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June 25, 2020 |
Best Lawyers in France 2021 Recognizes 17 Gibson Dunn Attorneys

Best Lawyers in France 2021 recognized 17 Gibson Dunn attorneys and named Gibson Dunn the Insolvency and Reorganization Law “Law Firm of the Year.” The partners highlighted, with their respective practice areas, include: Nicolas Autet – Public Law, and Regulatory Practice; Ahmed Baladi – Information Technology Law, Intellectual Property Law, Privacy and Data Security Law, Technology Law, and Telecommunications Law; Nicolas Baverez – Administrative Law, Public Law, and Regulatory Practice; Maïwenn Béas – Administrative Law, and Public Law; Amanda Bevan-de Bernède – Banking and Finance Law, and Investment; Eric Bouffard – International Arbitration; Bertrand Delaunay – Mergers and Acquisitions Law, and Private Equity Law; Jérôme Delaurière – Tax Law; Jean-Pierre Farges – Arbitration and Mediation, Banking and Finance Law, Insolvency and Reorganization Law, and Litigation; Pierre-Emmanuel Fender – Insolvency and Reorganization Law, and Litigation; Benoît Fleury – Corporate Law, and Insolvency and Reorganization Law; Bernard Grinspan – Corporate Law, and Information Technology Law; Ariel Harroch – Corporate Law, Mergers and Acquisitions Law, Private Equity Law, and Tax Law; Patrick Ledoux – Corporate Law; Vera Lukic – Information Technology Law, Privacy and Data Security Law, and Technology Law; Judith Raoul-Bardy – Corporate Law; and Jean-Philippe Robé – Banking and Finance Law, and Corporate Law. The list was published on June 25, 2020.

June 9, 2020 |
Federal Reserve Modifies Main Street Lending Programs to Expand Eligibility and Attractiveness

Click for PDF Yesterday, the Board of Governors of the Federal Reserve System (“Federal Reserve”) announced revisions to the three lending facilities the Federal Reserve is creating under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”):  the Main Street New Loan Facility (“MSNLF”); the Main Street Expanded Loan Facility (“MSELF”); and the Main Street Priority Loan Facility (“MSPLF,”) (collectively, the MSPLF, MSNLF, and MSELF are referred to as the “Main Street Programs”).  The Federal Reserve also released revised guidance on the Main Street Programs.  The Federal Reserve Bank of Boston, which is administering the Main Street Programs, has indicated that it will soon release updated application materials that reflect these changes to the Main Street Programs. The goal of these revisions, the Federal Reserve explained, is to “allow more small and medium-sized business to be able to receive support.”  The Federal Reserve expects the Main Street Programs to be open for lender registration soon, shortly after which the Federal Reserve will begin purchasing participations in loans and upsized tranches of existing loans through the Treasury’s Special Purpose Vehicle (“SPV”). Key Changes to Program Terms     Changes to the Main Street Programs include:

  • Reducing MSNLF and MSPLF Minimum Loan Size: For the MSNLF and MSPLF, the minimum loan size decreased to $250,000 (previously $500,000).
  • Increasing Maximum Loan Size for All Facilities: The new maximum loan sizes are:
    • MSNLF: The lesser of $35M, or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted 2019 EBITDA (previously the lesser of $25M).
    • MSPLF: The lesser of $50M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA (previously the lesser of $25M).
    • MSELF: The lesser of $300M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA (previously the lesser of $200M).
  • Loan Term Extended: The loan term for all three Programs is now 5 years (previously 4).
  • Payment Schedule Adjusted: For all three Programs, principal payment can now be deferred for 2 years and interest can be deferred for 1 year (previously interest and principal both deferred 1 year).  For years 3-5, principal is due based on the following schedule: 15%, 15%, 70%.  There is no penalty for prepayment.
  • Reduce Lender Risk Retention in MSPLF: The SPV will now purchase 95% participations in loans under the MSPLF (previously 85%).  Lenders will retain the remaining 5% of the loan.
Key New Guidance The FAQs include the following new guidance:
  • Economic Injury Disaster Loans Not Disqualifying “Specific Support”: A business cannot participate in a Main Street Program if the business has received “specific support” under Subtitle A of Title IV of the CARES Act.  Previous guidance has clarified that receiving funds under Section 4003(b)(1)–(3) of the CARES Act—which provides funds to specific industries such as air carriers and businesses critical to national security—or participating in the Primary Market Corporate Credit Facility both constitute “specific support” that bars participation in a Main Street Program.  Prior guidance also clarified that recipients of PPP loans could participate in a Main Street Program.  The revised FAQs further provide that Economic Injury Disaster Loans do not qualify as “specific support” under the CARES Act and, thus, do not bar participation in a Main Street Program.
  • Planned Expansion to Non-Profits: The Federal Reserve announced that, though nonprofit organizations currently remain ineligible to participate in the Main Street Programs, the Federal Reserve is “working to establish soon one or more loan options that are suitable for” nonprofits.
  • When Loan Is Sought By One Member of Affiliated Group, the Full Affiliated Group’s Debt and EBITDA Not Considered: If a borrower is the only business in an affiliated group that has received or sought funding through a Main Street Program, the debt and EBITDA of the borrower, and not the entire affiliated group, is used to determine whether that business can qualify for the Main Street Programs.  This is the case unless the borrower’s subsidiaries are consolidated into the borrower’s financial statements or if an affiliate of the borrower has previously borrowed (or applied to borrow) from a Main Street Program.  In the latter case, the entire affiliated group’s debt and EBITDA will determine maximum loan size.
  • Unforgiven Portion of PPP Loans Counts As “Outstanding Debt: When determining maximum loan size, the portion of an outstanding PPP loan that has not yet been forgiven counts as outstanding debt.
  • Financial Records Submitted to Lender: A borrower is required to submit to the lender financial records on the calculation of borrower’s adjusted 2019 EBITDA and the financial condition of the borrower.  These financial statements will provide the inputs for calculating the borrower’s 2019 adjusted EBITDA.  To this end, borrowers should submit the following financial statements:
    • GAAP Compliant Companies: Borrowers that are subject to U.S. GAAP reporting requirement or that already prepare financials in accordance with U.S. GAAP must submit U.S. GAAP-compliant financial records.
    • Audited Financial Statements: Borrowers that typically prepare audited financial statements must submit audited financial statements.  Otherwise, borrowers should submit reviewed financial statements or financial statements prepared for the purpose of filing taxes.
      • If a borrower does not yet have audited or reviewed financial statements, the borrower should use its most recent audited or reviewed financial statement.
    • Consolidation: If a borrower typically prepares financial statements that consolidate the borrower with is subsidiaries (but not its parent companies or sister affiliates) it must submit consolidated financial statements.  But if a borrower does not typically prepare consolidated financial statements, it need not do so unless required by the lender.
  • Previously Issued Loans That Conform With Prior Guidance Still Eligible: For the first 14 days the Main Street Programs operate, the SPV will purchase loans issued in reliance on the Term Sheets from April 30, 2020, so long as (1) the documentation is complete and consistent with the requirements in the April 30 Term Sheets and (2) the loan was funded prior to June 10, 2020.
  • Lenders Encouraged to Fund Loans Prior to Official Launch of Main Street Programs: Lenders are encouraged to fund loans eligible for the Main Street Programs before the Main Street Programs officially launch.  The SPV will purchase any loan for which (1) the requirement documentation is complete and properly executed and (2) the required documentation evidences that the loan is consistent with the relevant Main Street Program requirements.
__________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  Please feel free to contact the Gibson Dunn lawyers with whom you usually work, any member of the firm’s Public Policy or Financial Institutions practice groups, or the following authors: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com) Luke Sullivan – Washington, D.C. (+1 202-955-8296, LSullivan@gibsondunn.com) * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 8, 2020 |
President Signs Paycheck Protection Program Flexibility Act

Click for PDF On June 5, 2020, the President signed into law H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), which relaxes a number of requirements of and restrictions on the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and clarified by subsequent guidance from the Small Business Administration (“SBA”) and the U.S. Department of the Treasury.[i]  The bill passed the House by a vote of 417-1 and the Senate by voice vote, reflecting the strong bipartisan support behind the legislation.  Below is a summary of the major changes to the PPP instituted by the PPP Flexibility Act. Covered Period The CARES Act established an eight week “covered period”—beginning on the loan origination date and ending no later than June 30, 2020.  The portion of the PPP loan equal to the amount of loan proceeds used during this covered period for certain covered obligations, including payroll costs, mortgage interest payments, rent, and utilities, is eligible for forgiveness. The PPP Flexibility Act extends the covered period to 24 weeks—ending no later than December 31, 2020.  Borrowers who received a PPP loan prior to the PPP Flexibility Act may elect for the covered period to end 8 weeks after the origination of the loan.  The PPP Flexibility Act does not address whether new borrowers can apply for forgiveness prior to the end of the 24 week covered period. Covered Obligations In the First Interim Final Rule published on April 1, 2020, SBA and the Department of Treasury stated that at least 75 percent of PPP loan proceeds “shall be used for payroll costs.”  This ratio of payroll costs to other covered obligations was not in the CARES Act. The PPP Flexibility Act codifies a new ratio: at least 60 percent of PPP loan proceeds “shall” be used for payroll costs in order to receive full loan forgiveness.  Accordingly, up to 40 percent of loan proceeds may go to other covered obligations, including interest on covered mortgage payments, rent, and utilities. The text of the law appears to create a cutoff precluding loan forgiveness for borrowers that spend less than 60% of PPP loan proceeds on payroll costs—as opposed to a reduction in the amount of forgiveness, as reflected in previous guidance.  We expect additional guidance from SBA and the Department of Treasury to prevent this cutoff. Loan Terms For all PPP loan funds that are not forgiven, the CARES Act established that the outstanding balance will have a maximum maturity of 10 years and an interest rate not to exceed 4 percent.  The First Interim Final Rule instituted a maturity of 2 years and an interest rate of 1 percent. For new PPP loans originating on or after June 5, 2020, the PPP Flexibility Act extends the minimum maturity for outstanding balances to 5 years.  Existing PPP loans are unaffected. Rehiring Employees Under the CARES Act, employers who reduced the compensation or number of full-time equivalent employees could eliminate those reductions by June 30, 2020, and avoid any reduction in loan forgiveness. The PPP Flexibility Act extends the date to eliminate reductions to compensation or number of full-time equivalent employees to December 31, 2020. Also, SBA and the Department of Treasury Frequently Asked Question No. 40 provided a safe harbor from the reduction in loan forgiveness with respect to laid-off employees who reject a borrower’s offer of re-employment.  The FAQ states that the borrower must have made a good faith, written offer of rehire, and the borrower must document the former employee’s rejection of the offer. The PPP Flexibility Act codifies this safe harbor, stating that loan forgiveness will not be reduced if the borrower can, in good faith, document an inability to rehire former employees or hire similarly qualified employees on or before December 31, 2020.  The PPP Flexibility Act also provides a safe harbor for borrowers who cannot return to the same level of business activity at which the business was operating before February 15, 2020, due to compliance with standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. The PPP Flexibility Act does not articulate what “business activity” means or how it will be measured.  We look forward to additional guidance clarifying this issue. Loan Deferral Period Under the CARES Act, borrowers could defer payment of the principal, interest, and fees of their PPP loans for not less than six months and not more than one year. The PPP Flexibility Act changes this deferral period to end when the PPP loan forgiveness amount is remitted to the lender.  Also, if a borrower fails to apply for forgiveness within 10 months after the last day of the covered period, the borrower shall make payments of principal, interest, and fees beginning no earlier than 10 months after the covered period ends. Payroll Tax Deferral The CARES Act allowed certain companies to defer paying payroll taxes, excepting companies who had their PPP loans forgiven. The PPP Flexibility Act eliminates this exception, allowing companies whose PPP loans are forgiven to also defer payroll taxes. ____________________________ [i] For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program:  SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program; Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program; Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility; and Small Business Administration Publishes Loan Forgiveness Application.


Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com) Alisa Babitz – Washington, D.C. (+1 202-887-3720, ababitz@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Alexander Orr – Washington, D.C. (+1 202-887-3565, aorr@gibsondunn.com) William Lawrence – Washington, D.C. (+1 202-887-3654, wlawrence@gibsondunn.com) Samantha Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com) * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.  

June 2, 2020 |
New York State Legislature Passes Relief Package for Renters and Property Owners

Click for PDF On Thursday, May 28, 2020, the New York State Legislature fast-tracked a set of bills providing accommodations for renters and property owners affected by COVID-19.  The bills have been passed by both the Assembly and Senate.  There is no news yet on when or whether Governor Cuomo plans to sign the bills. The Assembly issued a press release announcing passage of the bills.  The bills related to housing are summarized as follows.  The only bills that appear to apply to commercial properties are possibly: (1) the two bills relating to property taxes, S8138B and S8122B; and (2) the bill relating to utilities, S8133A, to the extent “any residential customer” includes commercial multifamily operators who submeter utilities to residential users.

  • S.8419, Kavanagh / A.10522, Cymbrowitz: This legislation will enact the "Emergency Rent Relief Act of 2020" to establish an interim residential rent relief program for low-income tenants. The program will issue a subsidy for tenants who were rent burdened prior to the COVID-19 pandemic or are paying more than 30 percent of their income toward rent and are now experiencing an even greater rent burden due to a loss of income.  The program will be administered by the commissioner for housing and community renewal, who in turn is authorized to delegate administration in part “to any state, county, city, town, or public housing agency or any non-profit organization.”  The commissioner is also charged with establishing preferences to prioritize households with the greatest economic need.  The bill is effective immediately and expires on July 31, 2021.
  • S.8192B, Hoylman / A.10290B, Dinowitz: This legislation will prohibit the eviction for nonpayment of rent of residential tenants who have suffered financial hardship and were in arrears on rent while New York on PAUSE imposed restrictions in their county. The tenant would remain liable for the rent owed.  The bill does not define financial hardship.  The bill is effective immediately and has no expiration date.
  • S.8243C, Kavanagh / A.10351B, Rozic: This bill will require New York State regulated banking institutions to grant 180 days of mortgage forbearance, with the option for an additional 180 days, on a residential mortgage on their primary residence to any mortgagor who can demonstrate financial hardship as a result of the COVID-19 pandemic.  The bill applies to New York banking organizations as defined by the Banking Law, and New York mortgage servicers subject to supervision by the Department of Financial Services.  The bill does not define financial hardship.  The bill is effective immediately and permits forbearances to be back-dated to March 7, 2020; it has no expiration date.
  • S.8138B, Martinez/ A.10252A, Stern: This legislation will permit municipalities to defer certain property taxes during the COVID-19 State of Emergency and will also permit installment payments to be determined by the local legislative body. No additional interest or penalties will accrue during such deferment.  The bill is effective immediately and has no expiration date.
  • S.8122B, Comrie / A.10241A, Hyndman: This legislation will extend the application and renewal deadline to file for real property tax exemption or abatement programs until July 15, 2020 due to the COVID-19 declared State of Emergency.  The bill is effective immediately and has no expiration date.
  • S.8113A, Parker / A.10521, Mosley: This legislation will prohibit a utility corporation or municipality from terminating or disconnecting services to any residential customer for the nonpayment of an overdue charge for the duration of the COVID-19 State of Emergency. This moratorium will last 180 days from the expiration of the COVID-19 State of Emergency for those residential customers that have experienced a change in financial circumstances, and the utility corporation or municipality must offer such residential customers the right to enter into, or restructure, a deferred payment agreement without the requirement of a down payment, late fees or penalties.  The bill is effective immediately and has no expiration date.
___________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors: Mylan Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com) James L. Hallowell – New York (+1 212-351-3804, jhallowell@gibsondunn.com) Andrew A. Lance – New York (:+1 212-351-3871, alance@gibsondunn.com) Emil N. Nachman – New York (+1 212-351-6367, enachman@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 1, 2020 |
Federal Reserve Releases Application Materials and Guidance for the Main Street Lending Programs

Click for PDF On May 27, 2020, the Federal Reserve Bank of Boston released additional information on the three lending facilities the Federal Reserve is creating under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”):  the Main Street New Loan Facility (“MSNLF”); the Main Street Expanded Loan Facility (“MSELF”); and the Main Street Priority Loan Facility (“MSPLF,” together with the MSNLF and MSELF, the “Main Street Programs”). The Federal Reserve Bank of Boston released both application documents and high-level guidance.  The release of these documents comes on the heels of Secretary Mnuchin’s recent testimony before the Senate Banking Committee in which he said the Main Street Programs will launch by the end of May and money will start flowing to applicants soon thereafter.  Most recently, Federal Reserve Chairman Powell said he expects that Main Street Program loans will be issued in the coming days. This client alert first discusses the key new guidance on the Main Street Programs.  It then provides a high-level summary of the new documents released. Key Guidance

  • Credit Certification: To participate in the Main Street Programs, a borrower must certify that “it is unable to secure adequate credit accommodations from other banking institutions.”
    • Guidance clarifies that “[b]eing unable to secure adequate credit accommodations does not mean that no credit from other sources is available to the borrower.” Rather, the requirement is satisfied if “the amount, price, or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances.”  Accordingly, borrowers need not demonstrate that “applications for credit ha[ve] been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.”
  • Criminal and Civil Liability: If an application includes “knowing material misrepresentation,” the lender or borrower may be referred to law enforcement authorities for investigation and possible action under applicable criminal and civil law.
    • The application documents cite 8 U.S.C. § 1001, which criminalizes false statements made “knowingly and willfully” and is punishable by up to 5 years of imprisonment, and 31 U.S.C. § 3729, the False Claims Act, which carries heavy fines.
  • Additional Guidance on “Significant Operations in United States”: To determine if a borrower has “significant operations in the United States,” a business will be evaluated on a consolidated basis with its subsidiaries, but not with its parent companies or sister affiliates.  As a non-exhaustive example, the guidance notes that a borrower would have significant operations in the United States if greater than 50% of the borrower’s:
    • Assets are located in the United States;
    • Annual net income is generated in the United States;
    • Annual net operating revenues are generated in the United States; or
    • Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.
This guidance is helpful to many businesses that are based in the United States yet have a majority of employees overseas.
  • Subsidiaries of Non-U.S. Borrowers Can Participate: The guidance clarifies that a subsidiary of a non-U.S. company can participate in the Main Street Programs, so long as the borrower itself (1) is created or organized in, or under the laws of, the United States and (2) on a consolidated basis has significant operations in, and a majority of its employees based in, the United States.
    • But borrowers must only use loan proceeds to benefit the borrower, its consolidated United States subsidiaries, or the borrower’s affiliates that are United States businesses. The loan may not be used to benefit non-U.S. parents, affiliates, or subsidiaries.
  • Loans to “New Customers”: Under the MSNLF and MSPLF, lenders may originate loans to new customers—e., a business that has not previously worked with the lender.
  • MSPLF Loans Can Refinance Existing Loans: Guidance clarifies that, when a MSPLF loan is originated, a borrower may use the proceeds of that loan to refinance existing loans owed to other lenders.
    • After origination and until the MSPLF loan is repaid in full, however, the borrower must refrain from repaying the principal balance of, or paying any interest on, any debt other than the MSPLF loan, unless the debt or interest payment is mandatory and due.
  • MSELF Does Not Require Use of Original Lender: Under the MSELF, the lender for the upsized tranche need not be the lender that originally extended the underlying loan.
    • The MSELF lender must, however, have acquired the interest in the underlying loan as of December 31, 2019. The lender also must have assigned an internal risk rating to the underlying loan equivalent to a “pass” in the FFIEC’s supervisory rating system as of that date.
  • Program Restrictions Apply to Affiliates: A borrower can only participate in one Main Street Program, and a borrower cannot participate in both a Main Street Program and the Primary Market Corporate Credit Facility.  This restriction applies to a borrower’s affiliates.
  • Clarification on EBITDA Calculations: A borrower must adjust its 2019 EBITDA by using either: (1) the methodology that the lender has previously required for EBITDA adjustments when extending credit to the borrower; or (2) if the borrower is a new customer, the methodology employed for similarly situated borrowers on or before April 24, 2020.  The guidance notes that “similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics.
    • If a lender has used multiple EBITDA adjustment methods for the borrower or similarly situated borrowers, the lender should choose the most conservative method it has employed.
    • Lenders must select a single EBITDA adjustment method that it used at a point in time in the recent past and before April 24, 2020. The guidance forbids “cherry pick[ing]” different methodologies and applying adjustments used at different points in time or for a range of purposes.
  • Additional Guidance on MSELF Maximum Loan Size: Under the MSELF, the maximum size of the upsized tranche cannot exceed 35% of the borrower’s existing outstanding and undrawn available debt that is (i) pari passu in priority with the upsized tranche and (ii) equivalent in secured status (e., secured or unsecured) to the upsized tranche.
    • Secured Loans: If the upsized tranche is part of a secured loan, then all secured debt for borrowed money of the borrower that has not been made junior in priority through contractual subordination should be included in the calculation, regardless of the value or type of collateral.
    • Unsecured Loans: If the upsized tranche is part of an unsecured loan, then all unsecured debt for borrowed money of the borrower that has not been made junior in priority through contractual subordination should be included in the calculation.
  • Additional Guidance on MSPLF Loan Priority and Security: Under the MSPLF, loans must be senior to or pari passu with, in terms of priority and security, the borrower’s “Loan or Debt Instruments” and “Mortgage Debt.”
    • The guidance defines both terms:
      • “Loan or Debt Instruments” means debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all guarantees of the foregoing.
      • “Mortgage Debt” means debt secured by real property at the time of the MSPLF loan’s origination.
    • The MSPLF loan must be secured if, at the time of origination, the borrower has any other secured Loans or Debt Instruments, other than Mortgage Debt.
    • If the MSPLF loan is secured, then the “Collateral Coverage Ratio” for the MSPLF Loan at the time of its origination must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt).
      • “Collateral Coverage Ratio” means (i) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by (ii) the outstanding aggregate principal amount of the relevant debt.
    • If the MSPLF loan is secured by the same collateral as the borrower’s other Loans or Debt Instruments (other than Mortgage Debt), the lien upon such collateral securing the loan must be and remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral. The loan need not share in all of the collateral that secures the borrower’s other Loans or Debt Instruments.
    • The MSPLF loan can be unsecured only if the borrower does not have, as of the date of origination, any secured Loans or Debt Instruments (other than Mortgage Debt).
      • The unsecured loan must not be contractually subordinated in terms of priority to any of the borrower’s other unsecured Loans or Debt Instruments.
    • Additional Guidance on MSELF Loan Priority and Security Requirements: The MSELF’s security and priority requirements are largely the same as the requirements described above that apply to the MSPLF.  The major difference is for secured loans:  under the MSELF, the upsized tranche must be secured by the collateral securing any other tranche of the underlying credit facility on a pari passu  Lenders and borrowers may add new collateral to secure the loan (including the upsized tranche on a pari passu basis) at the time of upsizing.
      • If the underlying credit facility includes both term loan tranche(s) and revolver tranche(s), the upsized tranche needs to share collateral on a pari passu basis with the term loan tranche(s) only. Secured upsized tranches must not be contractually subordinated in terms of priority to any of the borrowers’ other Loans or Debt Instruments.
Documents Released
  • Lender Registration Certifications and Covenants: This document, which includes the certifications and covenants that lenders must make to participate in the Main Street Programs, must be signed and submitted by the lender at the time of its registration with the Main Street Special Purpose Vehicle (“SPV”).  The document must be signed by the lender’s CEO and CFO or officers performing similar functions.
  • Transaction Specific Lender Certifications and Covenants: Each Main Street Program has its own document regarding the lender certifications and covenants that apply to the program.  The document must be signed by an authorized officer of the lender.
    • MSNLF Lender Transaction Specific Certifications and Covenants
    • MSELF Lender Transaction Specific Certifications and Covenants
    • MSPLF Lender Transaction Specific Certifications and Covenants
  • Borrower Certifications and Covenants: Each Main Street Program has its own document regarding the borrower certifications and covenants that apply to the program.  The borrower’s CEO or CFO (or officers performing similar functions) must sign the document.  The lender must submit this document at the time a loan participation in the borrower’s loan is sold to the SPV.
    • MSNLF Borrower Certifications and Covenants
    • MSELF Borrower Certifications and Covenants
    • MSPLF Borrower Certifications and Covenants
    • The certifications and covenants include the following:
      • The borrower is an entity that is organized for profit as one of the following:
        • Partnership;
        • Limited liability company;
        • Corporation;
        • Association;
        • Trust;
        • Cooperative;
        • Joint venture with no more than 49 percent participation by foreign business entities;
        • Tribal business concern that is (i) wholly owned by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, or (ii) owned in part by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, if all other owners are either U.S. citizens or Businesses;
        • Any other form of organization that has been publicly designated by the Federal Reserve as a “Business.”
      • The borrower is not an “Ineligible Business.”
        • An “Ineligible Business” is a business of any of the types listed in 13 CFR 120.110(b)-(j), (m)-(s), as modified and clarified by Small Business Administration regulations for purposes of the Paycheck Protection Program on or before April 24, 2020.
      • The borrower was established prior to March 13, 2020.
      • The borrower meets at least one of the following conditions:
        • Has 15,000 employees or fewer; or
        • 2019 annual revenues of $5 billion or less.
      • The borrower has identified its affiliates, in accordance with the principles set forth in 13 CFR 121.301(f).
      • Neither the borrower nor the borrower’s affiliates have participated in, or will attempt to participate in, another Main Street Program or the Primary Market Corporate Credit Facility.
      • The borrower has not received “specific support” under the CARES Act, which is limited to support under Section 4003(b)(1)–(3).
      • The borrower is a business created or organized in the United States that has significant operations in, and a majority of its employees based in, the United States.
      • The borrower complies with the CARES Act’s conflicts of interest requirements in Section 4019(c).
      • The borrower will comply with the compensation, stock repurchase, and capital distributions restrictions in Section 4003(c)(3)(A)(ii).
      • The borrower is unable to secure adequate credit accommodations from other banking institutions.
      • The borrower is not insolvent.
        • A borrower is insolvent if it is in bankruptcy, resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding (as defined in paragraph B(ii) of section 13(3) of the Federal Reserve Act), or if it was generally failing to pay undisputed debts as they become due during the 90 days preceding the date of borrowing.
      • The borrower has provided financial records to the lender and a calculation of borrower’s adjusted 2019 EBITDA, and these records fairly present borrower’s financial condition.
      • The borrower will adhere to the priority, security, and repayment restrictions under the respective Main Street Program.
      • The borrower has a reasonable basis to believe that, as of the date of the loan origination or upsizing, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
      • If the borrower is a subsidiary of a foreign company, the borrower will use loan proceeds only for the benefit of the borrower, its consolidated U.S. subsidiaries, and other affiliates of the borrower that are U.S. businesses.
      • The borrower told the lender whether it previously received, or applied for, funds under another Main Street Program.
      • If the borrower is a company, all or substantially all of the assets of which comprise equity interests in other entities, then the borrower must certify that the loan is fully guaranteed on a joint and several basis by its selected subsidiaries.
      • The borrower will indemnify the beneficiaries of such certifications and covenants for any liability, claim, cost, loss, judgment, damage or expense that a beneficiary incurs or suffers as a result of or arising out of a material breach of any of the borrower’s certifications or covenants.
    • Loan Participation Agreement: This agreement has two parts:
      • Loan Participation Agreement Standard Terms and Conditions: This document sets forth the terms and conditions for all participations in the Main Street Programs.  It is incorporated in the Transaction Specific Terms and will be publicly available on the Federal Reserve Bank of Boston’s webpage.
      • Loan Participation Agreement Transaction Specific Terms: To effectuate the sale of a loan participation to the SPV, lenders must sign and submit this form.
    • Servicing Agreement: Lenders must submit the Servicing Agreement at the time a loan participation is sold to the SPV.
    • Assignment-in-Blank: Lenders must submit this to the SPV at the time a loan participation is sold to the SPV.  Borrowers also must sign the document.
    • Co-Lender Agreement: This agreement has two parts, and neither is required for existing multi-lender facilities.
      • Co-Lender Agreement Standard Terms and Conditions: This document sets out the terms and conditions for the Co-Lender Agreement.  It is incorporated into the Transaction Specific Terms and will be publicly available on the Federal Reserve Bank of Boston’s webpage.
      • Co-Lender Agreement Transaction Specific Terms: Lenders must sign and submit this document at the time a loan participation is sold to the SPV.  Borrowers are also required to sign the document.
    • Lender Wire Instructions: This document provides wire instructions for the bank account into which the SPV will transfer the purchase amount, servicing fees, and other payments related to the transaction under the specific Main Street Program.
    • Updated FAQs on Main Street Programs: This revised version of the FAQs published on April 30 provides additional guidance on the Main Street Programs.
__________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  Please feel free to contact the Gibson Dunn lawyers with whom you usually work, any member of the firm’s Public Policy or Financial Institutions practice groups, or the following authors: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com) Luke Sullivan – Washington, D.C. (+1 202-955-8296, LSullivan@gibsondunn.com) * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 1, 2020 |
Mylan Denerstein Named to City & State New York’s 2020 Albany Power 100

