Defy Ventures, Inc. v. U.S. Small Bus. Admin.

• Decision Date: 29 June 2020
• Docket Number: Civil Action No. CCB-20-1838, Civil Action No. CCB-20-1736
• Parties: DEFY VENTURES, INC., et al. v. U.S. SMALL BUSINESS ADMINISTRATION, et al. Carmen's Corner Store, et al. v. U.S. Small Business Administration, et al.
• Court: U.S. District Court — District of Maryland

469 F.Supp.3d 459

DEFY VENTURES, INC., et al.

v.U.S. SMALL BUSINESS ADMINISTRATION, et al.

Carmen's Corner Store, et al.

v.U.S. Small Business Administration, et al.

Civil Action No. CCB-20-1838

Civil Action No. CCB-20-1736

United States District Court, D. Maryland.

Signed June 29, 2020

Ronald S. Canter, The Law Offices of Ronald S. Canter LLC, Rockville, MD, for Carmen's Corner Store, Retail4Real, Altimont Mark Wilks.

James Jordan Gilligan, Indraneel Sur, United States Department of Justice, Washington, DC, for Small Business Administration, Jovita Carranza, Steven Mnuchin, The United States of America.

MEMORANDUM

Catherine C. Blake, United States District Judge

The COVID-19 pandemic has affected many small businesses, causing them to lose revenue or even shut down completely. In order to help these businesses and their employees, Congress created the Paycheck Protection Program ("PPP"), which provides for business loans that are fully forgivable if used for certain purposes, such as payroll expenses. The Small Business Administration ("SBA") has issued certain eligibility restrictions for participating in the PPP. At issue here is a rule restricting businesses from receiving PPP funds if they have a greater than 20% owner with a certain criminal history. The rule has gone through several iterations, which will be explained below. Most importantly, under the current iteration, the individual plaintiffs are eligible to apply for PPP funding.

The plaintiffs in Defy Ventures, Inc. v. Small Business Administration and Carmen's Corner Store v. Small Business Administration challenge this criminal history exclusion,¹ and both have filed motions for a preliminary injunction. Although the cases are not consolidated, because they bring similar claims, the court will address the motions together. Given that the application deadline for the PPP is June 30, 2020, the plaintiffs requested expedited briefing, which the court granted. Briefing was completed on June 26, 2020. No hearing is necessary. For the reasons explained below, both motions will be granted in part and denied in part.

FACTS AND PROCEDURAL HISTORY

I. The CARES Act and Section 7(a) Loans

The SBA was created by the Small Business Act, 15 U.S.C. § 631 et seq. Section 7(a) of the Act, which is codified at 15 U.S.C. § 636, authorizes the SBA to provide financial assistance to small business concerns. Under Section 7(a), the SBA generally guarantees loans from private lenders rather than disbursing funds directly to borrowers. (ECF 29-1, Decl. of John A. Miller, Deputy Associate Administrator for Capital Access, SBA ¶¶ 3-4).

In response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), Pub. L. No. 116-136, 134 Stat. 281 (2020), which was signed into law on March 27, 2020. Title I of the CARES Act created the PPP. The PPP, codified at 15 U.S.C. § 636(a)(36), is a "new loan program to be administered by the SBA under Section 7(a) of the Small Business Act." Camelot Banquet Rooms, Inc. v. United States Small Bus. Admin. , 458 F. Supp. 3d 1044, 1050, No. 20-C-0601, 2020 WL 2088637, at *2 (E.D. Wis. May 1, 2020). "The loans are made by the SBA's participating banks and guaranteed by the SBA itself." Id. Section 1106 of the CARES Act, however, provides that the PPP loans will be forgiven, and the SBA will pay the lender the amount forgiven, to the extent the borrower uses the funds for certain purposes, including for payroll expenses. 15 U.S.C. § 9005. Congress initially appropriated $349 billion for the PPP program, and then an additional $310 billion in April 2020. Paycheck Protection and Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620 (2020).

The provision at issue in this case is titled "Increased eligibility for certain small businesses and organizations" and is codified at 15 U.S.C. § 636(a)(36)(D)(i). It states that:

During the covered period, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 657a(b)(2)(C) of this title shall be eligible to receive a covered loan if the business concern, nonprofit organization, veterans organization, or Tribal business concern employs not more than the greater of—

(I) 500 employees; or

(II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.

