Questioning the Questionnaires: New PPP-Related Litigation Raises Issues for Borrowers

On December 8, 2020, the Associated General Contractors of America, Inc. (“AGC”) filed suit in the United States District Court for the District of Columbia against the Small Business Administration (“SBA”) and Office of Management and Budget (“OMB”).[1] The lawsuit seeks declaratory and injunctive relief prohibiting the SBA from using a “Loan Necessity Questionnaire” to collect information from borrowers who received Paycheck Protection Program (“PPP”) loans in excess of $2 million.

The SBA administers the PPP program through various banks who served as the lenders for PPP loans. In submitting PPP loan paperwork to these lenders, borrowers were asked to certify that the economic uncertainty at the time of their loan application made the loan application necessary for the borrower to continue operations. This is often referred to as the “uncertainty certification.” On May 13, 2020, the SBA, from a regulatory perspective, determined that all borrowers who had secured loans under $2 million would be deemed to have presumptively made the certification in good faith. However, on October 26, 2020, the SBA released a notice seeking approval of two new draft, unreleased form questionnaires—Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers, in which it signaled its intention to request additional information from borrowers with loans in excess of $2 million regarding their uncertainty certifications. Specifically, the new Loan Necessity Questionnaire contains many questions requesting information regarding a borrower’s operations following the PPP loan, in order to gauge the level of uncertainty the borrower was experiencing prior to receiving the loan.

In its lawsuit, the AGC argues the Loan Necessity Questionnaire is arbitrary and capricious and that the government failed to follow the requisite process mandated by federal law for introducing the form questionnaire. Specifically, the AGC contends that the government violated the Administrative Procedures Act when the OMB authorized the SBA to use the form questionnaire without providing the necessary 60 day period for public comment. Moreover, the AGC alleges that the questionnaire runs contrary to the intent and purpose of the CARES Act, which established the PPP, by requiring a means test, revenue impact test, and liquidity test that Congress never contemplated.

On December 9, 2020, the SBA issued additional guidance (FAQ #53) with respect to certain PPP borrowers receiving a Loan Necessity Questionnaire.[2] This guidance explains that the Loan Necessity Questionnaire will help the SBA assess the uncertainty certifications made by PPP borrowers that received loans of $2 million or more. Such assessment will be based on the totality of the borrower’s circumstances through a multi-factor analysis, and the SBA may take into account not only the borrower’s circumstances and actions before the borrower’s certification, but also those that occurred after such certification. That said, the SBA reaffirmed the principle that the borrower’s certification must have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary. The SBA officially publicly released the previously draft-only form Loan Necessity Questionnaire on December 10, 2020.[3]

The AGC has maintained the pursuit of its lawsuit, which ultimately requests that the court prohibit the SBA from using the information gleaned from the Loan Necessity Questionnaire in its current form to find a borrower was ineligible for a PPP loan, or to serve as the basis for denial of a borrower’s application to have its loan forgiven. While this case remains in the very early stages of litigation, its outcome could prove significant for many PPP loan recipients.

[1] Associated Gen. Contractors of Am., Inc. v. U.S. Small Bus. Admin., et al., D.D.C. Case No. 1:20-cv-03567-BAH.

[2] U.S. Small Business Administration, Paycheck Protection Program Loans Frequently Asked Questions (FAQs),

  1. 19, FAQ #53 (Dec. 9, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

[3] Form 3509 (for-profit borrowers): https://home.treasury.gov/system/files/136/SBA-Form-3509-PPP-Loan-Necessity-Questionnaire-For-Profit.pdf; Form 3510 (non-profit borrowers): https://home.treasury.gov/system/files/136/SBA-Form-3510-PPP-Loan-Necessity-Questionnaire-Non-Profit.pdf

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.

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Blog Contact:  Joseph Callow, Litigation Partner
jcallow@kmklaw.com or 513.579.6419

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