Key Takeaways
- Broad Enforcement Action: A recently unsealed qui tam complaint filed under the False Claims Act names more than 70 Maryland-based tax-exempt organizations—spanning 501(c)(2), (5), (6), (7), (8), (10), and (13) categories—alleging they fraudulently obtained Paycheck Protection Program (PPP) loans before their organization type became eligible.
- Three Distinct Theories of Liability: The complaint advances timing-based ineligibility claims, a "private club" exclusion theory (applicable to country clubs, yacht clubs, and fraternal lodges with selective membership), and a "fruit of the poisonous tree" argument invalidating second-draw loans tied to ineligible first-draw loans.
- Significant Financial Exposure: Defendants face potential treble damages, civil penalties, and repayment of loan amounts, with individual PPP loans ranging from $5,000 to $2.5 million.
- Immediate Action Required: Nonprofits that received a PPP loan—particularly those in the 501(c) categories at issue—should promptly review eligibility timing with experienced counsel.
Background
The Paycheck Protection Program (PPP), created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, provided forgivable loans to help eligible businesses and nonprofit organizations retain employees during the COVID-19 pandemic. Initially, eligibility for nonprofit organizations was limited to organizations described in sections 501(c)(3) and 501(c)(19) of the Internal Revenue Code. Congress later expanded eligibility on a staggered timeline: certain section 501(c)(6) organizations became eligible on December 27, 2020, while organizations described in sections 501(c)(2), 501(c)(5), 501(c)(7), 501(c)(8), 501(c)(10), and 501(c)(13) became eligible on March 11, 2021, under the American Rescue Plan Act. Private clubs, however, were excluded from the PPP, regardless of tax-exempt status. Applicants were required to certify eligibility and compliance with the PPP rules on both their loan applications and their forgiveness applications.
The Complaint
The U.S. District Court for the District of Maryland unsealed an amended qui tam complaint in United States ex rel. The Tarbell Group, LLC v. American Academy of Environmental Engineers and Scientists Inc., et al., Case No. MJM-25-cv-915, brought under the False Claims Act. It names more than 70 Maryland-based tax-exempt organizations spanning seven 501(c) categories—(2), (5), (6), (7), (8), (10), and (13)—as well as unknown individual defendants. The complaint alleges that defendants fraudulently obtained first- and second-draw PPP loans by falsely certifying eligibility, with individual loan amounts ranging from approximately $5,000 to $2.5 million. The relator asserts six causes of action targeting false loan applications, false forgiveness applications, and separate claims against "private club" defendants. The complaint seeks treble damages, civil penalties, costs, and attorneys' fees.
Key Legal Theories
Timing-Based Ineligibility
The central allegation for most defendants is straightforward: they received PPP loans before Congress made their category of 501(c) organization eligible. For example, numerous 501(c)(6) business leagues and trade associations received first-draw PPP loans between April and June of 2020—more than six months before Congress expanded eligibility to 501(c)(6) organizations. Similarly, 501(c)(7) social clubs, 501(c)(8) fraternal societies, and other categories received loans well before the March 11, 2021 expansion. Because each loan application required the applicant to certify its eligibility "under the rules in effect at the time," the complaint alleges that each such certification was knowingly false.
The Private Club Exclusion
A subset of defendants—primarily 501(c)(7) social and recreational clubs and 501(c)(8) fraternal organizations—face an additional theory. Preexisting SBA regulations excluded "private clubs or businesses which limit the number of memberships for reasons other than capacity." The complaint alleges that country clubs, yacht clubs, swim clubs, and fraternal lodges with selective membership processes (applications, sponsorship requirements, blackball votes, and other vetting procedures) are "private clubs" that were never eligible for PPP loans, regardless of the subsequent statutory expansions of eligible nonprofit borrowers.
The "Fruit of the Poisonous Tree" Theory
For defendants that obtained both first- and second-draw PPP loans, the complaint advances a derivative liability theory. Because a valid first-draw loan was a statutory prerequisite for obtaining a second-draw loan, the relator argues that an illegally obtained first-draw loan "taints" the second-draw loan. Under this theory, the second-draw loan is independently fraudulent because the borrower could not have met the prerequisite without its ineligible first-draw loan—effectively rendering the second certification false as well.
Implications for Nonprofits
While this case is focused on Maryland-based nonprofits, the legal theories advanced in the complaint have national implications. Nonprofits across the country that received PPP loans should take note of the following:
- Expanding Enforcement Landscape. This qui tam action and recent settlements spurred by qui tam actions signal a broadening of PPP enforcement beyond traditional targets (such as individuals who fabricated businesses or inflated payroll). The complaint and similar actions target established, legitimate nonprofits that believed they were eligible for the PPP loan, were approved for the loan, and received forgiveness of the loan.
- Forgiveness Does Not Equal Safety. Many organizations that received and had PPP loans forgiven may have assumed the matter was closed. However, loan forgiveness does not insulate borrowers from False Claims Act liability.
- Treble Damages and Civil Penalties Magnify Risk. The FCA's treble-damages provision and per-claim civil penalties mean that even relatively modest loan amounts can generate significant financial exposure. An organization that received a $500,000 PPP loan could face liability of $1.5 million or more in treble damages alone, plus additional statutory penalties.
What You Should Do Now
If your organization is a tax-exempt entity that received a PPP loan, we recommend taking the following steps promptly:
- Review Your PPP Application Timeline. Confirm the date your organization applied for and received its PPP loan(s) and verify that your 501(c) category was eligible at that time. Pay particular attention to the December 27, 2020 and March 11, 2021 eligibility expansion dates.
- Assess the Private Club Exclusion. If your organization is a membership-based entity—including social clubs, country clubs, fraternal lodges, or professional associations—evaluate whether your membership practices (applications, sponsorship requirements, membership caps, voting or vetting processes) could bring you within the PPP's private club exclusion.
- Preserve Relevant Documents. Retain all records related to your PPP loan application(s), forgiveness application(s), SBA correspondence, board minutes or resolutions authorizing the loan, eligibility analyses, and any legal opinions obtained at the time of application.
- Consult Experienced Counsel. If you have any concerns about your organization's PPP eligibility, the accuracy of certifications made, or potential exposure under the False Claims Act, engage counsel with experience in government investigations, white collar defense, and nonprofit regulatory compliance without delay.
Conclusion
The unsealing of the Tarbell Group complaint represents a significant development in PPP enforcement and a clear signal that qui tam relators are scrutinizing the eligibility of tax-exempt organizations that received PPP loans. Organizations in the affected 501(c) categories should act now to assess their exposure and take appropriate protective measures.