15 U.S.C. § 636(a)(36)(D)(i).

II. Criminal History Exclusion

The CARES Act granted the SBA emergency rulemaking powers to administer the PPP. CARES Act, Section 1114 (codified at 15 U.S.C. § 9012 ). On April 15, 2020, the SBA published an interim final rule (IFR) that provided additional restrictions on who could apply for PPP loans. It stated that "[y]ou are ineligible for a PPP loan if ... An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years." Business Loan Program Temporary Changes; Paycheck Protection Program, 85 FR 20811-01 ("April IFR").

This rule was revised on June 18, 2020, to shorten the time period for felony convictions. The revision changed "convicted of a felony within the last five years" to "convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year." Business Loan Program Temporary Changes; Paycheck Protection Program—Additional Revisions to First Interim Final Rule, 85 FR 36717-01 ("June IFR"). The other parts of the rule (ineligibility if an owner is incarcerated, on probation, on parole or presently subject to criminal charges) were not changed.

The rule was again revised on June 24, 2020, after the plaintiffs had filed their motions and on the day the defendants filed their oppositions. See Business Loan Program Temporary Changes: Paycheck Protection Program, Additional Revisions to First Interim Final Rule, https://www.sba.gov/document/policy-guidance-ppp-interim-final-rule-additional-eligibility-revisions-first-interim-final-rule (posted June 24, 2020) ("June 24 IFR"). The June 24 revision changed the rule in two ways. First, instead of a business being excluded because a greater than 20% owner is facing any criminal charges, the business will only be excluded if the owner is facing felony charges. Id. at 5. Second, as to the parole/probation exclusion, it is now "limited to individuals whose probation or parole commenced ... within the last five years for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, and within the last one year for other felonies." Id. at 6.

The SBA similarly restricts eligibility for those that have certain criminal histories as to its pre-existing Section 7(a) loan program, which the SBA has administered for many years. See 13 C.F.R. § 120.110(n). That regulation provides that "[b]usinesses with an Associate² who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude" are ineligible for SBA business loans. Id. Another regulation also states that to ensure creditworthiness, the SBA will consider the "[c]haracter [and] reputation" of the applicant. 13 C.F.R. § 120.150(a). Therefore, businesses with associates "[c]urrently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction" are also ineligible for financial assistance. SBA, SOP 50 10 5(K), Lender and Development Company Loan Programs, at 110 (Jan. 1, 2019). For associates with other types of criminal history, including those who have been convicted of a felony, the SBA requires an individualized character determination, which may involve an FBI fingerprint background check. Id. at 110–13; ECF 29-1, John Miller Decl., ¶¶ 9–12.

III. The Plaintiffs

A. Defy Ventures, Inc. v. Small Business Administration , No. 20-1838

The plaintiffs are Defy Ventures, Inc.; Sekwan Merritt; Prop Prep Properties, LLC d/b/a/ Lightning Electric; John D. Garland; and Sign Me Up Bethpage, Inc. d/b/a Fastsigns 2323. Merritt is a resident of Maryland and the sole owner of Prop Prep Properties LLC. (Compl. ¶¶ 17, 18). Under the prior iteration of the rule, and because Merritt is currently on parole, he could not obtain PPP funding for his business, which he intended to use to pay his employees and pay for essential business costs, such as general liability insurance. (Id. ¶¶ 71, 82–85). Garland is a resident of New York and the majority owner of Sign Me Up Bethpage, Inc. (Id. ¶ 19). Garland has been charged with petit larceny and violation of an order of protection in regards to a dispute with his wife, to which he has pleaded not guilty. (Id. ¶¶ 96, 97). Because of this, and under the prior iteration of the rule, Garland and his business partners could not get PPP funding that they intended to use for payroll costs, rent, utilities, and other essential expenses. (Id. ¶¶ 101, 102). Under the June 24 revised version of the rule, Prop Prep Properties and Sign Me Up Bethpage are both eligible to apply for PPP funding. Still, they have continued to experience difficulties in obtaining a loan. For example, Sekwan Merritt attempted to apply at his local Wells Fargo branch and was told to apply online, but when he tried, the online portal was no longer accepting applications. He also attempted to obtain a point of contact for the SBA (which has agreed to help Merritt obtain a loan), but when he finally was able to reach a Wells Fargo represen...