Small Firms Join Rush to Return Loans After Rules Revisions

A publicly-traded pharmaceutical company in New Jersey returned a $4.8 million coronavirus-relief loan it had planned to use to retain its 219 employees. Executives decided that guidance from federal officials suggested no public company would qualify for the aid.

But in Oregon, a publicly-traded technology firm with 200 employees decided to keep its $5 million loan, despite similar concerns.

Same guidance, different decisions. Attempting to clarify Congress’s hastily-written Paycheck Protection Program, the Trump administration issued rules and guidance that stirred new confusion, whipsawed borrowers and led dozens of firms to return loans.

Tough talk from Treasury Secretary Steven Mnuchin about potential criminal penalties for rule-breakers has also contributed to a climate of caution around a $669 billion program meant to help small businesses outlast the Covid-19 pandemic.

Now, with a deadline to return PPP loans without penalties just days away, firms and their advisers have had to grapple with rules that seem to run counter to the law they’re based on.

“The guidances and interim rules are really changing the underlying law,” said James P. Joseph, a partner at the law firm Arnold & Porter. “I have been a tax lawyer for 31 years, and I’ve never seen anything like it. They are building the plane while it’s in the air.”

Payrolls Focus

One example: As enacted on March 27, the law that created PPP allowed borrowers to use its low-interest, forgivable loans of as much as $10 million for a range of expenses beyond just paying workers, such as refinancing debt. But since then, the Treasury Department and Small Business Administration have issued rules that limit spending mostly to payroll.

Also, the law itself contained no restrictions on public companies seeking relief. But after public outrage over loans to public firms like the burger chain Shake Shack Inc., Treasury and SBA issued new guidance on April 23. It said public companies with “with substantial market value and access to capital markets” would be unlikely to qualify for PPP.

Such changes, coupled with an absence of guidance on how the Small Business Association will administer the forgiveness of loans, have prompted some to say thanks, but no thanks.

New Guidance

Aquestive Therapeutics Inc. of Warren, New Jersey, makes treatments for epileptic seizures, addiction recovery, and to manage nausea from chemotherapy. The company interpreted some of the new guidance to mean no publicly traded companies qualify — even though the firm believed it was eligible as the program “was originally written and intended.”

“As a result, we have decided that it is in the best interests of our company and our constituents to pay off the PPP loan,” the company said in a statement.

Bruce Davis, chief executive officer of technology services provider Digimarc Corp. in Beaverton, Oregon, came to the opposite conclusion. He said he was also concerned about the administration’s guidance after his company, with 200 workers, took a $5 million loan. But after triple-checking the requirements with legal and financial advisers, he decided that Digimarc met the criteria.

The administration should have been clearer about which companies wouldn’t be eligible based on the rules, Davis said.

Publicly traded companies have returned 48 loans worth more than $350 million so far, according to data compiled by FactSquared after the SBA and Treasury said firms that improperly certified that their loans were necessary could face legal trouble if they don’t give back the money by May 14.

Promoted as a lifeline to small businesses, the program provides loans worth a firm’s average monthly payroll multiplied by 2.5, but capped at $10 million. More than 4.2 million loans have been approved so far, with an average loan amount of about $125,175.

Lawsuit Filed

After the law was passed, the SBA and Treasury issued rules requiring borrowers to spend 75% of PPP loans on payroll to be eligible for loan forgiveness. But after laying off employees, many firms said they needed cash more for expenses such as rent than payroll. On Friday, a report issued by the SBA’s inspector general found that the rule “did not align with the allowable use requirements for PPP loans” under the law that created the program.

Mnuchin has said he thinks the rule reflects the intent of Congress to keep workers on payrolls. But he signaled on Monday he’d be open to “technical” fixes if both parties agree, especially for restaurants that are only now reopening.

“If Congress wants to change that rule, I’m happy to work with Congress if there’s bipartisan support to do that,” Mnuchin said on CNBC.

One borrower, Zumasys Inc., has sued the government over the guidelines. The San Clemente, California-based software company says that even though it has access to other credit, it’s entitled to its $750,000 PPP loan under the terms Congress set, because it truly needs the funds.

“We want the court to tell us whether or not this guidance, given by the SBA and Treasury, is valid, or is it in fact invalid and unenforceable,” said Mona Hanna, a lawyer for Zumasys with the firm of Michelman & Robinson. “We need to know.” Many companies would probably terminate workers or shut down completely rather than take on more non-forgivable debt, she said.

Creating Consternation

Mnuchin triggered more consternation among businesses in late April when he said the SBA “will be doing a full review” of loans over $2 million. A subsequent joint statement from Mnuchin and SBA Administrator Jovita Carranza said such reviews would ensue for loans for which borrowers sought forgiveness.

The SBA has said it intends to issue guidance before payback deadline about how it will review the loans to help firms “evaluate whether they may have misunderstood or misapplied” the standard for accepting them. A spokesperson didn’t respond to a request for details about how the reviews would be conducted, but said officials are quickly providing guidance to borrowers and lenders while approving loans of more than half a trillion dollars in just about five weeks.

As of Sunday, the SBA had issued more than $530 billion in new loans since April 3, more than four times the $115 billion it had outstanding at the end of 2019.

Of the new loans, almost 33,900 were for $2 million or more, based on data through May 8. The vast majority of them went to closely held businesses.

It’s unclear how many PPP borrowers will ultimately seek forgiveness, or how that process will work. The SBA missed an April 26 deadline in the law to issue a guiding rule on it, said Mary Beth Bosco, a partner at the law firm Holland and Knight.

Bad Faith

“Every time SBA comes out with a new interim rule, it seems to change the law or throw more confusion on it,” she said.

Mnuchin has said borrowers could face criminal charges if they make false certifications on loan applications. The required certifications include a statement that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business.

The Justice Department this week brought the first criminal case related to the program, charging two New England businessmen with fraud and alleging that their applications falsely claimed employees they don’t have.

 

Source: https://www.cbsnews.com/news/stimulus-check-delays-20-million-waiting-coronavirus-pandemic/

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