New York partner Mylan Denerstein was named to City & State New York’s 2020 Albany Power 100 list, recognizing the “power structure in Albany” and the “ebbs and flows in political influence.”  The list was published on June 1, 2020. Mylan Denerstein, Co-Chair of Gibson Dunn’s Public Policy Practice Group, leads complex litigation and internal investigations. She represents diverse companies confronting a wide range of legal issues, in their most critical times, typically involving federal, state and municipal government agencies. She also guides legislative and policy initiatives.

May 20, 2020 |
President Trump Issues Executive Order on Regulatory Relief to Support Economic Recovery

Click for PDF On May 19, 2020, President Trump signed an executive order entitled “Regulatory Relief to Support Economic Recovery.”[1]  The Order seeks “to combat the economic consequences of COVID-19” by giving “businesses, especially small businesses, the confidence they need to re-open.”  Order § 1.  In particular, the Order instructs agencies to “rescind[], modify[], waiv[e], or provid[e] exemptions from regulations and other requirements that may inhibit economic recovery.”  Id. § 1. The Order comprises five specific directives to executive branch departments, executive agencies, and independent agencies.  Order § 2(b) (defining a covered “agency” as per 44 U.S.C. § 3502(1)).  First, the Order mandates that agencies “use, to the fullest extent possible and consistent with applicable law” their emergency authorities “to support the economic response to the COVID-19 outbreak.”  Order § 3.  Relatedly, the Order “encourage[s]” agencies “to promote economic recovery through non-regulatory actions.”  Id. Second, the Order requires agencies to “identify regulatory standards that may inhibit economic recovery.”  Order § 4.  Once agencies have identified those standards, they must then “consider” a variety of responses “for the purpose of promoting job creation and economic growth.”  Id.  These include: (1) “taking appropriate action . . . to temporarily or permanently rescind, modify, waive, or exempt persons or entities from those requirements”; (2) “exercising appropriate temporary enforcement discretion”; and (3) providing “appropriate temporary extensions of time” for compliance.  Id. Third, the Order instructs agencies to provide regulated entities with “[c]ompliance assistance”—namely, guidance regarding what constitutes compliance and relaxed enforcement against those who attempt to comply in good faith.  Order § 5.  For example, the order requires agencies, other than the Department of Justice, to “accelerate procedures” for issuing “a pre-enforcement ruling” regarding “whether proposed conduct in response to the COVID-19 outbreak . . . is consistent with statutes and regulations administered by the agency.”  Id. § 5(a).  The Order further encourages agencies “to formulate, and make public, policies of enforcement discretion that . . . decline enforcement against persons and entities that have attempted in reasonable good faith to comply with applicable statutory and regulatory standards.”  Id. § 5(b). Fourth, the Order mandates that agencies “revise their procedures and practices” to reflect certain “principles of fairness in administrative enforcement.”  Order § 6.  The principles included largely reflect basic notions of due process, such as the proposition that “[l]iability should be imposed only for violations of statutes or duly issued regulations, after notice and an opportunity to respond,” and “[a]dministrative enforcement should be free of unfair surprise.”  Id. § 6(h), (i). Fifth, the Order requires agencies to review any temporary regulatory or enforcement measures they adopted in response to COVID-19 and “determine which, if any, would promote economic recover if made permanent.”  Order § 7.  Agencies must then report the results of their determination to the Director of the Office of Management and Budget, the Assistant to the President for Domestic Policy, and the Assistant to the President for Economic Policy, id., who will monitor compliance with the Order, Order § 8.

*          *          *

The President’s Order has the potential to transform the regulatory landscape across a wide array of industries.  Going beyond previous executive orders that have placed constraints on agencies’ ability to propose new regulations,[2] the Order imposes an affirmative mandate on agencies to root out unnecessary or unduly cumbersome regulations that inhibit economic growth for both temporary and even permanent repeal, and to improve their enforcement and adjudication procedures.  Although it remains to be seen how aggressively agencies will deregulate in response to the Order, it is possible that agencies will look to regulated entities and other interested parties to assist them in identifying regulations that should be rescinded or modified and revising their procedures, perhaps by commencing rulemakings to seek comment on the issues.  Regulated entities could also file petitions for rulemaking to initiate the process.  The Order thus provides regulated entities with a promising opportunity to work cooperatively with agencies in reducing or eliminating unnecessary regulatory burdens. In addition, the Order’s provisions for “pre-enforcement rulings” could be extremely useful in a variety of circumstances.  For example, companies seeking to restart or alter operations might want to check with federal agencies beforehand in order to ensure that they are complying with workplace safety and other regulations.  Similarly, companies and other entities applying for or that have received federal assistance may seek rulings as to eligibility or compliance with the use of federal assistance. _______________________ [1]           See Executive Order on Regulatory Relief to Support Relief to Support Economic Recovery (“Order”), WhiteHouse.gov (May 19, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-regulatory-relief-support-economic-recovery. [2]           See Gibson Dunn Client Alert, President Trump Issues Executive Order on Reducing Regulation and Controlling Regulatory Costs (Jan. 31, 2017), https://www.gibsondunn.com/president-trump-issues-executive-order-on-reducing-regulation-and-controlling-regulatory-costs.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Administrative Law and Regulatory Practice Group or Public Policy Practice Group: Helgi C. Walker – Chair, Administrative Law and Regulatory Practice Group, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com) Michael D. Bopp – Co-Chair, Public Policy Practice Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 18, 2020 |
Small Business Administration Publishes Loan Forgiveness Application

Click for PDF On May 15, 2020, the U.S. Small Business Administration (“SBA”) released the much anticipated loan forgiveness application (“Application”) for loans issued under the Paycheck Protection Program (the “Program” or “PPP”), available here.[i]  The Application and related instructions provide additional guidance regarding the amount of a PPP loan that may be forgiven and the amount such forgiveness may be reduced.  The SBA has said it will soon issue regulations and guidance to further assist borrowers with the Application and provide lenders with direction on their duties.  Below is a summary of the SBA Application and its instructions. Covered Period The Application provides borrowers with two paths to ascertain payroll costs eligible for forgiveness. The Application confirms, consistent with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) requirement, that only certain expenses paid or incurred during the 8-week period beginning on the date of the origination of a PPP loan may be forgiven.  The Application provides that the first day of this 56-day “Covered Period” must be the same as the “PPP Loan Disbursement Date,” which is defined as the date that the borrower received the PPP loan proceeds from the lender or, if PPP loan proceeds were received on more than one date, the first date on which the borrower received PPP loan proceeds. The Application also allows borrowers flexibility to choose an 8-week period specific to their own payroll schedule. If a borrower has a biweekly (or more frequent) payroll schedule, then the Application provides that the borrower may use an alternative 56-day period to calculate the amount of payroll costs paid or incurred that may be forgiven.  This 56-day period, known as the “Alternative Payroll Covered Period,” begins on the first day of the borrower’s first pay period following the PPP Loan Disbursement Date.  The Alternative Payroll Covered Period may only be used in lieu of the Covered Period to determine the amount of payroll costs eligible for forgiveness, and may not be used to determine the amount of nonpayroll costs eligible for forgiveness. Costs Eligible for Forgiveness The Application provides some detail on the amount eligible for forgiveness:

  1. Payroll Costs. Payroll costs paid and incurred during the Covered Period or Alternative Payroll Covered Period, as applicable, are generally eligible for forgiveness.  Payroll costs are paid on the day that paychecks are distributed or an ACH credit transaction is originated; they are incurred on the day that an employee’s pay is earned.  To be eligible for forgiveness, payroll costs must be paid during the Covered Period or Alternative Payroll Covered Period, except that payroll costs incurred during the last pay period of the Covered Period or Alternative Payroll Covered Period, as applicable, may be paid on or before the borrower’s next regular payroll date.  As provided by the CARES Act, the total amount of cash compensation of any individual employee that is eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.  The Application does not provide further guidance as to what costs constitute “payroll costs,” but refers readers to the Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811).
  2. Nonpayroll Costs. As previously announced by the SBA, the Application provides that nonpayroll costs cannot exceed 25% of the total forgiveness amount.  The Application further provides that to be eligible for forgiveness, nonpayroll costs must be either (1) paid during the Covered Period or (2) incurred during the Covered Period and paid on or before the next regular billing date, even if after the Covered Period ends.
The categories of nonpayroll costs eligible for forgiveness are:
  1. Covered mortgage obligations: payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020, but excluding any prepayment or payment of principal.
  2. Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.
  3. Covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Reduction of Loan Forgiveness Amount The forgiveness application includes “PPP Schedule A,” “PPP Schedule A Worksheet” and related instructions.  These materials are used to determine whether and to what extent the loan forgiveness amount will be reduced.  The Worksheet requires the borrower to list every employee employed during the Covered Period and, for each employee: his or her compensation, the average full-time equivalency of hours paid per week, and―if applicable―the amount of any salary or hourly wage reduction that exceeds 25%. As required by the CARES Act, the amount of loan forgiveness may be reduced if there are reductions in the number of the borrower’s full-time equivalent employees (“FTEs”) per month during the covered period and/or the total salary or wages of any employee during the covered period, in each case, as compared to a prior period.  For purposes of these determinations, borrowers must only include employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount over $100,000. However, the loan forgiveness amount will not be reduced if, during the period beginning on February 15, 2020, and ending on April 26, 2020, there is a reduction in the number of FTEs or total salary or wages, and the reduction is eliminated no later than June 30, 2020.  In addition, the loan forgiveness amount will not be reduced because of a reduction in the number of FTEs due to (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours.
  1. Reduction in Number of Full-Time Employees. The loan forgiveness amount will be reduced by multiplying (a) the forgivable costs by (b) the quotient obtained by dividing (a) the average number of FTEs per month during the Covered Period or Alternative Payroll Covered Period, as applicable, by (b) at the election of the borrower, (i) the average number of FTEs per month from February 15, 2019 to June 20, 2019 or (ii) the average number of FTEs per month from January 1, 2020 to February 29, 2020.  If the borrower is a seasonal employer, the denominator is either of the periods in clauses (i) or (ii), or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.

The Application provides two alternative methods for calculating a borrower’s number of FTEs:

    • For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.
    • Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours per week.
  1. Reduction in Total Salary or Wages. The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the Covered Period or Alternative Payroll Covered Period, as applicable, that is in excess of 25 percent of the total salary or wages during the period from January 1, 2020 through March 31, 2020.
Certifications The person signing the loan forgiveness application is required to make various certifications, including, among others, that:
  • The forgiveness amount requested, including all applicable reductions, does not include nonpayroll costs in excess of 25% of the amount requested and does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
  • The Borrower understands that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
  • The Borrower has accurately verified the payments for which the Borrower is requesting forgiveness.
  • The Borrower has submitted required documentation verifying payroll costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible nonpayroll costs payments.
  • The information provided in the forgiveness application and supporting documents and forms is true and correct in all material respects, and they understand that knowingly making a false statement to obtain forgiveness of the PPP loan is punishable by imprisonment and/or fines.
  • The tax documents submitted to the Lender are consistent with those submitted to the IRS and/or state tax or workforce agency.
  • The Borrower understands the SBA may request additional information to evaluate the Borrower’s eligibility for, and loan forgiveness of, the PPP loan, and that failure to provide such information may result in a determination that the borrower was ineligible for the PPP loan or a denial of the loan forgiveness application.
Documentation Requirements The Application lists documents to be submitted with the Application, including:
  • PPP Schedule A;
  • documentation verifying payroll costs eligible for forgiveness, such as bank account statements or third-party payroll service provider reports, tax forms and cancelled checks;
  • documentation showing the average number of FTE employees on payroll per month employed by the borrower for the relevant time periods; and
  • documentation relating to nonpayroll costs eligible for forgiveness verifying existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period, such as copies of lender amortization schedule and receipts or cancelled checks, current lease agreement and receipts or cancelled checks and invoices for business utilities from February 2020 and those paid during the Covered Period and receipts or cancelled checks.
The Application also lists documents that borrowers must retain but are not required to be submitted with the Application.  This includes the PPP Schedule A Worksheet and supporting documentation, and documentation regarding employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule. The Application provides that borrowers must retain certain information in their files for six years after the date the PPP loan is forgiven or repaid in full, and permit authorized SBA representatives, including representatives of SBA’s Office of Inspector General, to access such files upon request.  This information includes all records relating to the PPP loan, including documentation submitted with the PPP loan application, documentation supporting the certifications as to the necessity of the PPP loan request and eligibility for a PPP loan, documentation necessary to support the loan forgiveness application, and documentation demonstrating material compliance with PPP requirements. _____________________ [i] For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program and Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com) Alisa Babitz – Washington, D.C. (+1 202-887-3720, ababitz@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Alexander Orr – Washington, D.C. (+1 202-887-3565, aorr@gibsondunn.com) William Lawrence – Washington, D.C. (+1 202-887-3654, wlawrence@gibsondunn.com) Samantha Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com) * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.  

May 7, 2020 |
New York Moratorium on Residential and Commercial Evictions Extended Through August 20, 2020

Click for PDF On May 7, 2020, New York Governor Andrew Cuomo announced that the state’s moratorium on residential and commercial COVID-19-related evictions will be extended through August 20 and that new rent relief measures will be imposed. Executive Order 202.8, which established the eviction moratorium, was signed by Governor Cuomo on March 20, 2020.  Among other measures, the order placed a stay on all residential and commercial evictions.  This provision of the order, which was set to expire next month, will be extended an additional 60 days through August 20. In addition to extending the eviction moratorium, Governor Cuomo announced two additional measures to protect renters.  First, the state is banning late payments or fees for missed rent payments during the eviction moratorium period.  Second, the state will allow renters facing COVID-19-related hardships to use their security deposit in place of rent payments.  During his May 7, 2020 daily press briefing, Governor Cuomo stated that renters will be required to repay the deposit “over a prolonged period of time.” A press release announcing these measures was published on May 7, 2020.  At this time, no new Executive Order has been issued. ___________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors: Mylan Denerstein – New York (+1 212.351.3850, mdenerstein@gibsondunn.com) Andrew A. Lance – New York (:+1 212.351.3871, alance@gibsondunn.com) Emily Black – New York (+1 212.351.6319, eblack@gibsondunn.com) Stella Cernak – New York (+1 212.351.3898, scernak@gibsondunn.com) Doran Satanove – New York (+1 212.351.4098, dsatanove@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP  Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 5, 2020 |
Federal Reserve Issues New Guidance on Primary Market Corporate Credit Facility, Including Use of Subsidiary Issuers

Click for PDF The Board of Governors of the Federal Reserve System’s (“Federal Reserve”) issued revised guidance on May 4, 2020, with respect to the Primary Market Corporate Credit Facility (“PMCCF”) and noted that it expects the PMCCF to be operational sometime early this month.[1]  The revised guidance clarifies two substantive issues with respect to the application of the PMCCF’s issuer requirements. First, the revised guidance clarifies the extent to which U.S. subsidiaries may participate under the PMCCF in light of the requirement that issuers have “significant operations in and a majority of its employees based in the United States” (the “U.S. Requirements”).  Previous guidance on the matter was silent as to whether U.S. subsidiaries would be eligible to participate in the PMCCF and, if eligible, how such entities would be evaluated under the U.S. Requirements (e.g., application of employee and operations on a consolidated basis, whether use of funds would be restricted to U.S. operations, etc.). Second, the revised guidance clarifies the extent to which the PMCCF restriction that issuers not “have received specific support pursuant to the [Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)] or any subsequent federal legislation” applies to issuers generally.  Previous guidance did not provide additional detail as to what constitutes “specific support” under the CARES Act (e.g., support under Title IV programs, tax relief, participation in the Paycheck Protection Program, etc.). This revised guidance confirms that U.S. subsidiaries can participate in the PMCCF, and provides additional gloss on eligibility requirements under the U.S. Requirements and the “no specific support” under the CARES Act condition.  For additional background and information regarding the PMCCF and its requirements, please see our previous alerts, available here and here. The revised guidance provides several avenues by which a U.S. subsidiary issuer may participate in the PMCCF:

