David K. Taylor, Bradley Arant Boult Cummings, Nashville, TN
dtaylor@bradley.com
615-252-2396

Lawyer’s Advocacy in Arbitrations: No. 2 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers MakeThis post is a continuation of the Top 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during, and after arbitrations in which I served as the arbitrator. As stated in the previous post, there are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is therefore essential but many times does not happen.

No. 2: Not Performing Due Diligence on Potential Arbitrator(s)

This post applies not to privately administered arbitrations where the parties attempt to agree on an arbitrator, but to the standard situation (whether through the American Arbitration Association or some other ADR organization) in which counsel are sent a “list” of possible arbitrators and their biographical information. After the arbitration demand is filed, counsel are provided with the list from which to select the arbitrator or arbitrators who will decide the case. The selection process is like selecting a jury in a courtroom trial: Cross off the unacceptable arbitrators; list the rest in order of preference; send the list back to the case administrator (without copying the other counsel); and soon thereafter you are assigned an arbitrator or panel of arbitrators.

How best should you handle this process? Do you review just the information, send to your client, and then start crossing off names? ABSOLUTELY NOT. This is the person who will render a final, binding decision for your client. If possible, you should research beyond the provided bios. Remember, the purpose of the bio is to get selected to serve (and therefore get paid) and not show any preference or bias. You want someone who will “call balls and strikes,” but it is amazing how much more information you can obtain by spending an hour on the phone or sending email inquiries. Proposed arbitrators are supposed to disclose all conflicts, but you should search for more. The more information you can get the better decisions you can make. As an example, you may find out that the arbitrator allows all discovery, including depositions, when you may not want full blown discovery. You may uncover a potential bias with opposing counsel. Would you want to know that the arbitrator has numerous cases as a lawyer with not just the opposing counsel but her law firm? Go to websites (especially for the lawyers). Go to your sources, your colleagues, especially if the proposed arbitrators are from different states, and start asking questions. Finally, when you are assigned your arbitrator, start the process again. Find some colleague that has had that person serve as an arbitrator and identify preferences. That arbitrator may, for instance, have a real focus on proving up damages or is willing/unwilling to issue preliminary substantive rulings.

The primary point is this: Your client will rely on you to make recommendations for arbitrators. While you can’t tell the client that this or that proposed arbitrator will rule in your favor (just as you cannot with a judge), by going through an exhaustive selection investigatory process you can at least be as informed as possible. So win or lose, that’s providing good service and advice.

SBA Issues Continued Guidance on PPP LoansOn April 7, 2020, the Small Business Administration (SBA) issued additional guidance on the Paycheck Protection Program (PPP) in the form of answers to frequently asked questions about the PPP. According to the new guidance, actions taken by lenders or borrowers that conform to the guidance, the SBA’s Interim Final Rule, and any subsequent rules, will not be challenged by the U.S. government. However, because the guidance “does not carry the force and effect of law,” businesses should be cautious of over-reliance on this declaration. This update summarizes some of the most important information in the guidance related to borrower eligibility, “affiliation” issues and the calculation of payroll costs. Additional information on the PPP has been summarized in a recent blog.

Clarification of Eligibility Requirements

  • Applicants with more than 500 employees are eligible borrowers under the PPP if they meet the definition of a “small business concern” under the employee-based or revenue-based size standards set by the SBA. Applicants may also qualify for a PPP loan under the “alternative size standard” test, which requires that an applicant have a maximum tangible net worth of no more than $15 million and average net income after federal income taxes of no more than $5 million for two full fiscal years preceding the date of application.
  • Certain entities other than small business concerns are eligible for loans. Applicants must have 500 or fewer employees who principally reside in the United States or must meet the SBA employee-based size standards for the industry in which an applicant operates. These rules equally apply to 501(c)(3) non-profit organizations, 501(c)(19) veterans’ organizations, and SBA designated tribal business concerns.

Application of Affiliation Rules

  • Applicants must apply the “affiliation” rules discussed in the SBA’s Interim Final Rule on Affiliation and must certify eligibility on the loan application. Lenders may rely on an applicant’s certification of its affiliation status without further inquiry.
  • Importantly, the new guidance indicates that if a minority shareholder irrevocably waives or relinquishes existing rights to control the business or block action by the board of directors or shareholders then the minority shareholder is no longer an affiliate of the business (assuming no other relationship that triggers the affiliation rules).

