The Plight of a PPP Borrower – When SBA Denies Loan Forgiveness – Challenge It – Appeal! | Dorsey & Whitney LLP

Before the SBA “Examines” Your Loan for “Forgiveness” – Be Prepared! If the SBA denies the “Pardon” of the loan, you MUST appeal!

1. The PPP program and the SBA “reviews”.
The SBA runs the Paycheck Protection Program (PPP) loan program established under § 1102 of the Coronavirus Relief, Relief and Economic Security Act (CARES Act) (Pub. L. 116-136). Billions of dollars have been loaned under this PPP program. Now, the SBA is continuing “reviews” of these loan applications to determine whether the PPP loan will be “forgiven” in whole or in part. A “decision” by the SBA that the loan will not be canceled, in whole or in part, will force the borrower to repay the loan.

The SBA announced in fall 2020 that it would begin with “loan eligibility” “reviews” for loans over $ 2 million. This does not mean that loans below this level are “off the hook”. This is where the SBA begins its process.

The process begins with a “review” by the lender or the SBA of “loan eligibility” at the time the loan is made. Notice of a “review” could appear on any day and the notice period could be short. So, the borrower should be prepared. Waiting for the SBA to notify the borrower that they will begin the “review” might be too late. This means that the borrower must have their “ducks in a row” before the SBA calls. Careful and thorough preparation can be accomplished with the help of experienced accountants, business consultants and lawyers.

This review is not a complete “audit” process. An “audit” might be required years later after the “review”. Among other things, during the “review”, the SBA may examine the borrower’s use of the borrowed funds, the borrower’s financial performance after the loan is financed, and the accuracy of the information provided with the loan request. ready.

2. Appeal of an unfavorable decision by the SBA.
If the SBA reviews the borrower’s documents and decides that the “loan forgiveness” will not be permitted in whole or in part, the borrower can either accept the “decision” or fight it. The only way to fight the unfavorable “decision” is to appeal!

The only legally permitted appeal process is defined in the SBA regulations found at 13 CFR § 134.1204, et seq. The decision on the appeal will be made by an Administrative Law Judge (ALJ) who will review the borrower’s petition, the SBA’s response, and the “record”, that is, the documentation submitted by the borrower. borrower and the SBA. However, in order to get the refusal to cancel the loan set aside, the borrower must convince the ALJ that “the SBA’s loan review decision was based on a manifest error of fact or law”. 13 CFR § 134.1212. This is very difficult to prove because the courts have ruled that “manifest error of fact or law” means that “although there is some supporting evidence [the decision], the [administrative law judge] . . . remain with the firm and definitive conviction that a mistake has been made. Concrete pipes and products. of California, Inc. v. Constr. Southern California Tr. Workers’ Pension, 508 US 602, 622, 113 S. Ct. 2264, 124 L. Ed. 2d 539 (1993); see also PGBA, LLC v. United States, 389 F.3d 1219, 1224 (Fed. Cir. 2004). All of this means that careful preparation and diligent prosecution of the appeal is absolutely necessary.

Deadlines are essential in this appeal process. The appeal must be perfected or filed with the SBA Office of Hearings and Appeals (OHA) within 30 calendar days after the appellant’s receipt of the final SBA loan review decision, or the lender’s notification of the final SBA loan review decision, whichever occurs first.

This 30-day period is rigid. Even if the borrower thinks that the SBA’s “decision” will be that the PPP loan is canceled, the borrower should be prepared to appeal a “surprise” denial of the loan cancellation. Starting this appeal process involves more than just telling the OHA that the borrower is appealing. The appeal process must begin with the filing of a motion to appeal. 13 CFR § 134.1202.

This appeal request must include seven specific points of information. Some of these items require the attachment of highly confidential and signed tax returns to the Internal Revenue Service and state authorities. Note in particular points 5 and 6 below. Here is a summary of those points:

  1. The basis for the jurisdiction of the OHA, including, but not limited to, proof that the appeal is filed on time in accordance with § 134.1204;
  2. A copy of the SBA loan review decision being appealed or a description of that decision if a copy is not available;
  3. A complete and specific statement as to why the SBA’s loan review decision is alleged to be erroneous, along with all factual information and legal arguments supporting the allegations;
  4. The relief requested;
  5. Signed copies of income tax returns actually filed with the Internal Revenue Service (IRS), and quarterly business and individual employee wage returns and UI tax returns actually reported to the relevant state, for the relevant periods, if they are not provided with the PPP Loan Forgiveness Request (SBA 3508 form, SBA 3508EZ form or equivalent from the lender), or an explanation of why they are not relevant or not available;
  6. Signed copies of the applicable federal income tax returns actually filed with the IRS with the appropriate schedules (for example, IRS Form 1040 with Schedule C / F) documenting the income of self-employed persons or partners in a partnership, if they are not provided with the PPP borrower application form (SBA Form 2483 or lender’s equivalent), or an explanation of why they are not relevant or available; and
  7. The name, address, telephone number, e-mail address and signature of the appellant or his lawyer. 13 CFR § 134.1202. (I underline).

This appeal process is supposed to take a relatively short time compared to litigation in the courts. For example, the documentation that the administrative judge must examine is what is in the record or in the record, 45 days after the filing of the appeal motion. 13 CFR § 134.1207. Then, the regulations oblige the ALJ to give its opinion “Within 45 calendar days of the closure of the file, as far as possible. “ (Emphasis added) 13 CFR § 134.1213. This adjective “to the extent possible” is a clear message that the ALJ’s decision could be rendered well after the expiry of the 45 days. The total extent of this period will probably depend, among other things, on the workload of the ALJ.

The ALJ’s decision is obviously critical, but a final step is available for review. It is after the ALJ’s decision is final, the losing party can appeal to the Federal Court for review. 13 CFR § 134.1215; § 134.1216. This tribunal will examine the same issues as those examined by the ALJ. If the court decides that the ALJ’s decision was wrong, that decision could be overturned.

Many critical issues can arise during the appeal process. This could include the need for the borrower to seek protective orders from the ALJ regarding the production to the SBA of attorney-client privileged information or confidential information that must be protected from competitor access. So, in this regard, even though the appeal process could be completed in a relatively short period of time, vigilance and preparation are mandatory.

3. Preparation is essential.
Thorough advance preparation is essential to this whole process. Without full preparation, a borrower might be surprised and lose the fight.

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