Appeals Court Denies Govt. Stay in Michigan SBA Case

CINCINNATI, Ohio – In an order filed Friday, the U.S. Court of Appeals for the Sixth Circuit denied the U.S. Small Business Administration (SBA) a stay of the preliminary injunction recently granted to the plaintiffs by a district court in Michigan.

The decision was split 2-1, with Judges Jane Branstetter Stranch and Bernice B. Donald comprising the majority and Senior Judge Eugene E. Siler, Jr. dissenting.

After briefly covering the SBA’s Paycheck Protection Plan “Ineligibility Rule” which led to the adult business plaintiffs filing their lawsuit, the Sixth Circuit turned to the question of whether to impose a stay of the district court’s order. The first factor it evaluated was the “likelihood of success on the merits” of the plaintiffs’ case.

Noting that the “district court determined that the CARES Act unambiguously foreclosed the SBA from precluding sexually oriented businesses from receiving PPP loan guarantees during the pandemic,” the Sixth Circuit majority followed the lower court in zeroing in on language in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act which states that eligibility for the PPR loans “would be conferred to ‘any business concern.’”

“The term ‘any’ carries an expansive meaning,” the majority wrote in its decision. “It ‘refers to a member of a particular group or class without distinction or limitation’ and, in this way, ‘implies every member of the class or group.’ Thus, the Act’s specification that ‘any business concern’ is eligible, so long as it meets the size criteria, is a reasonable interpretation. That broad interpretation also comports with Congress’s intent to provide support to as many displaced American workers as possible and, in doing so, does not lead to an ‘absurd result’ as the SBA claims.”

The court added that by specifying “any business concern,” Congress “made clear that the SBA’s longstanding ineligibility rules are inapplicable given the current circumstances.”

“Neither may the SBA continue to apply these rules pursuant to § 636(a)(36)(B), which states: ‘Except as otherwise provided in this paragraph, the [SBA] may guarantee covered loans under the same terms,

conditions, and processes as a loan made under this subsection,’” the court added. “This provision likely constitutes a catch-all governing procedures otherwise unaffected by the mandate of the CARES Act and the PPP and does not detract from the broad grant of eligibility.”

In both opposing the preliminary injunction and requesting a stay of it, the SBA argued that because Congress specified that non-profit organizations are eligible for PPP loans, this suggests that Congress would have specified that adult businesses were eligible for the loans as well, if that was the intent of Congress. The Sixth Circuit rejected that argument, saying it was necessary for Congress to specify non-profit organizations “because they are not businesses, whereas the Act’s specification that eligibility is conferred on ‘any business concern’ encompasses sexually oriented businesses such as strip clubs that would ordinarily be ineligible for loans.”

The court also weighed the question of the relative harm that would be done to each party by either granting or denying the government’s request for a stay – and concluded this factor weighed in favor of the plaintiffs, as well.

“(T)he harm to the SBA in the absence of a stay is far outweighed by the harm to plaintiffs if a stay is granted,” the majority wrote. “Plaintiffs will be unable to obtain relief, and there will likely be no funds available to them through the PPP by the time this appeal is concluded. Plaintiffs are also at a substantial risk of losing their businesses. The stated purpose of the PPP is to protect the employment and livelihood of employees. Thus, the public interest is served in guaranteeing that any business, including plaintiffs’, receive loans to protect and support their employees during the pandemic which, we can all agree, constitutes extraordinary circumstances.

“The fact that other businesses will not receive loans if plaintiffs do is inherent in the SBA’s practice of guaranteeing loans on a first-come, first-served basis,” the court continued. “Regardless of whether plaintiffs do or do not receive these loans, there will be other businesses that do or do not receive loans as well. The SBA otherwise continues doing the same work it has been doing.”

In his dissent, Judge Siler parted with the majority on the question of whether the plaintiffs have a strong likelihood of success on the merits of the case, reasoning that the language of the CARES Act “seems to be ambiguous because it is open to two plausible interpretations.”

“Certainly, the statute says ‘any business concern,’” Siler conceded in his dissent. “Still, it is unclear whether Congress meant that any business concern was eligible for a PPP loan regardless of SBA restrictions or whether the language modifies the preceding language allowing businesses with up to 500 employees to be eligible for the loans.”

“Congress said that PPP loans are to be administered ‘under the same terms, conditions, and Processes’ as 7(a) loans, which exclude private clubs and adult entertainment businesses from eligibility,” Siler added. “Congress was clearly aware of SBA’s regulatory restrictions on 7(a) loans. If it intended for any business entity to be eligible for PPP loans, it could have simply said that without providing the additional language contained in the text. Instead, Congress specifically allowed certain businesses who were not previously eligible to apply for PPP loans.”