New Decisions in Challenges to CARES Act PPP Loans and “Stay at Home” Orders

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Courts continue to address constitutional and statutory challenges to COVID-19-related legislation and governmental orders. Among them, courts are examining eligibility for PPP loans under the CARES Act, as well as the constitutionality of “stay at home” and similar orders restricting activities.

PPP loans under the CARES Act

The eligibility requirements for PPP loans[1] are a major battleground in the courts. As we wrote in a previous Legal Update, a Washington, DC federal court upheld regulations that made political consultants ineligible for PPP loans.[2] But other challengers have had more success.

In a challenge brought by strip clubs, on First Amendment grounds, a Wisconsin federal court entered a preliminary injunction prohibiting the Small Business Administration (“SBA”) and US Treasury Department from making businesses that “[p]resent live performance of a prurient sexual nature” ineligible for PPP loans.[3] The government argued, as it did in the case of the political consultants in Washington, DC, that it was merely choosing not to subsidize a certain type of business.[4] The court, however, rejected the argument, finding that while political consultants express a wide variety of viewpoints on myriad topics, “nude dancing ... conveys a specific message,” or, said differently, one particular type of speech. The court accordingly ruled that “excluding erotic entertainment from a generally available loan program could well be characterized as an attempt to suppress a disfavored expressive message.”[5] On May 4, 2020, the Seventh Circuit Court of Appeals stayed the injunction pending appeal.[6]

Separately, a New Mexico bankruptcy court enjoined the SBA from preventing a religious organization from obtaining a PPP loan on the ground that the organization had filed for bankruptcy.[7] The organization argued that the SBA’s rule excluding bankruptcy debtors was arbitrary and capricious, exceeded the SBA’s statutory authority, and improperly discriminated against bankruptcy debtors, all in violation of federal law.[8] The bankruptcy court agreed with all three arguments. It found that the SBA’s rule was contrary to the CARES Act, which expressly excluded bankruptcy debtors from other programs but not from PPP loans and specifically envisioned borrowers being in financial distress.[9] The court concluded that the SBA’s “justification for excluding bankruptcy debtors is so weak the Court has to wonder if [the SBA] really believes it.”[10]

But not all PPP loan applicants challenging the requirements have met with success. In Maryland, a group of businesses without employees (“non-employer businesses”) sued the SBA and Treasury Department, which had allegedly limited the ability of non-employer businesses to obtain PPP loans.[11] Plaintiffs alleged that “non-employer businesses are disproportionately minority- and woman-owned,” and that the federal government knew this when restricting their ability to obtain PPP loans, thus violating Equal Protection.[12] A Maryland federal court rejected this argument, finding that plaintiffs’ evidence suggested that the loan restrictions harmed “business owners of both genders equally” and that there is “only a marginal difference between minority and non-minority rates of ownership of non-employer firms.”[13] Based on the foregoing, the court held that it could not infer any disparate impact or intent to discriminate.[14]

“Stay-at-Home” orders and other gathering restrictions

Several courts have rejected challenges to “stay at home” orders issued by state governors. The Michigan Court of Claims rejected a constitutional challenge to that state’s “stay at home” order, “not because the rights asserted by plaintiffs are not fundamental,” but because “those liberty interests are, and always have been, subject to society’s interests—society being our fellow residents. They—our fellow residents—have an interest to remain unharmed by a highly communicable and deadly virus, and since the state entered the Union in 1837, it has had the broad power to act for the public health of the entire state when faced with a public crisis.”[15] 

In rejecting a challenge to a similar state “stay at home” order, a Virginia federal court held that while the order was unprecedented, “the crisis imposed by the Coronavirus is also unprecedented, and the danger this crisis poses to the welfare of all residents in this Commonwealth as well as its neighboring states, fully justifies denial of plaintiff’s motion.”[16]

We previously wrote here about a challenge to Kansas’s restrictions on religious gatherings. Recently, in a subsequent decision, the federal court in that case rejected the governor’s attempt to dismiss the case.[17] The governor argued that the suit was barred by the Eleventh Amendment, which prevents federal courts from hearing suits brought against a state by one of that state’s citizens.[18] But the court concluded that because the governor was exercising her constitutional law enforcement powers, she could properly be sued in federal court.[19]

Conclusion

Courts will continue to address whether COVID-19-related orders and statutes pass muster under the constitution or applicable statutory authority. These decisions, taken together with the decisions we previously discussed, show that with respect to challenges to COVID-19 orders and statues, courts will likely weigh the specific facts and circumstances carefully, and several factors—including the scope, duration, and purpose of the government actions—will likely drive the courts’ decisions.  

 

[1] For more on the PPP loans and the CARES Act, see, e.g., https://www.seyfarth.com/news-insights/covid-19-business-stimulus-funding-update.html.

[2] 2020 U.S. Dist. LEXIS 69782 (D.D.C. Apr. 21, 2020). 

[3] 2020 WL 2088637 (E.D. Wisc. May 1, 2020).

[4] Id. at *8.

[5] Id. at *10. A Michigan federal court is considering a similar challenge brought by strip clubs in that state. That court held a hearing on plaintiffs’ motion for a TRO on May 5, 2020. Case No. 20-cv-10899, Dkt. No. 37 (E.D. Mich. May 4, 2020).

[6] Case No. 20-1729, Dkt. No. 9 (7th Cir. May 4, 2020).

[7] Adv. Pro. No. 20-1026-t, Dkt. No. 15 (Bankr. D.N.M. May 1, 2020). 

[8] 11 U.S.C. § 525(a). 

[9] Adv. Pro. No. 20-1026-t, Dkt. No. 15, at pgs. 9-11, 12-13.

[10] Id. at 11-12.

[11] 2020 WL 1985040 (D. Md. Apr. 26, 2020).

[12] Id. at *1-2.

[13] Id. at *4-5.

[14] Id.

[15] Id. at pgs. 10-11.

[16] 2020 U.S. Dist. LEXIS 74462, at *3-4 (E.D. Va. Apr. 8, 2020).

[17] 2020 U.S. Dist. LEXIS 73233 (D. Kans. Apr. 27, 2020). 

[18] Id. at *7-9.

[19] Id. at *15-27.