COVID-19 Economic Relief Investigations: They Will Expose Some Businesses to Civil Liability

Business Insights

COVID-19 Economic Relief Investigations: They Will Expose Some Businesses to Civil Liability

Apr 22, 2020 | Business Insights

The initial rounds of COVID-19 economic relief have largely been depleted. More rounds of relief are expected soon. Further out, there will be investigations and follow-on civil (and criminal) proceedings surrounding this largest-ever economic stimulus package in U.S. history, with almost $350 billion going to small businesses.

Federal and state authorities, and even some companies, could bring a host of civil claims arising out of business applications for and the receipt of emergency loans and grants, as well as relief tax benefits and credits. The claims may range from False Claims Act violations to tax and bank fraud to breach of contract, unjust enrichment, and unfair and deceptive trade practices.

Businesses participating in COVID-19 economic relief should prepare for investigations and the defense of civil claims. Of course, they should understand the relief programs and what was submitted and certified to the government and others.

COVID-19 Economic Relief

Congress passed into law three phases of economic relief in response to the COVID-19 crisis. (A fourth phase is in the works.) Phase one focused on vaccine research and development; phase two on paid sick leave and unemployment benefits; and phase three on economic stimulus. The major federal relief programs for businesses – in phases two and three — are summarized below, although states and even some private companies, too, have put together their own forms of relief programs.

Federal Loans

The phase three Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created perhaps the most notable COVID-19 relief program: the $349 billion Paycheck Protection Program (“PPP”). Small businesses apply to SBA-approved lenders for PPP loans largely for the purpose of obtaining funds to pay their employees. The loans may be forgiven up to an amount equal to eight weeks’ worth of payroll costs, turning large portions of the loans into grants. Borrowers must certify, among other things, that they are an eligible small business under SBA guidelines, that they are facing economic uncertainty due to COVID-19, and that loan proceeds will be used for payroll and certain other essential business functions such as rent or utilities.

The CARES Act expanded the Economic Injury Disaster Loan (“EIDL”) program. This SBA program allows small businesses impacted by COVID-19 to apply directly to the federal government for disaster loans. Loan proceeds up to $10,000 may be advanced by the government prior to full approval, and such proceeds, if requested and advanced, will automatically convert to a grant. The remainder of the loan may be advanced by the government on favorable repayment terms compared to private loans. Like the PPP, EIDL borrowers must certify that they are an eligible small business under SBA guidelines. They must also demonstrate economic injury due to COVID-19 by submitting supporting financial data.

The CARES Act also authorized the Federal Reserve to purchase loans to larger businesses affected by COVID-19 that might not otherwise qualify for a PPP loan or an EIDL due to their size. Loans under the “Main Street Lending Program” are available to U.S. businesses that have 10,000 employees or fewer or 2019 revenues of $2.5 billion or less. Here too, borrowers must certify their eligibility, that they will make reasonable efforts to maintain payroll and employees, and that they will follow restrictions regarding compensation, stock repurchase, and dividends or distributions, as provided for in the CARES Act.

Federal Tax Credits

The CARES Act provided an Employee Retention Tax Credit for businesses experiencing significant declines in gross receipts or partial or full suspension of operations due to COVID-19 governmental orders. This refundable tax credit applies against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible businesses can realize the credit immediately by ceasing to make normally scheduled payroll tax deposits with the IRS. The ability to claim the credit may be impacted by accepting other economic relief programs.

Through the phase two Families First Coronavirus Relief Act (“FFCRA”), Congress passed into law two other refundable tax credits for businesses: the Emergency Paid Sick Leave Act credit and the Expanded FMLA credit. The former credit applies for sick leave wages paid to employees who are unable to work because they are sick or quarantined due to COVID-19, or must care for a family member with COVID-19. The later credit applies for family leave wages paid to employees who are unable to work because they must care for children whose school or normal place of care is closed due to COVID-19.

COVID-19 Investigations and Civil Claims

While many businesses need this COVID-19 economic relief now, they should recognize the risk of investigations and civil liability later on. Given the size and speed of the economic relief, the conditions and requirements for that relief, and the history of enforcement actions following national crises (e.g., Hurricane Katrina, 2008 financial meltdown), federal and state authorities certainly will undertake relief investigations and pursue related claims. Private companies may do the same if they, too, participate in economic relief efforts. And these entities have a number of tools at their disposal.

