DV Diamond Club of Flint, LLC v. U.S. Small Bus. Admin.

• Decision Date: 11 May 2020
• Docket Number: Case No. 20-cv-10899
• Citation: 459 F.Supp.3d 943
• Parties: DV DIAMOND CLUB OF FLINT, LLC, et al., Plaintiffs, v. UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants.
• Court: U.S. District Court — Eastern District of Michigan

459 F.Supp.3d 943

DV DIAMOND CLUB OF FLINT, LLC, et al., Plaintiffs,

v.UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants.

Case No. 20-cv-10899

United States District Court, E.D. Michigan, Southern Division.

Signed May 11, 2020

Bradley J. Shafer, Matthew J. Hoffer, Shafer Assoc., Lansing, MI, Peter E. Garrell, Fortis LLP, Costa Mesa, CA, Gary S. Edinger, Gary S. Edinger, Attorney at Law, Gainesville, FL, for Plaintiffs.

James J. Gilligan, DOJ, Washington, DC, Peter A. Caplan, United States Attorney's Office, Detroit, MI, for Defendants.

OPINION AND ORDER GRANTING PLAINTIFFS' AND INTERVENORS' MOTIONS FOR A PRELIMINARY INJUNCTION (ECF Nos. 12, 23)

MATTHEW F. LEITMAN, UNITED STATES DISTRICT JUDGE

In order to mitigate the economic devastation caused by the COVID-19 pandemic, the United States Congress passed, and President Trump signed, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), Pub. L. No. 116-136, 134 Stat. 281 (2020). A primary purpose of the CARES Act is ensuring continued employment and income for employees of American small businesses. To that end, Congress created the Paycheck Protection Program (the "PPP") as part of the CARES Act. That program authorizes the Small Business Administration (the "SBA") to guarantee hundreds of billions of dollars in loans to small businesses. The loans are to be made by private lenders, and they may be forgiven if, among other things, the businesses use the funds to continue to pay their employees' wages. See 15 U.S.C. § 636(a)(36) ; 15 U.S.C. §§ 9005, 9006.

Congress intended that the SBA would make the PPP loan guarantees widely available to small businesses across the commercial spectrum. Indeed, Congress was aware that the SBA had historically declared certain classes of businesses ineligible for SBA lending, and Congress set about to "[i]ncrease[ ] [e]ligibility" for PPP loan guarantees. 15 U.S.C. § 636(a)(36)(D). Congress did that by establishing only two criteria for PPP loan guarantee eligibility and providing that "any business concern ... shall be eligible" for a PPP loan guarantee if it met those criteria. 15 U.S.C. § 636(a)(36)(D)(i) (emphasis added).

Despite this direction from Congress, the SBA adopted a rule excluding from PPP loan guarantee eligibility a wide range of businesses – including banks, political lobbying firms, certain private clubs with restrictive admissions practices, and sexually oriented businesses that present entertainment or sell products of a "prurient" (but not unlawful) nature (the "PPP Ineligibility Rule"). While Congress may once have been willing to permit the SBA to exclude these businesses from its (the SBA's) lending programs, that willingness evaporated when the COVID-19 pandemic destroyed the economy and threw tens of millions of Americans out of work. Simply put, Congress did not pick winners and losers in the PPP. Instead, through the PPP, Congress provided temporary paycheck support to all Americans employed by all small businesses that satisfied the two eligibility requirements – even businesses that may have been disfavored during normal times. Thus, the SBA's PPP Ineligibility Rule is invalid because it contravenes the PPP.

The Plaintiffs in this case are primarily businesses that provide lawful "clothed, semi-nude, and/or nude performance entertainment." (Mot., ECF No. 12, PageID.475.) They have been shuttered by the COVID-19 pandemic and the "stay at home" orders issued in response to the pandemic. They applied for PPP loans and intended to use the borrowed funds primarily to pay their displaced employees. But because their lawful entertainment was deemed to be of a "prurient sexual nature," the PPP Ineligibility Rule prevented them from obtaining PPP loans and/or from fully participating in the PPP.

Plaintiffs contend, among other things, that the PPP Ineligibility Rule is invalid because it contravenes the PPP. (See Am. Compl., ECF No. 11.) They have now filed a motion seeking a preliminary injunction barring the SBA from enforcing against them the provisions of the PPP Ineligibility Rule that prohibit sexually oriented businesses from obtaining PPP loan guarantees. (See Mot., ECF No. 12.) For the reasons explained below, the motion is GRANTED .

