PPP Update: AGC Lawsuit Hammers Away at the SBA, Alleging Violations of Borrowers’ Constitutional Rights

The Associated General Contractors of America, Inc. (“AGC”), the U.S. construction industry’s largest trade association, has taken dead aim at the controversial Paycheck Protection Program (“PPP”) loan necessity questionnaire (the “Questionnaire”) that was recently introduced by the U.S. Small Business Administration (“SBA”) and the so-called PPP “necessity” certification (the “Necessity Certification”). The Necessity Certification is the SBA requirement that PPP loan applicants certify in good faith that economic uncertainty makes the loan request necessary to support ongoing operations. In a lawsuit filed last month in U.S. District Court for the District of Columbia, AGC is asking a federal court to enjoin the use of the Questionnaire and grant other relief, but it appears that the lawsuit and pressure from other groups may have forced the SBA to reconsider its approach. This suit is the first—and, to date, the only—legal challenge to the Questionnaire.

The AGC does not dispute that the SBA has the authority under the CARES Act to evaluate borrowers’ good-faith Necessity Certifications made when applying for PPP loans. It does contend, however, that the Questionnaire is not tailored to any such evaluation—instead of limiting questions to the borrower’s financial circumstances at the time a loan application was made, the Questionnaire inquires as to the borrower’s financial status and performance in the weeks and months following the loan application. And, because the Questionnaire poses mainly yes/no questions, AGC contends that it deprives businesses of the opportunity to explain the totality of their circumstances at the time of the PPP loan application. AGC further contends that the SBA skirted the statutory procedure required to permit it to issue the Questionnaire.

AGC’s Complaint asserts three causes of action. First, it alleges that the Questionnaire is arbitrary, capricious, and contrary to the Paperwork Reduction Act of 1995 (the “PRA”). Second, AGC contends that the approval of the Questionnaire by the U.S. Office of Management and Budget (“OMB”) violated the PRA and the Administrative Procedure Act (“APA”). Third, AGC claims that, to the extent the SBA uses responses to the Questionnaire to deny a borrower’s application for PPP loan forgiveness, the SBA violates the due process rights of AGC’s members.

As this case is still in its infancy—as of January 4, 2021, neither the SBA nor the OMB has filed a responsive pleading—the ultimate outcome is unknown. However, the lawsuit appears to have already yielded some response from the SBA.

The day after AGC filed its Complaint, the SBA issued new guidance related to the Questionnaire. This new guidance states that the SBA “will assess whether the borrower had adequate basis for making the required good-faith certification, based on its individual circumstances in light of the language of the certification and SBA guidance. . . . In its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.” On December 10, 2020, the SBA appeared to step back from its position that the form Questionnaire remain available only to affected PPP borrowers rather than the general public, and officially released a copy of the Questionnaire on its website. Finally, on January 4, 2021, the SBA announced that there would be a 60-day public comment period regarding the Questionnaire, after which any resulting amendments would be submitted to OMB for approval.

We will continue to monitor developments.