Given the haste with which it has been deployed in response to the COVID-19 pandemic, a few beneficiaries of the paycheck protection program profiting from the cannabis industry, at least indirectly, have undoubtedly passed between mesh of the net.
These companies may face challenges when requesting cancellation of their loans because of their connection to what the federal government still considers illegal activity.
The easiest solution to this dilemma would be to simply return the money, and some lawyers say they would advise their clients to do just that.
But at least one lawyer thinks these companies might also consider launching a challenge under the Administrative Procedures Act, given that this is a rapidly evolving, if not irregular, body of case law that can grow. apply beyond the cannabis industry.
Companies directly engaged in the marijuana trade in states where sales are legal may not have dared to apply for PPP loans, as the borrower’s application form asked them to certify that “[t]The applicant is not engaged in any illegal activity under federal, state or local laws. “
But the door has arguably been left ajar for “indirect” marijuana businesses, such as businesses that provide testing services, or sell or install grow lights or other specialized equipment, or businesses that sell cannabis. auxiliary products, such as pipes and other smoking devices.
The Small Business Administration would argue that these businesses are also not eligible for PPP loans, referring to a regulation it passed in 1996, 13 CFR §120.110, which in subsection (h) prohibits “ companies engaged in illegal activity ”to participate in one of the SBA’s business loan programs. These programs include those under Section 7 (a) of the Small Business Act, of which PPP is now a part.
The SBA subsequently issued guidelines further clarifying that it was intended to sweep the ban on “businesses that earn income from marijuana-related activities or support the end-use of marijuana.”
But there is some tension between such limitations on access to SBA funding and Congress’ apparent desire when passing the CARES Act to make relief from the COVID-19 pandemic widely available.
Although cannabis was not at the heart of any of the early cases, rulings began to flow in federal courts involving companies also normally barred from accessing SBA funds.
Perhaps the most relevant cases are cases involving adult entertainment businesses, such as strip clubs. As with marijuana businesses, under 13 CFR §120.110 (p), certain sexually oriented businesses are not permitted to participate in SBA loan programs.
However, these companies have gone to federal court to challenge their denial of access to PPP funds using the APA, which prohibits agencies from taking action “beyond jurisdiction, authority or legal limitations, or below legal rights “.
As part of the first step of the two-step framework set out in Chevron, USA, Inc. v. Natural Resources Defense Council, Inc., courts must consider whether “Congress has directly addressed the precise issue at hand.”
In DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, United States District Court Judge Matthew J. Leitman of the Eastern District of Michigan framed the question as follows: “Can the SBA exclude from eligibility for a PPP loan guarantee a business enterprise that (1) during the period covered (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 company operates? “
Leitman then answered this question in the negative.
When it created the PPP program, Congress knew that the SBA had historically declared certain categories of businesses ineligible for SBA loans, and yet it made loans available to “any business enterprise,” explained Leitman.
“While Congress may have already been prepared to allow the SBA to exclude these companies from [the SBA’s] loan programs, that will evaporated when the COVID-19 pandemic destroyed the economy and put tens of millions of Americans out of work, ”Leitman wrote. “Put simply, Congress did not pick the winners and losers in the PPP.”
But faced with an almost identical problem in the Western District of New York, U.S. District Court Judge Lawrence J. Vilardo ruled in the opposite direction in Pharaoh’s GC, Inc. v. United States Small Business Administration.
After noting the division between the courts over whether the SBA’s eligibility requirements for a PPP loan contradict the plain text of the CARES Act, Vilardo sided with those who had argued that the SBA had not overstepped its authority by preventing some organizations from obtaining PPP loans.