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The vast majority of PPP borrowers still do not know whether their loans will be forgiven.

What to do if your PPP loan isn’t forgiven

Attorneys advise on how to prepare

The Paycheck Protection Program, or PPP, created by the passing of the Coronavirus Aid, Relief, and Economic Security, or CARES Act, in March 2020, has brought much needed relief to the restaurant industry.

The PPP came with a waiver of the affiliation rules set by the U.S. Small Business Administration to ensure more restaurants were able to take advantage of the financial assistance made available by the CARES Act and the additional assistance made available by the December 2020 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues, or the Economic Aid Act.

Nevertheless, the pandemic’s effect on the restaurant industry has been devastating. An estimated 110,000 eating and drinking establishments closed their doors last year, and 2.5 million restaurant industry jobs disappeared. Last year’s sales were $240 billion below pre-pandemic forecasts, which have led some to describe 2020 as the worst year for the restaurant industry in history.

To complicate matters for those that survived with PPP loans, the vast majority of borrowers still do not know whether their loans will be forgiven. It is an issue across all industries as the SBA is currently reviewing nearly 200,000 applications for forgiveness while expecting to review another 2.3 million applications in the coming months. The uncertainty confronting borrowers as to whether their loans will be forgiven and, if so, in what amount, is, of course, unfortunate. Fortunately, there is certainty in terms of what a borrower can do now to prepare for the SBA’s forgiveness decision. Furthermore, a borrower can be certain that it does not have to accept an adverse decision from the SBA that denies forgiveness, but can instead appeal the decision.

The SBA’s final loan review decision

The SBA will be reviewing millions of loan forgiveness applications in the coming year. The SBA’s decisions from these reviews may be adverse to the borrower. Referred to as “a final SBA loan review decision,” these adverse decisions generally find that a borrower was ineligible for a PPP loan in whole or in part and/or spent the loan proceeds on unauthorized uses.

Notably, these adverse decisions may even arrive after your lender has issued a full or partial approval decision to the SBA, meaning the SBA may disagree with your lender.

What should a borrower do while it is waiting for a “final SBA loan review decision,” and what should it do when it receives such a decision?

Knowing whom your company will talk to immediately after receiving the decision is a necessary step that you can and should decide now. Your company’s internal point of contact for its PPP loans, coupled with its trusted advisors and inside or outside counsel, must be ready to assist with an analysis of the SBA’s decision so your company knows how to respond. Based on that analysis, the next step very well may be to administratively appeal the decision.

Appealing an adverse SBA decision

A borrower can fight the SBA’s decision through an administrative appeal, which is described in the SBA regulations.

The process starts through the filing of a “petition” with the SBA’s Office of Hearing and Appeals, or OHA, within 30 calendar days after the borrower’s receipt of the final SBA loan review decision (or notification by the lender of the final SBA loan review decision, whichever is earlier).

This 30-day deadline is jurisdictional and rigid. The failure to meet the deadline will immediately put an end to a borrower’s attempt to reverse the SBA’s decision. Thus, a borrower must be prepared to act quickly, and even if the borrower thinks the SBA’s decision will be favorable, the borrower must be prepared to appeal an unanticipated denial of loan forgiveness.

The appeal petition must include seven items of information, including confidential information, as follows:

  1. The basis for OHA’s jurisdiction, including, but not limited to, evidence that the appeal is timely filed.
  2. A copy of the SBA loan review decision that is being appealed, or a description of that decision if a copy is unavailable.
  3. A full and specific statement as to why the SBA loan review decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations.
  4. The relief being sought.
  5. Signed copies of payroll tax filings actually filed with the Internal Revenue Service, and state quarterly business and individual employee wage reporting and unemployment insurance tax filings actually reported to the relevant state, for the relevant periods of time, if not provided with the PPP Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ or lender’s equivalent), or an explanation as to why they are not relevant or not available.
  6. Signed copies of applicable federal tax returns actually filed with the IRS with appropriate schedules (e.g., IRS Form 1040 with Schedule C/F) documenting income for self-employed individuals or partners in a partnership, if not provided with the PPP Borrower Application Form (SBA Form 2483 or lender’s equivalent), or an explanation as to why they are not relevant or not available.
  7. The name, address, telephone number, email address and signature of the appellant or its attorney.

An administrative law judge, or ALJ, will decide the appeal based on the petition filed by the borrower, the response of the SBA, and the “record,” that is, the documentation submitted by the borrower and the SBA to OHA.

In order to obtain a reversal of the denial of loan forgiveness, the borrower must convince the ALJ that “the SBA loan review decision was based on clear error of fact or law.” That is very difficult to prove because courts have ruled that “clear error of fact or law” means that “although there is evidence to support [the decision], the [ALJ] . . . is left with the definite and firm conviction that a mistake has been committed.”

All of that means that thorough preparation and diligent prosecution of the appeal is absolutely necessary.

By design, the appeal process is intended to be relatively quick, or at least much shorter than normal litigation. For instance, the documentation that the ALJ must review is what is in the record or on file, 45 days after the appellate petition is filed, and the regulations require the ALJ issue his or her opinion within 45 calendar days after the close of record, as practicable, (emphasis added). As noted by the emphasis, however, the “as practicable” qualifier is a clear message that the decision of the ALJ could be issued well after the expiration of 45 days.

In addition, the workload of the ALJs — likely very high even if the SBA issues a low percentage of adverse decisions — will also affect the duration of the appeal process.

The ALJ’s decision is obviously critical, but one last step is available for review: an appeal to the federal court to review the ALJ’s decision. The federal court will review the same issues that were reviewed by the ALJ. If the court decides the ALJ’s decision was in error, that decision could be reversed, ultimately bringing the relief sought by the borrower.

Parties to litigation naturally expect the possibility of an appeal after litigating a case through the trial court. PPP borrowers, however, do not have a history of PPP litigation to prepare them for an appeal. Instead, a final SBA loan review decision is apt to arrive unannounced and, if adverse, be unexpected. Knowing you can appeal such a decision, and having a team in place ready to do so, will be essential to a borrower’s ultimate utilization and forgiveness of its PPP loan(s).

Douglas Lang, Kirk Schuler, Jamie Whatley, and Ken Logsdon are partners at Dorsey & Whitney. 

This article does not necessarily reflect the opinions of editors or management.

TAGS: Finance
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