Who Decides Whether Your PPP Loan is “Forgiven” and What If They are Wrong?

The Paycheck Protection Program (“PPP”), which is currently only one month old, has been and remains a source of confusion, frustration, disappointment, worry, relief, envy, and bad public relations. Litigation has already occurred between borrowers and banks in several different contexts. An additional context is about to arrive.

The forthcoming litigation will involve the critical issue of whether a borrower’s PPP loan is “forgiven.” Effectively, a forgiven PPP loan is a grant. There’s a big difference between a $500,000 loan and a $500,000 grant.

So who decides whether the PPP loan is forgiven? The bank.

The CARES Act spans hundreds of pages. One lone sentence in the Act renders the bank solely responsible for making the determination of forgiveness: “Not later than 60 days after the date on which a lender receives an application for loan forgiveness under this section from an eligible recipient, the lender shall issue a decision on the [sic] an application.” See Section 1106(g) of the CARES Act (typographical error in original). [For the critics among us, and especially those critics with a sense of irony, it is just too much that one of the most important sentences in the lengthy CARES Act contains an obvious typographical error!]

What happens if the bank decides against forgiveness, but the borrower disagrees? In a word: Litigation. In a sentence: Litigation between the bank and the borrower, and probably not litigation between the borrower and the government, at least not at this initial stage of the forgiveness determination if the bank holds the debt.

The litigation between the borrower and the bank will take different forms. In some instances, the borrower might sue the bank in a proactive effort to obtain a court ruling that the bank misapplied the CARES Act or the corresponding SBA Rules; in such a case, the borrower will probably seek a declaratory judgment. In other instances, the bank might sue the borrower if the borrower fails to repay the unforgiven amount of the PPP loan; in such a case, the borrower will probably raise an affirmative defense that the bank failed to determine the loan was forgivable. These are just two examples. Other scenarios of forgiveness litigation are likely.

The SBA is continuing to issue guidance on various issues associated with the PPP loan process. It is too early to say how much litigation might be on the horizon regarding the issue of loan forgiveness. It is also too early to identify with any specificity what issues will dominate that litigation. However, there is little doubt that we will see “forgiveness” disagreements between banks and borrowers that will end up in court.