Michigan Court Grants Injunctive Relief Against SBA Regarding Ineligibility Criteria for Loans to Small Businesses

In March 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide financial relief to individuals and organizations impacted by the Coronavirus pandemic. As a part of the CARES Act, Congress created the Paycheck Protection Program (“PPP”) which authorized the Small Business Administration (“SBA”) to provide loans to small businesses. Historically, however, the SBA has rendered certain types of business ineligible to receive SBA loans. Recognizing this, Congress established merely two criteria for PPP eligibility providing that businesses:

(1) during the covered period

(2) must have less than 500 employees or less than the size standard in number of employees established by the Administration for the industry in which the business operates.

In addition to the above, Congress also provided that, if those criteria are met, “any business concern . . . shall be eligible to receive a covered loan.” Nevertheless, the SBA adopted its rule which excludes a wide range of businesses from PPP loan guarantee eligibility, including:

  • banks
  • political lobbying firms
  • sexually oriented businesses that present entertainment or sell products of a prurient, but lawful, nature.

Notably, the SBA’s PPP Ineligibility serves as the basis for a recent action before the Eastern District Court of Michigan. Particularly, in April 2020, an adult-entertainment establishment and multiple similarly situated businesses requested a preliminary injunction precluding the enforcement of the SBA’s PPP Ineligibility rule that bars sexually oriented businesses from obtaining PPP loan guarantees. The Eastern District Court of Michigan addressed the following question:

May the SBA exclude from eligibility for a PPP loan guarantee a business concern that (1) during the covered period (2) has less than 500 employees or less than the size standard in number of employees established by the administration for the industry in which the business operates?

In its analysis, the Court found that Congress has explicitly answered no. The Court acknowledged that the plain language of the PPP unambiguously provides that “any business concern is eligible for a PPP loan if it employed the requisite number of Americans during the covered period.” Based on such, the Court held that the SBA’s PPP Ineligibility rule directly contravenes the eligibility guarantees provided in Congress’s PPP.

Additionally, the Court addressed whether it may enter preliminary injunctive relief against the SBA given the language of 15 U.S.C. § 634 (b)(1) which provides:

In the performance of, and with respect to, the functions, powers, and duties vested in him by this chapter the Administrator may sue and be sued in any court of record of a State having general jurisdiction, or in any United States district court, and jurisdiction is conferred upon such district court to determine such controversies without regard to the amount in controversy; but no attachment, injunction, garnishment, or other similar process, mesne or final, shall be issued against the Administrator of his property.

In answering the above, the Court acknowledged that rather than seeking to “attach the SBA’s assets or otherwise interfere with its internal operations,” the Plaintiffs merely sought to set aside unlawful action by the SBA. Even more so, courts have consistently taken the position that § 634 (b)(1) does not preclude injunctions against the SBA in all circumstances. Thus, the Court found that it may enter preliminary injunctive relief against the SBA.

Lastly, in considering whether Plaintiffs’ motion for preliminary injunction should be granted, the Court balanced four primary factors:

(1) whether the movant has a strong likelihood of success on the merits;

(2) whether the movant would suffer irreparable injury absent the injunction;

(3) whether the injunction would cause substantial harm to others; and

(4) whether the public interest would be served by the issuance of an injunction.

Finding that each of the above factors favored issuing the preliminary injunction, the Court granted Plaintiffs’ motion barring the SBA from enforcing its provisions prohibiting sexually oriented business from obtaining PPP loan guarantees.

Subsequently, the SBA appealed the Eastern District Court of Michigan’s decision requesting the Sixth Circuit Court of Appeals to stay the preliminary injunction pending a decision on the merits of said appeal. However, on May 15, 2020, providing a similar analysis as the district court, the Sixth Circuit likewise determined that the relevant factors favored denying a stay.

Cases can be found at:

DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, et al., Case No. 20-cv-10899, 2020 WL 2315880 (E.D. Mich. May 11, 2020).

DV Diamond Club of Flint, LLC, et al. v. Small Business Administration, Case No. 20-1437 (6th Cir. May 15, 2020).

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