Eligibility and Payroll Calculations for Seasonal Businesses

  • Seasonal businesses that were not in operation on February 15, 2020, may still be eligible if the businesses were in operation for an eight-week period between February 15, 2019, and June 30, 2019.
  • Seasonal businesses may determine average monthly payroll costs using data from February 15, 2019, or March 1, 2019, and June 30, 2019. If the applicant was not in business during this time, then average monthly payroll costs between January 1, 2020, through February 29, 2020, may be used.

Employee Numbers Calculation

  • For the purposes of applying an employee-based size standard, applicants may use the SBA’s calculation of the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application “or from calendar year 2019.” If a business has been operational for less than 12 months, then all months the business has operated should be used for this calculation. (For seasonal businesses, applicants may use the periods described above in calculating the average).

Calculating Payroll Costs

  • Applicants, not lenders, are responsible for accurately calculating payroll costs and determining the applicability of the SBA’s affiliation rules. While lenders must “perform a good faith review, in a reasonable time,” the “level of diligence by a lender should be informed by the quality of supporting documents supplied by the [applicant].” If errors are identified in an applicant’s payroll costs calculation, the guidance states that the lender should work with the applicant to fix the error. That said, to minizine risk and delay, applicants should ensure in the first instance that submitted payroll information is complete and accurate.
  • Payroll costs can be calculated using aggregate payroll costs from either the previous 12 months or from calendar year 2019 (see above for seasonal businesses).
  • When calculating payroll costs, the exclusion of an employee salary that is greater than $100,000 annually applies only to cash compensation and not to non-cash benefits such as contributions to retirement or defined-benefit plans, payments for group healthcare coverage, including insurance premiums, or state and local taxes.
  • Employee vacation, parental, family, medical and sick leave are all included in payroll costs. But qualified sick and family leave wages for which a credit is allowed under the CARES Act are not included.
  • Borrowers that utilize third-party payroll providers or Professional Employer Organizations (PEOs) can rely on payroll documentation provided by these providers if the documents indicate the amount of wages and payroll taxes reported to the IRS.

Finally, applicants who have already submitted, and lenders that have already approved, a loan application based on the SBA’s April 2, 2020, Interim Final Rule do not need to take any further action based on this updated guidance. Applicants may, however, revise applications based on clarifications provided in the guidance if an application has not yet been processed.

Once an applicant’s loan is approved, a lender must make a first disbursement of loan funds no later than ten days after the loan approval date. Thereafter, loan forgiveness eligibility is determined based on a borrower’s payroll costs during an eight-week period that begins to run on the date of the first loan disbursement.

The SBA will continue to update this guidance with answers to other frequently asked questions. Bradley will monitor the SBA’s updates along with other developments related to the PPP or CARES Act.

If you have any questions about the PPP or any related issues, please feel free to contact Aron Beezley, Elizabeth Boone, Frederic Smith, or Alex Thrasher.

What Small Businesses Need to Know about New PPP GuidanceLast week, the Small Business Administration (SBA) published its Interim Final Rule providing formal guidance on the implementation of the Paycheck Protection Program (PPP) authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the PPP, the SBA is authorized to guarantee a total of $349 billion in loans through June 30, 2020.  PPP loans will be guaranteed at 100% and the full principal amount of the loans, plus accrued interest, may be eligible for forgiveness. This article provides a summary of important information contained in the Rule that potential applicants may find useful.

Who Is Eligible?

  • For the period of February 15 through June 30, 2020, in addition to “small” business concerns, any business concern, nonprofit organization, veterans organization, or tribal business concern can receive a loan of as much as $10 million under this program if the concern or organization employs 500 or fewer employees, or a higher number if that higher number is permitted under the SBA size standards. In other words, a concern or organization can qualify for a 7(a) loan either if it is already considered “small,” as defined by the SBA’s size standards using the employee or annual receipts cap dictated by the concern’s or organization’s specific North American Industry Classification System (NAICS) code, or a concern or organization can qualify if it has 500 or fewer employees.
  • Individuals operating as sole proprietorships, independent contractors, or eligible self-employed individuals that were in operation on February 15, 2020 are eligible.
  • The following are ineligible under the PPP: Household employers; owners who own 20% or more of the equity of an applicant and are incarcerated, on probation, or parole, are presently subject to an indictment, criminal information, arraignment, or other means of bringing formal charges, or have been convicted of a felony within the last five years; and those who have obtained a direct or guaranteed loan from the SBA or another federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
  • An eligible borrower that is granted a PPP loan may not apply for another PPP loan and the SBA cautions that “if you apply for a PPP loan you should consider applying for the maximum amount.”

