Small Businesses File Lawsuit Challenging Modifications to PPP Borrower Certification Requirements

2 min

On May 4, a group of software and information technology companies filed suit in the Central District of California against the Small Business Administration (SBA) and the Treasury Department, alleging that recent guidance requiring companies that had received loans under the Paycheck Protection Program (PPP) to take into account other sources of liquidity is improper on APA grounds and "opposite of what the law intended."

Plaintiffs are Zumasys, Inc., a software company based in San Clemente, California, and two of its subsidiaries, jBase Inc. and TCS LLC. Plaintiffs received PPP loans prior to the issuance of FAQ No. 31 on April 23 and FAQ No. 37 on April 28. FAQ Nos. 31 and 37 require businesses to assess other sources of liquidity as part of the borrower's certification that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant" (see our alert here for more information). The lawsuit does not appear to challenge the Interim Final Rule issued on April 24, which expanded on FAQ No. 31.

Plaintiffs allege that they had already begun spending the PPP loan proceeds on payroll and other allowable costs, which would be eligible for forgiveness under the CARES Act, when the new guidance was issued. FAQ 31 provides that businesses may return the funds prior to May 7 (which has since been extended to May 14) without penalty. Plaintiffs allege that requiring them to repay the funds, some of which have already been spent, will cause them financial harm.

The plaintiffs seek judicial review of FAQ Nos. 31 and 37 under the APA, alleging that this guidance attempts to impose the "credit elsewhere" requirement on the PPP, which was specifically waived by the CARES Act. The plaintiffs further seek a declaratory judgment that FAQ Nos. 31 and 37 are contrary to law. On these grounds, plaintiffs seek preliminary and/or permanent injunction withdrawing FAQ Nos. 31 and 37 and enjoining the government from making PPP eligibility determinations based on the requirements imposed by FAQ Nos. 31 and 37.