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Financial Services Law Insights and Observations

District court grants preliminary injunction against PPP Ineligibility Rule

Federal Issues Courts SBA Small Dollar Lending CARES Act Covid-19

Federal Issues

On May 11, the U.S. District Court for the Eastern District of Michigan granted a preliminary injunction against the enforcement of the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) Ineligibility Rule, concluding that the rule—which excludes “banks, political lobbying firms, certain private clubs with restrictive admissions practices, and sexually oriented businesses that present entertainment or sell products of a ‘prurient’ (but not unlawful) nature” from PPP loan eligibility—contravenes the purpose of the PPP. According to the opinion, a group of businesses that “provide lawful ‘clothed, semi-nude, and/or nude performance entertainment’” filed suit against the SBA seeking a preliminary injunction against the enforcement of the PPP Ineligibility Rule, after they were prevented from obtaining the loans and/or participating in the PPP because their businesses were deemed to be “of a ‘prurient sexual nature.’” The SBA argued that Congress could not have intended to support businesses that the SBA has historically denied financing, saying it would lead to “absurd results.” The court rejected this argument, stating, “these are no ordinary times, and the PPP is no ordinary legislation.” The court reasoned that because the intent of the CARES Act, which houses the PPP, is to protect workers in need, it is “not absurd to conclude” that in order to support workers from all businesses, Congress would temporarily permit SBA financial assistance to previously excluded business types. Finding that the Rule is in conflict with the Congressional purpose of the PPP, the court granted the preliminary injunction barring the SBA from enforcing the Rule.

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