INSIGHTS/

PPP Loan Lawsuits Make Their Way To Court

The Department of Justice (DOJ) is cracking down on PPP loan fraud by leveraging information gleaned from qui tam lawsuits filed by private citizens on behalf of the government.

December 30, 2021

The Department of Justice (DOJ) is cracking down on PPP loan fraud by leveraging information gleaned from qui tam lawsuits. A qui tam lawsuit is a suit filed by private citizens on behalf of the government. Under the False Claims Act, private citizens can file a lawsuit against anyone they believe has fraudulently received money from the government. Some employees are using the False Claims Act to file lawsuits against businesses that did not use PPP loans to fund payroll needs as the program intended.

On Aug. 26, 2021, the DOJ announced that Seth Bernstein, owner of jet charter company JetReady, agreed to pay $287,055 to settle allegations that he misappropriated PPP loan proceeds. The settlement-resolved allegations brought by former JetReady employee Victoria Hablitzel in a qui tam action. (source)

According to the complaint Bernstein received a $1,173,382 PPP loan and diverted $98,929 to cover a charitable contribution to support the construction of a drive-in theater in Nantucket, MA, sports fields in Winter Park, FL, as well as other items not eligible for PPP funding. JetReady did not use any of the PPP funds for payroll or to bring back furloughed employees.

In another PPP whistleblower lawsuit, a duct cleaning company agreed to pay $30,000 in damages and civil penalties after it took out two PPP loans in violation of the program rules. Under the False Claims Act, private citizens can receive a reward of up to 30% of any money recovered in a lawsuit. This creates a strong financial incentive for current or former employees to file a lawsuit if they’re privy to employer PPP loan fraud.

The [duct cleaning company] settlement “includes the resolution of a claim brought under the qui tam or whistleblower provisions of the False Claims Act.” The whistleblower, J. Bryan Quesenberry, will receive $4,500 for their disclosures. According to the DOJ, “[t]he matter remains under seal as to allegations against entities other than Sextant.” (source)

It’s important to note that the False Claims Act allows for settlements/judgments that are triple the amount subject to a fraud claim. So if a company is accused of fraudulently receiving a $10,000 PPP loan, a court could levy a $30,000 judgment if the company is found guilty. It’s important to note that the DOJ may be unwilling to allow the discharge of fraud judgments in bankruptcy.

The Bernstein settlement demonstrates the methods that the government will use to protect FCA claims involving PPP loans in bankruptcy proceedings. The agreement states that the United States will rescind the FCA release and file a civil action to recover significantly more than the settlement amount if Bernstein’s obligations under the agreement are avoided for any reason, including bankruptcy. (source)

Whistleblowers Protected

The False Claims Act allows anyone to file a qui tam lawsuit even if they only have a reasonable belief that someone has defrauded the government. If a qui tam lawsuit is unsuccessful, the whistleblower is protected from retaliation under the law. And that protection from retaliation extends to any actions a person might take to gather evidence that someone is defrauding the government.

“Good Faith” Borrowers

In May 2020, the SBA announced that it would assume that all borrowers who applied for PPP loans of less than $2 million did so in good faith. However, qui tam lawsuits could spell trouble for small businesses that laid off employees or cut wages after receiving a PPP loan. Employees, former employees, competitors, contractors, or anyone else might bring a qui tam lawsuit under the False Claims Act for any of the following reasons:

  1. They suspect the business was ineligible for a PPP loan.
  2. They suspect the business did not spend the PPP loan as required.
  3. They suspect that the loan was not necessary to maintain the operation of the business.

And while most qui tam lawsuits are filed due to genuine concerns about fraud, there may also be lawsuits filed for financial gain or retaliation. This is why every business owner must take action to protect themselves.

Lawsuit “Proof” Your Business

While there is no way to guarantee that you will avoid the annoyance and expense of a qui tam lawsuit, it’s important to position your company so that you can easily defend against litigation. Here are a few tips:

1. Meticulous recordkeeping.
You must keep a record of every expense you paid using your PPP loan.

2. Follow the rules.
Only spend PPP loans on expenses that are eligible under the program rules. If you’re not sure if an expense is eligible, seek legal advice.

3. Update your accounting system.
Most large companies have dedicated accounting departments to handle their financial books but many smaller businesses are farther behind. This is usually the case for one or two person companies. If that’s your situation, consider investing in simple business accounting software that makes it easy to track and document how you’re spending your PPP loan. Some software even allows you to upload and attach receipts so that you can easily keep track of everything and provide proof in case of an audit.

If you’re facing a qui tam lawsuit, contact an attorney immediately.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.