I

A

The SBA is "a government agency established by § 204 of the Small Business Act of 1953, 67 Stat. 233 (codified in 1958 at 15 U.S.C. § 633 )." United States v. Peoples Household Furnishings, Inc. , 75 F.3d 252, 253 (6th Cir. 1996). Among other things, the SBA "aid[s], counsel[s], assist[s], and protect[s] ... the interests of small-business concerns." Small Bus. Admin. v. McClellan , 364 U.S. 446, 447, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960). The Small Business Act provides the SBA and its Administrator "extraordinarily broad powers to accomplish these important objectives, including [the ability to lend] money to small businesses whenever [those businesses] could not get necessary loans on reasonable terms from private lenders." Id. In addition to directly lending money to small businesses, the SBA may guarantee loans made by private lenders. See id. The SBA may also "establish general policies" governing the "granting and denial" of the financial assistance it provides. 15 U.S.C. § 633(d).

On January 31, 1996, the SBA first declared certain types of businesses ineligible to participate in SBA lending programs (the "Original SBA Ineligibility Rule"). The Original SBA Ineligibility Rule is codified at 13 C.F.R. § 120.110. The rule prohibits "banks," "[l]ife insurance companies," "businesses primarily engaged in political or lobbying activities," "[b]usinesses deriving more than one-third of gross annual revenue from legal gambling activities," and "[p]rivate clubs and businesses which limit the number of memberships for reasons other than capacity," among others, from receiving SBA-backed loans. 13 C.F.R. §§ 120.110(b), (f), (g), (i), and (r). In addition, and most relevant here, the Original SBA Ineligibility Rule prohibits certain sexually oriented businesses from participating in SBA lending programs. More specifically, it provides that the following businesses are barred from receiving SBA financial assistance:

(p) Businesses which:

(1) Present live performances of a prurient sexual nature; or

(2) Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;

120.110(p)(1)-(2).

In 2019, the SBA issued its "Standard Operating Procedure for Lender and Development Company Loan Programs 50 10 5(K)" (the "2019 SOP"). (See the 2019 SOP, ECF No. 12-11.) This publication provides guidance to lenders concerning how to administer and apply the SBA's rules and regulations, including the Original SBA Ineligibility Rule. (See id. ) In relevant part, the 2019 SOP explains that "certain business types" may be "ineligible" to participate in SBA loan programs. (Id. , PageID.570.) With respect to businesses that present entertainment or sell products of a "prurient sexual nature," the 2019 SOP instructs lenders as follows:

a. A business is not eligible for SBA assistance if:

i. It presents live or recorded performances of a prurient sexual nature; or

ii. It derives more than 5% of its gross revenue, directly or indirectly, through the sale of products, services or the presentation of any depictions or displays of a prurient sexual nature.

b. SBA has determined that financing lawful activities of a prurient sexual nature is not in the public interest. The Lender must consider whether the nature and extent of the sexual component causes the business activity to be prurient.

c. If a Lender finds that the Applicant may have a business aspect of a prurient sexual nature, prior to submitting an application to the LGPC (non-delegated) or requesting a loan number (delegated), the Lender must document and submit the analysis and supporting documentation to the Associate General Counsel for Litigation at PSMReview@sba.gov for a final Agency decision on eligibility. Upon approval by SBA, the Lender may submit the application to the LGPC or may proceed to process the loan under its delegated authority. A non-delegated Lender must submit a copy of SBA's approval with the application to the LGPC. A delegated Lender must retain its analysis, supporting documentation, and evidence of SBA's approval in its loan file and must submit the analysis and supporting documentation to SBA with any request for guaranty purchase. SBA also may review such documentation when conducting Lender oversight activities.

(Id. , PageID.571.)

B

In March 2020, Congress passed the CARES Act in order to "provide an economic stimulus for our nation's businesses and citizens" affected by the COVID-19 pandemic. Am. Ass'n of Political Consultants v. U.S. Small Bus. Admin. , 2020 WL 1935525, at *1 (D.D.C. Apr. 21, 2020). Title I of the CARES Act focuses on supporting displaced American employees. It is titled the "Keeping American Workers Paid and Employed Act." See Pub. L. No. 116-136, 134 Stat. 281 (2020) at Title I. The PPP is within Title I of the CARES Act. See 15 U.S.C. § 636(a)(36).

Another federal court recently provided the following succinct and helpful explanation concerning how the PPP operates:

The PPP is a new loan program to be administered by the SBA under Section 7(a) of the Small Business Act (codified at 15 U.S.C. § 636(a) ). Its purpose is to assist small businesses during the COVID-19 crisis by immediately extending them loans on favorable terms. The loans are made by the SBA's participating banks and guaranteed by the SBA itself. Section 1106 of the CARES Act provides that a borrower's indebtedness under a PPP loan will be forgiven to the extent that the borrower uses the funds to pay expenses relating to payroll, mortgage interest, rent, and utilities during the eight-week period following the loan's origination. CARES Act § 1106. If a borrower qualifies for loan

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