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SBA ISSUES NEW RULE ALLOWING INCREASED PPP LOAN AMOUNTS FOR CERTAIN PARTNERSHIPS AND SEASONAL EMPLOYERS PREVIOUSLY CAUGHT IN GAPS OF CHANGING RULES

(Last updated May 14, 2020)

Late on Wednesday, May 13, 2020, the SBA released its ninth Interim Final Rule on the Paycheck Protection Program titled “Business Loan Program Temporary Changes; Paycheck Protection Program – Loan Increases.” The latest IFR is linked here.

Section 1102 of the CARES Act initially seemed to provide that businesses could include individuals with self-employment income from the business in the PPP loan size calculations. Then, on the eve of the opening of the PPP floodgates, the SBA issued additional guidance which provided that self-employed individuals could not be included in those calculations, which caused many companies to rush to reduce their PPP loans to comply. One enormous gap created by that guidance related to the treatment of partners in a business who often are technically self-employed as they are not W-2 employees. After many applications were submitted and accepted, the SBA (on April 14, 2020) changed course and said that partners in a partnership could be included in the PPP loan application for the business.

Similarly, the SBA was late in providing guidance to seasonal employers with respect to how their loan amounts should be calculated – only providing different rules for them on April 28.

These two issues resulted in a number of businesses applying for PPP loans that were less than the appropriate maximum amount. Given that the second tranche of PPP funding still has (as of May 8th) over $120B left to fund, it seems that the SBA is again feeling generous.

The new IFR authorizes lenders to increase PPP loan amounts for previously issued loans to two groups of borrowers:

(1) Partnerships. If a partnership received a PPP loan that excluded compensation for partners from the calculation, its PPP lender may submit an electronic request through the SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed.

(2) Seasonal Employers. If a seasonal employer received a PPP loan before the alternative loan calculation formula for seasonal employers was released on April 28, and the application of the updated formula would result in an increased PPP loan amount for such employer, the lender may submit an electronic request through the SBA’s E-Tran Servicing site to increase the PPP loan amount, even if the loan has been fully disbursed.

In both cases, the loan amount may only be increased if the lender’s first SBA Form 1502 report to the SBA on the applicable PPP loan has not been submitted. Once Form 1502 (a form submitted by a lender to the SBA providing payment and loan information) has been submitted, the PPP loan size cannot be increased. The SBA deadline for the submission by lenders of the Form 1502 for issued loans is currently May 22, 2020. Of course, if the increase is available to a qualifying business, the applicable borrower must provide its lender with required documentation to support the calculation of the increase.

If either of these scenarios applies to your business, our recommendation is that you reach out immediately to your PPP lender to see if the Form 1502 has been submitted for your loan. If not, then you have a small window to increase your loan amount to the maximum size available to you.

David Heidenreich
dheidenreich@ccsb.com
214.855.3031
SBA PROVIDES MUCH NEEDED GUIDANCE ON THE “NECESSITY” CERTIFICATION FOR PPP LOANS AND THE IMPACT ON THE FORGIVENESS PROCESS

(Last updated May 13, 2020)

Today (May 13, 2020), the SBA released an update to its PPP FAQs in which it added a single – but critically important – Q&A. Question 46 of the FAQs deals with the “necessity” certification that has been the subject of much discussion – and angst – for many businesses in recent weeks.

Two things stand out:

(1) Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be automatically deemed to have made the required “necessity” certification in good faith as it is unlikely that they would have adequate access to sources of liquidity.

(2) For those borrowers who received a loan in excess of $2 million, an opportunity will be provided to explain their justification (think “necessity”) in pursuing their PPP loan and, if they are determined to not have been an appropriate recipient, they will have the opportunity to pay the loan back promptly in which case “SBA will not pursue administrative enforcement or referrals to other agencies . . . .”

Question 46 and its answer can be found in the PPP FAQs here.

This development is expected to bring quite a bit of peace to many business owners as smaller borrowers will have the benefit of the “safe harbor” as to the necessity certification and larger borrowers will have the opportunity to pay back their loans should they be determined to not have been an eligible recipient – and thereby avoid the specter of the previously threatened administrative or criminal enforcement actions.

To be clear, all PPP borrowers will still be required to demonstrate appropriate and timely uses of PPP funds as part of the forgiveness process. To that end, we reiterate our previous recommendation each PPP borrower begin now (to the extent not already underway) to build its case for forgiveness by documenting company decisions made leading to the PPP application and by tracking and compiling records on PPP loan fund usage. Additionally, we recommend that each borrower submit its application for forgiveness as soon as the 8-week period for PPP fund utilization is complete. We expect that lenders will quickly be overwhelmed by the volume of forgiveness applications.

David Heidenreich
dheidenreich@ccsb.com
214.855.3031
MONICA LATIN BECOMES MANAGING PARTNER OF CARRINGTON COLEMAN

Carrington, Coleman, Sloman & Blumenthal has named trial lawyer Monica W. Latin as Managing Partner, effective May 1.

Ms. Latin, who has been practicing at the firm for more than half of Carrington Coleman’s 50-year history, succeeds Bruce Collins who has held the position since 2013. She was named Managing Partner-elect in May 2019, is a member of the firm’s executive committee, and has served for many years as chair of the firm’s Business Litigation Practice Group.

“This is both a tremendous honor and a great responsibility, and I welcome it,” Ms. Latin says. “To have the opportunity to continue the rich tradition and high standard of ethics and client service this firm has established over 50 years is something I look forward to doing.”

