On Dec. 8, Associated General Contractors of America (AGC) filed a lawsuit (PDF) in the U.S. District Court for the District of Columbia against the U.S. Small Business Administration (SBA) and the Office of Management and Budget regarding a post-loan questionnaire sent to Paycheck Protection Program (PPP) recipients.

According to the AGC website, the plaintiff represents over 27,000 general contractors, specialty contracting firms, and other service providers and suppliers.

AGC claims that the questionnaire, SBA Form 3509 (PDF) for for-profit PPP recipients (Form 3510 for nonprofits), includes and invites multiple problems.

“The administration has every right, and obligation, to ensure businesses were eligible to apply for and receive the relief loans,” said Stephen E. Sandherr, AGC’s chief executive officer, in a statement. “But they do not have the right to use a secretly crafted form to gather unprecedented amounts of proprietary information that has little or nothing to do with the economic uncertainty that led businesses to apply for the loans in the first place.”

The PPP program itself comprised a hastily assembled plan to cushion COVID-19’s economic blow in the early spring by issuing quick loans to U.S. businesses. Recipients who agreed to meet certain requirements regarding maintaining jobs on payroll and usage restriction for those funds could then apply for complete loan forgiveness, no repayment necessary.

Given time-sensitive and precarious economic conditions, the federal government opted to require a “good faith certification” from borrowers to attest to their uncertainty in continuing their ongoing operations.

Borrowers depleted the first allocation of funds, and the government replenished PPP reserves.

Later in the year, the public saw headlines regarding certain companies running contrary to either the spirit or the letter of the program in applying for and often receiving PPP loans.

Subsequent media coverage reported on the incomplete nature of some successful applications. Concerned reactions over borrower abuse of the program and other operational issues arose.

Those concerns led SBA to issue Form 3509, introduced in November to gather information allowing SBA loan reviewers to “evaluate the good-faith certification” on original PPP loan applications.

The SBA is requiring PPP borrowers of $2 million or more to complete the questionnaire. According to U.S. Treasury data (PDF), that group represents only six-tenths of one percent (0.6%) of PPP borrowers, but their loans represent 15% of the PPP money issued.


Prudent or Prying?

The AGC contends the questionnaire is “arbitrary and capricious” and cannot be used as the basis for negative action regarding a PPP borrower or loan status. The association contends that Form 3509 “attempts to set a means test” and implies that companies who received PPP loans could face repercussions for doing well in the second quarter of 2020.

The SBA 3509 introduction states that “receipt of this form does not mean that SBA is challenging” the initial good-faith certification. The SBA states that in its effort to “protect taxpayer resources,” it may ask for follow-up information, and that any subsequent determination “will be based on the totality of your circumstances.”

So what does SBA 3509 actually ask? The form is divided into two parts: a business activity assessment and a liquidity assessment. Paraphrased in layman’s terms, here is the core of the business activity assessment.

  1. What was your gross revenue for 2Q 2020? Provide 2Q 2019 or 1Q 2020 figure for context.
  2. Did a state or local government order your company to shut down due to COVID-19?
  3. Has your company been subject to a COVID-related order to alter operations? If so, provide some detail.
  4. Has your company voluntarily ceased or reduced operations since mid-March? If yes, provide context/detail.
  5. Has the borrower voluntarily altered operations in that timeframe?
  6. Has the borrower started any new capital improvement projects not due to COVID-19 since mid-March? If so, describe.

The section ends with an open box to add comment.

The liquidity assessment begins by asking for the total of borrowers’ cash plus assets as of the last day of the calendar quarter preceding their PPP loan applications.

It also asks if borrowers have paid any dividends or other capital distributions to its owners between mid-March and the loan forgiveness covered period.

The bulk of the remainder inquires about expenditures during the loan forgiveness timeframe that could conceivably run beyond the scope or intent of approved PPP loan usage. Various restrictions received considerable attention as Congress debated and refined the program’s terms earlier in the year.

These questions ask about any prepayment of outstanding debt and any compensation of any employee or any owner beyond $250,000 on an annualized basis.

Subsequent questions focus on company status. They ask about ownership by any publicly traded company, private equity firm, or foreign state-owned enterprise; the book value of the company prior to the loan; any listing on a national securities exchange; and whether the borrower directly received any other CARES Act funds beyond the PPP loan.

The form includes a deadline of 10 days from receipt of the questionnaire, with another five days after that for the borrower’s lender to upload any required supporting documents, signatures, or certifications.


Drawing The Line

A judge may or may not recognize a certain amount of latitude that an agency such as the SBA can exercise in a process designed to ferret out potential fraud within a program, especially one erected and launched in such unusual circumstances. The SBA may also argue that a portion of the form serves to determine the program’s effectiveness, with regard to business success and survival.

However, even if a court finds that the SBA is within its bounds to issue Form 3509 to certain PPP borrowers, the AGC complaint regarding the creation of the form itself would still remain. In short, the AGC contends that the questionnaire was composed in violation of at least two different federal guidelines on creating such documents, failing transparency standards by bypassing public comment periods.

According to the AGC, the SBA defense suggests that adhering to the normal public comment process would have given a counterproductive heads-up to exactly the type of PPP participant that the form is intended to identify.