  1. Test 1 (A or B): S. Subsidiary Whose Sole Purpose to Issue Debt.  If the sole purpose of the U.S. subsidiary issuer is to issue corporate debt, eligibility will depend on the contemplated distribution of PMCCF proceeds, based on the satisfaction of one of the two following tests:
    1. If 95 percent or more of the proceeds from the PMCCF are transferred to another corporate affiliate (a “Primary Corporate Beneficiary”) for use in its operations, the Primary Corporate Beneficiary, on a consolidated basis with its consolidated subsidiaries, must satisfy the U.S. Requirements.
    2. If there is no Primary Corporate Beneficiary, at least 95 percent of the proceeds of the PMCCF must go to corporate affiliates, each of which, on a consolidated basis with its consolidated subsidiaries, satisfy the U.S. Requirements.
  2. Test 2: Other U.S. Subsidiary Issuers.  If the U.S. subsidiary issuer is not a subsidiary whose sole purpose is to issue debt, it may participate in the PMCCF so long as it, on a consolidated basis with its consolidated subsidiaries, satisfies the U.S. Requirements.  Use of PMCCF proceeds by issuers satisfying Test #2 does not appear to be restricted to solely U.S. entities or operations and may be directed to non-U.S. operations and non-U.S. affiliates so long as the U.S. subsidiary issuer otherwise satisfies the consolidation test noted above. If the U.S. subsidiary does have a direct or indirect non-U.S. parent or intermediate holding company, please see #4 below. If the U.S. subsidiary’s only purpose is to issue debt, the requirements under Test #1(A) or #1(B) must be met.
With respect to the abovementioned tests, we note the following additional takeaways:
  1. Upstream Entities: Upstream entities and sister affiliates of a U.S. subsidiary issuer will not be considered if the U.S. subsidiary issuer, with its consolidated downstream group, satisfies the U.S. Requirements.
  2. Downstream Entities: Guidance does not appear to restrict participation in the PMCCF if a downstream consolidated subsidiary of the U.S. subsidiary issuer is not itself a U.S. entity, so long as the consolidated group satisfies the U.S. Requirements.
  3. Creating/Identifying a New U.S. Subsidiary Issuer: Guidance explicitly provides that corporates may create a new entity or identify an existing entity as an issuer and may rely on the ratings history of any U.S. affiliate that is guaranteeing the issuance.  Participating issuers under the PMCCF are subject to a participation threshold that may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020.  U.S. subsidiary issuers participating in the PMCCF and relying on an affiliate guarantee would be subject to the 130% threshold, calculated with respect to its top-tier parent’s issuances on a consolidated basis.[2]
  4. U.S. Subsidiary of a Non-U.S. Parent: A U.S. subsidiary issuer of a non-U.S. company may participate if it otherwise satisfies the U.S. Requirements, but will be restricted in the use of its PMCCF proceeds.  The U.S. subsidiary must covenant that PMCCF proceeds are used only for the benefit of the U.S. subsidiary issuer, its consolidated U.S. subsidiaries, and other affiliates that are U.S. businesses, and not for the benefit of its non-U.S. affiliates.[3]
  5. Significant Operations Requirement: The revised guidance provides a non-exhaustive list of examples that would satisfy the “significant operations” component of the U.S. Requirements.  The U.S. subsidiary issuer would qualify as having “significant operations” in the U.S. if, as reflected in its most recent audited financial statements, it has greater than 50% of its:
    1. Consolidated assets in the U.S.; or
    2. Annual consolidated net income generated in the U.S.; or
    3. Annual consolidated net operating revenues generated in the U.S.; or
    4. Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the U.S.
  6. “Specific Support” Requirement: Eligibility under the PMCCF also requires issuers not to have “received specific support pursuant to the CARES Act or any subsequent federal legislation.”  The revised guidance clarifies this restriction by stating that an issuer is not eligible if “it has received a loan, loan guarantee, or other investment from the Treasury Department under section 4003(b)(1)-(3).”  In addition, the revised guidance states that an issuer may use tax credits or tax relief in the CARES Act and still participate in the PMCCF.
Conclusion Revised guidance under the PMCCF provides a path to eligibility for certain U.S. subsidiaries of corporates and manufacturers with substantial overseas operations.  It does so without requiring consolidated, parent level calculations.  While the guidance helpfully clarifies these structural issues and the substantive requirements thereunder, the guidance does not address the administrative aspects of the PMCCF (e.g., application forms, dates, procedures) other than through a general statement that the PMCCF will purchase eligible assets soon this month.  We will continue to monitor developments with respect to the PMCCF, including when additional guidance on the application process for the PMCCF is released. ______________________    [1]   The PMCCF term sheet has not been updated.    [2]   The maximum amount of instruments that may be purchased by the PMCCF and Secondary Market Corporate Credit Facility (“SMCCF”) with respect to an issuer may not exceed 1.5% of the combined size of the PMCCF and SMCCF, currently sized at $750 billion.  Measurement of the 1.5% threshold will be at the time of purchase of the bond or portion of loan syndication.    [3]   The revised guidance also notes that U.S. branches or agencies of non-U.S. banks may participate as eligible sellers under the SMCCF provided that they otherwise satisfy the U.S. Requirements.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team or its Capital Markets or Financial Institutions practice groups, the Gibson Dunn lawyer with whom you usually work, or the following authors: Authors: Michael D. Bopp, Andrew L. Fabens, Arthur S. Long and James O. Springer © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 1, 2020 |
The Constitutional Consequences of Governmental Responses to COVID-19:  The Right to Travel and the Dormant Commerce Clause

Click for PDF The COVID-19 pandemic has resulted in unprecedented governmental actions at the federal, state, and local levels.  Those actions have raised substantial constitutional questions.  In previous alerts, we discussed the constitutional implications of various proposed legislative and executive actions in response to COVID-19, including under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1]  Here, we flag additional business-related constitutional questions raised by the government’s restrictions on travel, with a particular focus on the extent of a state’s authority to impose restrictions on out-of-state visitors and to restrict interstate travel.  As governments continue to take swift and often unprecedented action in response to the pandemic, additional novel constitutional challenges are likely to arise. As COVID-19 has spread, some state and local governments have erected checkpoints at which they stop, order quarantine of, and even turn away travelers arriving from states with substantial community spread of the virus.[2]  Other states have barred short-term rentals to individuals arriving from out of state, making it impractical to travel to those locations.[3]  And all over the country, states and localities have imposed significant restrictions on their own citizens’ ability to travel even within the state or locality.  While some state quarantine restrictions provide broad exceptions for travelers engaging in commerce, others do not, and in the latter group of states businesses may find routine commercial activity—e.g., interstate transport of goods and employee business travel—far more difficult to conduct.[4] These and similar restrictions implicate the constitutional right to travel.  That right—whose textual source has long remained “elusive”[5]—“embraces at least three different components[:]  the right of a citizen of one State to enter and to leave another State, the right to be treated as a welcome visitor rather than an unfriendly alien when temporarily present in the second State, and, for those travelers who elect to become permanent residents, the right to be treated like other citizens of that State.”  Saenz v. Roe, 526 U.S. 489, 500 (1999).  Under Supreme Court precedent, the right to travel is typically applied to an individual who wishes to travel—not necessarily to goods she wishes to transport.  But since commercial transport today depends in large part upon the movement of people—from the truck driver to the pilot—restraints on an individual’s right to travel necessarily inhibit the transport of goods. State laws implicate the right to travel where, inter alia, they deter, intend to impede, or utilize classifications that punish interstate travel.  Soto-Lopez, 476 U.S. at 903.  And a law that burdens the right to travel is unconstitutional “[a]bsent a compelling state interest.”  Dunn v. Blumstein, 405 U.S. 330, 342 (1972).[6]  In keeping with the right’s multifaceted nature, courts have relied on it to invalidate state restrictions in a variety of contexts.  See, e.g., Soto-Lopez, 476 U.S. at 911 (invalidating New York restriction of civil service preference to veterans entering armed forces while living in state); Mem’l Hosp. v. Maricopa Cty., 415 U.S. 250 (1974) (invalidating Arizona 1-year residency requirement for receiving nonemergency hospitalization or medical care); Crandall v. Nevada, 6 Wall. 35 (1868) (invalidating Nevada tax imposed on individuals leaving state by railroad, coach, or other vehicle transporting passengers for hire). Quarantine and travel restrictions may also raise related questions under the dormant Commerce Clause, which is more often litigated in the commercial context.  Although the Commerce Clause “is framed as a positive grant of power to Congress,” the Supreme Court has “long held that this Clause also prohibits state laws that unduly restrict interstate commerce.”  Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019).[7]  If a state law affirmatively discriminates against interstate transactions, it is presumptively invalid, passing constitutional muster only if its “purpose could not be served as well by available nondiscriminatory means.”  See Maine v. Taylor, 477 U.S. 131, 138 (1986); see also Granholm v. Herald, 544 U.S. 460 (2005).  If a law is nondiscriminatory, courts require that the law’s benefits to the state exceed its burden on interstate commerce.  See Taylor, 477 U.S. at 138.  But the dormant Commerce Clause doctrine admits two exceptions:  (i) state laws authorized by valid federal laws, and (ii) states acting as “market participants,” which covers distribution of state benefits and the actions of state-owned businesses.  See Ne. Bancorp v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159, 174 (1985); White v. Mass. Council of Constr. Emp’rs, 460 U.S. 204, 206–08 (1983).[8]  Dormant Commerce Clause analysis is often fact-intensive, especially when the balancing test for nondiscriminatory laws is applied.  See Pike v. Bruce Church, 397 U.S. 137, 139–42 (1970). The more restrictive dormant Commerce Clause standard may well apply in the COVID-19 context, where certain quarantine requirements appear facially discriminatory by applying only to out-of-state travelers.  As a result, such requirements would be presumed invalid unless there are no available nondiscriminatory means that can advance its purposes.  While a high threshold, this test is not a death knell for the travel restrictions.  The Supreme Court and other courts have upheld discriminatory laws at times, with significant deference to the factual findings of lower courts.  See Taylor, 477 U.S. at 141, 146–48 (upholding Maine restriction on importation of out-of-state baitfish, finding no “clear[] err[or]” in the district court’s factual findings regarding the effects of baitfish parasites and non-native species on Maine’s wild fish population); see also Shepherd v. State Dep’t of Fish & Game, 897 P.2d 33, 41–43 (Alaska 1995) (holding that requirements giving hunting preferences to Alaska residents adequately promoted state interest in “conserving scarce wildlife resources for Alaska residents”). Any challenge under either the right to travel or the dormant Commerce Clause would likely be evaluated based on the breadth and severity of the restrictions on travel, the difference (if any) on the treatment of in-state and out-of-state residents, the exigencies and public health needs faced by the geographic area at issue, the impact on interstate commerce of the restrictions challenged, the feasibility and efficacy of alternative, narrower constraints on movement that just as successfully combat the spread of the virus, and whether quarantine requirements and other restrictions are properly calibrated to achieve their public-health objectives.  In addressing these issues, courts may also consider whether states are acting pursuant to federal law and, where it is the federal government that is acting, whether it is acting pursuant to the Spending Clause.  See U.S. Const. art. I, § 8, cl. 1. In evaluating challenges under both the right to travel and the dormant Commerce Clause doctrines, courts will look to the limited precedent arising in the context of quarantines.  In cases that generally pre-date modern jurisprudence on the right to travel and the dormant Commerce Clause, the U.S. Supreme Court has upheld quarantines—particularly those imposed pursuant to states’ police powers—for public health reasons.  In Compagnie Francaise de Navigation a Vapeur v. Board of Health of State of Louisiana, 186 U.S. 380 (1902), for example, the Court upheld a New Orleans ordinance prohibiting all domestic and foreign travelers—regardless of health status—from entering the city because of a yellow fever outbreak, noting that it was “not an open question” that state quarantine laws are constitutional, even where they affect interstate commerce.  Id. at 387.  On the other hand, some courts have rejected quarantine measures when imposed against individuals for whom the state had no reasonable basis to suspect individual infection or exposure to the disease.  See, e.g., In re Smith, 40 N.E. 497, 499 (N.Y. 1895) (rejecting Brooklyn quarantine of individuals who had refused smallpox vaccination as overbroad under New York health law which, because it affected “the liberty of the person,” was to be “construed strictly,” without explicitly referencing the right to travel). In the event that states’ quarantine requirements in response to COVID-19 face constitutional challenges, courts may be called upon to reconcile these lines of precedent—weighing the fundamental right to free travel and entitlement to equal treatment for out-of-state citizens against the compelling need to prevent the spread of contagion.  Courts will likely also consider precedent recognizing the states’ well-established “police power” in addressing public health crises.  See, e.g., Jacobson v. Massachusetts, 197 U.S. 11, 38 (1905) (upholding state’s mandatory vaccination during smallpox outbreak); Phillips v. City of New York, 775 F.3d 538, 542 (2d Cir. 2015) (relying on Jacobson in rejecting substantive due process and free exercise challenges to New York mandatory school vaccination requirement).  Courts may likewise consider the fact that quarantines necessarily require establishing boundaries, which logically may be drawn using existing state or municipal borders. Furthermore, in an environment in which states have adopted divergent approaches to quarantines and similar restrictions, courts may bear important principles of federalism in mind.  Nearly a century ago, Justice Brandeis lauded the states as “laborator[ies]” for “novel social and economic experiments,” New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932)—a famous phrase that may sound more literal than metaphorical today.  While the Constitution guarantees liberty in interstate travel and trade, it also seeks to protect the autonomy and creativity of the individual states.  And those principles may well conflict if, for instance, one state determines that more restrictive quarantine measures are appropriate than a sister state.  Resolution of any such conflict may require, as with many issues related to COVID-19, a challenging balance of individual liberty and federalism interests.  As federal, state, and local governments continue to restrict the movement of people and goods in response to COVID-19, it is unclear whether their actions will be challenged under the constitutional provisions outlined above, much less how those challenges would fare in court.  Nonetheless, constitutional constraints on governmental action remain significant.  Even in these unprecedented times, all levels of government must make sure to implement responses that grant proper deference to the principles and precedent underlying the constitutional provisions discussed above. _________________________   [1]  See Constitutional Implications of Government Regulation and Actions in Response to the COVID-19 Pandemic (Mar. 27, 2020), https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic/; Constitutional Implications of Rent- and Mortgage-Relief Legislation Enacted in Response to the COVID-19 Pandemic (Apr. 15, 2020), https://www.gibsondunn.com/constitutional-implications-of-rent-and-mortgage-relief-legislation-enacted-in-response-to-the-covid-19-pandemic/; New York Governor v. New York City Mayor:  Who Has the Last Word on New York City’s Business Shutdown? (Apr. 18, 2020), https://www.gibsondunn.com/new-york-governor-v-new-york-city-mayor-who-has-the-last-word-on-new-york-citys-business-shutdown/.   [2]  See, e.g., Fla. Exec. Order No. 20-86 (Mar. 27, 2020) (directing establishment of road checkpoints and mandating self-quarantine for travelers from states with substantial community spread of COVID-19), available at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-86.pdf; R.I. Exec Order No. 20-12 (Mar. 26, 2020), (requiring travelers from New York to self-quarantine for 14 days), available at http://www.governor.ri.gov/documents/orders/Executive-Order-20-12.pdf; see also Joe Barrett, Tourist Towns Say, ‘Please Stay Away,’ During Coronavirus Lockdowns, Wall St. J., Apr. 6, 2020 (discussing Florida Keys ban on visitors but not property owners, and Cape Cod petition to turn away visitors and nonresident homeowners from bridges that provide the only road access to the area), https://www.wsj.com/articles/tourist-towns-say-please-stay-away-during-coronavirus-lockdowns-11586165401?.   [3]  See, e.g., Fla. Exec. Order No. 20-87 (Mar. 27, 2020) (suspending certain vacation rentals on the basis that “vacation rentals and third-party platforms advertising vacation rentals in Florida present attractive lodging destinations for individuals coming into Florida”), available at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-87.pdf.   [4]  Compare, e.g., Fla. Exec. Order No. 20-86 (exempting “persons involved in any commercial activity” from self-quarantine requirement), with Second Supplementary Proclamation – COVID-19, Office of the Governor, State of Hawaii (Mar. 21, 2020) (exempting only “persons performing emergency response or critical infrastructure functions who have been exempted by the Director of Emergency Management” from Hawaii out-of-state self-quarantine requirement), available at https://governor.hawaii.gov/wp-content/uploads/2020/03/2003152-ATG_Second-Supplementary-Proclamation-for-COVID-19-signed.pdf.   [5]  Attorney Gen. of N.Y. v. Soto-Lopez, 476 U.S. 898, 902 (1986).  The right to travel “has been variously assigned to the Privileges and Immunities Clause of Art. IV, to the Commerce Clause, and to the Privileges and Immunities Clause of the Fourteenth Amendment.”  Id. (citations omitted); see also Jones v. Helms, 452 U.S. 412, 418 (1981) (“Although the textual source of this right has been the subject of debate, its fundamental nature has consistently been recognized by this Court.”).  The Supreme Court has also stated that the right is “part of the ‘liberty’ protected by the Due Process Clause of the Fourteenth Amendment.”  City of Chicago v. Morales, 527 U.S. 41, 53 (1999) (plurality opinion).   [6]  The Supreme Court has distinguished the constitutional right to interstate travel from the freedom to travel abroad; the former is “virtually unqualified,” while the latter is “no more than an aspect of the ‘liberty’ protected by the Due Process Clause [and] can be regulated within the bounds of due process.”  Haig v. Agee, 453 U.S. 280, 306–07 (1981) (quoting Califano v. Aznavorian, 439 U.S. 170, 176 (1978)).   [7]  In recent years, “some Members of the [Supreme] Court have authored vigorous and thoughtful critiques” of the dormant Commerce Clause.  Tenn. Wine, 139 S. Ct. at 2460 (collecting opinions of Justices Gorsuch, Scalia, and Thomas).  “But,” the Court noted last term, “the proposition that the Commerce Clause by its own force restricts state protectionism is deeply rooted in our case law.”  Id.   [8]  Where governmental actions are challenged on a basis other than the dormant Commerce Clause (e.g., the Due Process Clause), other considerations may of course be relevant to an analysis of the action’s constitutionality.


Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team or its Appellate or Public Policy practice groups, or the following authors: Akiva Shapiro - New York (+1 212.351.3830 , ashapiro@gibsondunn.com) Avi Weitzman – New York (+1 212-351-2465, aweitzman@gibsondunn.com) Patrick Hayden - New York (+1 212.351.5235, phayden@gibsondunn.com) Alex Bruhn* - New York (+1 212.351.6375, abruhn@gibsondunn.com) Jason Bressler - New York (+1 212.351.6204, jbressler@gibsondunn.com) Parker W. Knight III* - New York (+1 212.351.2350, pknight@gibsondunn.com) * Not admitted to practice in New York; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 1, 2020 |
Federal Reserve Announces Revisions To And Expansion Of The Main Street Lending Programs

Click for PDF On April 9, 2020, we published an alert on the Board of Governors of the Federal Reserve System’s (“Federal Reserve”) announcement that it was creating two loan facilities, the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”), pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Yesterday, the Federal Reserve announced key changes to those Facilities, including the creation of a third program, the Main Street Priority Loan Facility (“MSPLF,” together with the MSNLF and MSELF, the “Main Street Lending Programs”), which is meant to extend assistance to more highly leveraged companies and those with lower earnings in 2019. Key takeaways from the Federal Reserve’s announcement include:

  • Creating a New Facility for More Leveraged Borrowers: The MSPLF is a new lending facility with less restrictive leverage requirements than the MSNLF, requiring the maximum loan size to be the lesser of $25 million or six times adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); as compared to the MSNLF, which establishes a maximum of four times adjusted 2019 EBITDA.
  • Increasing Scope of Eligible Borrowers: The revised terms sheets for the Main Street Lending Programs modify certain borrower eligibility tests to make more borrowers eligible.  They raise the maximum employee cap from 10,000 to 15,000 and the maximum annual revenue cap from $2.5 billion to $5.0 billion.
  • Clarification on Eligible Borrowers: Under the additional guidance on eligible borrowers, it appears that U.S. subsidiaries of foreign businesses or U.S. businesses owned by non-U.S. persons can participate in the Main Street Lending Programs.
  • SBA Affiliation Rules: When determining the number of employees for purposes of the Main Street Lending Programs, the SBA Affiliation Rules apply.  These rules are discussed in prior alerts available here and here.
  • Decreasing Minimum Loan Size: Under the MSNLF, minimum loan size has been reduced from $1 million to $500,000.  Similarly, the newly created MSPLF will require only a minimum of $500,000 to be borrowed.
  • Increasing Maximum Loan Size in MSELF: The minimum borrowable amount required under the MSELF has been increased to $10 million from $1 million.  The maximum amount borrowable under the MSELF has been increased to the lesser of (a) $200 million that is pari passu in priority and equivalent in security with the MSELF loan (increased from $150 million), (b) 35% of outstanding and undrawn available debt (increased from 30% and adding the priority and security requirements), or (c) six times 2019 adjusted EBITDA (unchanged from previous guidance).
  • No “Specific Support”: Similar to other Federal Reserve programs, all three Main Street Lending Programs now require that the borrower “has not received specific support pursuant to the [CARES Act].”  Accompanying guidance clarified that “specific support” does not include participation in the Paycheck Protection Program, but it does include support pursuant to Section 4003(b)(1)-(3) of the CARES Act, which provides funding to specific industries—namely, passenger and cargo air carriers and businesses critical to national security.
  • Prior Existence: Eligible borrowers must have existed prior to March 13, 2020, and not be “ineligible business[es].”[1]
The following requirements, although substantively unchanged from April 9 guidance, will apply to all three Main Street Lending Programs:
  • Only One Program May Be Selected: As required under previous guidance, borrowers may only participate in one Main Street Lending Program or the Primary Market Corporate Credit Facility (“PMCCF”).  Borrowers may not participate in both a Main Street Lending Program and the PMCCF.
  • Compensation, Dividend, and Buy-Back Restrictions Apply: Compensation, stock repurchase, and capital distribution restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act continue to apply.
  • No Forgiveness: Loans remain unforgivable.
  • Program Size: The overall aggregate size of the Main Street Lending Programs remains unchanged at $600 billion.
  • Application Process: There will be an application process run by lenders.  The guidance instructs potential borrowers to contact lenders to see if the lender plans to participate in the Main Street Lending Programs and to request additional information.  The official launch date of the Main Street Lending Programs, however, has not yet been announced.
The chart below details changes to key terms under the MSNLF and MSELF, as well as the features of the MSPLF.
Main Street Lending Programs
  MSNLF MSELF MSPLF
Version Old Terms (April 9)[2] New Terms (April 30)[3] Old Terms (April 9)[4] New Terms (April 30)[5] New Program (April 30)[6]
Revenue Cap $2.5 billion Either $5 billion or 15,000 employees[7] $2.5 billion Either $5 billion or 15,000 employees[8] Either $5 billion or 15,000 employees
Employee Cap 10,000 10,000
Term 4 years 4 years 4 years 4 years 4 years
Minimum Loan Size $1,000,000 $500,000 $1,000,000 $10,000,000 $500,000
Maximum Loan Size Lesser of $25M or 4x 2019 adjusted EBITDA Lesser of $25M or 4x 2019 adjusted EBITDA Lesser of $150M, 30% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA Lesser of $200M, 35% of outstanding and undrawn available debt that is pari passu with other debt and equivalent in secured status, or 6x 2019 adjusted EBITDA Lesser of $25M or 6x 2019 adjusted EBITDA
Risk Retention 5% 5% 5% 5% 15%
Payment (year one deferred for all) Post-Year 1 unspecified Years 2-4: 33.33% each year Post-Year 1 unspecified Years 2-4: 15%, 15%, 70% Years 2-4: 15%, 15%, 70%
Rate Secured Overnight Financing Rate (“SOFR”) + 250–400 basis points LIBOR + 3% Secured Overnight Financing Rate (“SOFR”) + 250–400 basis points LIBOR + 3 LIBOR + 3%
Main Street Priority Loan Facility The new MSPLF is similar in concept and terms to the MSNLF and MSELF.  As noted above, it is an additional avenue of relief for certain higher-leveraged borrowers.  Differences from the MSNLF include:
  • Lender Participation: Under the MSNLF and MSELF, the Special Purchase Vehicle (“SPV”), which the Federal Reserve and Treasury will capitalize, will purchase 95% of the interest in MSNLF and MSELF loans.  Under the MSPLF, however, the SPV will purchase only 85%, and require lenders to retain the remaining 15%;
  • Loan Size Calculation: The maximum loan size under the MSPLF is capped at the lesser of $25 million and six times adjusted 2019 EBITDA (as compared to the lesser of $25 million or four times adjusted 2019 EBITDA under the MSNLF);
  • Loan Amortization: Rather than the standard one-third amortization rate for years two through four under the MSNLF, loans under the MSPLF will be amortized at 15% for years two and three, with a final balloon payment of 70% due in year four;
  • Loan Subordination: MSPLF loans must be senior to or pari passu, both in terms of priority and security, with the other debt instruments of the borrower (excluding mortgage debt).  This is the same for an upsized tranche under the MSELF.  MSNLF loans, however, must only be senior to or pari passu in terms of priority (but not security) with the other debt instruments of the borrower (inclusive of mortgage debt);
  • Loan Refinancing: MSPLF loans allow for the borrower to refinance its existing debt at the time of origination of the MSPLF loan, provided that the MSPLF lender is not also the holder of the refinanced debt.  Such refinancing is not permitted under the MSNLF.
Main Street New Loan Facility The key changes to the MSNLF are as follows:
  • Minimum Loan Size Decrease: Minimum loan size changed from $1 million to $500,000;
  • Additional Guidance on Eligible Businesses: The guidance clarifies that an eligible business is any of the following:  an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or (with limited exceptions) a tribal business concern as defined in 15 U.S.C  657a(b)(2)(C);
  • Ineligible Businesses: A number of businesses are ineligible to participate, including (but not limited to) non-profit businesses, and financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (but pawn shops, although engaged in lending, may qualify in some circumstances);
  • Eligible Lenders: The additional guidance provides that eligible lenders include a “U.S. branch or agency of a foreign bank,” a “U.S. intermediate holding company of a foreign banking organization,” or a “U.S. subsidiary of” any entity that otherwise meets the definition of eligible lender; currently, nonbank financial institutions are not considered eligible lenders;
  • Financial Condition Assessment: Lenders are now expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application;
  • Solvency Certification: A borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period;
  • Adjusted EBITDA Certification: Lenders must certify that the methodology used to generate a borrower’s 2019 adjusted EBITDA is the same as previously used;
  • LIBOR Pricing: Pricing for the loans will be based on LIBOR, not SOFR as originally proposed.  Guidance explains that this change is intended to facilitate timely originations as lenders continue to prepare to transition from LIBOR to alternative reference rates”; and
  • Retained Interest: Lenders must retain their 5% portion of the loan until it matures or the SPV sells all of its 95% participation, whichever comes first.
Main Street Expanded Loan Facility Largely the same new features apply to the MSELF as apply to the MSNLF, including: (i) additional guidance on eligible and ineligible business; (ii) more targeted guidance on eligible lenders; (iii) the financial condition assessment; (iv) additional solvency certifications;  (v) the adjusted EBITDA certification; and (vi) LIBOR pricing. The April 30 guidance also includes some new features unique to the MSELF:
  • Requirements on Loan Being Upsized: The upsized tranche must be senior to or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt;
  • Additional Loan Requirements: The upsized tranche must:
    • Be a term loan originated on or before April 24, 2020, and that has a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing); and
    • Have principal amortization of 15% at the end of the second year, 15% at the end of the third year, and balloon payment of 70% at maturity at the end of the fourth year;
  • Eligible Lender Requirements: The lender must be one of the lenders that holds an interest in the underlying loan at the date of upsizing.  Additionally, the lender must:
    • Retain its 5% portion of the upsized tranche of the loan until the upsized tranche of the loan matures or the SPV sells all of its 95% participation, whichever comes first; and
    • Retain its interest in the underlying loan until the underlying eligible loan matures, the upsized tranche of the eligible loan matures, or the SPV sells all of its 95% participation, whichever comes first.
Conclusion Despite some broadening at the margins, the Federal Reserve’s actions do not transform the fundamental nature of the Main Street Lending Programs.  The requirements of a financial assessment of the borrower, and solvency and adjusted EBITDA certifications, will focus the Programs on firms that have not incurred very significant amounts of leverage.  Borrowers will also be required to comply with the CARES Act restrictions on stock repurchases and dividends, and the statute’s executive compensation limitations.   We will continue to monitor developments with respect to these Programs, including when additional guidance on the application process for the Main Street Lending Programs is released. ____________________    [1]   For more information regarding the PPP and “ineligible business” standard, please see 13 CFR 120.110(b)-(j) and (m)-(s) and our discussion of the implementing regulations of the PPP, available at https://www.gibsondunn.com/analysis-of-small-business-administration-memorandum-on-affiliation-rules-and-faqs-on-paycheck-protection-program/.    [2]   MSNLF (April 9): https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a7.pdf    [3]   MSNLF (April 30): https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200430a1.pdf    [4]   MSELF (April 9): https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a4.pdf    [5]   MSELF (April 30): https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200430a3.pdf    [6]   MSPLF (April 30): https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200430a2.pdf    [7]   Borrower only needs to satisfy the revenue or employee test, but not both as previously required under April 9 guidance.    [8]   Borrower only needs to satisfy the revenue or employee test, but not both as previously required under April 9 guidance.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Michael D. Bopp, Arthur S. Long, Roscoe Jones, Jr.*, James O. Springer and Luke Sullivan  * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 29, 2020 |
Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility

