After laying dozens of criminal charges against Paycheck Protection Program loan recipients in recent months, on January 12, the U.S. Department of Justice announced its first civil settlement resolving allegations of loan fraud PPP. In accordance with the settlement agreement, SlideBelts, an internet retail company and bankrupt debtor, and its President and CEO, Brigham Taylor, have agreed to pay a total of $ 100,000 to resolve allegations of violation of the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989. SlideBelts also repaid the PPP loan of $ 350,000 that it received.
This first civil settlement confirms that the government will actively and aggressively prosecute borrowers and those involved in allegations of PPP loan fraud.
The government’s allegations
The Settlement Agreement sets out a lengthy recitation of the facts, for which SlideBelts and Taylor “admit, acknowledge[d]and accept[ed] responsibility. ”Specifically, the settlement agreement states that on April 3, 8 and 14, SlideBelts submitted three applications for PPP loans to three different federally insured banks, ranging from $ 300,000 to $ 350,000, and has falsely stated, in response to question 1 of each loan application: that SlideBelts was “not currently involved in any bankruptcy”, although at the time SlideBelts was in fact a debtor in bankruptcy proceedings.
The settlement agreement states that on April 10, the first lender denied SlideBelts’ claim and informed Taylor that it had incorrectly answered question 1 because the lender knew that SlideBelts was currently bankrupt. According to the settlement agreement, ‘Taylor replied that his response was a'[o]versight ”, but nevertheless argued that the bankruptcy question in the application was“ overbreadth ”” on the part of the US Small Business Administration. On April 14, Taylor contacted the first lender again and said the term bankruptcy should not be included in question 1 of the PPP loan application and asked the lender to approve the loan. But the lender again rejected the request, repeating that SlideBelts was definitely not eligible for a PPP loan because it was bankrupt. Three hours later, SlideBelts submitted a third claim to another lender, making the same false statement.
The second lender finally approved SlideBelts’ request to the third lender and granted a PPP loan of $ 350,000. According to the settlement agreement, “Taylor signed the loan note with [the second lender] and falsely stated that SlideBelts was not bankrupt to influence [the second lender] to execute the note and pay the loan proceeds to SlideBelts. The settlement agreement also states that “the misrepresentation of Taylor and SlideBelts caused [the second lender] to submit a false claim to the SBA for $ 17,500 in loan processing fees, which the SBA paid to the “second lender”.
On April 22, the day after the loan disbursed from the second lender to SlideBelts, Taylor emailed the second lender “explaining that SlideBelts had just realized that we may not have responded. [Question 1] correctly because we filled out the form quickly and wanted to bring it to your attention[.]“SlideBelts did not return the loan; instead, eight days later, SlideBelts filed a petition in bankruptcy court for retroactive approval of the PPP loan. According to the settlement agreement, SlideBelts’ motion “did not disclose to the [bankruptcy] [c]if he had obtained the loan by making a false statement to [the second lender] regarding its bankruptcy status. “
On June 16, the SBA opposed SlideBelts’ motion and asked the court to order SlideBelts to return the loan. The second lender joined the SBA’s opposition. However, SlideBelts did not return the loan and instead asked the bankruptcy court to dismiss the case so that he could come back for bankruptcy later and “ask. [PPP] funds while the case is closed. The bankruptcy court allowed SlideBelts’ motion to dismiss its bankruptcy case, and on July 8, SlideBelts returned the $ 350,000 loan to the second lender.
In particular, the government does not appear to be alleging that SlideBelts would not have been entitled to a PPP loan if it had not been in bankruptcy or that SlideBelts had misused the loan funds before returning them.
The government maintains that SlideBelts and Taylor (i) violated FIRREA for misrepresenting its loan applications and committing banking and electronic fraud, and (ii) raped FCA for making false statements and bringing the lender to submit a false claim for the processing fees and, therefore, that they “are owed to the United States for damages and penalties totaling $ 4,196,992”.
Lessons learned
The government’s civil settlement with SlideBelts and Taylor sends several notable messages to the PPP borrower community:
- Individuals will be held responsible: The settlement with Taylor is in line with the DOJ’s continued pursuit of individuals in CAF affairs. Indeed, the settlement agreement specifically calls on Taylor for answering questions about the PPP loan application and for making allegedly false statements to lenders. The settlement, which was made on an “inability to pay” basis, also took into account Taylor’s financial disclosures and provided that $ 17,500 of the $ 100,000 settlement amount (likely attributable to the $ 17,500 of loan processing fee) “constitutes a Taylor refund”
- The DOJ and the SBA will not hesitate to small civilian establishments: SlideBelts received a PPP loan of $ 350,000, which is far less than the loan amounts involved, even in some of the recent DOJ prosecutions. That the DOJ would announce a relatively small loan as its first civil settlement signals that the DOJ will not hesitate to prosecute borrowers of small PPP loans it suspects of wrongdoing
- Expect to learn more about FIRREA: FIRREA imposes heavy civil penalties for violations of 14 specified criminal laws, such as bank and mail / electronic fraud laws “affecting a federally insured financial institution”. Not much was said about FIRREA after its promulgation in 1989, but it was given new life after the 2008 financial crisis. FIRREA’s prominence in the settlement with SlideBelts and Taylor indicates that the government will not hesitate to use this powerful tool in future civil regulations. Likewise, although the government has chosen to settle these claims within the framework of FIRREA, with its less demanding burden of proof, the regulation recalls that borrowers, and in particular individuals, may be liable to criminal prosecution for credit fraud. PPP loans.
- Failure to pay settlements can result in a bullet in the arm: The DOJ has long been willing to consider an entity’s claim that it is unable to pay the amount demanded by the DOJ because it does not have sufficient assets to pay the government and cope. to his ordinary and necessary expenses. In political orientation recently released in September, the DOJ clarified this policy regarding a defendant’s “inability to pay”, possibly in anticipation of PPP settlements. Given the economic factors driving the PPP loan applications, the DOJ’s settlement with SlideBelts and Taylor – which was done on an inability to pay basis with an initial partial payment and payments over time, with interest – may indicate that the DOJ will be prepared to settle other civil PPP cases under similar conditions
- The DOJ and the SBA stay true to their word: The SBA has constantly reminded borrowers that it retains the ability to review any PPP loan at any time for any reason and has included clear language in application documents regarding the applicability of civil and criminal laws and laws. penalties for intentional inaccuracies. This regulation confirms that the SBA is serious
Conclusion
With over $ 525 billion in PPP funds disbursed for over five million loans until the end of the initial program last August, and more along the way as first-draw PPP loans have been re-authorized and Second-draw PPP loan applications are now being accepted, this long-awaited first civil settlement under the PPP is likely the first of many to come. Indeed, in the coming months, it is likely that civilians qui tam cases are likely to be discovered, making this case the tip of the iceberg.
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