Attorneys in a Texas firm took on an administrative appeal at the Small Business Administration and obtained a $10 million forgiveness of a Paycheck Protection Program loan for a California-based client.
This type of SBA loan was created at the outset of the COVID-19 pandemic to help companies keep staff on payroll and was intended to be forgiven if borrowers complied with the staffing requirements.
The Munsch Hardt firm created a COVID-19 business response team to assist businesses with the vagaries of the rapidly changing business environment during that period.
Most of the loans were forgiven in the ordinary course of forgiveness request reviews, said David Roth, a shareholder at the Houston office for Munsch Hardt. In some cases, however, clients had to ask Munsch Hardt for help.
In the case of a California textile manufacturer, which Roth declined to identify by name, they received a denial and demand to repay a $10 million loan obtained in 2020, plus interest, he said.
“My partner, Jeff Dunn is a very active banking and finance lawyer. The company had found him through a referral, through one of the banking associations he belongs to,” Roth said.
Munsch Hardt shareholder Susan Sample also worked the case.
Prior to retaining Munsch Hardt’s services, the company began the forgiveness process in mid-2021 and was notified of the denial in October. Dunn was contacted shortly after.
“We looked at all that they had submitted and all the correspondence and it looked to us that it was very possible the SBA just misunderstood why they should have qualified,” Roth said.
The Munch Hardt attorneys were convinced that, after accounting for the client’s corporate structure, the SBA had applied the wrong test in its initial review. They filed an appeal Jan. 19, 2022.
One threshold for qualifying for forgiveness was that the business have less than 500 employees, but the client had slightly more. Munsch Hardt argued that the number of employees wasn’t relevant in this case.
“What mattered was the gross revenue and net assets. Our client qualified under that last test. We believed the SBA mistakenly applied the 500-employee test,” he said.
What happened next, Roth emphasized, is what could make the strategy used helpful to others.
“Generally, there are not many appeals processes being publicly discussed right now. We sort of had to be creative and create a process within the bounds of SBA procedure,” he said.
Typically, administrative staff handle the review and any appeal ends up in the hands of an administrative judge. An SBA regional counsel is not normally involved until the actual appellate hearing.
They decided to reach out to SBA’s regional counsel, Kelle Acock, prior to the administrative hearing.
The SBA has no prescribed method for having a dialogue with its counsel outside the appeals process, but Acock was willing to listen, he said. The Munsch Hardt attorneys walked through their reasons for a reversal.
“Ultimately, this lawyer at the SBA would have been the one who would’ve had to defend their position. But she didn’t have the authority to just withdraw the forgiveness denial, so there are two arms of the SBA that we were dealing with,” Roth said.
The appeal never got heard by the administrative judge because communication between SBA’s counsel and the loan review staff led to the agency changing its position.
By using this dual track process, Roth said it gave the SBA a way to get to the right decision without being forced into an all or nothing process before an administrative judge. In communicating tactfully, both with SBA counsel and staff, the attorneys recognized the human factor.
“Nobody wants to be wrong, Roth said. “And everybody wants to do the right thing.”
To view the full article, click here.