On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, an integral portion of the Consolidated Appropriations Act of 2021 (the “Act”). As detailed in our Alert released on December 24, 2020, the Act includes the continuation and expansion of the Paycheck Protection Program (“PPP”), subject to certain eligibility requirements and borrowing restrictions. With respect to PPP matters, the Act has been enacted without modification to its initial proposed form.

In the coming weeks, we expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The U.S. Small Business Administration is directed to issue regulations to effectuate the PPP-related provisions of Act within 10 days of its enactment.

Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

Congress has reached a bi-partisan agreement on the Consolidated Appropriations Act of 2021 (the “Act”), which includes a supplemental relief package aimed at mitigating the continued economic impact of COVID-19 on American businesses, individuals and families, and includes expansion of the Paycheck Protection Program (“PPP”) as initially enacted under the CARES Act[1].  The Act is currently pending signature by the President, who has indicated that he does not intend to sign without further modification of certain matters not directly related to the PPP.  If the President does not sign, it is possible that Congress will agree to certain modifications to the Act or override any Presidential veto and adopt the Act as drafted.

Below is a summary of the key provisions of the expanded PPP, as proposed in the Act in its current form.

Expansion of Paycheck Protection Program Relief.  The Act not only provides for a second round of PPP funding to first and second-time borrowers, but also provides a mechanism for borrowers to increase the amount of their original PPP loans.

(a) Borrowers with Existing PPP Loans. First, the Act permits borrowers who, due to supplemental guidance issued by the SBA, obtained a smaller PPP loan than they could have otherwise obtained upon passage of such supplemental guidance. Affected borrowers may request that their PPP lenders increase their existing PPP loan by the differential. Second, the Act permits PPP borrowers who returned all or any portion of their original loan to reapply for a loan in the amount of such returned portion. This extends to eligible borrowers who did not accept the full amount of the initial PPP loan as well, allowing such borrowers to apply for an increase up to the maximum amount initially authorized.

(b) New and Second Round Borrowings. As drafted, the Act proposes to allocate approximately $267.5 billion in funding for a new pool of PPP funds, $25 billion of which are reserved for businesses with 10 or fewer employees as of February 15, 2020. Eligible borrowers may now apply for a second PPP loan, provided that such supplemental loan cannot exceed $2 million and, the aggregate amount of all loans to all affiliated borrowers from both the first and second round of funding shall not exceed $10 million.

Generally, the aggregate PPP loan amount per applicant shall not exceed 2.5 times the average monthly payroll for the 12 months preceding the date of application or the average monthly payroll for 2019. For accommodation and food service businesses under NAICS Code 72, the maximum loan amount if increased to 3.5 times monthly payroll, not to exceed $2 million.

(c) Eligible Borrowers.

    • All first-time PPP applicants will be subject to the eligibility criteria set forth in the initial PPP under the CARES Act. In order to apply for a second loan under the PPP, the applicant must be a business with 300 or fewer employees (decreased from 500 under the initial program) and have experienced a decline in gross receipts of 25% in any completed quarter in 2020 prior to the loan compared to the same quarter in 2019.
    • The Act expands eligibility to certain 501(c)(6) organizations, subject to certain conditions.
    • The Act permits a debtor in possession or bankruptcy trustee to obtain a PPP loan on behalf of a debtor, which loan will be treated as a debt of the company unless and until forgiven. Further, any Plan of Reorganization that provides for payment of a claim specified in Section 503(b)(10) of the Code (i.e., administrative claims) may be confirmed if the plan proposes make payments on account of such claim when due under the terms of the PPP loan giving rise to such claim.

(d) Use of Proceeds for New PPP Loans. The Act substantially expands the provisions of the existing PPP relating to authorized uses of PPP loan proceeds, in an effort to address certain non-ordinary course expenses incurred by businesses in connection with COVID-19 safety measures. New categories of acceptable uses of PPP loan proceeds include:

