Opinion ID: 6323764
Heading Depth: 3
Heading Rank: 2

Heading: COVID-19 and the CARES Act

Text: In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act to, in part, alleviate the pandemic’s substantial economic effects on small businesses. See Coronavirus Aid, Relief, and Economic Security Act, Pub L. No. 116-136, 134 Stat. 281, 286 (2020). Relevant here, Section 1102 of the Act establishes the PPP, a temporary program targeted at providing small businesses with the funds necessary to meet their payroll and operating expenses and therefore keep workers employed. See CARES Act § 1102, 134 Stat. at 286 (codified as amended at 15 U.S.C. § 636(a)(36)). The PPP provides potentially forgivable loans to eligible small businesses, allowing the recipient to seek loan forgiveness if at least 60% of the loaned funds are used for specified expenses, such as payroll. See id. § 636(a)(36); id. § 636m(b)–(d). However, unauthorized uses of PPP funds, as well as certain authorized uses, are ineligible for loan forgiveness. Compare id. § 636(a)(36)(F) (detailing authorized uses), with id. § 636m(b) (detailing forgiveness-eligible uses). Congress initially authorized $349 billion in PPP loan commitments, but, after those funds were quickly depleted, added another $310 8 billion one month later and eventually extended a third round of PPP funding at the end of 2020. See CARES Act § 1102(b), 134 Stat. at 293; Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139, § 101(a)(1), 134 Stat. 620, 620 (2020); see Consolidated Appropriations Act, 2021, Pub. L. No. 116260, § 311, 134 Stat. 1182, 2001–07 (2020). Rather than establishing the PPP as a standalone program, the CARES Act places the PPP under Section 7(a) of the Small Business Act, providing that the SBA “may guarantee covered [PPP] loans under the same terms, conditions, and processes” as other Section 7(a) loans. 2 15 U.S.C. § 636(a)(36)(B); see CARES Act § 1102, 134 Stat. at 286 (amending “Section 7(a) of the Small Business Act”); Pharaohs GC, Inc. v. U.S. Small Bus. Admin., 990 F.3d 217, 224 (2d Cir. 2021) (acknowledging the PPP’s placement under Section 7(a)). The Act relaxed many of the Section 7(a) eligibility criteria for PPP applicants and waived some of the standard Section 7(a) requirements altogether. 15 U.S.C. §§ 636(a)(36)(D), (H)–(J), 2 This was not an unusual framework for Congress to adopt, as it has, on multiple occasions, created specialized Section 7(a) loan programs and has modified or eliminated the standard Section 7(a) requirements for those loans. See, e.g., Small Business Reauthorization and Manufacturing Assistance Act of 2004, Pub. L. No. 108-447, § 101(a), 118 Stat. 3441, 3442 (codified as amended at 15 U.S.C. § 636(a)(31)) (creating an express loan program and limiting the maximum loan amount to $500,000); Military Reservist and Veteran Small Business Reauthorization and Opportunity Act of 2008, Pub. L. No. 110-186, § 208, 122 Stat. 623, 631 (codified as amended at 15 U.S.C. § 636(a)(33)) (creating the increased veteran participation program and reducing the fees on veteran participation loans by 50%). 9 (R). However, the Act did not exempt PPP loans from Section 7(a)’s statutory “sound value” requirement. 3 Id. § 636(a)(6). Given the need to move expeditiously to address the pandemic’s economic effects, the CARES Act directed the SBA to issue emergency regulations implementing the PPP within only fifteen days.4 CARES Act § 1114, 134 Stat. at 312 (codified as amended at 15 U.S.C. § 9012). In keeping with this statutory mandate, the SBA issued multiple rules implementing the PPP. The SBA’s first interim final rule, which noted that “[t]he intent of the [CARES] Act is that SBA provide relief to America’s small businesses expeditiously . . . by . . . streamlining the requirements of the regular 7(a) loan program,” waived the standard Section 7(a) creditworthiness inquiry and full underwriting requirements for PPP loans. 5 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,811–12, 20,815 (Small Bus. Admin. Apr. 15, 2020) (waiving the 3 PPP loans also share many other features with standard Section 7(a) loans, including, for instance, allowing borrowers to apply to and obtain PPP loans from private lending institutions, which then issue their own funds to qualifying borrowers, guaranteed by the SBA. See, e.g., 15 U.S.C. § 636(a)(36)(F)(ii). 4 To accomplish this expeditiously, Congress exempted the SBA from the standard rulemaking notice requirements. See CARES Act § 1114, 134 Stat. at 312 (codified as amended at 15 U.S.C. § 9012). 5 Among other procedures, the SBA also established that PPP applicants must apply through approved lenders and that PPP funds are distributed on a “first-come, first-served” basis until the allocated funds are exhausted. See 85 Fed. Reg. at 20,812–13. 10 normal Section 7(a) criteria under 13 C.F.R. § 120.150); see also Business Loan Program Temporary Changes; Paycheck Protection Program—Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, 85 Fed. Reg. 21,747, 21,750 (Small Bus. Admin. Apr. 20, 2020) (describing the lack of underwriting requirements for the PPP). However, the SBA took other steps to follow its statutory “sound value” mandate, such as requiring that borrowers sign promissory notes specifying set interest rates and outlining key repayment terms. See 85 Fed. Reg. at 20,813 (establishing 1% interest rates and two-year maturation dates for PPP loans); see 85 Fed. Reg. at 20,814 (clarifying that “[i]f you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts”); see Business Loan Program Temporary Changes; Paycheck Protection Program— Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23,450, 23,450–52 (outlining promissory notes requirements) (Small Bus. Admin. Apr. 28, 2020). Moreover, although the first interim final rule did not specify that all bankruptcy debtors were ineligible to receive PPP funds, it established the use of the PPP Application form, which asks applicants whether they are “presently involved in any bankruptcy” and provides that, if the applicant’s answer is “’Yes,’ 11 the loan will not be approved.” SMALL BUS. ADMIN, PAYCHECK PROTECTION PROGRAM BORROWER APPLICATION FORM 2483 (VERSION 1), https://www.sba.gov/sites/default/files/2022-02/PPP-Borrower-ApplicationForm-Fillable.pdf; see 85 Fed. Reg. at 20,814 (establishing use of SBA Form 2483). In its fourth interim final rule, the SBA explicitly clarified that bankruptcy debtors are ineligible to receive PPP funds, explaining that “[t]he Administrator, in consultation with the Secretary [of the Treasury], determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans.” See 85 Fed. Reg. at 23,451.