New “Necessity” Forms Create Headaches and Risks for PPP Borrowers

Cozen O'Connor
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Cozen O'Connor

The SBA is continuing its quest to complicate and add risk to the Paycheck Protection Program (PPP) through new Forms 3509 and 3510. If you and your affiliates have PPP loans of $2 million or more, the forms will be coming to you, if they haven’t already.

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This simple wording was one of the certifications made by borrowers in the PPP loan application. Congress did not define what constitutes “necessity,” and given the sharp economic downturn in the first half of 2020, many borrowers had little hesitation in signing such a certification.

However, beginning with FAQ 31 on April 23, SBA has issued a series of interpretations about necessity. The result has been a great deal of uncertainty and angst among PPP borrowers, many of whom view the interpretations as changing the rules after the fact and in a way inconsistent with the purpose of the program. Among these SBA announcements was a statement that SBA would review all PPP loans of $2 million or more with regard to necessity. The SBA has now started to do this through Form 3509 and Form 3510, targeted at for-profit and nonprofit borrowers, respectively.

On October 26, SBA published a notice of its intent to use these forms, although the forms themselves were not published. Even today, a search of both the SBA and Department of Treasury websites for “3509” or “3510”does not turn up the forms, and they are not included in the Treasury Department’s webpage on which all other PPP forms and rules are found. However, the forms are available on the SBA’s PPP portal for lenders. The comment period for the forms ended on November 25, and a number of highly critical comments were submitted, including one “cease and desist letter” demanding SBA suspend the use of the form and tell borrowers they need not respond to it, for “badly disregarding the Administrative Procedure Act, the Paperwork Reduction Act and fundamentals of due process.” Nonetheless, SBA has started to notify lenders that they are to send the form to designated borrowers, and some borrowers have received the form from their lenders.

Form 3509 requires for-profit borrowers to respond to a series of questions and to provide supporting information. These are grouped into two categories:

Business activity assessment:

  • Gross revenue during the second quarter of 2020, compared to Q2 of 2019
  • Orders by state or local authorities to shut down or significantly alter operations
  • Voluntary cessation or reduction of operations
  • Voluntary alteration of operations
  • New capital improvement projects between March 13 and the end of the borrower’s “covered period” (for most borrowers, 24 weeks from receipt of loan proceeds) (herein, the relevant period)

Liquidity assessment:

  • Cash on hand at end of quarter preceding PPP loan application
  • Payment of dividends (other than pass-through estimated tax payments) during the relevant period
  • Prepayment of outstanding debt during the relevant period
  • Compensation of employees or owners during the covered period at an annual rate exceeding $250,000
  • Was borrower publicly traded on date of loan application, and if not what was borrower’s book value on last day of calendar quarter before loan application
  • Did a public company own 20 percent or more of borrower on date of loan application
  • Is borrower 50 percent or more owned by another entity and, if so, what is the parent’s name, is the parent publicly traded, and is the parent organized outside the United States
  • Is borrower 20 percent or more owned by a private equity firm, venture capital firm, or hedge fund
  • Is borrower 50 percent or more owned by a foreign state-owned enterprise
  • Did borrower receive other CARES Act assistance, other than tax benefits

Form 3510 asks a series of similar questions, geared to the nonprofit organization context.

For many of these questions, the borrower is required to provide supporting information. For several questions, the borrower is given a space to provide optional information, limited to 1,000 characters. Some borrowers will face a difficult decision to volunteer additional information or to remain silent, wait for the SBA to make a decision, and then contest that decision, if necessary.

The form must be signed by an authorized representative of the borrower. Like other PPP forms, it is submitted under the penalty of federal statutes prohibiting false statements, punishable as felonies with up to 30 years’ imprisonment and a fine of up to $1 million.

Unlike other PPP forms, Form 3509 also requires the signer to certify “that the information provided in this questionnaire and all supporting documentation is true and correct in all material respects” and that the certification is made “after reasonable inquiry of people, systems, and other information available to the Borrower.” Obviously, this places a significant burden on the borrower and its representative signing the form.

The SBA’s October 26 notice estimated 42,000 parties would be required to respond to Form 3509, with an estimated annual hour burden of 67,833. If all 42,000 borrowers completed the form in the same year, this translates to about 1.6 hours per borrower. Many borrowers expect the response to take significantly longer. As a result, borrowers with PPP loans of $2 million or more (together with any affiliates) may want to begin collecting the required information and preparing their response.

The borrower must submit its response to the lender within 10 business days. Failure to do so may result in SBA’s determining that forgiveness of the loan should be denied, and the SBA may seek immediate repayment of the loan or “pursue other available remedies.”

The implication is that SBA views the listed points as the only ones that are relevant in determining whether the loan was “necessary.” Of course, these topics were not necessarily on borrowers’ minds when they applied for their loans. Moreover, many borrowers’ necessity determinations were based on factors not listed in the form, such as the impact of the pandemic on their customers or employees and what the impact on their revenues might be over more than just the second quarter of 2020.

A borrower and its representative signing the form, as well as the person who signed the original loan application, may be concerned about potential liability. This might include the criminal statutes cited in the forms, as well as potential civil liability under the False Claims Act (which provides for treble damages) or other sources, potential reputational damage, and the significant time and expense of responding to a broader investigation or other proceedings.

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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