    • Covered Operational Expenditures: Payments by a business for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
    • Covered Property Damage Costs: Any cost related to property damage, vandalism and looting due to public disturbances that occurred during 2020, to the extent not covered by insurance or other compensation.
    • Covered Supplier Costs: Payments to suppliers pursuant to a contract, order, or purchase order in effect before the date of disbursement of the PPP loan, for the supply of goods that are essential to the operations of the business at the time such expenditure is made.
    • Covered Worker Protection Expenditures: Any operating or capital expenditure required to facilitate the adaptation of the applicant’s business to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent State or local requirements, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19, in all cases during the period commencing on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires. Such expenditures may include costs or expenses incurred in connection with the following:
      • purchase or maintenance of a drive-through window, air filtration or ventilation system or physical barriers (e.g. sneeze guards);
      • expansion of additional indoor, outdoor or combined business space;
      • onsite or offsite health screening capabilities;
      • purchase of particulate filtering face-piece respirators;
      • purchase and maintenance of personal protective equipment

In addition to the above, the Act expands the definition of payroll costs to include payments for group health or other group insurance benefits (including group life, disability, vision and dental insurance), including insurance premiums. The above notwithstanding, in order to obtain full forgiveness of any PPP loan, no less than 60% of loan proceeds must be used to fund payroll and associated eligible costs.

(e) Forgiveness. In addition to existing PPP loan forgiveness requirements, the Act codifies an attempt by the Federal Reserve and the SBA to simplify the PPP loan forgiveness process for smaller loans. For PPP loans less than $150,000, the SBA will issue a new one-page forgiveness application (to be issued within 24 days of passage of the Act), in which a borrower will attest to compliance with all loan requirements, supported by limited information. Upon forgiveness, records must be retained for at least 3 years (4 years with respect to employment records). The Act also provides direction to the SBA to submit an audit plan to Congress regarding policies and procedures for review or larger loans. Lastly, proceeds of EIDL loans will no longer reduce full forgiveness.

(f) Deductibility of PPP Loan Funded Expenses.

    • The Act clarifies that gross income does not include any amount as a result of the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for deductible expenses paid with the proceeds of a PPP loan (e.g., employee salaries) that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
    • While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible.  The IRS then stated that no deduction would be allowed under existing law for an expense that is deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income.  The Act changes current law to reverse that decision and permit a deduction.

The Act passed both houses of Congress on December 20, 2020. The President has indicated as recently as Wednesday, December 23, 2020, that he does not intend to sign the Act without substantial changes. If and when passed, we can expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The SBA is directed to issue regulations to carry-out the Act within 10 days of its enactment.

Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.


[1] For a comprehensive review of the existing Paycheck Protection Program and related SBA guidance, please refer to our COVID-19 Resource Center.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The Southern District of New York has recently issued a decision that could ultimately have a significant impact on the enforceability of contracts that required performance during the COVID-19 pandemic.  In JN Contemporary Art, LLC v. Phillips Auctioneers LLC, (20-cv-04370), the Honorable Denise Cote, U.S.D.J., ruled that COVID-19 constituted a “natural disaster,”—thus falling within the ambit of a force majeure clause contained within the parties’ contract—and excused the defendant’s performance under the contract by dismissing the breach of contract case.  This decision, if ultimately upheld, will have implications that will trickle down to the likely thousands of cases that will be filed as a result of the pandemic.

In brief, in JN Contemporary Art, LLC, the plaintiff, the owner of a painting by artist Rudolf Stingel (hereinafter, “JN”), contracted with an art auction house – the defendant, Phillips Auctioneers LLC (hereinafter, “Phillips”) – to (among other things) grant Phillips the right to sell the painting at a specific, live, New York auction that was to be held in May 2020 in exchange for a guaranteed minimum payment to JN of $5 million.  Of note, the contract contained a force majeure clause within the contract’s termination provision that stated, “[i]n the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war. . .[Phillips] may terminate this Agreement with immediate effect.  In such event [Phillip’s] obligation to make payment of the Guaranteed Minimum shall be null and void…”

After an adjournment of the auction as a result of the pandemic, Phillips terminated the contract and sent a termination notice to JN citing its inability to conduct the live New York auction at its planned May 2020 date.  JN thereafter sued for, among other things, specific performance and alleged that Phillips terminated the contract without cause and was, in actuality, using the pandemic as a pretext to avoid its contractual obligations because of the weakening market for the painting.

In a 36-page decision, the Court rejected JN’s arguments (among others), and agreed with Phillips that the COVID-19 pandemic constitutes a “natural disaster” that excused Phillips performance under the contract pursuant to the force majeure clause in the termination provision.  Specifically, the Court held, in relevant part, that:

It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.  One need look no further than the common meaning of the words natural disaster.  Black’s Law Dictionary defines “natural” as “[b]rought about by nature as opposed to artificial means,” and “disaster” as “[a] calamity; a catastrophic emergency. . . .”