Click for PDF To Our Clients and Friends: In the last week, as the U.S. Small Business Administration (“SBA”) prepared for additional Paycheck Protection Program (the “Program” or “PPP”) funding and began accepting—for the second time—applications from participating lenders, the SBA issued a series of new guidance materials related to Program eligibility, fund accessibility, and loan amount calculations. With an additional $349 billion in funding to PPP under the Paycheck Protection Program and Health Care Enhancement Act (the “PPP and Health Care Enhancement Act”), the Program, established by the Coronavirus, Aid, Relief, and Economic Security (“CARES”) Act, is set to provide a total of $659 billion to help small businesses impacted by COVID-19 with funds to pay eight weeks of payroll and other eligible costs.  The PPP and Health Care Enhancement Act, which was enacted into law on April 24, 2020, and primarily designed to replenish funds for the Program, did not substantially change the overall structure of the Program.  The new law did, however, set aside $60 billion in funding for “community financial institutions” to serve underserved small businesses and nonprofit organizations[1] and directed the SBA to allow agricultural enterprises[2] to apply for Economic Injury Disaster Loans.  With the additional funds Congress provided in the PPP and Health Care Enhancement Act, the SBA started accepting PPP applications from lenders again on April 27, 2020. This client alert, the sixth in a series of alerts regarding the Program,[3] will address the SBA’s (1) Fourth Interim Rule (the “Fourth IFR”), which speaks to, among other topics, the eligibility (or ineligibility) of private equity firms, hedge funds, and the gaming industry to participate in the Program; (2) certification that a PPP loan is needed in order to support ongoing operations; (3) Fifth Interim Final Rule (the “Fifth IFR”), acknowledging a disparity in treatment under the maximum loan calculation under the CARES Act for seasonal employers and Sixth Interim Final Rule (the “Sixth IFR”) on disbursements; (4) guidance on how to calculate maximum loan amounts and related payroll documentation requirements; and (5) guidance on how to calculate the number of employees under employee-based size standards for eligibility. Thematically, much of the new guidance is cautionary in nature; warning public, private equity-held, and other businesses with access to liquidity that PPP loans are not for them.  Adding teeth to those warnings the Treasury Department also announced that all PPP loans of more than $2 million will be audited. The Fourth Interim Final Rule Under the Fourth IFR, hedge funds and private equity firms are explicitly prohibited from receiving a PPP loan because they are “primarily engaged in investment or speculation.”  This rule is consistent with prior restrictions on Section 7(a) loans identified in 13 CFR §120.110 and described in SBA’s Standard Operating Procedure (SOP) 50 10, which prohibited loans to “speculative businesses” for the “sole purpose of purchasing and holding an item until the market price increases” or “[e]ngaging in a risky business for the chance of an unusually large profit.”  Prior to the Fourth IFR “speculative” businesses included those “[d]ealing in stocks, bonds, commodity futures, and other financial instruments.”[4] The Fourth IFR acknowledges, however, that a portfolio company of a private equity fund may still be eligible for a PPP loan and concludes that “[t]he affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.”  The acknowledgment comes with a cautionary note:  that borrowers should “carefully review” the PPP loan application certifications, including that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The Fourth IFR also contains the following additional clarifying provisions:

  • Government-Owned Hospitals. Hospitals otherwise eligible to receive a PPP loan are not determined ineligible because of ownership by state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
  • Legal Gaming Activities. Businesses that receive legal gaming revenues are eligible for PPP loans.  In a shift from the SBA’s Third Interim Rule, the Fourth IFR states that 13 CFR 120.110(g) (providing that businesses deriving more than one-third of gross annual revenue from legal gambling activities are ineligible for SBA loans) is inapplicable to PPP loans.  Businesses that receive illegal gaming revenues remain ineligible.
  • Employee Stock Ownership Plans. Participation in an ESOP (as defined in 15 U.S.C. § 632(q)(6)) does not result in an affiliation between the business and the ESOP.
  • Bankruptcy Proceedings. An applicant is ineligible for PPP loans if it, or its owner, is the debtor in a bankruptcy proceeding at the time of the application or any time before the loan is disbursed.
Borrower Certification Safe Harbor In the SBA’s FAQ, the SBA reiterates that “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.”  Regardless of eligibility requirements, borrowers must certify in good faith that the PPP loan request is necessary even though the CARES Act suspended the ordinary requirement that borrowers must be unable to obtain credit elsewhere.  Specifically, the guidance states that borrowers need to consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” when certifying that the PPP loan request is necessary to ongoing operations. The guidance concluded that it is “unlikely” a public company “with substantial market value and access to capital markets will be able to make the required certification in good faith, “ and cautioned that such companies should be prepared to demonstrate to the SBA, upon request, the basis for its certification.  In addition, yesterday, Secretary of the Treasury Steven Mnuchin said that the government will audit any PPP loans above $2 million. Notably, the Fourth IFR establishes a form of amnesty by allowing “borrowers [to] promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.”  Under the Fourth IFR, any borrower that applied prior to April 23, 2020 and repays the loan in full by May 7, 2020 “will be deemed by SBA to have made the required certification in good faith.” The Fifth and Sixth Interim Final Rules On April 27, 2020, the SBA issued the Fifth Interim Final Rule (available here) to provide seasonal employers with an alternative method to calculate their maximum loan amount.  In doing so, the Fifth IFR stated that without the rule, “many summer seasonal businesses would be unable to obtain funding on terms commensurate with those available to winter and spring seasonal businesses.”  Under Section 1102 of the CARES Act, a seasonal employer may determine its maximum loan amount by reference to the employer’s average total monthly payments for payroll during “the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.”  The Fifth IFR allows seasonal employers to calculate the maximum loan amount using any consecutive 12 week period between May 1, 2019 and September 15, 2019.  The Rule also clarifies that if a seasonal business was not fully operating or dormant as of February 15, 2020, it is still eligible to receive a PPP loan. The Sixth Interim Final Rule, posted on April 28, 2020 and available here, provides that lenders must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval (defined as when the loan is assigned an SBA loan number).  Loan approvals will be cancelled for any loans that are not disbursed because of a borrower’s failure to provide required loan documentation, including a promissory note, within 20 calendar days of loan approval.  The Sixth IFR provides for transition rules for those loans that have received an SBA loan number prior to the posting of the Sixth IFR but are not yet fully disbursed. Maximum Loan Calculation and Payroll Documentation Requirements In addition, on April 24, 2020, the SBA provided guidance (available here) to assist businesses in calculating their payroll costs for determining the maximum possible PPP loan amount.  Under the guidance, the SBA outlines the methodology potential borrowers should use to calculate the maximum amount they can borrow, as well as the documentation the borrower should provide to substantiate the loan amount.  A table summarizing the required documentation as articulated in the guidance is below. The SBA guidance reminds borrowers that, under most circumstances, “PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week period following the first disbursement of the PPP loan.” Records from a retirement administrator, or a health insurance company or third-party administrator for a self-insured plan can be used to demonstrate employers retirement and health insurance contributions.

Supporting Documentation Requirements

No. Eligible Borrower 2019 Documentation 2020 Documentation
1. Self-employed with no employees
  • IRS Form 1040 Schedule C.
  • IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record establishing you were self-employed in 2019.
Invoice, bank statement, or book of record establishing operation on February 15, 2020.
2. Self-employed with employees
  • IRS Form 1040 Schedule C.
  • IRS Form 941[1], or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports.
  • State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements).
  • Documentation of any retirement or health insurance contributions.
Payroll statement or similar documentation from the pay period that covered February 15, 2020.
3. Self-employed farmers
  • IRS Form 1040 Schedule 1 and Schedule F.
4. Partnerships without employees
  • IRS Form 1065 (including K-1s).
Invoice, bank statement, or book of record establishing the partnership was in operation on February 15, 2020.
5. Partnerships with employees
  • IRS Form 1065 (including K-1s).
  • IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports.
  • State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements).
  • Documentation of any retirement or health insurance contributions.
Payroll statement or similar documentation from the pay period that covered February 15, 2020.
6. S Corporations or C Corporations
  • IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports.
  •  State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements)
  • Filed business tax return (IRS Form 1120 or IRS 1120-S) or other documentation of any retirement and health insurance contributions.
Payroll statement or similar documentation from the pay period that covered February 15, 2020.
7. Eligible Non-Profit Organizations
  • IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports.
  • State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements)
  • IRS Form 990 or other documentation of any retirement and health insurance contributions
Payroll statement or similar documentation from the pay period that covered February 15, 2020.
Employee-Based Size Standards and Definitions In guidance issued on April 26, 2020 (available here), the SBA reiterated that under the 500-employee or other applicable employee-based threshold, the term “employee” under the CARES Act includes “individuals employed on a full-time, part-time, or other basis.”  Although this is consistent with the original text of the CARES Act, the guidance confirms that a part-time employee working 10 hours per week should be counted the same as a full-time employee for purposes of loan eligibility.  In contrast, the guidance acknowledges, to determine the extent of any reduction in the loan forgiveness amount in the event of a reduction in headcount, the CARES Act uses the standard of “full-time equivalent employees.” Although the CARES Act and related guidance issued to date do not define the term in the context of the Program, Title II of the CARES Act defines “full-time employee” by referencing the Internal Revenue Code, 26 U.S.C. § 4980H, which defines the term as “an employee who is employed on average at least 30 hours of service per week.”  In addition, the Internal Revenue Service defines “full-time equivalent employee” as “a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.”  Absent further guidance, these definitions may be instructive.
   [1]   A search tool for identifying all eligible lenders is available on the SBA website here.    [2]   Existing law defines “agricultural enterprises” to mean “small business concerns engaged in the production of food and fiber, ranching, raising of livestock, aquaculture, and all other farming and agricultural-related industries.”    [3]   For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, and Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program.    [4]   See SBA’s Standard Operating Procedure (SOP) 50 10.    [5]   Very small businesses that file an annual IRS Form 944 instead of quarterly IRS Form 941 should provide IRS Form 944.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com) Alisa Babitz – Washington, D.C. (+1 202-887-3720, ababitz@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Alexander Orr – Washington, D.C. (+1 202-887-3565, aorr@gibsondunn.com) William Lawrence – Washington, D.C. (+1 202-887-3654, wlawrence@gibsondunn.com) Samantha Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com) * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2020 |
The Multipronged Approach to Government Oversight and Investigations Related to COVID-19 and the CARES Act

Click for PDF With passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”), Congress unleashed the greatest torrent of aid to private businesses this country has ever seen.  Additional waves of assistance also are likely, all of which will spawn a massive, multi-branch oversight effort.  And that’s not even counting investigations of alleged profiteering, other false claims, and the government’s response to the pandemic.  Until November, a barrage of investigations and oversight will be conducted against the backdrop of the 2020 presidential election.  The political reality is sure to intensify oversight efforts, particularly of private businesses that receive CARES Act funds. This alert describes the various government entities that will oversee and investigate the use of CARES Act funds.  It begins with Congress, noting the current and soon-to-be-created committees that will be tasked with, or have jurisdiction to, oversee funds dispersed through the CARES Act.  The alert then explores the role that Inspectors General will play in overseeing expenditure of the funds, augmented by two supplemental oversight bodies created under the Act.

Congressional Oversight and Investigations

Congressional oversight of the CARES Act and its progeny, as well as the Administration’s response to COVID-19, will be robust and multifaceted.  This oversight has already begun, and more is forthcoming.  Yesterday, April 23, the House established a select subcommittee to spearhead oversight and investigative efforts.  In the Senate, Majority Leader McConnell has designated a CARES Act oversight coordinator.  Pursuant to the bill, a bicameral commission is being established to examine implementation of the CARES Act.  And at the same time, several committees in both the House and Senate have either begun or announced COVID-related investigations or oversight.  As a result of all these efforts, CARES Act and other COVID oversight is likely to dominate the investigative agenda of Congress for this year and likely next. We look at the various congressional oversight and investigative efforts in the subsections below. House Select Committee on the Coronavirus Crisis On April 23, the House of Representatives passed H. Res. 935, a resolution establishing a new bipartisan select investigative subcommittee of the Committee on Oversight and Reform to oversee the Trump administration’s response to the coronavirus pandemic, called the “Select Subcommittee on the Coronavirus Crisis” (“Coronavirus Subcommittee” or “the Subcommittee”).[1] The Subcommittee will be composed of 12-members, with Speaker Pelosi (D-Calif.) choosing seven members and House Minority Leader Kevin McCarthy (R-Calif.) choosing five.[2]  House Majority Whip Jim Clyburn (D-SC) has already been tapped to chair the Subcommittee.[3] In remarks made on the House floor, Speaker Pelosi indicated that the Subcommittee’s efforts will be mainly directed towards investigating the implementation of the coronavirus stimulus packages and rooting out any sort of profiteering and fraud.  Specifically, she stated that the Subcommittee “will be laser-focused on ensuring that taxpayer money goes to workers’ paychecks and benefits and it will ensure that the federal response is based on the best possible science and guided by health experts — and that the money invested is not being exploited by profiteers and price gougers.”[4]  And in previous statements, Speaker Pelosi had similarly emphasized that the Committee would focus its attention on “preventing waste, fraud and abuse” and would “protect against price gouging, profiteering and political favoritism.”[5] It is worth noting, however, that the Coronavirus Subcommittee’s mandate is significantly broader than simply overseeing the implementation of the coronavirus stimulus packages and protecting against profiteering.  Indeed, pursuant to H. Res. 935, the Subcommittee has been given an expansive scope and is officially charged with investigating and reporting on the following issues relating to the pandemic:
  • the efficiency, effectiveness, equity, and transparency of the use of taxpayer funds and relief programs to address the coronavirus crisis;
  • reports of waste, fraud, abuse, price gouging, profiteering, or other abusive practices related to the coronavirus crisis;
  • the implementation or effectiveness of any Federal law applied, enacted, or under consideration to address the coronavirus crisis and prepare for future pandemics;
  • preparedness for and response to the coronavirus crisis, including the planning for and implementation of testing, containment, mitigation, and surveillance activities; the acquisition, distribution, or stockpiling of protective equipment and medical supplies; and the development of vaccines and treatments;
  • the economic impact of the coronavirus crisis on individuals, communities, small businesses, health care providers, States, and local government entities;
  • any disparate impacts of the coronavirus crisis on different communities and populations, including with respect to race, ethnicity, age, sex, gender identity, sexual orientation, disability, and geographic region, and any measures taken to address such disparate impacts;
  • executive branch policies, deliberations, decisions, activities, and internal and external communications related to the coronavirus crisis;
  • the protection of whistleblowers who provide information about waste, fraud, abuse or other improper activities related to the coronavirus crisis;
  • cooperation by the executive branch and others with Congress, the Inspectors General, the Government Accountability Office, and others in connection with oversight of the preparedness for the response to the coronavirus crisis; and
  • any other issues related to the coronavirus crisis.[6]
In short, the Subcommittee is tasked with investigating companies, grant recipients, and the Administration, with respect to matters broadly related to the pandemic. It is noteworthy that the Subcommittee is authorized to investigate the preparedness for and response to the coronavirus crisis, considering Speaker Pelosi had previously said that the Subcommittee’s mandate would be forward-looking in nature.[7] While the Subcommittee has a broad scope, Speaker Pelosi’s statements and the nature of the Subcommittee suggest that one of its focuses will be on tracking how the recovery money is distributed and which entities ultimately receive that money.  For instance, the Subcommittee will almost certainly review the Paycheck Protection Program (PPP) disbursements, the $349 billion in loan guarantees offered to small businesses under the SBA’s 7(a) program pursuant to the CARES Act as well as an additional $321 billion appropriated for the PPP under a fourth coronavirus package passed on April 23.  There already has been considerable negative publicity focused on national hotel and restaurant chains that have received millions of dollars in grants pursuant to the PPP.[8] Moreover, the fact that Rep. Jim Clyburn has been tapped as the chair also provides some leads on the potential direction and focus of the Committee’s oversight efforts.  In response to being named chairman of the Coronavirus Subcommittee, Rep. Clyburn stated he believes “very strongly that we cannot let the assistance directed toward addressing this crisis accrue in an unequitable fashion” and that in previous crises like the Great Depression and other recessions, parts of the country “were left behind, having not been treated equitably.”[9]  These statements indicate that Rep. Clyburn will focus the Subcommittee’s attention on investigating whether the Trump administration implements the provisions aimed at providing financial assistance to workers and families as intended, including whether individuals and households receive the additional unemployment insurance funds and direct rebates. The Subcommittee has been given all the bells and whistles an investigative Chair could desire.  The Subcommittee Chair has the authority to issue subpoenas, both for testimony and documents.  Staff can take depositions.  And, unusually but importantly, the Chair can compel the submission of information via interrogatory.[10]  Members can be allotted more than the usual five minutes for questioning during hearings, and the Subcommittee’s staff will be permitted to question witnesses at hearings[11]  Of course, there are still questions concerning the feasibility of actually convening hearings in light of the social distancing guidelines put in place in response to the coronavirus crisis.  And while there have been some discussions concerning the possibility of holding virtual hearings, it remains to be seen whether Congress would pursue that option.[12] Several Republican lawmakers voiced their opposition to the formation of the Coronavirus Subcommittee as being duplicative and unnecessary.  In particular, Reps. Greg Walden (R-OR), Patrick McHenry (R-NC), and Kevin Brady (R-TX), Ranking Members of the Energy and Commerce, Financial Services, and Ways and Means Committees, respectively, sent Speaker Pelosi a letter on April 23, questioning Pelosi’s claim that the Subcommittee will be bipartisan and noting that “standing committees have the respective institutional knowledge and expertise to ensure the appropriate questions are asked and answered.”[13]  Rep. McCarthy had previously voiced similar concerns in response to the Speaker’s initial announcement regarding the Subcommittee.[14]  Republicans could choose not to participate in the Subcommittee once it is formed.  When the Select Committee on Events Surrounding the 2012 Terrorist Attack in Benghazi (also known as the “Benghazi Committee”) was announced, Democrats initially did not commit to participating in it and a number of Democratic lawmakers suggested that appointing members to the Committee would give credence to an unnecessary and wasteful investigation.[15]  Nevertheless, ultimately the Democrats did choose to fully participate in the Benghazi Committee, with Speaker Pelosi reasoning that Democrats could at least have access to pertinent information and a say in determining the direction of the committee’s investigation.[16]  It seems similarly unlikely in this scenario that the Republicans would choose to not participate on the Subcommittee. Other House Oversight and Investigations It is almost certain that the Subcommittee will not be the only House body to investigate and oversee COVID-related matters.  Indeed, committees and lawmakers are already beginning to review and investigate possible fraud, abuse, and/or profiteering related to COVID-19, and it is likely that more investigations will be announced in the near future. For example, on April 1, Maxine Waters, Chair of the House Committee on Financial Services, sent a letter to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza, stating “[a]ny funds granted through the [PPP] must not be used to pay any debts or obligations to private funds, including management or consulting fees.”[17]   Her letter stressed that the purpose of the program is to help companies maintain workforce levels, pay and benefits, and provide workers with a minimum of two weeks paid leave.  Other House committees that could oversee different elements of the coronavirus packages include Energy and Commerce, Judiciary, and Ways and Means. Moreover, there are other aspects of the coronavirus pandemic that Congress is likely to investigate besides the administration and implementation of the stimulus packages.  Some of these investigations have already been initiated.  For instance, in an April 15 letter Senator Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) inquired into the role private equity firms have played in decisions made by physician practices that they own.[18]  Further, Rep. Raja Krishnamoorthi, a member of the House Committee on Oversight and Reform and Chairman of the Subcommittee on Economic and Consumer Policy, sent a letter on April 15, 2020 requesting documents and information from a corporation regarding its contract to produce low-cost, portable ventilators intended to be stockpiled by the federal government in the event of a pandemic.[19]  Similarly, the Democratic members of the Subcommittee on Antitrust, Commercial and Administrative Law, led by House Judiciary Committee Chairman Jerrold Nadler (D-NY) and Antitrust Subcommittee Chairman David N. Cicilline (D-RI), have initiated an inquiry of their own related to the development of ventilators for the national stockpile.  On April 10, 2020, those Members sent a letter to the Federal Trade Commission Chairman Joseph Simons requesting documents regarding the FTC’s investigation of a company’s acquisition of a rival medical device manufacturer.[20]  Specifically, the request relates to allegations of abandoning a contract to develop inexpensive portable ventilators for the national stockpile.[21] Senate Oversight and Investigations While the Republican-controlled Senate is unlikely to conduct as much oversight of the CARES Act as the Democratic-controlled House, we will see oversight and investigative activity.  Majority Leader McConnell announced that Chairman Mike Crapo (R-ID) of the Senate Banking Committee will lead and coordinate the Senate’s oversight of the CARES Act.[22]  McConnell stated that “[t]he Banking Committee already has jurisdiction over the largest parts of the legislation, including economic stabilization and the Federal Reserve” and that “Chairman Crapo will also work closely with the chairs of other committees of jurisdiction as they supervise their own portions of the CARES Act.”  As the Majority Leader suggests, other Senate committees, particularly Homeland Security and Governmental Affairs, Finance, and Small Business & Entrepreneurship, will have jurisdiction over various elements of the coronavirus packages. It also appears that there will be multiple investigations and other oversight inquiries into the causes of the coronavirus pandemic and the Trump administration’s preparedness for, and initial response to, the pandemic.  For example, Senate Homeland Security and Governmental Affairs Committee Chairman Ron Johnson (R-Wis.) has already stated that his committee will begin a probe into the origins and response to the coronavirus pandemic.[23]  Johnson added that the probe will focus on why the national stockpile of equipment was not better prepared, why pharmaceutical ingredients and medical devices are manufactured overseas, and the World Health Organization’s response to the virus. Bicameral Congressional Oversight Commission Additionally, the CARES Act created the Congressional Oversight Commission (the “Commission”), a bicameral commission composed of five members chosen by the majority and minority leaders of both houses of Congress.[24]  Four of the five members of the Commission have already been announced.  The Democratic appointments are Donna Shalala (D-FL), a former Health and Human Services secretary, and Bharat Ramamurtri, a former Deputy Policy Director for Economic Policy for Elizabeth Warren, to sit on the Commission.[25]  Meanwhile, the Republicans have appointed Senator Pat Toomey (R-PA), a member of the Senate Banking, Budget and Finance Committees, and Rep. French Hill (R-Ark.), a member of the House Financial Services Committee.[26]  The Chairperson, who has yet to be named, will be chosen by Pelosi and Senate majority leader Mitch McConnell (R-KY), in consultation with House Minority Leader McCarthy and Senate Minority Leader Chuck Schumer (D-NY).[27] The Commission’s purpose is to conduct oversight on the implementation of the CARES Act by the Federal Government, including efforts by the Treasury Department and Federal Reserve to “provide economic stability as a result of the coronavirus disease 2019 (COVID–19) pandemic of 2020.”[28]  The Commission is responsible for submitting regular reports to Congress focusing on the following elements related to the CARES Act: (i) the use of contracting authority under the CARES Act and the administration of the CARES Act by Treasury and the Federal Reserve; (ii) the impact of loans, loan guarantees, and investments on the financial well-being of U.S. citizens and the U.S. economy; (iii) the extent to which information made available pursuant to the CARES Act has contributed to market transparency; and (iv) the effectiveness of loans, loan guarantees, and investments in minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.[29] The Commission has the authority to convene hearings, call witnesses, take testimony, hire staff, and meet regularly.[30]  Moreover, the chair is empowered to obtain information from any agency by request.[31] The Commission appears to be similar in some respects to the Financial Crisis Inquiry Commission (FCIC) that was created in response to the financial crisis of 2007-2008, and was responsible for investigating the causes of that financial crisis.  The FCIC was composed of ten members that were similarly appointed on a bipartisan and bicameral basis.  The FCIC spent more than a year examining the causes of the financial crisis.  During that span, it reviewed millions of pages of documents, interviewed more than 700 witnesses, held 19 days of public hearings, and ultimately issued a final report.[32] Efforts to Create a 9/11-Style Commission There are currently multiple proposals in both the House and Senate to establish a bipartisan and bicameral commission-style panel to conduct a comprehensive and wide-ranging review of the government’s coronavirus response.[33]  For the most part, these plans closely resemble the structure of the 9/11 Commission, which was a ten-member panel, evenly divided between the political parties, dedicated to investigating the failure to prevent the September 11, 2001 terrorist attacks.[34]  Like the 9/11 Commission, a number of the proposals would give this panel the power to issue subpoenas and refer any defiance for prosecution.[35]  However, a couple of the proposals would not have the panel begin its work until after the 2020 election.[36]  Speaker Pelosi has indicated that she is supportive of an after the fact investigation but, as stated above, has emphasized that she is currently more focused on ensuring there is real-time oversight of the implementation of the CARES Act and other coronavirus stimulus packages.[37]

