What Happens If I Spend PPP Funds On Unauthorized Expenses?

What Happens If I Spend PPP Funds On Unauthorized Expenses?

October 21, 2020 0 By Nate Riordan

Originally posted on Medium

By Nate RiordanCat Reny and Alexander Morrison

The Rules of Your PPP Loan

The money from your PPP loan has limitations on the ways it can be spent. These are called authorized uses and are related to payroll and other expenses necessary to maintain a business. They are: (1) payroll costs; (2) costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, as well as insurance premiums; (3) mortgage interest payments (but not mortgage prepayments or principal); (4) rent payments; (5) utility payments; (6) interest payments on other debt obligations incurred before February 15, 2020; and (7) refinancing an SBA EIDL made between January 31, 2020 and April 3, 2020. Mortgage interest, rent, and utility payments are only authorized if they are for obligations incurred before February 15, 2020. These rules apply not only to the borrower itself, but also to any shareholder, member, or partner of the borrower company that would use the funds. This means that spending performed by a shareholder, member, or partner must follow the same rules, however, it does not provide for personal liability of those parties. Spending the money in ways not approved under these guidelines can lead to varying degrees of liability for only the borrower itself.

Consequences For Breaking the Rules

The first case involves a Mr. David T. Hines who applied for and obtained $3.9 million in PPP loans and purportedly used the funds to purchase a Lamborghini. However, this was not the only charge levied against him. It was alleged that Mr. Hines made false representations regarding the number of employees he had and his monthly payroll expense. He claimed to have 70 employees and pay approximately $4 million each month in payroll, but prosecutors allege he was actually paying closer to $200,000 in payroll each month. Hines has been charged with bank fraud, making false statements to a financial institution, and engaging in transactions in unlawful proceeds. The headlines paint this story as a man spending his PPP loans on a fancy car and being arrested for it, but in actuality it is a matter involving charges of bank fraud and other fraudulent actions.

The second case is very similar. Mr. Maurice Fayne, a reality-TV personality who stars in the show Love & Hip Hop: Atlanta, applied for PPP loans for his trucking company, Flame Trucking. He ultimately received just over $2 million in loans. After receiving the loans, he allegedly spent roughly $1.5 million on jewelry, cars, other luxury items, and child support. One might ask how prosecutors can tell if the reality-TV star was not just spending his own money on those items. Surely, just buying yourself nice things with your own money and not PPP loan funds is not enough to raise suspicion? But, as in the Lamborghini case, there is more to it than meets the eye. Mr. Fayne had allegedly submitted fake bank statements in his application indicating payroll expenses he did not actually have. Investigators discovered this only after Fayne’s bank informed them that his account had been closed since September 2019, and prosecutors believe Fayne had sent forged bank statements including months for October, November, and December to the lender. Like the Lamborghini case, this case is really about allegations of bank fraud and false statements.

It seems that the SBA will take action only when fraud and false statements are involved. If you are a borrower acting in good faith in spending the money and making no false statements or fraudulent representations to the SBA or a lender, then seemingly you have nothing to worry about. Essentially, unless you are knowingly doing something wrong, you should not need to worry about criminal charges. At worst, you will have to pay back the portion used in an unauthorized way instead of having it forgiven. The best thing you can do is document everything and make sure you can demonstrate a genuine belief that you needed the loan for its intended purposes, and that you spent the loan money in good faith.

SBA Audits

How do I get my PPP Loan forgiven?

The entire amount of your PPP loan may be forgiven provided that all the funds were spent in an authorized way. Any expenses that do not fall under the categories above cannot be forgiven and must be repaid. The expenses must have occurred within a 24-week period beginning on the day you received the first payment from the lender. December 31, 2020 is the final cutoff date for eligible expenses, so anyone taking a PPP loan after July 16 will not be able to take full advantage of the 24 weeks. Next, at least 60% of the loan must be used for payroll costs only. Payments to independent contractors do not count as payroll costs, and payments to any employee that exceed an annualized rate of $100,000 are not eligible to be included in the PPP loan forgiveness. You must also maintain the same number of employees, however, if you make a written offer in good faith that is for the same salary/wage and number of hours but the employee rejects the offer, then you are exempt from including that employee. Assuming you meet all these requirements, and you keep detailed and thorough documentation of the expenses paid and to whom, you are likely eligible to have your PPP loan forgiven.

What if my PPP Loan will not be forgiven and I enter default?

Conclusion

Seattle Bankruptcy Attorney

Contact the experienced bankruptcy and business law attorneys at Wenokur Riordan PLLC today at (206) 724-0846 to discuss your situation.     

Footnotes:
1. CARES Act 1102(a)(i)(A)(viii)
2. 
https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf at 4 Section R.
3. Id at 3 Section O.
4. Id at 4 Section S.
5. Id.
6. Id.
7. Id.
8. Complaint, 3, United States of America v. David Tyler Hines, №1:20-MJ-03237-BECERRA
9. Id at 6.
10. Id.
11. Id at 1.
12. 
https://www.justice.gov/opa/pr/reality-tv-personality-charged-bank-fraud
13. Complaint, 5, United States of America v. Maurice Fayne, №1:20-mj-370
14. Id at 5–7.
15. Id at 8.
16. Id.
17. 
https://home.treasury.gov/news/press-releases/sm1026. Lowered from 75%.
18. 
https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf at 2.
19. 
https://home.treasury.gov/system/files/136/PPP–IFR–Revisions-to-Loan-Forgiveness-Interim-Final-Rule-and-SBA-Loan-Review-Procedures-Interim-Final-Rule.pdf at 6.
20. 
https://www.sba.gov/sites/default/files/2020-07/PPP-Borrower-Application-Form-508.pdf at 3