Know Your Appeal Rights When You Seek Forgiveness For Your Paycheck Protection Program Loan
When you are working with your lender to seek forgiveness of your Paycheck Protection Program (“PPP”) Loan, you should keep in mind your appeal rights should the Small Business Administration (“SBA”) make any number of adverse determinations regarding that PPP Loan. In August 2020, the SBA issued Interim Final Rules which established the process by which borrowers could appeal certain SBA determinations regarding those PPP Loans. While these Rules have a technical legal name, for simplicity’s sake we will refer to them as the SBA’s PPP Appeal Rules. A review of the SBA’s PPP Appeal Rules provides guidance to borrowers about many items to keep in mind from the outset in submitting your forgiveness application. The first most practical consideration just might be what information the SBA will review in deciding any appeal, giving the borrower a view of the breadth and scope of information to present to the SBA during the forgiveness application process and audit process. The short answer is that the record on appeal will in almost every circumstance be limited to the written administrative record of the materials the SBA considered when reaching its determination. 13 C.F.R. §134.1207; 1209. The SBA will submit the written administrative record and the borrower will have the opportunity to object to the failure to include information, but the appeal rules provide only the SBA with the ability to request discovery and it must be on a showing of good cause. These rules governing the evidentiary materials that will be considered on appeal highlight the importance of including any and all materials which the borrower deems necessary to support the purposes of the loan and the forgiveness of the loan given this limited ability to widen the record at a later date. This also highlights the importance of ensuring that no attorney client privileged materials are submitted to the SBA. The borrower should work with counsel to ensure that the attorney client privilege is maintained throughout this process.
Knowing the importance of the submissions might seem a strange place to start regarding the appeal process, but without that knowledge, a borrower might decide to leave some information out thinking it can just submit it later. Such a decision could result in that information never being considered by the SBA. As an example, the SBA released additional guidance regarding its PPP Loans on December 9, 2020 in its PPP Loans Frequently Asked Questions (“FAQ”). In response to FAQ Number 53, the SBA explained which borrowers were receiving a Loan Necessity Questionnaire. The SBA further noted as part of the questionnaire process that if the SBA determined it needed additional information it would allow the borrower to submit a narrative supplement as well as additional documentation. This process outlined by the SBA as well as its PPP Appeal Rules reinforce the importance of taking a holistic approach that will allow the borrower to submit an application and questionnaire response with the basis for the strength of the borrower’s entitlement to the PPP loan and for the forgiveness of that loan at the forefront. With this proper frame established we can address some of the more typical questions that arise with appeals from decisions of administrative agencies such as the SBA.
One such question is what decisions of the SBA can be appealed? The SBA’s PPP Appeal Rules make clear that only certain decisions of the SBA can be appealed, and they are SBA reviews of a PPP loan that finds a borrower:
(1) Was ineligible for a PPP loan;
(2) Was ineligible for the PPP loan amount received or used the PPP loan proceeds for unauthorized uses;
(3) Is ineligible for PPP loan forgiveness in the amount determined by the lender in its full approval or partial approval decision issued to SBA (except for the deduction of any Economic Injury Disaster Loan advance in accordance with section 1110(e)(6) of the CARES Act); and/or
(4) Is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA.
13 C.F.R. §134.1201(b)(1)-(4). Notice that appeals are only authorized from the decisions of the SBA, not of the lender. And, only the borrower has the right to appeal. 13 C.F.R. §134.1201(c).
The next question might rightly be, when can I appeal? The borrower has 30 calendar days from the earlier of: (1) the date the borrower received the receipt of the final SBA loan review decision, or (2) notification by the lender of the final SBA loan review decision. 13 C.F.R. §134.1204.
So, before those thirty days run what needs to get filed and where? Appeals are filed with the SBA Office of Hearing and Appeals (“OHA”) and the SBA’s PPP Appeal Rules set out exactly what needs to be contained in the Appeal Petition. 13 C.F.R. §134.1202. Of note, although the Petition must include many things, importantly it must include “a full and specific statement as to why the SBA loan review decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations.” 13 C.F.R. §134.1202(3).