In her long tenure at the firm, Ms. Latin has worked closely with some of its most storied figures, including founding partner Jim Coleman, who died in February 2020, and Chief U.S. District Court Judge Barbara M.G. Lynn of the Northern District of Texas, who was Ms. Latin’s first supervising partner.

“Monica is a natural to take the reins of this firm,” says outgoing Managing Partner Bruce Collins. “She knows the firm inside and out, knows what it stands for, and understands our challenges and opportunities.”

Ms. Latin intends to maintain her active trial and appellate practice and will continue representing clients on a regular basis. As the first woman in Carrington Coleman’s top leadership role, she credits the firm’s namesake for the opportunity.

“Jim Coleman and our other founders created an inclusive culture where success is measured by dedication to excellence, client service, and professionalism,” she says. “Carrington Coleman lawyers have always worked in and are deeply devoted to upholding that tradition and the diversity it ensures.”

BRET MADOLE ELECTED TO EXECUTIVE COMMITTEE

(Last updated May 1, 2020)

Bret Madole was elected to Carrington Coleman’s Executive Committee, effective May 1, 2020. Bret joined Carrington Coleman in March 2014 to lead the firm’s Corporate Practice Group. Prior to joining the firm, he was a named partner in the firm David, Goodman & Madole.

“It is a tremendous honor to be elected to the Executive Committee of this storied law firm during the 50th anniversary of its founding,” says Mr. Madole. “And, when you consider the legal legends who have served on the EC and that I am joining at the same time as we have our first female Managing Partner, it is also very humbling and special.”

Mr. Madole’s practice focuses on corporate, mergers and acquisitions, and banking/finance.

FEDERAL RESERVE REWORKS MAIN STREET LOAN PROGRAM; SBA PROMISES TO AUDIT PPP LOANS IN EXCESS OF $2M BEFORE FORGIVENESS APPROVED

(Last updated April 30, 2020)

Main Street Business Lending Program Adjustments

On April 30, 2020, the Federal Reserve (Fed) announced modifications to the Main Street Business Lending Program (the “Program”). In our original client alert on the program (issued April 9, 2020 – which can be found here), we discussed both the Main Street Expanded Loan Facility (MSELF) and the Main Street New Loan Facility (MSNLF). This morning, the Fed added the Main Street Priority Loan Facility (MSPLF) to the mix which allows lenders to provide increased loan sizes if they are willing to retain 15% of the subject loan instead of the 5% retention requirement for lenders under the MSELF and MSNLF. The following table provides a basic comparison between the three facilities available under the Program:

The Fed has also released newly updated term sheets for the three facilities under the Program. The MSNLF Term Sheet can be found here, the MSPLF Term Sheet can be found here, and the MSELF Term Sheet can be found here.

The two most significant adjustments to the Program include: (i) the loan minimum size was reduced from $1,000,000 to $500,000, which is expected to make the Program a useful option to a wider group of smaller businesses; and (ii) on the upper end, the Program was adjusted to make it available to businesses with up to 15,000 employees and $5B in annual revenues (up from maximums of 10,000 employees and $2.5B in annual revenues under the terms announced in early April).

As a means of providing further guidance, the Fed has also published answers to frequently asked questions with respect to the Program (found here).

It is expected that these adjustments will make the Program’s loan options more enticing to small and medium-sized businesses. Please note, however, that loans under the Program are still not forgivable as the Paycheck Protection Program loans are.

Updated Guidance on the Key PPP Loan Certification

Certainly, you have heard news reports related to larger businesses (often publicly traded companies) obtaining large PPP loans and then being encouraged to return the amounts loaned under the logic that they couldn’t possibly have made the certification in the application that “(c)urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” in good faith.

Question 31 of the PPP FAQ sheet maintained by the Treasury (linked here) states in part:

“Although the CARES Act suspends the ordinary requirement that borrowers must be able to obtain credit elsewhere, . . . borrowers still must certify in good faith that their PPP loan request is necessary. . . . Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

To reiterate that further scrutiny will be forthcoming, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza issued a joint statement on April 28, 2020, which stated the following:

“The SBA has decided, in consultation with the Department of Treasury, that it will review all [PPP] loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming.”

The SBA has said in its response to the above-referenced Question 31 that “(a)ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.” In response, over $170 million in PPP loans made to publicly traded companies has already been repaid.

The SBA also issued yet another Interim Final Rule on April 30, 2020 (linked here), which clarified that “single corporate groups” (and regardless of otherwise applicable waivers of SBA affiliation rules) cannot receive more than $20 million in PPP loans in the aggregate. The term “single corporate group” was described as a group of entities majority-owned, directly or indirectly, by a common parent. This decision was in no doubt triggered by the news that large, publicly-traded companies, had received significant PPP loans in the aggregate – including one Dallas-based hotel group which reportedly received an aggregate of approximately $126 million in PPP loans. Of note, the referenced hotel group has stated publicly that it does not plan to return the PPP funds that it received. One thing is clear – a forgiveness showdown between the SBA and larger PPP borrowers is on the horizon.

As stated in a previous alert, our recommendation is that borrowers start to build their respective cases for forgiveness now by compiling reports on revenue decreases and other adverse effects suffered by their businesses as a result of the coronavirus pandemic.

As a final note, in case you were thinking that additional PPP fund authorizations will be coming in the future, news reports today indicate that one-third of the second tranche of $310B in PPP funds has already been lent and no further funding authorizations will be coming – a fact confirmed by both Secretary Mnuchin and Speaker Pelosi.

Carrington Coleman Partner, David Heidenreich
David Heidenreich
dheidenreich@ccsb.com
214.855.3031