Agency Oversight

In parallel with Congress, Inspectors General (IGs) will play a key role in overseeing the federal pandemic response and expenditure of stimulus dollars.  As further detailed below, the CARES Act provides specific funding for Offices of the IG (OIGs) at several agencies and creates two supplemental oversight bodies.  This expanded role for IGs in overseeing the expenditure of the CARES Act funds is consistent with oversight mechanisms in past emergency relief packages.  Both the Troubled Asset Relief Program (“TARP”) under the Bush administration and the American Recovery and Reinvestment Act of 2009 in the Obama era appropriated substantial funds for OIG oversight.  And if history is any indicator, OIGs, and the army of personnel and resources they bring to bear, are likely to be involved in investigations and enforcement actions related to the spending for years to come.[38] The Role of IGs in Oversight of Federal Spending Created by Congress through the Inspector General Act of 1978 (“the IG Act”) in the wake of Watergate, IGs are designed to serve as independent agency watchdogs.[39]  IGs are tasked with overseeing their respective agency’s programs and operations and keeping agency heads and Congress informed of fraud, waste, and abuse.  To accomplish these tasks, Congress has vested IGs with robust investigatory authority.  IGs may independently hire staff, access relevant agency records and information, investigate matters without interference by agency heads, and report findings and recommendations directly to Congress.[40]  And perhaps the most important information gathering tools an IG has in its arsenal are its subpoena authority and ability to take witness testimony under oath.[41]  IG subpoenas can be extremely broad in scope, can be served on private parties, are enforceable in federal court, and offer limited protections to recipients.[42] Investigatory authority is not the only power that OIGs possess.  They also play a significant role in enforcement, both in their own right and by serving as extra sets of eyes and ears for DOJ agents and other regulators.  OIGs are staffed with trained, credentialed, and sworn special agents, investigative attorneys, and administrative investigators.  The IG Act vests 25 OIGs with law enforcement authority, including the power to carry a firearm and to “seek and execute warrants for arrest, search of premises, or seizure of evidence.”[43]  In 2017 alone, OIGs boasted $21.9 billion from investigative receivables and recoveries, as well as 4,383 successful prosecutions and 4,622 suspensions or debarments.[44] OIG investigations may be initiated based on information received from a variety of sources, including other government agencies, the media, Congress, or whistleblowers.  And although OIG investigations are generally inward-facing, government contractors and other recipients of federal funds may find themselves entangled in OIG investigations where they are suspected of involvement in wrongdoing in relation to an agency’s programs and operations.  An OIG investigation can even reach companies who do not receive government funding but are believed to have information that may be relevant to allegations of waste, fraud, or abuse in programs that do receive federal dollars. There are serious collateral risks to receiving an OIG subpoena or otherwise being investigated by an OIG.  Whenever an OIG suspects that a federal criminal law has been violated, it may report that information to DOJ for further investigation or prosecution.  For civil violations, the OIG may also refer the matter to DOJ for False Claims Act or other enforcement, impose civil penalties under the Program Fraud Civil Remedies Act, and/or refer the matter to their respective agencies for administrative action, including suspension or debarment. CARES Act Provisions The CARES Act appropriates over $148 million to OIGs in 14 agencies, and creates two supplemental oversight bodies to augment the IG community: 1) the Office of the Special Inspector General for Pandemic Recovery (“SIGPR”) within the U.S. Department of Treasury, and 2) the Pandemic Response Accountability Committee (“PRAC”).[45]

Existing Offices of Inspector General 

Of the $148 million in appropriations for existing IGs, around $120 million of that is earmarked for IGs comprising the PRAC—the agencies that have the greatest roles in spending the stimulus money.[46]  The amounts provided under the Act range from $35 million for the OIG at the Treasury Department, responsible for distributing over $500 billion in emergency relief under the Act, to $750,000 for the OIG at the Department of Agriculture, commensurate with their roles in “carrying out investigations and audits related to the funding provided to prevent, prepare for, and respond to coronavirus under [the] Act.”

Oversight of the Paycheck Protection Program

Capitalizing on lessons learned from past bailouts, Inspectors General are likely to be particularly focused on monitoring government lending under the Act, including the $670 billion Paycheck Protection Program (“PPP”) under the Small Business Administration’s (“SBA”) 7(a) program.  To facilitate audits and investigations of spending under the program, the CARES Act earmarks $25 million for the OIG at the SBA, more than doubling its current annual budget, to be spent over a four-year period.[47]  Given the fact that the SBA processed more loan applications over 14 days than it had in the previous 14 years combined—over 1.6 million applications through nearly 5,000 lenders nationwide when the program ran out of funds on April 16—enforcement after-the-fact is likely to be substantial as the SBA OIG wades through audits and investigations over the next several years.[48] Failure to comply with the many regulations that attach to lending under the PPP or other programs under the CARES Act could result in fines, penalties, or worse for borrowers that fail to exercise proper diligence in applying for and using the funds from these loans.  Although it was designed to make loans for small businesses more broadly and rapidly accessible, the PPP contains complex qualification and utilization criteria for borrowers (e.g., loan forgiveness under the Program is contingent on using the funds for specific purposes), who are responsible for agreeing to a battery of self-certifications–including that the applicant is eligible under the SBA’s PPP guidance.[49]  Because borrowers had to quickly navigate complex applications under extraordinarily stressful circumstances to obtain PPP loans before the funds ran out, they will be vulnerable to mistakes in the application process.  Thus, SBA OIG audits and investigations related to the PPP are likely to be particularly focused on material false statements in the loan application process, which could give rise to liability under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.   Through the FCA, the government can hold a PPP borrower responsible for up to three times the amount of the SBA loan if it finds the borrower knowingly made a false statement in the loan application or other representations to the government with “reckless disregard” for the truth or falsity of that statement. As we explained in our April 8 client alert, “Fraud in the COVID-19 Age: Examining and Anticipating Changing Enforcement Activity,” in the aftermath of past crises, DOJ and qui tam relators have vigorously pursued FCA claims targeting entities that benefited from government spending—efforts contributing heftily to the nearly $40 billion that the federal government has recovered under the FCA in the last decade alone.[50]  Indeed, DOJ has already signaled that it will prioritize the investigation and prosecution of coronavirus-related fraud schemes, and Attorney General Barr has issued guidance to all U.S. Attorneys to be on the lookout for misconduct.[51]

Special Inspector General for Pandemic Relief

In addition to oversight from existing IGs, the Act established a new Special Inspector General for Pandemic Recovery (“SIGPR”) within the Department of the Treasury.  SIGPR has a broad mandate to oversee and audit the making, purchasing, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury under the Act.  To this end, the Act directs SIGPR to collect a list of all businesses that received loans and summarize “the reasons the Secretary determined it to be appropriate to make each loan or loan guarantee under th[e] Act.”   The Act allocates $25 million to SIGPR to conduct this oversight. The Act grants SIGPR the authority provided in Section 6 of the Inspector General Act of 1978.  Thus, SIGPR is authorized to subpoena information in the form of documents, reports, and related information. SIGPR’s oversight will likely receive significant public attention—through a highly political lens.  The Act requires SIGPR to submit quarterly reports to “the appropriate committee of Congress.”  These reports will be highly scrutinized by Congress and the media.  And if the reports raise issues about specific borrowers, this may well spawn congressional investigations into those borrowers or calls for those borrowers to testify. SIGPR’s duties are similar to the duties of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”).  SIGTARP was charged with monitoring, auditing, and investigating funds dispersed through the 2008 Troubled Asset Relief Program.  SIGTARP also provided quarterly reports to Congress and testified before numerous congressional committees. Because of these similarities, SIGPR’s objectives and actions may resemble SIGTARP’s.   In its reports to Congress, SIGTARP often emphasized statistics about the funds recovered from its investigations and the number of enforcement actions brought based on its investigation.  Indeed, today SIGTARP’s website cites the number of individuals sent to prison based on its investigations (300).[52]  The site also notes that SIGTARP investigations led to 24 enforcement actions against institutions, many of which are widely recognized companies.[53]  SIGPR will likely channel its investigative efforts in a similar manner, hoping to expose (and recoup funds from) borrowers’ fraud or waste.  And SIGPR’s oversight efforts may well focus on well-known private companies, as investigations into such companies will likely generate significant interest in SIGPR’s efforts.  Finally, like SIGTARP, SIGPR will likely refer conduct uncovered during its investigations to government agencies with civil or criminal enforcement power. Moreover, Congress is sure to pay close attention to SIGPR.  In fact, Congress’ interest in SIGPR is already on display.  President Trump recently nominated Brian Miller to serve as SIGPR.  Miller currently serves as Special Assistant to the President and Senior Associate Counsel in the White House Counsel’s Office.  Previously, Miller served as the Inspector General for the General Services Administration (“GSA”).  In this role, he led a high-profile investigation into wasteful spending at a GSA conference in Las Vegas.[54]  The head of GSA resigned because of the investigation.[55] Miller’s nomination requires confirmation by the Senate, and Miller has already garnered significant criticism from Democrats.  Senate Minority Leader Schumer, for example, called Miller “exactly the wrong type of person to choose for this position.”[56]  Speaker Pelosi echoed this sentiment, saying: “The Inspector General providing oversight of the federal response of this historic relief package for workers and families must be independent from politics.  The President’s nomination of one of his own lawyers clearly fails that test.”[57]  Politically charged attacks against Miller make it more likely that Congress—particularly the Democratic-controlled House—will contend that it cannot rely on SIGPR to oversee CARES Act funds and, in turn, must conduct direct oversight of the CARES Act through investigations and hearings. Speaker Pelosi’s announcement of the House select committee exemplifies this dynamic. There also may be tension between SIGPR’s oversight duties and the Trump Administration.  Many new stories, for example, have scrutinized the signing statement President Trump issued regarding Section 4018(e)(4)(B) of the Act, which states that if “information or assistance requested by” SIGPR is “unreasonably refused or not provided,” SIGPR shall report that “without delay” to the appropriate congressional committees.  President Trump’s signing statement noted that he did not understand, and his Administration would not treat, “this provision as permitting the SIGPR to issue reports to the Congress without the presidential supervision required by the Take Care Clause, Article II, section 3.”[58]  This statement reflects long-standing separation of powers disputes regarding the independence of IGs, which are members of the Executive Branch.  Indeed, questions arose during the Obama Administration (and prior administrations) regarding the authority and independence of IGs.[59]  Still, President Trump’s signing statement may foreshadow complex internal dynamics between SIGPR and politically appointed leaders of the Treasury Department, or more generally between SIGPR and the White House.

Pandemic Response Accountability Committee

The Inspector General Reform Act of 2008 established the Council of Inspectors General on Integrity and Efficiency (“CIGIE”) to coordinate and oversee the IG community.  The CARES Act requires CIGIE to establish a Pandemic Response Accountability Committee (“PRAC”) to “conduct and coordinate oversight of covered funds and the Coronavirus response.”  Under the Act, the Chairperson of CIGIE, which currently is Department of Justice Inspector General Michael Horowitz, selects the Chair of PRAC.  The other PRAC members are the Inspectors General of the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and the Treasury; the Inspector General of the Small Business Administration; the Treasury Inspector General for Tax Administration; and any other Inspector General, as designated by the Chairperson from any agency that expends or obligates covered funds or is involved in the Coronavirus response. PRAC will have an Executive Director and a Deputy Executive Director.  The CARES Act provides that these appointments shall be made within 30 days of the Act’s passage by the Chair of PRAC, “in consultation with the majority leader of the Senate, the Speaker of the House of Representatives, the minority leader of the Senate, and the minority leader of the House of Representatives.”  This reference to congressional coordination spurred another signing statement from President Trump, which said that any requirement for an Executive Branch Committee to consult with Congress would violate Article II of the Constitution.[60] PRAC has already sparked political controversy.  On March 30, CIGIE Chair Horowitz appointed Glenn Fine as Chair of PRAC.  At the time, Fine was the Deputy Inspector General of the Department of Defense, but he was serving as the Acting Inspector General of the Department of Defense.  Yet a week later, President Trump appointed a new Department of Defense Inspector General, Jason Bend, and designated a new Acting Inspector General at the Department of Defense, current Environmental Protection Agency Inspector General Sean O’Donnell.  That meant that Fine was no longer on PRAC—and consequently could not serve as Chair.  Democratic politicians claimed that this was yet another attempt by President Trump to thwart efforts to oversee the CARES Act.  CIGIE Chair Horowitz has not yet appointed a new Chair of PRAC. More substantively, CIGIE has announced that PRAC will “work closely with” other IGs to “ensure that the funds intended to support individuals, workers, healthcare professionals, businesses and others affected by the pandemic are used efficiently, effectively, and in accordance with the law.”[61]  To do so, the CARES Act provides PRAC with significant resources and authority.  In terms of resources, PRAC receives $80 million under the Act, which far exceeds the $25 million allocated to SIGPR.  In terms of authority, in addition to powers under Section 6 of the Inspector General Act, PRAC has subpoena power over persons who are not federal officers or employees.  This is significant, and it will enable PRAC to compel testimony from private individuals and companies. Like SIGPR, PRAC is required to draft numerous reports about its oversight efforts.  Specifically, PRAC is required to submit to the President and Congress management alerts on management risks and funding problems.  PRAC is also required to submit biannual reports to the President and Congress summarizing PRAC’s activities. Finally, PRAC is permitted to submit to Congress “other reports or provide such periodic updates on the work of the Committee as the Committee considers appropriate.” The precise role PRAC will play in oversight of CARES Act funds is uncertain, in part because PRAC is somewhat novel.  No similar oversight committee was created to oversee funds dispersed under TARP.  PRAC may play a supporting role, coordinating efforts between various IGs.  Alternatively, PRAC may assert an independent role, using its subpoena power and funding to initiate broad-ranging investigations that cut across multiple agencies.  Either way, PRAC’s existence increases the likelihood that IGs will collaborate and initiate joint investigations.

