Justice Department Announces Nation’s First Civil Settlement for PPP Loan Fraud | PilieroMazza SARL
On January 12, 2021, the United States Department of Justice (DOJ) reached a settlement with California-based SlideBelts, Inc. (SlideBelts) and its President and CEO in what is announced as the country’s first settlement in a civil case arising from fraud in the Paycheck Protection Program (PPP) loan program initiated by the Coronavirus Aid, Relief and Economic Security Act (CARES). This one-of-a-kind regulation reminds small businesses that have received PPP loans to take their declarations and certifications very seriously, whether requesting a rebate or seeking a future payback loan through a program made available through of congressional action. Failure to do so places your business in the crosshairs of potential penalties that include significant pecuniary or criminal liability.
In August 2019, SlideBelts filed for Chapter 11 bankruptcy. This bankruptcy proceeding remained pending until June 30, 2020, when it was dismissed. But, while the bankruptcy proceedings were still pending, in April 2020, SlideBelts filed a series of PPP loan applications with federal lending institutions.
As part of the application process, PPP applicants were required to make certain declarations and certifications, including that the applicant was not currently involved in bankruptcy proceedings. In administering the PPP loan program, the US Small Business Administration (SBA) used the SBA loan program 7 (a) underwriting factors to help lending institutions decide on approval quickly. loans. Among underwriting factors 7 (a) is the fact that bankrupt debtors are not eligible for loans. As a result, the PPP loan application also revealed that if an applicant were to go bankrupt, a PPP loan would not be approved.
According to the DOJ settlement announcement, SlideBelts certified that it was not involved in bankruptcy proceedings when submitting two PPP loan applications submitted to two different lenders. The first application was rejected because the lender had independent knowledge of the current bankruptcy proceedings. By rejecting the request, the institution informed SlideBelts of the reasons why it was not eligible for a PPP loan and, after attempts to convince the lender otherwise, SlideBelts admitted defeat. However, hours after the first claim was rejected, SlideBelts submitted a third claim to a third lender, again certifying that it was not involved in bankruptcy proceedings.
The second loan request has been approved. SlideBelts again stated that it was not involved in bankruptcy proceedings during the execution of the PPP promissory note and ultimately received approximately $ 350,000 in PPP funds. Shortly after receiving the loan repayment, SlideBelts informed the second lender that it “may not have completed [the bankruptcy question] correctly. . . . “Despite alerting the lender to the earlier misrepresentation, SlideBelts did not immediately return the PPP funds.
Eventually, SlideBelts informed the bankruptcy court of the receipt of the PPP loan. The government responded by asking the court to order SlideBelts to return the money to the second lender. SlideBelts then sought to dismiss its bankruptcy proceedings, in part to apply for a PPP loan. The bankruptcy proceedings were subsequently dismissed and ultimately SlideBelts returned the funds from the PPP loan to the second lender.
As part of DOJ’s civil settlement with SlideBelts, SlideBelts will pay $ 100,000 in civil penalties and restitution, in addition to the funds it repaid to the second lender. Without the settlement, SlideBelts would likely have faced claims in excess of $ 4 million under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). In fiscal 2020 alone, DOJ recovered more than $ 2.2 billion in FCA and fraud cases.
Given the simple facts of the SlideBelts case, it may have somewhat restricted application in light of the other risks inherent in applying for and receiving PPP funds. However, this one-of-a-kind regulation is instructive on a larger point. It emphasizes the importance of the declarations and certifications that PPP applicants make when submitting PPP loan applications, executing loan documents, and remitting requests. Small businesses receiving PPP assistance need to ensure that their declarations and certifications are, in fact, correct when made. The consequences can be catastrophic. Intentional or reckless misrepresentation in a PPP loan application or pardon request could trigger triple damages, legal penalties over $ 1 million, and criminal liability.