The Little Darlings strip club in Flint, Michigan, was forced to turn off its stage lights and close its doors by the state’s stay-at-home order, but it failed to get a federal small-business emergency loan aimed at softening the financial blow from COVID-19.
Owners of Little Darlings, along with clubs such as Baby Dolls Topless Saloon in Dallas and Cheerleaders Gentlemen’s Club in Philadelphia, thought it was wrong that they were excluded from the more than $600 billion Paycheck Protection Program (PPP) created by Congress and the Trump administration to try to save businesses and jobs during the coronavirus crisis.
So the strip clubs sued the Small Business Administration (SBA). And a federal judge in Wisconsin this week sided with the strip clubs, granting a preliminary injunction to force the government to issue loans to four strip clubs, which government lawyers quickly appealed. Another judge in Michigan is expected to issue his decision in a separate case soon.
SBA rules have long denied loans to businesses that “present live performances of a prurient sexual nature.” Until COVID-19, it didn’t really matter.
“Nobody cared,” said Bradley Shafer, an attorney in Lansing, Michigan, representing about 40 strip clubs and adult-oriented companies that taken together are seeking about $10 million in PPP loans. “They were making money. They didn’t need SBA loans. Now, it’s a totally different world. These are dire times.”
The emergency loan program — hastily hatched and riddled with problems — has been hit with a series of lawsuits in recent weeks from industries feeling left out.
Strip clubs sued.
So did a group of cleaning crews.
Then payday-loan companies.
These industries had different reasons for going to court, but all wanted to take part in an unprecedented spending program that has doled out 3.8 million loans in just a few weeks. The loans are forgivable if companies spend most of the funds on retaining or rehiring employees and meet other conditions.
An SBA spokesman declined to comment on the suits, saying the agency doesn’t discuss pending litigation.
But the PPP rules aren’t written in stone, judging from past practice.
The Trump administration last month eliminated a long-standing rule that would’ve prevented small casinos from getting the emergency loans.
The agency is still issuing loans from the Paycheck Protection Program — which ran into problems almost right away after an initial round of $349 billion quickly evaporated, soaked up by some larger chains and publicly traded firms. The Treasury Department has called on such firms to return their loans and extended a Thursday deadline to May 14. More than $300 million has already been returned.
A second $322 billion round of loans launched late last month. The average loan is for about $80,000.
But the money is expected to move fast, leading companies to ask courts to make quick rulings on their objections.
“We are all concerned that the government is just going to run out the clock,” Shafer said.
The owners of Jani-King cleaning companies went to court to argue that each of their businesses are franchises that ought to qualify separately for small-business funds even though they are not listed on the agency’s franchise list.
The SBA’s rejection of their loans threatens the entire network of companies operating in Alabama, Louisiana, Ohio, Mississippi and Washington, D.C., “with irreparable harm,” the plaintiffs argued in court filings in a District of Columbia federal court.
Government attorneys responded in court filings that Jani-King had cast aside SBA rules in making their claims, lacked standing to bring them in court and “have not provided the minimum evidence needed” to support their arguments.
Other companies wanted to keep the loans they’d already received.
A network of small Southern California tech firms filed a federal lawsuit Monday seeking to hold onto its loans even after the Trump administration warned that recipients should not accept the money if they have access to other capital.
San Clemente-based software firm Zumasys, and two related IT companies, together employ fewer than 70 people and received a total of around $750,000 in PPP funds. They did so, according to the companies’ attorney, with the understanding that eligibility wasn’t restricted to companies that couldn’t get loans elsewhere.
When Treasury and SBA later changed the guidelines, it forced companies that had already applied to face “a new requirement that’s not part of the Cares Act,” said Mona Hanna, an attorney in Irvine, California.
“They’ve created confusion. They have issued what we consider an underground violation,” Hanna said.
A federal judge rejected the claim by the American Association of Political Consultants that it was wrong that the PPP loan program excluded companies “primarily engaged in political or lobbying activities.” That exclusion matched SBA guidelines for its regular lending programs.
In rejecting the claim, the judge acknowledged, “These are trying times. Businesses and individuals of all trades are suffering from the detrimental effects of this pandemic.”
Late last month, the owner of 22 payday-loan and check-cashing stores in California sued the SBA after its request for a $644,000 loan was denied. The SBA said in a court filing that its own rules have long prohibited loans to payday lenders.
The first judge to take a shot at the SBA regulations was U.S. District Judge Lynn Adelman, who last week issued the preliminary injection to stop the agency from rejecting the loans for four strip clubs in Wisconsin operating under the name Silk Exotic Gentlemen’s Club.
“The government has singled (strip clubs) out for unfavorable treatment based solely on the content of their speech,” Adelman said.
U.S. attorneys appealed her ruling.
In the Michigan case, U.S. District Judge Matthew Leitman held a second hearing Tuesday on whether to grant a temporary restraining order in his case.
“I don’t think I’ve ever reconvened a hearing to ask more questions,” the judge said over the Zoom video conference feed that was substituting for his regular courtroom. “This case is one I’m really wrestling with.”
Leitman pressed attorneys on both sides about the SBA’s “prurient sexual nature” exclusion — whether it was too vague and if it fit what courts normally considered beyond constitutional protections.
The judge noted that Congress created the PPP program with broad eligibility requirements. Then he said he’d have a decision soon, recognizing that the federal money was going quick.