* * *

In the aftermath of the COVID-19 crisis and the torrent of aid that is flowing to mitigate its damage, businesses who receive funds under the CARES Act will face an unprecedented level of scrutiny by multiple congressional committees and agency oversight bodies.  Indeed, companies that have stumbled through the gauntlet of complex certification and utilization requirements attached to lending under the Act’s various programs are already coming under investigation.  Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and are available to assist with any questions you may have regarding CARES  Act oversight and enforcement. ____________________    [1]   H. R. 935, 116th Cong. (2020).    [2]   Id at § 2.    [3]   Press Release, Speaker’s Press Office, Apr. 2, 2020, available at https://www.speaker.gov/newsroom/4220.    [4]   Kyle Cheney, House creates new select coronavirus oversight committee over GOP objections, Apr. 23, 2020, available at https://www.politico.com/news/2020/04/23/house-creates-coronavirus-oversight-committee-204316.    [5]   Supra note 3.    [6]   Supra note 1, § 3.    [7]   Ramsey Touchberry, What Is Pelosi’s Coronavirus Committee? Why Overseeing Covid-19 Money Will Be Met With Hurdles, April 3, 2020, available at https://www.newsweek.com/what-pelosis-coronavirus-committee-why-overseeing-covid-19-money-will-met-hurdles-1496014.    [8]   Jonathan O’Connell, White House, GOP face heat after hotel and restaurant chains helped run small business program dry, April 20, 2020, available at https://www.washingtonpost.com/business/2020/04/20/white-house-gop-face-heat-after-hotel-restaurant-chains-helped-run-small-business-program-dry.    [9]   Press Release, Office of the Majority Whip, Apr. 3, 2020, available at https://www.majoritywhip.gov/?press=majority-whip-clyburn-statement-on-being-named-chairman-of-the-house-select-committee-on-the-coronavirus-crisis-2. [10]   Supra note 1, § 4. [11]   Id. [12]   Michael Thorning, Virtual Congressional Hearings: Could They Work? Six Recommendations, Mar. 27, 2020, available at https://bipartisanpolicy.org/blog/virtual-congressional-hearings-could-they-work-six-recommendations/. [13]   Press Release, Patrick McHenry, Ranking Republican, House Committee on Financial Services, McHenry, Walden, Brady Oppose Pelosi’s Plan to Create Partisan COVID-19 Oversight Subcommittee, Apr. 23, 2020, available at https://republicans-financialservices.house.gov/uploadedfiles/2020-04-23_gop_rankers_to_pelosi.pdf. [14]   Burgess Everett & Marianne Levine, Senate Republicans plan coronavirus probe — with a focus on China, Apr. 13, 2020, available at https://www.politico.com/news/2020/04/13/senate-republicans-coronavirus-probe-china-184206 [15]   Josh Hicks, Schiff: Benghazi select committee a ‘colossal waste of time’, May 4, 2014, available at https://www.washingtonpost.com/news/post-politics/wp/2014/05/04/schiff-benghazi-select-committee-a-colossal-waste-of-time/?arc404=true. [16]   Jennifer Steinhauer & Jonathan Weisman, Pelosi Picks 5 Democrats for Panel on Benghazi, May 21, 2014, available at https://www.nytimes.com/2014/05/22/us/politics/bucking-deputies-pelosi-picks-5-democrats-for-benghazi-panel.html. [17]   Press Release, House Committee on Financial Services, April 2, 2020, available at https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=406477. [18]   Isaac Arnsdorf, Medical Staffing Companies Cut Doctors’ Pay While Spending Millions on Political Ads, Apr. 20, 2020, available at https://www.propublica.org/article/medical-staffing-companies-cut-doctors-pay-while-spending-millions-on-political-ads. [19]   Press Release, House Committee on Oversight and Reform, Krishnamoorthi Seeks Documents on Ventilators Meant to Supply Federal Stockpile, April 15, 2020, available at https://oversight.house.gov/news/press-releases/krishnamoorthi-seeks-documents-on-ventilators-meant-to-supply-federal-stockpile. [20]   Press Release, House Judiciary Committee, Nadler, Cicilline, and Antitrust Subcommittee Democrats Demand Answers on FTC Approval of Covidien’s Acquisition of Newport Medical Instruments, Apr. 10, 2020, available at https://judiciary.house.gov/news/documentsingle.aspx?DocumentID=2914. [21]   Id. [22]   Press Release, Senate Majority Leader’s Press Office, Apr. 17, 2020, available at https://www.republicanleader.senate.gov/newsroom/press-releases/mcconnell-announces-oversight-plans-for-historic-cares-act-. [23]   Burgess Everett & Marianne Levine, Senate Republicans Plan Coronavirus Probe – with a focus on China, Apr. 13, 2020, available at https://www.politico.com/news/2020/04/13/senate-republicans-coronavirus-probe-china-184206. [24]   Coronavirus Economic Stabilization Act of 2020, Pub. L. No. 116-136 § 4020. [25]   Kyle Cheney & Melanie Zanona, Pelosi, McConnell name picks to serve on coronavirus oversight panel, Apr. 17, 2020, available at https://www.politico.com/news/2020/04/17/french-hill-coronavirus-oversight-panel-192660. [26]   Id. [27]   Pub. L. No. 116-136 § 4020(c). [28]   Pub. L. No. 116-136 § 4020(b). [29]   Id. [30]   Pub. L. No. 116-136 § 4020(e). [31]   Id. [32]   Rock Center for Corporate Governance, available at http://fcic.law.stanford.edu/. [33]   Kyle Cheney, Lawmakers fight for a piece of coronavirus ‘9/11 Commission’, Apr. 6, 2020, available at https://www.politico.com/news/2020/04/06/congress-coronavirus-commission-168195; Press Release, Senator Dianne Feinstein’s Newsroom, Apr. 10, 2020, available at https://www.feinstein.senate.gov/public/index.cfm/press-releases?ID=8FFEB75D-F6BB-4138-BD68-2B5629335340. [34]   Id. [35]   Id. [36]   Id. [37]   Mike Lilis, Pelosi forms House committee to oversee coronavirus response, Apr. 2, 2020, available at https://thehill.com/homenews/house/490798-pelosi-forms-house-committee-to-oversee-coronavirus-response. [38]   In FY 2017, approximately 13,000 employees at 73 OIGs conducted audits, inspections, evaluations, and investigations.  See CIGIE’s Annual Report to the President and Congress, Fiscal Year 2017, available at  https://www.oversight.gov/sites/default/files/cigie-reports/FY17_Annual_Report_to_the_President_and_Congress.pdf. [39]   See generally Kathryn A. Francis, Cong. Research Serv., R45450, Statutory Inspectors General in the Federal Government: A Primer (2019), available at  https://fas.org/sgp/crs/misc/R45450.pdf. [40]   Id. [41]   The IG Act authorizes IGs to subpoena information in the form of documents, reports, and related information.  See 5 U.S.C. app. 3 §6(a)(4). [42]   Federal courts have enforced IG administrative subpoenas where “the subpoena (1) is within the IG’s statutory authority; (2) seeks information reasonably relevant to the inquiry; and (3) is not unreasonably broad or burdensome.”  See United States v. Westinghouse, 788 F.2d 164, 171 (3d Cir. 1986). [43]   Pub. L. No. 107-296, § 812; listed in 5 U.S.C. Appendix (IG Act) §6(f); see generally Wendy Ginsberg, Cong. Research Serv., R43722, Offices of Inspectors General and Law Enforcement Authority: In Brief (Sept. 2014), available at  https://fas.org/sgp/crs/misc/R43722.pdf.  Relevant to CARES Act oversight, the OIGs for the Departments of Labor and Treasury, as well as the SBA, are among those vested with Law Enforcement Authority. [44]   Council of the Inspectors General on Integrity and Efficiency, Annual Report to the President and Congress, Fiscal Year 2017, published January 3, 2019, available at  https://www.oversight.gov/sites/default/files/cigie-reports/FY17_Annual_Report_to_the_President_and_Congress.pdf. [45]   In addition to the provisions related to OIGs, the Act allocates $20 million to the Government Accountability Office (“GAO”) and provides a mandate for GAO reports to Congress on all expenditures of funds under the act, including monthly briefings to congressional committees on the implementation of the new law, as well as quarterly reports to the public. [46]   The PRAC includes Inspectors General of the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and the Treasury; the Inspector General of the Small Business Administration; the Treasury Inspector General for Tax Administration; and any other Inspector General, as designated by the Chairperson from any agency that expends or obligates covered funds or is involved in the coronavirus response. [47]   See SBA, Office of Inspector General, FY 2019 Congressional Budget Justification, available at https://www.sba.gov/sites/default/files/2019-08/FY_2019_CBJ_Office_of_Inspector_General.pdf. [48]   See Robin Saks Frankel, The Paycheck Program Ran Out of Funding. What’s Next for Small Business Owners?, Apr. 16, 2020, available at  https://www.forbes.com/sites/advisor/2020/04/16/the-paycheck-protection-program-ran-out-of-funding-whats-next-for-small-business-owners; see also SBA’s Agency Financial Report: Fiscal Year 2019, available at https://www.sba.gov/sites/default/files/2019-12/SBA_FY_2019_AFR-508.pdf (“In FY 2019, the SBA approved more than 58,000 loans in the 7(a) and 504 loan programs, providing [approximately] $28 billion to small businesses.”). [49]   SBA, Paycheck Protection Program Interim Final Rule- Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, Apr. 14, 2020, available at https://www.sba.gov/document/policy-guidance--ppp-interim-final-rule-additional-eligibility-criteria-requirements-certain-pledges-loans. [50]   Fraud in the COVID-19 Age: Examining and Anticipating Changing Enforcement Activity (Apr. 8, 2020), available at https://www.gibsondunn.com/fraud-in-the-covid-19-age-examining-and-anticipating-changing-enforcement-activity. [51]   U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download. [52]   SIGTARP Investigations By the Numbers, Office of the Special Inspector General for the Troubled Asset Relief Program, available at https://www.sigtarp.gov/Pages/Home.aspx. [53]   Id. [54]   Alexander Abad-Santos, GSA Threw an $800,000 Party and All You Got Was the Bill, The Atlantic, Apr. 3, 2012, available at  https://www.theatlantic.com/politics/archive/2012/04/gsa-threw-800000-party-and-all-you-got-was-bill/329797/. [55]   Lesa Jensen, GSA head resigns over ‘wasteful’ Las Vegas seminar, CNN, Apr. 2, 2012, available at  https://www.cnn.com/2012/04/02/politics/gsa-head-resigns/index.html. [56]   Press Release, Senate Democrats, Apr. 4, 2020, available at  https://www.democrats.senate.gov/newsroom/press-releases/schumer-statement-on-nomination-of-brian-miller-to-be-special-inspector-general-for-pandemic-recovery. [57]   Press Release, Speaker’s Press Office, Apr. 6, 2020, available at  https://pelosi.house.gov/news/press-releases/pelosi-statement-on-nomination-of-white-house-lawyer-as-inspector-general-for. [58]   Remarks by President Trump at Signing of H.R.748, The CARES Act, Oval Office, Mar. 27, 2020, available at  https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-h-r-748-cares-act/. [59]   See Obama Administration Frustrates Inspectors General on Records Access, Government Executive, Feb. 3, 2015, available at  govexec.com/management/2015/02/obama-administration-frustrates-inspectors-general-records-access/104496/. [60]   More specifically, President Trump’s statement said that required consultation with Congress would “violate[] the separation of powers by intruding upon the President’s power and duty to supervise the staffing of the executive branch under Article II, section 1 (vesting the President with the ‘executive Power’) and Article II, section 3 (instructing the President to ‘take Care’ that the laws are faithfully executed).” [61]   Press Release, CIGIE, Apr. 1, 2020, Additional Inspectors General Designated As Members of CIGIE’s Pandemic Response Accountability Committee, available at  https://www.ignet.gov/sites/default/files/files/PRAC-press-release-additional-members.pdf.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors: Authors: Michael Bopp, Stuart Delery, Roscoe Jones*, Benjamin Belair, Luke Sullivan, and Crystal Weeks * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 22, 2020 |
Colorado and Georgia Plan to Relax COVID-19 Restrictions and Allow Some Businesses to Reopen

Click for PDF On April 20, 2020 the governors of Colorado and Georgia announced plans to begin easing the restrictions the states imposed in response to the outbreak of COVID-19.  Certain businesses will be permitted to reopen so long as they follow state social distancing laws and guidelines designed to limit the spread of the virus.  These precautions are intended to keep any increase in COVID-19 cases to a level that can be managed by the states’ hospital systems.  The plans of each state, as set out in a slide presentation by the governor of Colorado and an executive order issued by the governor of Georgia, are discussed below.  Colorado urges its citizens to remain at home when they can, and Georgia’s plan includes a detailed list of mandatory precautions.  In Colorado, there will be a process for local governments to issue stricter local rules based on local conditions; in Georgia such local control is expressly forbidden by the governor’s executive order.  Colorado and Georgia provide different approaches to emerging from the COVID-19 restrictions and may serve as competing models as other states consider how and when to begin lifting their own COVID-19 restrictions.

Colorado’s “Safer at Home” Plan Will Permit Some Businesses to Reopen, but Urges Personal Caution and Telecommuting

On April 20, Colorado Governor Polis announced a plan to scale back the restrictions on business activity currently in effect in the state. The plan, which we expect to be further detailed in the coming days, is designed to allow physical distancing rates — a measure of reductions in person-to-person interactions — which are now at 75%-80%, to decline to, but no further than, 60%-65%.  In combination with the other measures the plan will include, the state expects a 60%-65% social distancing rate to keep the infection rate low enough that the outbreak can be managed by the state’s medical infrastructure. According to the Governor’s April 20 presentation, Colorado’s current stay-home order will be permitted to lapse on Sunday, April 26, 2020 and will be replaced by the new rules.  The presentation makes clear that “[t]here will be a process for local governments to modify these standards based on local conditions.”  See Presentation of Jared Polis, Gov. of Colo. (Apr. 20, 2020).  Under the new plan the Governor’s Office continues to encourage the citizens of Colorado, especially members of particularly vulnerable populations, to stay home as much as possible.  The plan includes as well the following mandatory and optional provisions:

Mandatory:

  • Gatherings of more than ten are prohibited
  • The sick may not go to work
  • Offices may open to up to 50% of staff
  • Telecommuting must be maximized
  • Retail shops may open for curb-side sales. Non-critical in-store sales will be phased in
  • Dental care and elective medical services may open with strict precautions to ensure adequate personal protective equipment and the ability to meet critical care needs
  • Restaurants remain closed to dine-in business for now, but the state is considering a reduced-capacity reopening
  • Bars remain closed
  • Child care will reopen with strict precautions but university and K-12 education will remain closed
  • Real estate showings may begin but open houses will remain prohibited

Optional:

  • Face masks are encouraged
  • Large workplaces are advised to have symptom and temperature checks

Georgia’s Executive Order Allows Certain Businesses to Reopen and Requires Compliance With Detailed Precautionary Measures

Georgia’s plan to reopen its economy — which is set out in Governor Kemp’s Executive Order 04.20.20.01 — is modeled on the “Opening Up America Again” guidelines issued by the White House.  Governor Kemp has presented his plan as a “phase-one” reopening under those guidelines.  See Ga. E.O. 04.20.20.01.  The governor has emphasized that Georgia’s increased hospital capacity will help ensure that the outbreak does not overwhelm the state’s medical infrastructure, and is working to increase testing capacity.  The state’s existing shelter-in-place order will remain in effect until April 30, but certain businesses will be permitted to reopen, subject to a detailed list of mitigation measures, on Friday, April 24 and Monday, April 27. In contrast to the approach taken by Colorado — which allows localities to apply stricter regulations as appropriate — Georgia’s executive order expressly supersedes conflicting local rules.  In Georgia, municipalities generally have statutory home rule protections and counties have constitutional home rule protections that are subject to definition by statute.  See Ga. Const. art. IX, § 2, ¶ I; Ga. Code § 36-35-3.  The governor, however, has the emergency power to suspend statutes and has expressly decreed that his executive order will override the statutory home rule provisions on which local and county orders rely.  See Ga. E.O. 04.02.20.01; Ga. Code § 38-3-51(d)(1). The details of the April 27 reopening have yet to be announced, but dine-in restaurants, social clubs, and theaters are expected to be permitted to resume operations and be required to comply with the stringent precautionary rules detailed below as well as additional social distancing measures. The governor’s April 20 executive order announces those businesses permitted to reopen on April 24 and sets out the restrictions applicable to them.  The order allows these businesses to reopen for “Minimum Basic Operations,” defined to “include remaining open to the public subject to the restrictions of this Order.”  The order lists twenty protocols with which business must comply. Pursuant to the governor’s executive order, the following businesses may reopen on April 24:
  • Gyms
  • Fitness centers
  • Bowling alleys
  • Body art studios
  • Barber shops, beauty salons, beauty shops, and the schools for those trades
  • Estheticians
  • Hair designers
  • Persons licensed to practice massage therapy
Each of these businesses must comply with following mitigation measures
  • Screening and evaluating workers who exhibit signs of illness, such as a fever over 100.4 degrees Fahrenheit, cough, or shortness of breath
  • Requiring workers who exhibit signs of illness to not report to work or to seek medical attention
  • Enhancing sanitation of the workplace as appropriate
  • Requiring hand washing or sanitation by workers at appropriate places within the business location
  • Providing personal protective equipment as available and appropriate to the function and location of the worker within the business location
  • Prohibiting gatherings of workers during working hours
  • Permitting workers to take breaks and meals outside, in their office or personal workspace, or in such other areas where proper social distancing is attainable
  • Implementing teleworking for all possible workers
  • Implementing staggered shifts for all possible workers
  • Holding all meetings and conferences virtually, wherever possible
  • Delivering intangible services remotely wherever possible
  • Discouraging workers from using other workers' phones, desks, offices, or other work tools and equipment
  • Prohibiting handshaking and other unnecessary person-to­person contact in the workplace
  • Placing notices that encourage hand hygiene at the entrance to the workplace and in other workplace areas where they are likely to be seen
  • Suspending the use of Personal Identification Number ("PIN") pads, PIN entry devices, electronic signature capture, and any other credit card receipt signature requirements to the extent such suspension is permitted by agreements, with credit card companies and credit agencies
  • Enforcing social distancing of non-cohabitating persons while present on such entity's leased or owned property
  • For retailers and service providers, providing for alternative points of sale outside of buildings, including curbside pickup or delivery of products and/ or services if an alternative point of sale is permitted under Georgia law
  • Increasing physical space between workers and customers
  • Providing disinfectant and sanitation products for workers to clean their workspace, equipment, and tools
  • Increasing physical space between workers' worksites to at least six (6) feet.
Gibson Dunn is monitoring the situations in Colorado and Georgia as harbingers of what may come in other states as well.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors: Authors:  Mylan Denerstein, Lauren Elliot, Lee R. Crain, Stella Cernak, and Parker W. Knight III © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 20, 2020 |
California’s COVID-19 Executive Orders Create a Layered Patchwork of Rules That Are Sometimes Conflicting and Always Changing

Click for PDF As COVID-19 continues to spread across the U.S., Californians for weeks have received evolving guidance from the state, counties, cities, and the federal government encouraging residents to stay home and mandating the closure of certain, non-essential businesses.  California was one of the first places in the U.S. to issue a stay home order, starting a trend of a patchwork of regulations, orders, and laws on state, county, and local levels.  As the landscape of government directives  continues to shift day-by-day (or, at times, hour-by-hour), businesses must continually monitor numerous layers of government for guidance and evaluate their operations to ensure they remain in compliance with all applicable restrictions. On March 19, 2020, the State of California issued Executive Order No. N-33-20, which required all Californians to “stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors” for an indefinite duration.  The State Order refers to and incorporates federal guidance on what constitutes “critical infrastructure sectors,” as outlined by the U.S. Department of Homeland Security Cybersecurity and Infrastructure Security Agency (CISA).  CISA’s guidance (updated March 28) broadly lists sixteen critical infrastructure sectors considered vital to the population’s health and well-being, and provides further detailed guidance (updated March 28) outlining “essential critical infrastructure workforce” roles. While the State Order provides some clarity to individuals and businesses seeking to comply with the appropriate orders, county and city governments have issued their own orders, sometimes creating more stringent restrictions on individuals and businesses than what is mandated in the State Order.  While each order is unique, there are commonalties between the orders.  Each order protects the operations of the healthcare industry, essential infrastructure, and the food supply chain.  Most orders explicitly encourage employers to institute work-from-home policies.  All orders mandate the closure of restaurants for dine-in services, limiting restaurants to take-out or delivery.  Nearly all orders mandate the closure of gyms and fitness centers. On March 16, 2020, the first wave of state and local orders restricting personal movement and non-essential business operations began with seven Bay Area counties and the City of Berkeley issuing “Shelter In Place” orders.  These orders, while initially in effect until April 7, have now been modified to extend to May 3. (San Francisco, San Mateo, Marin, Contra Costa, Alameda, Santa Cruz, Santa Clara, City of Berkeley.)  The County-level orders frame the restrictions differently than the statewide order, focusing on essential “businesses” at the local level, such as grocery stores, banks, and hardware stores.  Comparatively, the state order identifies sixteen critical sectors, rather than identifying specific type of business.  Despite the framing of these issues, the orders appear to be consistent in which businesses are allowed to continue operating. On March 31, 2020, the Bay Area counties issued revised orders, which supersede the prior orders.  (San Francisco, San Mateo, Marin, Contra Costa, Alameda, Santa Cruz, Santa Clara, City of Berkeley.)  The new orders tighten and clarify the restrictions on personal conduct and “essential” activities and businesses, and extend their duration to May 3.  These orders mandated that businesses “that include an Essential Business component” “alongside non-essential components must, to the extent feasible, scale down their operations to the Essential component only[.]”  The revised orders similarly mandate that all construction must stop, except for the following exceptions: (1) projects immediately necessary to the maintenance, operation, or repair of Essential Infrastructure; (2) projects associated with Healthcare Operations; (3) affordable housing that is or will be income-restricted, including multi-unit or mixed-use developments containing at least 10% income-restricted units; (4) public works projects if specifically designated as an Essential Governmental Function by the City Administrator; (5) shelters and temporary housing, but not including hotels or motels; (6) projects immediately necessary to provide critical noncommercial services to individuals experiencing homelessness, elderly persons, persons who are economically disadvantaged, and persons with special needs; (7) construction necessary to ensure that existing construction sites that must be shut down under this Order are left in a safe and secure manner, but only to the extent necessary to do so; and (8) construction or repair necessary to ensure that residences and buildings containing Essential Businesses are safe, sanitary, or habitable to the extent such construction or repair cannot reasonably be delayed. While the Bay Area counties previously determined that their March 16 Shelter in Place Orders were “complementary” to the State Order, those counties now are stating that their revised March 31 orders are more restrictive.  Executive Orders from Bay Area counties indicate that the county orders, which contain, in some respects, “more stringent restrictions[,]” must be complied with in order to “control the public health emergency as it is evolving within the County and the Bay Area.” Much like the Bay Area, Southern California adopted a patchwork of local city- and county-wide executive orders governing the crisis.  The City of Los Angeles and the County of Los Angeles both issued “Safer at Home” orders identifying similar, though not identical, “Essential Businesses” that are permitted to operate during the crisis.  For example, the City of Los Angeles prohibits any open houses or “in-person showings of housing for lease or sale[,]” while the County permits professional services related to the transfer and recording of ownership in housing, “including residential and commercial real estate and anything incidental thereto[.]”  More nuanced, the County permits the operation of businesses “that supply office or computer products needed by people who work from home[,]” while the City more broadly permits businesses “that supply or provide storage for products needed for people to work from home.” Recently, several localities in Southern California, including Los Angeles County and San Diego County, separately issued local orders requiring some businesses to post “Social Distancing Protocols” at all entrances of the facility in order to be visible by the public and by employees.  The mandated form Protocols require the business to include specific information about the measures that the business is taking to comply with the social distancing and sanitation procedures mandated by the local orders.  While the Protocols generally require similar information, the orders are inconsistent as to which businesses must post the protocols.  In Los Angeles County, all Essential Businesses must post a Protocol, while San Diego County requires only businesses that remain open to the public. To add a further layer of complication, each level of government authority has the power to enforce its orders, usually through either a fine or imprisonment.  However, each government entity has a different approach to the enforcement of the orders.  Many officials, including the California Governor Gavin Newsom, have taken the public stance that they are hoping for voluntary cooperation of businesses and residents, with the hope that formal enforcement measures are not necessary.  Governor Newsom stated that he did not expect to use law enforcement to enforce the order at this time, but that the “social pressure” is “the most powerful enforcement tool we have.” Initially, some mayors indicated that they did not intend for the widespread police enforcement of the orders.  However, in recent days, we have seen an increased level of enforcement in the Bay Area and in Southern California.  On April 3, Los Angeles prosecutors filed criminal charges against four local, non-essential businesses that “flagrantly” refused to close, including a smoke shop, a shoe store, and a discount electronics retailer.  One individual in the Los Angeles area was cited $1000 for surfing, despite repeated warnings from a police officer that the beaches were closed.  Similarly, San Francisco police chief Bill Scott said that San Francisco cited at least one person and one business for violating the City’s Shelter in Place Order, and the City Attorney recently obtained a warrant that to shut down an underground nightclub that was operating in violation of the local Order.  Other localities have already begun to enforce their ordinances more strictly.  In the City of Manhattan Beach located in Los Angeles County, the city issued 129 citations and shut down four construction projects over a single weekend for violations of the city’s social distancing ordinance.  While the current enforcement is generally focused on individuals and businesses that ignore government demands for compliance with orders, it’s not clear whether all businesses were given a warning prior to the enforcement actions.  We may continue to see a tightening on the enforcement of these orders as the virus continues to spread or as the level of compliance with the orders decreases. The current regulatory landscape in response to the COVID-19 pandemic in California is complex and continually evolving.  This trend is likely to continue into the foreseeable future.  As the pandemic continues, cities and counties will tailor their restrictions to the needs of the locality.  The COVID-19 restrictions are still new and have not been clarified through litigation, In the face of such uncertainty, businesses must proactively monitor the announcements of the State, the counties, and the cities within which they operate, seek guidance where there is ambiguity and evaluate the risks associated with the uncertainties in each order.


Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors: Authors:  Mylan Denerstein, Lauren Elliot, Victoria Weatherford and Dione Garlick © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 18, 2020 |
New York Governor v. New York City Mayor: Who Has the Last Word on New York City’s Business Shutdown?

