specified under the PPP, and that if the funds are knowingly used for unauthorized purposes, the applicant may be liable for federal law violations punishable by, among other things, substantial fines and possible prison sentences. The PPP Application requires that the certifications be made “in good faith.” On May 13, 2020, the Small Business Administration (“SBA”) responded to frequently asked questions by declaring that any borrower, together with its affiliates, which received PPP loans with an original principal of less than $2 million will be deemed to have made the required certifications concerning the necessity of the loan request in good faith. The SBA further stated that if it determines that a borrower “lacked an adequate basis for the required certification concerning the necessity of the loan request,” the SBA will seek repayment of the loan and will inform the borrower that no forgiveness will be forthcoming. Full repayment of the loan will preclude “administrative enforcement or referrals to other agencies” regarding the certification. This updated guidance from the SBA should significantly reduce a business’s exposure for its certifications regarding “necessity of the loan,” but certification exposure will remain as to the business’s certifications regarding loan eligibility and how loan proceeds are to be spent. Most businesses applying for, and accepting, PPP loans are doing so with the hope and possible expectation that all or most