The Court further noted that:

[A] pandemic requiring the cessation of normal business activity is the type of “circumstance” beyond the parties’ control that was envisioned by the Termination Provision.  The exemplar events listed in Paragraph 12(a) include not only environmental calamities events such as floods or fires, but also widespread social and economic disruptions such as “general strike[s],” “war,” “chemical contamination,” and “terrorist attack.”

By interpreting COVID-19 as a “natural disaster” that excused contractual performance within the ambit of this specific force majeure clause, the Court may have opened an avenue of relief to many parties to contracts that could not be performed as a result of the multitude of Government orders related to the COVID-19 pandemic.  Contracting parties should therefore study their contracts closely to determine and assess their rights and whether they are entitled to relief as a result of the ongoing worldwide crises.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The U.S. Small Business Administration (the “SBA”), in consultation with the Department of the Treasury, has further updated its Frequently Asked Questions (“FAQs”) regarding the issuance of Loan Necessity Questionnaires to certain Paycheck Protection Program (“PPP”) borrowers (“PPP Borrowers”). Such additional guidance comes nearly a month after the SBA initially released Questionnaires to PPP lenders (“PPP Lenders”) for them to require completion by PPP Borrowers who borrowed $2 million or more in PPP loans, as detailed in our prior Alert. While many hoped that the SBA would retract certain of the Questionnaire’s post-application date inquiries related to a PPP Borrower’s good faith economic need at the time of the application, the FAQs have confirmed the continued use of the Loan Necessity Questionnaires in this context, including consideration of a PPP Borrower’s post-application circumstances as it relates to its “economic need”.

Per FAQ 53, the SBA will continue to provide PPP Lenders with the Questionnaire for distribution to PPP Borrowers who borrowed $2 million or more, in an effort to review such loans (and other loans as appropriate) for eligibility, fraud or abuse, and compliance with PPP loan forgiveness requirements. The SBA indicated that it will use the Questionnaire as a screening mechanism to assess a PPP Borrower’s initial “economic need” certification on its application (i.e., that “[c]urrent economic uncertainty makes [the PPP loan] request necessary to support the ongoing operations of the [PPP Borrower]”). The FAQ specifically states that the assessment will be “based on the totality of the borrower’s circumstances through a multi-factor analysis” and that the PPP Borrower is required to have made the certifications “in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary”.  However, the FAQ further states that the SBA will consider the PPP Borrower’s circumstances and actions both before and after such PPP Borrower’s application, to the extent that doing so will assist the SBA in determining the validity of the statutory economic need certification at the time of the application. The FAQ provides that the Questionnaire is not intended to indicate that a PPP Borrower’s certification is being challenged, but rather to assess whether such PPP Borrower had an adequate basis for making such good-faith certification at the time of application.

While it is suggested that the Questionnaire is being used as screening mechanism for PPP forgiveness applications, it appears that post-application circumstances will be taken into consideration in assessing a PPP Borrower’s  good faith “need” certification. PPP Borrowers with loans at or above the $2 million threshold should be prepared within 10 business days of submission of its PPP loan forgiveness application, not only to certify to the information contained in the Questionnaire, but to gather, review and ultimately produce all relevant documentation. Further, such PPP Borrowers should be prepared for any follow-up inquiries from the SBA.

Our attorneys are available to guide you and answer any questions regarding the Questionnaire and related PPP considerations.


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The U.S. Small Business Administration (the “SBA”) is requiring lenders to obtain completed “economic need” questionnaires (the “Questionnaire”) from Paycheck Protection Program for-profit and nonprofit borrowers (“PPP Borrowers”) who borrowed $2 million or more in Paycheck Protection Program (“PPP”) loans. While the content of the Questionnaire remains subject to review and final approval by the Office of Management and Budget, PPP Borrowers should be prepared to complete the Questionnaire as part of the PPP forgiveness application submissions.

Economic Need Certification, Generally

As summarized in our prior Alerts regarding PPP loan eligibility and forgiveness[1], all PPP Borrowers were required, at the time of application, to demonstrate economic need for PPP funds, specifically certifying in good faith that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant”. In determining whether a PPP Borrower meets the need threshold, subsequent SBA guidance instructed borrowers to consider the state of its then-current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner not materially detrimental to the business.

