Seventh Circuit Denies Stay of Injunction, Potentially Opens PPP Doors for More Small Businesses

COVID-19 Update

On May 20, 2020, the U.S. Court of Appeals for the Seventh Circuit sided with a lower court which invalidated applying the “Ineligibility Rule” by the Small Business Administration (SBA) to the Paycheck Protection Program (PPP), which had been previously used to exclude small businesses in certain industries from obtaining a PPP loan. The court specifically refused to stay a nationwide preliminary injunction prohibiting the SBA and the SBA’s lending banks from applying subsection (p) of the Ineligibility Rule in making eligibility determinations for loans under the PPP. The reasoning underlying the ruling likely applies to the entire Ineligibility Rule, making other companies, such as banks, finance companies and casinos, eligible.

What happened

The Ineligibility Rule provides that certain types of businesses are ineligible for SBA business loans. 13 C.F.R. § 120.110. Even though Congress used the existing structure of the SBA’s lending program to create the backbone of the PPP, it expressed an intent to expand eligibility for PPP loans to, “in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C).” 15 U.S.C. § 636(a)(36)(D)(i) (emphasis added). However, the SBA’s subsequent interim final rule clarified that the types of businesses identified in the Ineligibility Rule remain ineligible to receive a PPP loan under the CARES Act.

On May 1, the U.S. District Court for the Eastern District of Wisconsin issued a decision and order for two separate cases filed by nightclubs that featured erotic dance entertainment in Camelot Banquet Rooms v. U.S. Small Business Administration, No. 20-C-0601 (May 1, 2020). These nightclubs, as businesses that “[p]resent live performances of a prurient sexual nature,” had been prohibited from receiving funds through the PPP by the application of subsection (p) of the Ineligibility Rule. After discussing the clear intent of the CARES Act to broaden the categories of eligible businesses in order to keep American workers paid and employed, the court ruled that by prohibiting this type of business from receiving PPP funds, the SBA had exceeded the scope of regulatory authority Congress granted the SBA in the CARES Act and the Small Business Act. The court enjoined the SBA and its lending banks from using subsection (p) of the Ineligibility Rule in making PPP eligibility determinations. While the Seventh Circuit temporarily stayed this preliminary injunction on May 4, it vacated that temporary stay order on May 20 when it denied the stay.

Why it matters

While the nationwide preliminary injunction only directly applies to subsection (p) of the Ineligibility Rule, the courts’ rulings may have some effect on the other subsections if they are challenged. Additionally, on May 11, the U.S. District Court for the Eastern District of Michigan granted a broader preliminary injunction, albeit one that only applied to the plaintiffs and interveners in that case, against the application of the Ineligibility Rule to the PPP. We will continue to carefully monitor these developments. Unfortunately for applicants presumptively barred by the Ineligibility Rule and lenders dealing with their applications, these rulings remain on appeal, so there is still a significant lack of clarity around these issues.

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