With respect to “affiliation” rules, the Rule references the requirements at 13 CFR Sec. 121.103 and 121.301 and states that additional guidance will be forthcoming. On April 3, 2020, the SBA then issued additional guidance regarding the application of certain affiliation rules applicable to the PPP. Notably, this additional guidance states that “qualified faith-based organizations” are exempt from the SBA’s affiliation rules “where the application of the affiliation rules would substantially burden those organizations’ religious exercise.”

How Much Can Be Borrowed?

  • The PPP authorizes loans up to $10 million as determined by a payroll-based formula.
  • Under the payroll-based formula, an applicant must aggregate its payroll costs from the last 12 months for employees whose principal place of residence is the United States. Then, an applicant must subtract compensation paid to any employees, independent contractors, or sole proprietor in excess of an annual salary of $100,000. An applicant can use the following formula to determine the eligible loan amount: (Reduced Aggregate Payroll / 12) x 2.5 = Eligible Amount. (If an applicant received relief under the Economic Injury Disaster Loan (EIDL) program from January 31 to April 3, 2020, an additional adjustment may be required).
  • “Payroll costs” are defined as “compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent . . . ; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earning from self-employment or similar compensation.” However, the Rule indicates that payments to independent contractors may not be included in “payroll costs.” This requirement appears to be inconsistent with the CARES Act, and further clarification on this issue will be required from the SBA.
  • The Rule excludes from the meaning of “payroll costs”:
    • Compensation of employees residing outside the U.S.;
    • Compensation of individual employees in excess of an annual salary of $100,000;
    • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
    • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
    • Independent contractors do not count as employees for purposes of PPP loan calculations.

What Are the Loan Terms?

  • There is no up-front fee payable to the SBA by the borrower, and no collateral or personal guarantees will be required to obtain a loan.
  • The administrator determined that the interest rate on PPP loans will be 1%.
  • PPP loans mature in two years, which was determined to be sufficient “in light of the temporary economic dislocations caused by the coronavirus.”
  • Loan payments must be made beginning six months following the loan disbursement date; however, interest will continue to accrue during the six-month deferment period.
  • The loan may be forgiven up to the full principal amount plus accrued interest if the loan is used for the limited purposes prescribed in the Rule.

For What Purposes May the Loan Proceeds Be Used to Be Eligible for Loan Forgiveness?

  • Most importantly, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” The Rule indicates that “the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.” This determination is not necessarily consistent with the text of the PPP in the CARES Act, and it is not clear whether the administrator has the authority to make this determination.
  • Authorized uses of the loan proceeds include payroll costs; health insurance premiums and costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave; mortgage interest payments; rent payments; utility payment; interest payments on any other debt obligations that were incurred before February 15; and refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020.
  • The borrower must document how loan proceeds are used for payroll costs in order to determine the amount of forgiveness.
  • Loan proceeds used for unauthorized purposes must be repaid. If a borrower knowingly uses funds for unauthorized purposes, the Rule warns that the borrower may be subject to additional liability for charges such as fraud and the “SBA will have recourse against [a] shareholder, member, or partner for the unauthorized use” of loan proceeds.

To eliminate the risk that some or all of PPP loan proceeds will not be forgiven, borrowers will need to be careful to monitor use of the funds and maintain good documentation accounting for expenditure of the loan proceeds. Although use of funds is permitted for the specific non-payroll expenses mentioned above, the SBA intends to cap forgiveness of those amounts at 25% of the forgivable amount. If the cap is later determined to be invalid or additional funds are made available to support the program, borrowers may not have to worry about this limitation, but, because of the current uncertainty, borrowers should plan accordingly.

How Does an Applicant Apply?

In addition to the guidance provided in the Rule, the SBA has issued the PPP loan application.  Lenders started accepting applications for PPP loans to small business concerns and sole proprietorships on April 3, 2020. Applications for independent contractors and self-employed individuals will be accepted beginning April 10, 2020. The PPP loan application can be accessed at here.

Applicants may wish to contact their preferred financial institution directly to determine whether PPP loans are offered, but the SBA’s website provides a platform to identify nearby eligible lenders. The tool is available here.

Closing Comments

While the PPP and CARES Act offer welcome relief to small businesses, the SBA’s Final Interim Rule on implementation of the PPP shows the complexities involved in actually obtaining that relief. Applicants and borrowers must stay mindful of the limitations imposed on the use of the loan proceeds and the potential consequences for violating these restrictions. Additionally, some small businesses may face nuanced affiliation issues that delay submission of a loan application or slow the loan approval process.

If you have any questions about the SBA’s Final Interim Rule on the Paycheck Protection Program or any related issues, please do not hesitate to contact Aron Beezley, Frederic Smith, Elizabeth Boone, or Alex Thrasher.