Additional SBA guidance issued on May 13, 2020 provided a safe harbor for PPP Borrowers that, together with its affiliates, received PPP funds in an amount less than $2 million. Such PPP Borrowers are deemed to have made the economic need certification in good faith, on the basis that such category of borrowers were less likely to have had access to other sources of liquidity at the time the loan was applied for and obtained. The SBA further clarified that PPP Borrowers who obtained loans in excess of $2 million may still have an adequate basis for making the required certification, but will be subject to SBA review for compliance with program eligibility requirements set forth in prior SBA Interim Final Rules and the Borrower Application Form.

Loan Necessity Questionnaire

The SBA has already begun to distribute the Questionnaire to PPP lenders servicing PPP Borrowers with loans of $2 million or more. Not only does the Questionnaire impose substantial document production and certification requirements on PPP Borrowers, but it also requires PPP Borrowers to respond within only 10 business days from receipt of the Questionnaire. Most notably, the Questionnaire focuses not only on compliance at the time of application (and the veracity of related “economic need” certifications), but also the condition of the business and operations of PPP Borrower following receipt of funds.

The Questionnaire focuses primarily on the assessment of two operational conditions: business activity and liquidity.

  • Business Activity Assessment. With respect to business activity, PPP Borrowers are required to provide details relating to gross revenues in the second quarter of 2019 (or, for businesses not in operation in 2019, the first quarter of 2020) and 2020. In addition, PPP Borrowers are required to provide information relating to cash outlays necessitated in connection with mandatory shutdowns and/or significant operational alterations resulting from government mandates and emergency declarations issued throughout the pandemic. Note that the nonprofit questionnaire requires substantively similar information, with a focus on gross receipts from gifts, grants, contributions and other amounts.
  • Liquidity Assessment. The liquidity assessment contains a series of questions relating to cash flow, capital expenditures and distributions of the applicable PPP Borrower both at the time of application and thereafter. PPP Borrowers are required to disclose, among other things:
    • Cash and cash equivalents as of the last day of the calendar quarter immediately preceding PPP Borrower’s submission of its application;
    • Payment of dividends or distributions to the PPP Borrower’s owners;
    • Prepayment of debt during the Covered Period;
    • Employee compensation in excess of $250,000 on an annualized basis;
    • Ownership of 20% or more of PPP Borrower by any publicly traded company (together with name and market capitalization of any such publicly traded company) or any private equity firm, venture capital firm or hedge fund;
    • Information relating to subsidiaries, parents and affiliates of the PPP Borrower; and
    • Receipt of funds from any CARES Act program or other COVID-19 relief.

Again, the nonprofit questionnaire follows a similar form, with additional questions relating to cash, savings and temporary cash investments, types and values of endowment funds (including donor-restricted endowments, quasi-endowments or similar funds), and questions specific to health care service providers.

Conclusions and Considerations

The Questionnaire raises substantial concerns for PPP Borrowers, as it requires PPP Borrowers to consider current operational and liquidity factors which appear to go well beyond the SBA’s previous guidance with respect to the economic need assessment determined at the time of the application (and through the previous safe harbor periods). It is unclear whether this will be used as a screening mechanism to determine which loans require further review or if there is actually an intent to determine eligibility based upon subsequent events. Unless and until there is further guidance, PPP Borrowers with loans at or above the $2 million threshold should be prepared not only to certify to the information detailed above, but to gather, review and ultimately produce substantial documentation with respect to their responses at the time of submission of their PPP loan forgiveness application. While many PPP Borrowers are hoping for additional guidance prior to submitting their PPP forgiveness application, the SBA has not yet indicated if and when any such  further guidance will be issued.

We are closely monitoring the situation and will provide updated alert(s) as additional information becomes available. Our attorneys are available to guide you and answer any questions regarding the Questionnaire and related PPP considerations.


[1] For additional information, please see our prior alerts issued on April 24, 2020 (regarding SBA Frequently Asked Questions), May 13, 2020 (regarding SBA guidance with respect to the good faith certification), May 14, 2020 (regarding extension of the safe harbor deadline) and May 18, 2020 (regarding loan forgiveness).

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.