DOJ Announces Nation’s First Settlement of Civil Case for PPP Loan Fraud

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PilieroMazza PLLCOn January 12, 2021, the U.S. Department of Justice (DOJ) entered into a settlement with California-based SlideBelts, Inc. (SlideBelts) and its president and chief executive officer in what is advertised as the country’s first settlement in a civil case arising out of fraud in the Paycheck Protection Program (PPP) loan program initiated through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This first-of-its-kind settlement is a reminder to small businesses that received PPP loans to take their representations and certifications very seriously, whether in pursing forgiveness or seeking any future recovery loan through a program made available through Congressional action. Failure to do so places your business in the cross hairs of potential penalties that include significant monetary or criminal liability.

In August 2019, SlideBelts filed for Chapter 11 bankruptcy. That bankruptcy proceeding remained pending until June 30, 2020, when it was dismissed. But, while the bankruptcy proceeding was still pending, in April 2020, SlideBelts filed a series of PPP loan applications with federal lending institutions.

As part of the application process, PPP applicants were required to make certain representations and certifications, including that the applicant was not presently involved in a bankruptcy proceeding. In administering the PPP loan program, the U.S. Small Business Administration (SBA) used the underwriting factors for the SBA’s 7(a) loan program to assist lending institutions in making quick judgments about loan approval. Among the 7(a) underwriting factors is that debtors in bankruptcy are ineligible for loans. Accordingly, the PPP loan application also disclosed that if an applicant was in bankruptcy, a PPP loan would not be approved.

According to DOJ’s settlement announcement, SlideBelts certified that it was not involved in a bankruptcy proceeding when submitting two PPP loan applications submitted to two different lenders. The first application was rejected because the lender had independent knowledge of the existing bankruptcy proceeding. In rejecting the application, the institution informed SlideBelts why it was ineligible for a PPP loan, and, after attempts to convince the lender otherwise failed, SlideBelts acknowledged defeat. However, within hours of the rejection of the first application, SlideBelts submitted a third application to a third lender, again certifying that it was not involved in bankruptcy proceedings.

The second loan application was approved. SlideBelts again represented that it was not involved in a bankruptcy proceeding when executing the PPP promissory note and eventually received approximately $350,000 in PPP funds. Shortly after receiving the payout of the loan, SlideBelts informed the second lender that it “may not have filled out [the bankruptcy question] correctly. . . .” Despite alerting the lender to the prior misrepresentation, SlideBelts did not immediately return the PPP funds.

Eventually, SlideBelts notified the bankruptcy court of its receipt of the PPP loan. The government responded by requesting that the Court order SlideBelts to return the money to the second lender. SlideBelts then sought to dismiss its bankruptcy proceeding, in part to apply for a PPP loan. The bankruptcy proceeding was then dismissed, and, eventually, SlideBelts returned the PPP loan funds to the second lender.

As part of DOJ’s civil settlement with SlideBelts, SlideBelts will pay $100,000 in civil penalties and restitution, in addition to the funds it repaid to the second lender. If not for the settlement, SlideBelts likely would have faced claims for payment in excess of $4 million pursuant to the False Claims Act (FCA) and Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In Fiscal 2020 alone, DOJ recovered over $2.2 billion from FCA and fraud cases.

Given the SlideBelts matter’s straightforward facts, it may be of somewhat narrow application in light of the other risks inherent in the application for and receipt of PPP funds. Nevertheless, this first-of-its-kind settlement is instructive for a larger point. It highlights the importance of the representations and certifications PPP applicants make when submitting PPP loan applications, executing loan documents, and requesting forgiveness. Small businesses receiving PPP assistance must ensure that their representations and certifications are, in fact, accurate when made. The consequences can be catastrophic. An intentional or reckless misrepresentation in a PPP loan application or application for forgiveness could trigger triple damages, statutory penalties in excess of $1 million, and criminal liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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