False Claims Act (“FCA”) (31 U.S.C. §§ 3729-3733)

The U.S. government may recover treble damages, penalties, and attorney fees for submitting materially false statements and claims for payment. Even “causing” the submission of false statements or claims can lead to FCA liability. Whistleblowers or “relators” may file these actions on behalf of the government. Under certain scenarios, the limitation period for FCA claims can be 10 years.

The PPP, EIDL, and Main Street Loan applications require the business borrower to certify a number of things: e.g., eligibility for the loan; the necessity of the loan due to current economic uncertainty; the use of loan proceeds for qualifying business-related purposes; the truth and accuracy of all information provided in the application and all supporting documents and forms; and/or the non-engagement in illegal activity under federal, state or local law.

(The loan relief programs may also require the lender to certify that it has obtained and reviewed the borrower application (including, for example, documents demonstrating qualifying payroll amounts).)

Without careful attention and a compliance system in place, a business (or even a lender) could make a false claim on and in connection with the federal loan application. And if the business failed to correct the application or return monies when certain conditions that once were true no longer are, it could be subject to a “reverse false claim.” A business that owns portfolio businesses and “causes” them to apply for federal funds could also find itself in trouble. Current ambiguities in the loan programs only heighten the exposure to potential FCA liability.

Tax Enforcement (26 U.S.C. §§ 6651, 6662, 6663)

The U.S. government may recover unpaid tax, interest, and penalties for filing false or fraudulent returns. Inaccurate returns due to negligence can carry penalties of 20 percent of the underpayment. Fraudulent returns can lead to penalties of 75 percent of the underpayment.

When businesses seek the Employee Retention Credit, Emergency Paid Sick Leave Act credit, the Expanded FMLA credit, or other relief tax benefits like increased deductions for net operating losses, they must prepare and file truthful and accurate returns and supporting forms with the IRS. Errors or misstatements could lead to sizable underreporting, IRS investigations, and enforcement proceedings by the Department of Justice, Tax Division.

State Attorneys General Actions

Over half the states, and some municipalities, have their own false claim act laws. Like the FCA, many of these laws provide for multiples of damages and penalties for the submission of materially false statements and claims for payment. Like the FCA, many of these laws allow for whistleblower prosecutions.

The state programs offering COVID-19 loans and grants have their own application process. Just as with the federal loan programs, businesses should be careful and truthful in completing state applications for relief and related information reports. They could be at risk of state false claims act liability. Since states have announced aggressive COVID-19 enforcement actions, businesses could also be at risk of other claims such as breach of contract, unjust enrichment, and unfair and deceptive trade practices.

Bank Claims

SBA-approved banks, credit unions, and other lenders actually provide the COVID-19 relief funds to businesses. Although the U.S. government may guarantee the repayment of these funds, lenders could still bring fraud and other claims against borrowers. Lenders could also bring claims in connection with their own loan forbearance and deferral programs. So, not only must businesses worry about COVID-19 government investigations and liability, they must consider the possibility of defending against related bank claims.

Other Non-Governmental Claims

Private industry has joined the COVID-19 economic relief effort. For example, Amazon and Facebook are accepting applications for small business grants. To be eligible, applicants must represent and demonstrate, among other things, their small-business size, nature as a service or retail establishment, decrease in revenues tied to COVID-19, and geographic proximity to the grantor. Under the terms of the applications and/or applicable state law, grantors could pursue fraud, breach of contract, unjust enrichment and other claims against applicants (whether successful or unsuccessful ones). Grantors may also refer such applicants to state and federal law enforcement.

COVID-19 Liability Risk Management

Investigations and civil proceedings will follow the COVID-19 financial crises. The scale of emergency funding and speed with which businesses applied for and received funds makes this all but a certainty.

Businesses participating in COVID-19 economic relief can mitigate the risk of investigations and civil liability a number of ways:

  • Fix errors in submissions to the government
  • Keep records of submissions and supporting detail
  • Monitor on-going eligibility for relief programs
  • Stay abreast of changes in and interpretations of program requirements
  • Maintain and follow compliance procedures and internal controls
  • Respond truthfully and carefully to government and other inquiries

The panic over COVID-19 will eventually subside. People will venture beyond their homes. Sports and entertainment will return. Business will revert to normal (almost). But the investigations will also come. And they will lead to a new panic for some.

Get ready.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors, and are not necessarily the views of any client.


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