Federal Appeals Court Affirms Injunction Against SBA Imposition of PPP Eligibility Requirements

May 28, 2020

As the Small Business Administration grafts preexisting eligibility rules atop the Paycheck Protection Program, courts step in to expand access.

The US Court of Appeals for the Sixth Circuit affirmed a lower court’s granting of a preliminary injunction requiring that the Small Business Administration (SBA) process Payment Protection Program (PPP) applications without applying eligibility requirements not Found in the CARES Act.

In DV Diamond Club of Flint, LLC v. United States Small Business Administration,[1] on a motion for a preliminary injunction, a federal trial court provided a favorable ruling for businesses seeking to expand eligibility for PPP loans under the CARES Act. In implementing the PPP, the SBA used its own preexisting ineligibility rules to bar certain businesses from participation. Those rules barred from SBA assistance, among others, any business that “presents live or recorded performances of a prurient sexual nature,” which included the DV Diamond Club of Flint and other adult entertainment businesses that were parties to the case.

In reviewing the propriety of this agency action, the trial court applied the test set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc..[2] Under Chevron, a court need not defer to agency interpretations that run contrary to express congressional intent. The trial court concluded that “Congress intended that the SBA would make the PPP loan guarantees widely available to small businesses across the commercial spectrum,” and that only two statutorily-express criteria should be applied to determinate eligibility. The trial court found that SBA rules that limited eligibility beyond the statutorily-express criteria were invalid.

On that basis, the trial court granted the preliminary injunction, ordering that “[i]n the event that Plaintiffs . . . otherwise meet the eligibility requirements for PPP loans, the SBA shall guarantee the loans for which Plaintiffs . . . have applied or attempted to apply.”

The SBA appealed the decision to the Sixth Circuit, which affirmed in a 2-1 decision on May 15. The Sixth Circuit agreed with the trial court that Congress was clear in what criteria applied in determining PPP eligibility, and found that purpose of the program requires broad availability: “The stated purpose of the PPP is to protect the employment and livelihood of employees. Thus, the public interest is served in guaranteeing that any business, including plaintiffs’, receive loans to protect and support their employees during the pandemic which, we can all agree, constitutes extraordinary circumstances.”

Judicial Intervention and the PPP Going Forward

With the waning of available PPP funds, otherwise-eligible businesses likely will have limited ability to avail themselves of the Sixth Circuit’s ruling in seeking approval of new PPP loans—the injunction in DV Diamond applies only to the parties to that case, and did not strike down SBA rules for non-parties. Nor has the SBA yet acted to reframe its rule to comply with DV Diamond.

However, the Sixth Circuit’s affirmance suggests courts may be receptive to other legal challenges to SBA implementations of the PPP that diverge from the text of the CARES Act. As the focus of the PPP shifts, we continue to monitor the SBA’s implementation of rules concerning loan forgiveness under the program. The DV Diamond decision counsels paying particular attention to where the SBA’s forgiveness rules may run afoul of the CARES Act and likewise be subject to challenge.

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[1] No. 20-cv-10899, 2020 WL 2315880 (E.D. Mich. May 11, 2020).

[2] 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).