With the onslaught of businesses applying for and receiving federal funding through Paycheck Protection Program (PPP) loans under the The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the volume of regulatory and enforcement actions is likely to spike in the coming months. Businesses who received PPP funds need to be aware and mindful of the legal risks that accompany this financial relief. Specifically the federal False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA) provides a tool for both the federal government and private citizens to initiate actions related to federal funding.
Under the FCA, it is unlawful to make materially false claims or false statements in connection with the receipt of funding through government programs. See 31 USC § 3729. In addition to allowing the U.S. to pursue perpetrators of fraud on its own, the FCA allows private citizens to file suits on behalf of the government (called “qui tam” suits) against those who have defrauded the government. Private citizens who successfully bring qui tam actions may receive a portion of the government’s recovery. See 31 U.S.C. § 3730. These so-called whistleblower lawsuits should be taken very seriously, and businesses need to be aware of the potential risk for these suits.
All employers who applied for a PPP loan were required to sign certifications. One certification specifically focused on a borrower’s “need” for a PPP loan due to economic uncertainty. While Small Business Administration (SBA) and Department of Treasury (Treasury) guidance indicates that businesses borrowing less than $2 million will be deemed to have made the necessary “need” certification in good faith, this does not prevent a private citizen from bringing a qui tam suit under the FCA. As a result, businesses should take any questions, concerns, or allegations they receive surrounding the propriety of their PPP loan certification seriously. The potential qui tam area of concern with regard to the “need” certification, in part, relates to whether there was access to alternative sources of liquidity sufficient to fund operations. Two other potential qui tam areas of concern are: (a) the borrower’s use of PPP loan proceeds, and (b) whether the applicant was eligible under SBA rules to become a PPP borrower. Businesses should be cognizant that such qui tam claims can also pertain to whether it made false certifications and provided false statements about its number of employees, company affiliations, calculations of the maximum loan amount, use of PPP loan proceeds, or other criteria for loan eligibility.
The potential damages awarded under a federal FCA case can be significantly higher than the actual loan amount. The FCA allows for an award of three times the amount of the government’s claimed damages, as well as civil damages for each false claim. These qui tam lawsuits are incentivized by rewarding the successful whistleblower with an award of not less than 25% and not more than 30% of the proceeds of the action or settlement. See 31 U.S.C. § 3730(d)(2). The private citizen will also recover reasonable expenses, including attorneys’ fees and costs. Consequently, a business that received a $2 million loan, could end up paying damages of more than $6 million if it is found to have made a false certification. The whistleblower could receive up to $1.8 million of that amount.
Private equity and venture capital funds need to be especially careful, as they are potentially at risk for the actions of their portfolio companies in cases where they are active in operational decisions, including the certification of the application for PPP funds as well as the use of such funds. These entities are not customarily allowed to be a borrower under SBA programs, and that remained the case under the PPP loan unless the entity fit a certain exemption under the CARES Act. However, the FCA applies broadly to “any person” who “presents or causes to be presented” false claims or who “makes, uses, or causes to be made or used,” any materially false statements. See 31 U.S.C. § 3729(a)(1)(A)-(B).
If you are made aware of any questions, concerns, or allegations surrounding the propriety of your company’s PPP loan certifications, don’t wait for the government to show up and start asking questions. Contact your legal counsel and look into it immediately.
For further information, please contact any member of Taft’s SBA Task Force.
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