Click for PDF During the COVID-19 emergency, what are businesses operating in New York City to do if the Mayor issues an executive order that conflicts with one from the Governor of the State?  Under applicable law and legal principles, the last word should rest with the Governor.  To be sure, businesses must comply with the valid orders of local governments, but the Governor of New York may, by executive order, suspend otherwise-valid sources of law, including orders from mayors.  This may be surprising to some, as New York’s Constitution provides local governments with protections from State-level encroachments in the form of the home rule doctrine, but these protections do not likely limit the Governor’s executive orders in response to the COVID-19 pandemic. New York’s Governor’s Broad Emergency Authority. Under New York Executive Law 29-a, a statute initially passed by the New York State Legislature in 1978, the Governor of the State of New York has immense power during certain states of emergency.  The Legislature amended Section 29-a in early March to provide the Governor with even greater authority in light of the looming threat of COVID-19.[1]  According to the legislative history, the amendment was intended to allow “the governor” to issue “any directive necessary to respond to a state disaster emergency.”[2]

Section 29-a provides that

Subject to the state constitution, the federal constitution and federal statutes and regulations, the governor may by executive order temporarily suspend any state, local law, ordinance, or orders, rules or regulations, or parts thereof, of any agency during a state disaster emergency, if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster or if necessary to assist or aid in coping with such disaster.[3]

The law further provides that the governor “may issue any directive during a state of disaster emergency declared in the following circumstances,” which include an “epidemic” and, as added by the recent amendment, a “disease outbreak.”[4]  The amendment also added to the statute that “[a]ny such directive” issued by the Governor “must be necessary to cope with the disaster and may provide for procedures reasonably necessary to enforce such directive.”[5]  The Governor’s power is not unlimited.  In fact, if the New York State Legislature wishes to override the Governor’s directive under Section 29-a, it “may terminate by concurrent resolution executive orders issued under [Section 29-a] at any time.”[6] Given the breadth of Section 29-a, an executive order from the Governor meant to manage the COVID-19 pandemic should fall within the scope of the Governor’s statutory authority.  After all, the statute was expressly amended for this purpose.[7]  Case law also supports this result.  Not surprisingly, to date there has been very little litigation over the Governor’s Section 29-a powers, the only case to address the statute in meaningful detail, admittedly decided nearly 20 years ago, affirmed the Governor’s exercise of emergency authority.[8]  And, just this month, a court upheld one of Governor Cuomo’s COVID-19 executive orders against a challenge that it denied criminal defendants their statutory right to a prompt preliminary hearing.[9] Only on rare occasion have courts second-guessed governmental emergency orders.  For example, last year, a court granted a preliminary injunction against an Emergency Declaration issued by the County Executive of Rockland County that shut down schools in the face of a measles outbreak.[10]  That court reasoned that the outbreak was not an “epidemic” as used within the meaning of a different emergency statute from Section 29-a.[11]  The recent amendments to Section 29-a should avoid this result, however, because they clarified that the Governor may issue orders in the face of both an “epidemic” and a “disease outbreak.”[12]  Moreover, the Rockland County court’s reasoning does not account for the factual differences between a county-wide measles outbreak and the COVID-19 pandemic—among other things, there has been a measles vaccine available for decades. In short, unless some other statute or constitutional provision served to limit his action, the Governor would be within his statutory authority to issue directives to New York businesses, or to suspend mass transit and public gatherings, including concerts, shows, games and other events.[13] Local Government’s Emergency Powers and Constitutional Home Rule. While the Mayor of New York City has authority to issue emergency orders to manage the COVID-19 pandemic, his orders are likely ineffective if they conflict with an order from the Governor made pursuant to Executive Law Section 29-a.  Still, the Mayor of New York City is empowered to issue local emergency orders to deal with an ongoing or imminent crisis.[14]  This stems from New York State Executive Law Section 24, which provides that a governmental “chief executive may promulgate local emergency orders to protect life and property or to bring [an] emergency situation under control.”[15]  The New York City Charter itself incorporates Section 24.[16]  But, as already mentioned, Section 29-a on the Governor’s emergency powers allows the Governor to “suspend any statute, local law, ordinance, or orders,”[17] which on its face includes an order from a mayor.  Thus, the Governor’s emergency powers allow him to suspend a mayor’s “order[].” In the face of the Governor’s overriding executive order,  New York City’s Mayor may argue that the State Constitution limits the State’s ability to control local affairs.  But while the State Constitution does provide protections through the provisions relating to home rule, those protections are limited, and indeed may be inapplicable altogether.

As the New York Court of Appeals has said,

Enacted to protect the autonomy of local governments, the Municipal Home Rule Clause allows the legislature to “act in relation to the property, affairs or government of any local government only by general law, or by special law only (a) on request of two-thirds of the total membership of its legislative body or on request of its chief executive officer concurred in by a majority of such membership.”[18]

For three reasons, constitutional home rule should not limit the Governor from issuing an order that conflicts with the New York City Mayor’s management of the COVID-19 pandemic. First, constitutional home rule challenges may not apply to executive orders at all.  The relevant constitutional text constrains the “Legislature” and the “law[s]” it may pass, not the Governor or any action he may take via executive order.[19]  As one case explained in rejecting a home rule challenge to a county executive’s order, “an Executive Order” functions merely as an “implementing directive” made under an already-existing law.[20]  An executive order, then, is “not a law and, therefore, claims predicated on alleged violation of the State Constitution or statute that themselves pertain to laws, are not viable.”[21]  With that in mind, a mayor who wishes to challenge an executive order made pursuant to Executive Law Section 29-a would likely have to show that Section 29-a itself violates the Constitution’s home rule provisions.  Such a challenge would almost certainly fail, as Section 29-a is not aimed at “the property, affairs or government of any local government,” which is the only limitation the home rule provision creates.[22] Second, even if an executive order from the Governor were subject to a home rule inquiry, it would likely count as a permissible “general law.”  Under the State Constitution, home rule does not apply to any state “general law,” meaning one “which in terms and in effect applies alike to all counties, all counties other than those wholly included within a city, all cities, all towns or all villages.”[23]  Courts have thus far typically deferred to the Legislature when deciding whether a statute is properly classified as a general law,[24] which has led to an extraordinarily view of what falls into that general law category.[25] Third, even if an executive order from the Governor were construed as a “special law” for home rule purposes, it may still be valid under the Substantial State Concern doctrine.  That doctrine provides that if (1) the State has a “substantial interest” in the subject matter and (2) “the enactment . . . bear[s] a reasonable relationship to the legitimate, accompanying substantial State concern,” the Legislature may act even if doing so interferes with issues of local concern.[26]  For example, in Greater New York Taxi Association v. State, the Legislature substantially expanded the number of authorized taxi medallions and modified regulations governing both yellow cabs and livery cabs in New York City specifically, despite the fact that “regulation of” taxicabs “has always been a matter of local concern.”[27]  The Court of Appeals held that the law in question was valid as it meant to further “the public health, safety and welfare of residents of the state of New York traveling to, from and within the city of New York,” which constituted “a matter of substantial state concern.”[28]

* * *

In sum, the Governor would very likely be within his authority to issue a statewide order directed to businesses during the context of the COVID-19 pandemic, and a mayor of an affected municipality likely would have no recourse to challenge such an order.  Executive Law Section 29-a expressly places extraordinary authority in the Governor to deal with an “epidemic” or “disease outbreak”—conditions no doubt satisfied by the current COVID-19 pandemic.  Of course, any order under Section 29-a would have to be, as noted, consistent with the federal and state constitutions, which could provide a basis for challenge depending on the from that a particular order might take. ____________________    [1]   See Senate Bill S7919, NY State Senate, https://www.nysenate.gov/legislation/bills/2019/s7919.    [2]   Id.    [3]   N.Y. Exec. L. § 29-a(1) (emphasis added); Senate Bill S7919, supra note 1.    [4]   N.Y. Exec. L. § 29-a(1) (emphasis added).    [5]   Id.    [6]   Exec. L. § 29-a(4).    [7]   See Senate Bill S7919, supra note 1.    [8]   See People v. Haneiph, 191 Misc.2d 738 (Sup. Ct. Kings Cty. 2002) (rejecting criminal defendant’s motion to dismiss for failing to satisfy the state Speedy Trial statute and holding that Governor Pataki’s suspension of the Speedy Trial statute after 9/11 was not unconstitutional).    [9]   See People v. Hood, 2020 WL 1672425, at *3 (N.Y. City Ct. Apr. 4, 2020) (“[T]he right to a prompt preliminary hearing is purely statutory.  As such, it is within the Governor’s power to suspend that statutory right during a state emergency disaster.”) [10]   See W.D. ex. rel. A v. County of Rockland, 63 Misc. 3d 932 (Sup. Ct. Rockland Cty. 2019). [11]   Id. at 936. [12]   See supra note 1. [13]   See Selfridge v. Carey, 522 F. Supp. 693, 696 n.4 (N.D.N.Y. 1981) (noting in dicta that Section 29-a “would appear to accord the Governor authority to ban public activities in certain circumstances”). [14]   See generally Exec. L. § 24. [15]   Id. § 24(1). [16]   See New York City Charter § 10-171. [17]   Exec. L. § 29-a(1). [18]   Greater N.Y. Taxi Ass’n v. State, 21 N.Y.3d 289, 301 (2013) (quoting N.Y. Const. art. IX, § 2(b)(2)) [19]   See N.Y. Const., art. IX, § 2(b)(2). [20]   Godfrey v. Spano, 15 Misc. 3d 809, 817-18, 836 N.Y.S.2d 813, 819 (Sup. Ct. Westchester Cty.) (citing Clark v. Cuomo, 66 N.Y.2d 185 (1985)), judgment aff’d, 13 N.Y.3d 358 (2009). [21]   Id.  See also People v. Haneiph, 191 Misc. 2d 738, 743 (Sup. Ct. Kings Cty. 2002) (affirming Governor’s order under Section 29-a while noting that an executive act is valid so “long as ‘the basic policy decisions underlying the regulations have been made and articulated by the Legislature.’” (quoting Matter of N.Y.S. Health Facilities Ass’n v. Axelrod, 77 N.Y.2d 340, 348 (1991)). [22]   See N.Y. Const., art. IX, § 2(b)(2) (emphasis added). [23]   Matter of City of Utica, 91 N.Y.2d 964, 965 (1998) (quoting N.Y. Const., art. IX, § 3(d)(1)). [24]   See Greater N.Y. Taxi Ass’n, 21 N.Y.3d at 302 (“Our review concerning what constitutes a substantial state interest is not dependent on what historically has been the domain of a given locality. Rather, our determination is dependent on the stated purpose and legislative history of the act in question.” (internal quotation marks omitted)). [25]   In one case, while a law conferred benefits only on the Museum of Modern Art in New York City, the court found it was still a “general” law because “other institutions” might “in time, meet the[] [law’s requirements] also.”  See Hotel Dorset Co. v. Tr. for Cultural Res. of City of New York, 46 N.Y.2d 358, 368-369 (1978).  Accordingly, it is likely that any executive order from the Governor meant to manage the COVID-19 pandemic could be written in terms that are general enough to render it a “general law,” even if the bulk of its effects are immediately felt in New York City.  Cf. id. [26]   See, e.g., City of New York v. Patrolmen’s Benevolent Ass’n, 89 N.Y.2d 380, 391 (1996); see also Adler v. Deegan, 251 N.Y. 467, 491 (1929) (Cardozo, J., concurring) (“[I]f the subject be in a substantial degree a matter of state concern, the Legislature may act, though intermingled with it are concerns of the locality.”); Matter of Kelley v. McGee, 57 N.Y.2d 522, 538 (1982) (“It is well established that the home rule provisions of article IX do not operate to restrict the Legislature in acting upon matters of State concern.”). [27]   See Greater N.Y. Taxi Ass’n, 21 N.Y.3d at 296-300. [28]   Id. at 303 (emphasis in original).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors:

Authors:  Mylan Denerstein, Lauren Elliot, Victoria Weatherford, Lee Crain, and Michael Klurfeld © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 15, 2020 |
Constitutional Implications of Rent- and Mortgage-Relief Legislation Enacted in Response to the COVID-19 Pandemic

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I.  Overview

In a previous alert, we discussed the constitutional principles governing legislative responses to COVID-19 under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1]  Here, we apply those principles to proposals currently being debated in state legislatures that would provide broad residential and commercial rent and mortgage relief.  For example, a recent amendment to California Assembly Bill No. 828 would both prohibit residential eviction proceedings for failure to pay rent during the declared state of emergency, and, upon the resumption of such proceedings after the emergency, provide that a tenant could have her rent judicially reduced by 25% for 12 months if the pandemic has adversely affected the tenant’s ability to pay, absent material economic hardship to the landowner.  Importantly, under the California bill, landowners owning 10 or more rental units would be presumed not to suffer material economic hardship due to rent reduction. New York also is considering several bills suspending rent payments for residential or small-business commercial tenants.  One such bill (Senate Bill S8125A) suspends rent payments for 90 days, without any obligation to later pay back the suspended rent, for those tenants who have lost income or shuttered their place of business due to government-ordered COVID-19 restrictions.  The bill also would provide mortgage relief to landowners experiencing financial hardship from the lost rental payments.[2]  Another bill (Senate Bill S8140A) would provide vouchers to tenants whose rent burden is more than 30% of their income and have experienced a substantial loss of income due to COVID-19, although those vouchers would have market-price caps. These and other novel rent- and mortgage-relief schemes may raise constitutional considerations, both for landowners and for lenders with loans secured by the property in question.

II. Regulatory Takings

Landowners and lenders may be able to challenge rent- and mortgage-relief legislation by arguing that they are subject to a compensable regulatory taking.  Whether a landowner or lender has been subjected to a regulatory taking will depend on the specific features of the particular legislation at issue and, to the extent the claim is brought on an “as-applied” basis, the landowner’s or lender’s specific circumstances.  To raise a takings challenge, the challengers would want to highlight, inter alia, “the extent to which the regulation interferes with reasonable investment-backed expectations.”  Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001). To be sure, some courts have previously upheld certain rent-control regimes in states like California and New York, based on the specific characteristics of those regimes at the time of the legal challenges.  See, e.g., Guggenheim v. City of Goleta, 638 F.3d 1111, 1120-22 (9th Cir. 2010) (en banc); Fed. Home Loan Mortg. Corp. v. New York State Div. of Hous. & Cmty. Renewal, 83 F.3d 45, 48 (2d Cir. 1996) (collecting cases).  But the recently proposed legislation appears to be unlike anything either state has previously enacted.  For example, some of the proposed COVID-19 bills contemplate permanently depriving at least some landowners of their contractually expected rent, and depriving at least some lenders of the revenue stream that enable debt payments and the maintenance of their collateral, which are a sort of “interfere[nce] with distinct investment-backed expectations” unlike that presented in these prior court challenges.  Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005) (internal quotation marks omitted). Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003), is one example of a successful challenge to an onerous rent-regulation regime.  There, the court held that federal legislation that forced certain landowners to provide low-income housing beyond the originally-agreed-upon period of twenty years constituted a taking requiring just compensation.  The court concluded that the character of the government’s action was akin to a physical taking, as the developers were able to rent their properties only to low-income tenants for up to an additional twenty years.  Id. at 1337-40.  In addition, the law destroyed the owners’ reasonable investment-backed expectations, as they expected to be able to free themselves from the low-income housing restrictions at the end of the initial twenty years.  Id. at 1346-53.  Other cases, too, have contemplated that preventing a landowner from recouping the costs to maintain the property—thereby creating “negative value”—may amount to a regulatory taking.  See, e.g., Love Terminal Partners v. United States, 126 Fed. Cl. 389, 425 (2016), rev’d on other grounds, 889 F.3d 1331 (Fed. Cir. 2018).  Landowners thus may be able to rely on these cases in arguing that legislation akin to that proposed in California and New York constitutes an unlawful taking by forcing them to continue renting apartments to non-paying tenants, thereby severely diminishing—or even eliminating—their rental revenue and significantly impairing their investment-backed expectations in their rental properties.  And in the same way, lenders may be able to argue that mortgage-relief schemes would undermine their reasonable expectations in the loans secured by the property. The strength of each individual Takings claim will depend on the particular features of the challenged legislation, the particular characteristics of the affected buildings, and the particular harms inflicted on the plaintiffs and those similarly situated.  Landowners and lenders facing COVID-19-related legislation should therefore keep in mind that they may have a viable regulatory-takings claim and should seek further guidance where appropriate.

III.  Other Constitutional Challenges

A.  The Contracts Clause

Landowners and lenders may also be able to challenge state rent- and mortgage-relief legislation as violating the Contracts Clause of the U.S. Constitution when the law effectively overwrites the terms of existing agreements—for example, by reducing or suspending rent payments under the California and New York proposals—and thereby forces landowners and lenders to bear an outsized portion of the economic burden resulting from the COVID-19 pandemic. State laws that “operate[ ] as a substantial impairment of a contractual relationship” and that are not “drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose’” violate the Contracts Clause.  Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018) (internal quotation marks omitted)).  Landowners and lenders may argue that a statute permanently depriving them of all or part of their rental and mortgage payments—in addition to undermining the contractual bargain and interfering with their reasonable expectations under their rental and mortgage agreements—would exceed a reasonably necessary response to the pandemic and inappropriately shift to landowners and lenders the financial burdens of the economic interruption.  Moreover, depending on the legislation being challenged, landowners and lenders may be able to identify more reasonable alternatives that the state legislature eschewed.  For instance, if the legislation permanently deprives landowners of rental payments, it could be argued that the legislation is unreasonable, particularly in light of the fact that some other proposed bills contemplated a voucher-based system that would spread the costs of rent relief across taxpayers without undermining or altering previously entered contracts.  But to the extent the voucher system does not permit full recoupment of the lost rental payments, even a voucher or other cost-spreading measure could be subject to constitutional scrutiny if challenged by landowners. Some courts have previously upheld certain rent regulations against Contracts Clause attacks, primarily on the ground that residential leasing is a “heavily-regulated industry” and that, according to these courts, landowners therefore “cannot claim surprise that [their] relationships with certain tenants are affected by governmental action.”  Kraebel v. N.Y.C. Dep’t of Hous. Pres. & Dev., 959 F.2d 395, 403 (2d Cir. 1992).  Cases like Kraebel, however, are distinguishable on multiple grounds.  For example, Kraebel involved a rent-relief law that ultimately reimbursed landowners for any loss of expected rent payments.  959 F.2d at 398.  Some of the California and New York bills, however, appear to contemplate permanently depriving at least some landowners of the reduced or suspended rent payments.  Moreover, even if a particular landowner could anticipate regulations similar to those previously enacted by the state or locality in which the landowner’s properties are located, it could “not contemplate th[e] departure” from previous measures embodied in legislation that goes far beyond traditional limitations and requirements, including the permanent loss of their contractually expected rent payments.  West End Tenants Ass’n v. George Washington Univ., 640 A.2d 718, 735 (D.C. 1994). Thus, the Contracts Clause may offer landowners and lenders a potential avenue for challenging state COVID-19 rent-relief legislation that interferes in their ongoing contractual relationships and shifts to them the financial burdens of the pandemic’s economic interruption.

B.  The Due Process and Equal Protection Clauses

The Due Process Clause of the Fourteenth Amendment may also provide a potential ground for challenging state laws that deprive landowners and lenders of revenue.  A plaintiff asserting a substantive due process claim must prove: (1) a valid property interest and (2) that defendants “infringed on that property right in an arbitrary or irrational manner.”  Royal Crown Day Care LLC v. Dep’t of Health & Mental Hygiene of City of New York, 746 F.3d 538, 545 (2d Cir. 2014) (internal quotation marks omitted).  As with the Contracts Clause challenge, affected entities could argue that a particular rent- or mortgage-relief law arbitrarily and irrationally infringes on landowners’ and lenders’ property rights.  See, e.g., Regina Metro. Co. v. New York State Div. of Hous. & Cmty. Renewal, --- N.E.3d ---, 2020 WL 1557900 (N.Y. Apr. 2, 2020) (per curiam) (holding that retroactive extension of statute of limitations for time-barred rent-overcharge claims violated due process on rational basis review); Richardson v. City & Cty. of Honolulu, 759 F. Supp. 1477, 1494 (D. Haw. 1991) (holding that ordinance imposing maximum ceiling on renegotiated lease rents for condominiums did not rationally further the legitimate goal of reducing the cost of leasehold housing because it applied to condominiums not used for residential purposes, did not limit rates charged to sublessors, did not consider the market value of the property, and designated no government authority to oversee its application). Similarly, the Equal Protection Clause of the Fourteenth Amendment may provide another path to challenge COVID-19 rent- or mortgage-relief legislation, particularly where the proposals would place unique burdens on landowners and lenders.  The legislation could also be challenged under the corollary provisions of state constitutions.  See, e.g., Pennell v. City of San Jose, 721 P.2d 1111, 1117 (Cal. 1986) (rejecting the claim that “equal protection is . . . denied simply because some landlords may receive rents different (albeit nonconfiscatory) from those received by other landlords with similarly situated apartments,” but noting that it “might be inclined to hold such a scheme unconstitutional if the disparity in approved rents among landlords with and without hardship tenants was shown to be so great as to be characterized as arbitrary or grossly unfair”). Granted, some cases discussing the Due Process and Equal Protection Clauses in the rent-control or rent-stabilization context have concluded that the specific controls at issue in those cases were rationally related to a legitimate government purpose.  See, e.g., Pennell v. City of San Jose, 485 U.S. 1, 12-14 (1988); Harmon v. Markus, 412 F. App’x 420 (2d Cir. 2011).  But these cases did not involve anything like the proposals being discussed in response to COVID-19, including provisions that would retroactively and permanently deprive landowners of their contractually expected rent payments.  Thus, notwithstanding decisions declining to grant Due Process Clause challenges to particular rent-control measures, the COVID-19-related rent-relief legislation may be sufficiently irrational—both in its substance and in targeting landowners—to constitute violations of the Due Process and Equal Protection Clauses.

IV.  Conclusion

We cannot prejudge the constitutionality of any contemplated COVID-19 rent-relief legislation.  The analyses under the clauses of the federal and state constitutions that most readily apply to economic regulation turn on the specific features of the challenged legislation, among other case-specific considerations.  But as the nation moves through this crisis, and legislatures consider relief to those impacted by COVID-19, it bears remembering that the operations of federal, state, and local governments remain subject to constitutional scrutiny, and rent- and mortgage-relief legislation may raise significant constitutional questions in response to which affected landowners or lenders may be able to bring suit.
  [1]  See Gibson Dunn’s March 27, 2020 Client Alert, Constitutional Implications of Government Regulations and Actions in Response to the COVID-19 Pandemic, available at https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic/   [2]  Some states are considering or have already passed mortgage-forbearance legislation that may similarly impact constitutional protections afforded to lenders, as discussed in this alert.  See, e.g., DC Act 23-286 COVID-19 Response Supplemental Emergency Amendment Act of 2020 (enacted Apr. 10, 2020) (establishing a system for deferred mortgage payments); N.J. Bill A3948 (as introduced) (establishing a system for deferred mortgage payments and rent suspensions) (introduced Apr. 13, 2020).
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Litigation, Appellate, Public Policy, or other practice groups, or the following authors: Authors:  Avi Weitzman, Akiva Shapiro, Lochlan Shelfer, and Declan Conroy © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 10, 2020 |
New York Empire State Development Corporation Further Updates Guidance on Businesses Deemed Essential Under Governor Andrew Cuomo’s “New York State on PAUSE” Executive Order

Click for PDF On April 9, 2020, the New York Empire State Development Corporation (“ESD”) further updated its guidance for determining whether businesses are “essential” and therefore exempt from the in-person workforce restrictions established in Governor Cuomo’s March 20, 2020 “New York State on PAUSE” Executive Order (EO 202.8).  That March 20 order required all non-essential businesses keep 100 percent of their workforce at home.  These updates, which we review in this alert, demonstrate that ESD is continuing to evolve the breadth and depth of its guidance on what constitutes an essential business.  It is therefore critical that businesses continue to stay apprised of the latest developments. The ESD’s April 9 version of the guidance contains four primary updates to its previous guidance, which was last updated on April 8.[1]

  • First, the new guidance adds two new essential business categories—“Recreation” and “Professional services with extensive restrictions”—which together set forth social distancing and workplace restrictions regarding parks and open public spaces, legal and real estate services, and houses of worship.
  • Second, the updated guidance provides further detail on what constitutes essential construction in the context of affordable housing and the energy industry, and clarifies that essential construction also includes construction necessary to protect the health and safety of occupants of a structure as well as construction for existing projects of an essential business.
  • Third, the updated guidance incorporates new examples of essential businesses in the preexisting healthcare, manufacturing, retail, and essential services industry categories.
  • Fourth, the updated guidance broadens the list of businesses deemed non-essential and therefore prohibited from requesting a designation as an essential business under the guidance.
These four primary updates to the guidance are reviewed below in further detail.  