Who decides the appeal? Once OHA receives the appeal, it will assign either an Administrative Law Judge or an Administrative Judge to decide it. 13 C.F.R. §134.1206. The Judge will issue a Notice and Order establishing when the Administrative Record must be filed by the SBA (typically within 20 days of this issuance of the Notice and Order). Parties may ask for extensions of the deadlines established in the Notice and Order.
What should the SBA include in the Administrative Record? The Administrative Record should include all the documents the SBA relied upon in reaching its final decision but need not include all documents related to the borrower (including documents that the SBA might claim are privileged). 13 C.F.R. § 134.1207. The borrower can object to the exclusion of materials from the Administrative Record. The Judge will rule on any objection and may allow the Administrative Record to be supplemented.
The SBA provides the Administrative Record but does it also get to respond to the Appeal Petition? The SBA can file a response to the Appeal Petition but it must do so before the date established by the Judge for the close of the record. Importantly, only the SBA is allowed to respond to the Appeal Petition. 13 C.F.R. §134.1208.
How long will it take to get a ruling from the Judge? The SBA’s PPP Appeal Rules provide that the Judge will issue a decision 45 calendar days after the close of the record but also includes in its rules the phrase “as practicable.” 13 C.F.R. §134.1213. This means that the Rules envision most decisions in 45 days but gives some leeway to provide later rulings. In reaching a decision, the Judge will apply a standard that requires the borrower to prove by a preponderance of the evidence that the SBA’s decision was based on a clear error of fact or law. 13 C.F.R. §134.1212. The SBA’s PPP Appeal Rules seem to contemplate that this decision will generally be made on the Appeal Petition, the Administrative Record, and the SBA’s Response, with only discovery available to the SBA if it asks for it and shows good cause for it. Further, while the parties may be able to request an oral hearing, such a hearing can only go forward if the Judge determines that there is a question of disputed material fact that requires the taking of testimony and confronting witnesses. 13 C.F.R. §134.1209(c). In issuing the decision, the Judge can affirm, reverse, or remand the SBA loan decision. 13 C.F.R. §134.1214. The Judge’s decision is typically published on the SBA’s website, but if a protective order is in place, an unredacted decision is typically issued by the Judge to the parties and a redacted version published on the website. 13 C.F.R. §134.1213(e). The Judge’s decision is an initial decision, which can become final after 30 calendar days. 13 C.F.R. §134.1213(b). Either party can ask for reconsideration of the Initial Decision within ten calendar days of the issuance the Initial Decision. 13 C.F.R. §134.1213(c). In additional, within 30 calendar days after the service of an initial decision or a reconsidered initial decision of an Administrative Law Judge or Administrative Judge, any party may file and serve a request for review by the SBA’s Administrator. This is important because in order for the borrower to exhaust its administrative remedies and preserve its right to seek judicial review of an SBA final decision in a federal district court, a borrower that disputes an initial decision or reconsidered initial decision must file and serve a request for review of the initial decision or reconsidered initial decision by the SBA’s Administrator. 13 C.F.R. §134.1213(d).
Once the Judge rules, is there any way to appeal that decision? Only if a borrower exhausts its administrative remedies. 13 C.F.R. §134.1216. The borrower will then be able to seek judicial review of the SBA’s final decision pursuant to the Administrative Procedures Act in the appropriate federal district court.
Are there any additional financial issues to be aware of? Yes. The borrower is on its own for attorneys’ fees for this appeal process as the SBA’s PPP Appeal Rules specifically provide that the prevailing party cannot receive an award of attorneys’ fees. 13 C.F.R. §1215. And, the appeals process does not act to stay the borrower’s obligation to repay the loan, if the SBA determined that the loan should not be forgiven. 85 Fed. Reg. 52884 (Aug. 27, 2020).
In all, your appeal strategy should not be an afterthought, but an integral part of the overall strategy being implemented to achieve forgiveness of your PPP loan. To do so you should consult your lender, your accountant, and most definitely your legal counsel to ensure that you submit all the evidence you will need to provide in an effort to prove your case against the SBA someday down the appeal process road.