I.  The Updated Guidance Incorporates Two New Essential Business Categories

The updated guidance now includes two additional essential business categories:  “Recreation” and “Professional services with extensive restrictions.”  According to the guidance, recreation includes parks and other open public spaces—except for golf courses, the use of boat launches and marinas for recreational vessels, and “playgrounds and other areas of congregation where social distancing cannot be abided.” The new professional services category is largely directed to legal and real estate services, as well as houses of worship.  With respect to legal services, the guidance clarifies that lawyers may provide in-person services, but only in support of essential businesses.  Even so, the guidance recommends that such work be conducted “as remotely as possible,” while mandating that the remainder of all legal work shall be performed remotely.  With respect to real estate services, the guidance permits services necessary to complete a transfer of real property to occur in person “only to the extent legally necessary and in accordance with appropriate social distancing and cleaning/disinfecting protocols.”  Otherwise, all real estate transactions should be conducted remotely.  Finally, with respect to houses of worship, the revised guidance allows individuals to enter them only where six feet of distance can be maintained between persons.  That permission notwithstanding, the guidance cautions that individuals should not be gathering in houses of worship until the end of the COVID-19 public health emergency, and encourages religious leaders to hold virtual religious services.

II.  The Updated Guidance Provides Further Detail Concerning What Constitutes Essential Construction

The ESD’s prior guidance on construction, which Gibson Dunn reviewed in a prior alert, provided that all non-essential construction must cease, except for emergency construction such as projects “necessary to protect health and safety of the occupants” or projects for which it would be unsafe to allow them to remain incomplete.  The prior guidance also noted that essential construction included that of roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters.  And it provided that essential and non-essential emergency construction must adhere to social distancing and safety best practices, to be enforced by state and local authorities, with up to $10,000 fines for a violation.  All that remains in effect in the updated guidance. The updated guidance, however, affords new detail on what constitutes “essential” construction with respect to affordable housing and the energy industry.  Construction of affordable housing is now defined as construction work where: “either (i) a minimum 20% of the residential units are or will be deemed affordable and are or will be subject to a regulatory agreement and/or a declaration from a local, state, or federal government agency or (ii) where the project is being undertaken by, or on behalf of, a public housing authority.”  And certain construction in the energy industry is now expressly included as “essential” construction which may continue, as set forth in greater detail in the response to Question 14 of the ESD’s FAQs.[2]  The updated guidance also categorizes as essential construction that which is “necessary to protect the health and safety of occupants of a structure” and construction for “existing (i.e. currently underway) projects of an essential business.”

III.  The Updated Guidance Incorporates New Examples into Several Other Essential Business Categories

The revised guidance sets forth additional examples of essential businesses among several of the original 12 categories of businesses provided in the prior guidance and narrows the scope of one example in the financial institutions category.  These essential business categories and their new examples are set forth below.
  • Essential Health Care Operations: Emergency chiropractic services; physical therapy, prescribed by a medical professional; occupational therapy, prescribed by a medical professional.
  • Essential Manufacturing: Any parts or components necessary for essential products that are referenced within the guidance, such as sanitary and personal care products regulated by the Food and Drug Administration.
  • Essential Retail: Telecommunications to service existing customers and accounts; and delivery for orders placed remotely via phone or online at non-essential retail establishments—provided that only one employee is physically present at the business location to fulfill orders.
  • Essential Services: Marine vessel repair and marinas, but only to support government or essential commercial operations, and not for recreational purposes; landscaping, but only for maintenance or pest control and not cosmetic purposes; designing, printing, publishing and signage companies to the extent that they support essential businesses or services; remote instruction or streaming of classes from public or private schools or health/fitness centers—provided that no in-person congregate classes are permitted.
  • Financial Institutions: The prior example of “services related to financial markets” has been narrowed to exclude debt collection services.

IV.  The Updated Guidance Provides Further Examples of Businesses Deemed Non-Essential

The ESD’s updated guidance broadens the types of businesses deemed non-essential and therefore ineligible to request a designation as an essential business. The prior guidance provided that non-essential businesses included those that were previously ordered to close due to prior restrictions on gatherings with 50 or more participants, such as bars, restaurants, gyms, movie theatres, casinos, auditoriums, concerts, conferences, worship services, sporting events, and any physical fitness centers.[3] The revised guidance now also specifically enumerates certain additional businesses as “non-essential.”  These include “[a]ny indoor common portions of retail shopping malls with 100,000 or more square feet of retail space available for lease,”; “[a]ll places of public amusement, whether indoors or outdoors,” such as amusement rides, aquariums, bowling alleys, and children’s play centers, among others; and barbershops, hair salons, tattoo or piercing parlors, and related personal care services like nail technicians, and laser hair removal services.  The new restrictions further note that restaurant take-out or delivery for off-premise consumption do not fall within the scope of restaurants deemed non-essential, which are now more clearly specified as those offering dine-in restaurant or bar services.

* * *

In sum, as ESD continues to help businesses navigate the effects of Governor Cuomo’s “New York State on PAUSE” Executive Order, its guidance on what constitutes essential businesses continues evolving as to the breadth and depth of the types of business and activities covered.  Gibson Dunn will continue to track these updates and will report on important developments. Prior client alerts providing an overview of the Governor Cuomo’s “New York State on PAUSE” executive order’s in-person workforce restrictions and ESD’s guidance on essential businesses exempt from the order may be accessed here, here, and here.  As noted in Gibson Dunn’s March 24, 2020 alert, New York Attorney General Letitia James has urged employees who believe their employers to be acting in violation of Governor Cuomo’s executive order to file a complaint with the New York State Office of the Attorney General’s Labor Bureau.
[1]  The April 8 guidance removed the following sentence that was present in earlier versions:  “Houses of worship are not ordered closed however it is strongly recommended not to hold congregate services. If held, social distance must be maintained and compliance with DOH guidance, which can be found at https://coronavirus.health.ny.gov/ information-providers.” [2]  The answer to Question 14 in the ESD’s FAQs explains (among other things) that utility operations and maintenance for existing power generation, fuel supply, and “[t]ransmission and distribution infrastructure,” are examples of essential construction “necessary to respond to the COVID-19 state emergency or to provide basic human services” like food, shelter, and safety. [3] See Governor Andrew M. Cuomo, E.O. 202.3 (March 16, 2020).
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team. Mylan Denerstein – New York (+1 212.351.3850, mdenerstein@gibsondunn.com) Lauren Elliot – New York (+1 212.351.3848, lelliot@gibsondunn.com) Stella Cernak – New York (+1 212.351.3898, scernak@gibsondunn.com) Lee Crain – New York (+1 212.351.2454, lcrain@gibsondunn.com) Doran Satanove – New York (+1 212.351.4098, dsatanove@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 9, 2020 |
Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program

Click for PDF The U.S. Small Business Administration (“SBA”) recently published a memorandum (the “Memorandum”) and new Frequently Asked Questions (“FAQs”) (available here) clarifying the size standards and affiliation rules applicable to the Paycheck Protection Program (the “Program” or “PPP”).  As described in greater detail in our previous client alerts, SBA “Paycheck Protection” Loan Program Under the CARES Act, Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed, Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program, and Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, the Program provides $349 billion to help small businesses impacted by COVID-19 keep their employees on the payroll and their businesses solvent. Governing Regulations for Affiliation Borrowers of PPP loans must apply SBA’s affiliation rules as spelled out in 13 CFR § 121.301(f), which apply to SBA’s 7(a) program and were adopted for the PPP through the CARES Act.[1]  But there is a catch:  borrowers have to look at the 2019 version of § 121.301 (see 81 Fed. Reg. 41423) because Section 1102(e) of the CARES Act permanently rescinded the SBA’s February 2020 amendment to § 121.301.  SBA’s 2020 amendment would have included a “totality of the circumstances” test (as currently is part of 13 CFR § 121.103), affiliation based on a newly organized concern in the same industry under the same management, and additional bases for affiliation based on identity of interest, including common investments and economic dependence. Under the CARES Act and applicable guidance and regulations, an applicant must aggregate its own number of employees or revenue with that of all of its affiliates for the purposes of determining eligibility for a PPP loan.  The applicant is eligible if: (1) it qualifies as a small business concern as defined in section 3 of the Small Business Act, 15 U.S.C. 632; (2) it and its affiliates have 500 or fewer employees whose principal place of residence is in the United States; (3) it and its affiliates meet the SBA employee-based size or revenue standards for the industry in which they operate, (including the “alternative standard” detailed below); or (4) it is a nonprofit organization, veterans organization, or Tribal business concern as outlined in Section 1102(a)(i) of the CARES Act.[2] The applicable (2019) version of § 121.301(f) lays out four principles that may establish an affiliate relationship between a PPP borrower and another entity:  (1) equity ownership; (2) stock options, convertible securities, and agreements to merge; (3) management; and (4) identity of interest. Affiliation Based on Equity Ownership Any entity that owns or has the power to control more than 50 percent of the borrower’s voting equity is considered an affiliate of the borrower.[3]  Further, SBA will deem that a minority shareholder exercises “negative control” if it has the ability, under the borrower’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.[4]  (See below.)  If no such entity owns 50 percent of the equity, SBA will deem the Board of Directors, President, or CEO (or other officers, managing members, or partners who control the management of the concern) to be in control of the borrower.[5] Affiliation Based on Stock Options, Convertible Securities, and Agreements to Merge For purposes of determining whether an entity owns 50 percent of the borrower, SBA will consider stock options, convertible securities, and agreements to merge as though the rights granted have been exercised.[6] Affiliation Based on Management Affiliation arises where the President or CEO (or other officers, managing members, or partners who control the management of the concern) of the applicant also controls the management of one or more other concerns.  Affiliation also arises where a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one of more other concerns.[7]  Thus far, SBA guidance does not further elaborate on what constitutes control over the Board of Directors, so we recommend that applicants disclose their interpretation of ”control,” in light of their own facts, in an addendum to the PPP loan application. Additionally, affiliation arises where a single individual, concern, or entity controls management of the borrower through a management agreement.[8] Affiliation Based on Identity of Interest Where close relatives share identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area), those concerns are affiliated.[9] Waivers to Affiliation Rules The CARES Act waives SBA’s affiliation rules for an applicant’s eligibility for a PPP loan for:  (1) any business concern with not more than 500 employees that is assigned a North American Industry Classification System (“NAICS”) code beginning with 72;[10] (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958. The SBA’s existing affiliation exclusions, including the exclusions under 13 CFR 121.103(b)(2),  also apply to the PPP.  These exclusions include:  (1) business concerns owned in whole or substantial part by investment companies licensed, or development companies qualifying, under the Small Business Investment Act of 1958 are not considered affiliates of such investment companies or development companies; (2) business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (“PEO”) are not affiliated with the leasing company or PEO solely on the basis of a leasing agreement; and (3) additional exclusions delineated in 13 CFR § 121.103(b)(2).[11] Negative Control As discussed above, negative control over a concern exists when a “minority shareholder . . . has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.”[12]  The Memorandum notes that there is SBA Office of Hearings and Appeals’ (“OHA”) case law “interpreting the rule.”[13]  We would note that OHA case law on negative control interprets 13 CFR § 121.103, not § 121.301.  That said, § 121.103(a)(3) states that negative control exists where a minority shareholder “has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders,” which is language identical to § 121.301(f)(1).  Hence, while the SBA’s interim final rule on affiliations states that “the detailed affiliation standards contained in section 121.103 currently do not apply to PPP borrowers,” OHA precedents interpreting negative control under the aforementioned language found in both § 121.103 and § 121.301 is instructive and should be viewed by applicants as likely controlling.[14] SBA Office of Hearings and Appeals Case Law OHA case law describes two sets of actions for the purposes of determining whether a minority shareholder can exercise negative control over an entity: “extraordinary” actions and “essential” actions.  “Extraordinary” actions are actions that a minority shareholder may be given the power to block in order to protect its investment, but do not interfere with the day-to-day operations of the company.[15]  OHA case law indicates that the ability to block extraordinary actions will not result in a finding of negative control.[16]  These actions include:

  • Amending the bylaws;[17]
  • Issuing additional capital stock;[18]
  • Changing the amount or character of the concern’s contribution to capital;[19]
  • Entering into any substantially different business;[20]
  • Changing the character or business of the concern;[21]
  • Committing any act that would make it impossible to carry on ordinary business;[22]
  • Selling all or substantially all of a firm’s assets;[23]
  • Mortgaging or encumbering all or substantially all of a concern’s assets;[24]
  • Committing any act in contravention of the operating agreement;[25]
  • Approving the addition of new members or withdrawing old members;[26]
  • Increasing or decreasing the size of the Board;[27]
  • Increasing or decreasing the number of authorized interests;[28]
  • Reclassifying interests;[29] or
  • Filing for bankruptcy.[30]
OHA case law also indicates that, if a minority owner has the power to block actions that are “essential to the daily operation of the company,” the minority owner will be found to have negative control over the company.  These essential actions include:
  • Controlling the budget;[31]
  • Hiring and firing officers;[32]
  • Setting employee compensation;[33]
  • Borrowing money or creating debt;[34]
  • Encumbering assets;[35]
  • Paying dividends;[36]
  • Purchasing equipment;[37]
  • Making changes to a budget;[38]
  • Incurring expenses over a threshold limit;[39] or
  • Amending or terminating leases.[40]
If a minority shareholder holds negative control over the PPP loan applicant, the borrower will be considered an affiliate of the minority shareholder and an affiliate of any concern that the minority shareholder controls. Waiver of Negative Control Minority shareholders may irrevocably waive or relinquish negative control over the applicant in order to avoid affiliation, so long as affiliation does not exist under a different provision.[41]  While SBA/Treasury FAQs refer to waiving “existing rights specified in 13 CFR 121.301(f)(1),” the application of OHA’s negative control precedent to § 121.301(f) suggests that minority shareholders may also irrevocably waive rights that OHA precedent recognizes as conferring negative control to avoid affiliation.[42] PPP Loan FAQs In addition to the Memorandum and FAQs related to affiliation, the recently-issued FAQs provided the following new information regarding the PPP:
  • Eligibility.[43] Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry.  A business can also qualify for the PPP as a small business concern if it and its affiliates met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.[44]
  • Seasonal Businesses.[45] In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.
  • Professional Employer Organizations.[46] SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (“EIN”) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation.  Relevant information from a Schedule R (“Form 941”), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes.  In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.
  • Lender Forms.[47] Lenders may use their own online systems and a form they establish that asks for the same information (using the same language) as the Borrower Application Form. Lenders are still required to send the data to SBA using SBA’s interface.
  • Number of Employees.[48] Borrowers may use their average employment over the previous 12 months or from calendar year 2019 (or the period between February 15, 2019, or March 1, 2019, and June 30, 2019 for seasonal employers; or the period January 1, 2020 through February 29, 2020 for borrowers not in business from February 15, 2019 to June 30, 2019) to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
  • Accounting for Federal Taxes.[49] Payroll costs are calculated on a gross basis without regard to (e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (“FICA”) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.  For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs.  The employee would receive $3,500, and $500 would be paid to the federal government.  However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.[50]
  • Updated Applications.[51] Borrowers and lenders who have already submitted applications may rely on the laws, rules, and guidance available to them at the time of the relevant application.  If an application has not yet been processed, borrowers may revise their application based on the guidance in the FAQs.
  • FinCen Rule CDD.[52] If the PPP loan is being made to an existing customer of the lender and the necessary information was already verified, the lender does not need to re-verify the information. Additionally, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.
  • Promissory Notes.[53] Lenders may use their own promissory note or an SBA form of promissory note.
  • Eight-Week Forgiveness Period.[54] For the purposes of PPP loan forgiveness, the borrower must calculate its payroll costs over an eight-week period.  That eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.  The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
The FAQs also clarify certain provisions of the guidance already released by the SBA and Treasury Department.
  • Application Certification.
    • Since borrowers attest to the accuracy of their calculation of payroll costs on the application, lenders are only required to conduct a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents. As stated in the PPP Interim Final Rule, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.  If the lender identifies errors in the borrower’s calculation or a material lack of substantiation in the borrower’s supporting documents, the FAQs state that the lender should work with the borrower to remedy the issue.[55]
    • It is the responsibility of the borrower to determine which entities (if any) are the borrower’s affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.[56]
    • Lenders may accept and rely on signatures from a single individual who is authorized to sign on behalf of the borrower. Borrowers should be aware that an individual’s signature is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20 percent or more of the applicant’s equity, contained in the application.[57]
  • Eligibility.[58] Borrowers are not required to qualify as a small business concern as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP.  The FAQs state that in addition to small business concerns, a business is eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States, or meets the SBA employee-based size or revenue standards for the industry in which it operates, or the alternative standard described above.  If the applicant is a tax-exempt nonprofit organization, a tax-exempt veterans organization, or a Tribal business concern with 500 or fewer employees whose principal place of residence is in the United States, or meets the SBA employees based size standards for the industry in which it operates, it is also eligible for a PPP loan.[59]
  • Payroll Cost Calculations.
    • The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits.[60]
    • Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. Payroll costs do not include qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.[61]
  • Felonies.[62] Businesses are only ineligible if an owner of 20 percent or more of the equity of the applicant is presently incarcerated, on probation, on parole; subject to an indictment, criminal information arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation (including probation before judgment).
  • Independent Contractors.[63] Because independent contractors and sole proprietors are themselves eligible for a PPP loan, eligible borrowers should not include any amounts paid to independent contractors or sole proprietors when calculating the borrower’s payroll costs.
____________________    [1]   PPP Loan FAQs, No. 5.  While § 121.103 governs the SBA’s general principles of affiliation, § 121.103(a)(8) states that “applicants in SBA’s Business Loan [including the PPP], Disaster Loan, and Surety Bond Guarantee Programs” are to use “the size standards and bases for affiliation . . . set forth in § 121.301.”    [2]   PPP Loan FAQs, No. 3.  Our understanding of FAQ No. 3 is that it does not expand eligibility beyond the basic eligibility requirements for all applicants for SBA business loans outlined in 13 CFR § 120.100, but we await further guidance clarifying this point.    [3]   13 CFR § 121.301(f)(1).    [4]   Id.    [5]   Id.    [6]   13 CFR § 121.301(f)(2).    [7]   13 CFR § 121.301(f)(3).    [8]   Id.    [9]   13 CFR 121.301(f)(4). [10]   Industries with an NAICS code beginning with 72 are considered “accommodation and food services” industries, which include hotels, casinos, caterers, restaurants, and drinking places (alcoholic beverages). [11]   These other exclusions include:  (1) business concerns owned and controlled by Indian Tribes, or other Native American organizations are not affiliates of such entities; (2) business concerns owned and controlled by Indian Tribes, or other Native American organizations are not affiliates of the affiliates such entities; (3) Business concerns which are part of an SBA approved pool of concerns for a joint program of research and development or for defense production as authorized by the Small Business Act are not affiliates of one another because of the pool; (4) Business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (“PEO”) are not affiliated with the leasing company or PEO solely on the basis of a leasing agreement; (5) For financial, management or technical assistance under the Small Business Investment Act of 1958, as amended, an applicant is not affiliated with investors including venture capital operating companies, employee benefit or pension plans, charitable trusts, foundations or endowments, and other investment companies; (6) firms with mentor-protégé agreements are not affiliates by virtue of the agreement; and (7) members of a small agricultural cooperative are not affiliates with each other by virtue of the cooperative. [12]   13 CFR § 121.301(f)(1).  Section 121.103(a)(3) also states that “negative control includes . . . instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.” [13]   Memorandum, pg. 6. [14]   § 121.301 does not include a “totality of the circumstances” affiliation test, while § 121.103 does.  To the extent negative control is found under the totality of the circumstances and not under affiliation by ownership under § 121.301(f)(1), OHA precedent would not control. [15]   Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (collecting cases). [16]   Id. [17]   Appeal of Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012). [18]   Id. [19]   Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011). [20]   Appeal of Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012). [21]   Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)). [22]   Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011). [23]   Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011); Size Appeal of Dooleymack Government Contracting, LLC, SBA No. SIZ-5086 (2009)). [24]   Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)). [25]   Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)). [26]   Size Appeal of DHS Systems, LLC, SBA No. SIZ-5211 (2011). [27]   Id. [28]   Id. [29]   Id. [30]   Size Appeal of Dooleymack Government Contracting, LLC, SBA No. SIZ-5086 (2009). [31]   Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012); DHS Systems, LLC, SBA No. SIZ-5211 (2011). [32]   Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); DHS Systems, LLC, SBA No. SIZ-5211 (2011). [33]   Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012); DHS Systems, LLC, SBA No. SIZ-5211 (2011). [34]   OHA found negative control even when the minority shareholder could only veto the creation of debt over a certain dollar threshold.  See Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017) (citing BR Construction, LLC, SBA No. SIZ-5303 (2011). [35]   Carntribe-Clement, SBA No. SIZ-5357 (2012). [36]   Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement, SBA No. SIZ-5357 (2012); Size Appeal of Eagle Pharmaceuticals, Inc., SBA No. SIZ-5023 (2009). [37]   Carntribe-Clement, SBA No. SIZ-5357 (2012). [38]   Id.BR Construction, LLC, SBA No. SIZ-5303 (2011). [39]   BR Construction, LLC, SBA No. SIZ-5303 (2011). [40]   Carntribe-Clement, SBA No. SIZ-5357 (2012). [41]   PPP Loan FAQs, No. 6. [42]   Id. [43]   PPP Loan FAQs, No. 2. [44]   We do not understand this provision to expand the eligibility of businesses under the PPP beyond the CARES Act or other guidance released by the SBA. [45]   PPP Loan FAQs, No. 9. [46]   PPP Loan FAQs, No. 10. [47]   PPP Loan FAQs, No. 13. [48]   PPP Loan FAQs, No. 14. [49]   PPP Loan FAQs, No. 16. [50]   The definition of “payroll costs” in the CARES Act, excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020.  As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.  Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.  Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period. [51]   PPP Loan FAQs, No. 17. [52]   PPP Loan FAQs, No. 18. [53]   PPP Loan FAQs, No. 19. [54]   PPP Loan FAQs, No. 20. [55]   PPP Loan FAQs, No. 1. [56]   PPP Loan FAQs, No. 4. [57]   PPP Loan FAQs, No. 11. [58]   PPP Loan FAQs, No. 3. [59]   As noted above, we do not understand this FAQ to expand eligibility beyond the basic eligibility requirements for all applicants for SBA business loans outlined in 13 CFR § 120.100, but we await additional guidance on this point. [60]   PPP Loan FAQs, No. 7. [61]   PPP Loan FAQs, No. 8. [62]   PPP Loan FAQs, No. 12. [63]   PPP Loan FAQs, No. 15.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Authors:  Michael D. Bopp, Roscoe Jones, Jr.*, Alisa Babitz, Courtney Brown, Alexander Orr, William Lawrence and Samantha Ostrom * Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.