Every so often there is a new killer virus on the horizon. In the past decade, it was MERS. In the 2000s, it was SARS, the bird flu, and H1N1. In the 1990s, it was Ebola. In the 1970s, it was swine flu. In 1918, it was the “Spanish flu.” There have been others.

Although the symptoms of each new virus vary, each one generates pressing legal matters in the moment, and leaves a wave of litigation in its wake. But with the Coronavirus, we’re truly in “novel” territory. There have been serious outbreaks in the past; however, none rivals COVID-19 in modern legal history. That said, the kinds of claims that resulted from past viruses are likely to reoccur. Given the Coronavirus’s heightened lethality, though, one can safely predict the litigation to follow the current crisis will be greater in number and exposure.

What We’ve Seen in the Past

In the aftermath of past outbreaks, there have been a large variety of lawsuits, primarily against employers and businesses. Some of the legal theories we expect to see as the basis of such claims include:

• Discrimination (e.g., unlawful termination from work for inability to receive a vaccine due to precautions and contraindications, race/ethnicity discrimination or hostile work environment claims due to perceived geographic origins of a virus).
• Product liability (e.g., for long-term side effects from taking a vaccine). Note, however, that for manufacturers and distributors of FDA-approved vaccines and “countermeasures”, liability is now limited to cases of “willful misconduct” under the Public Readiness and Emergency Preparedness Act (PREP Act). A PREP Act declaration was made in mid-March, retroactive to the beginning of February.
• False Advertising (e.g., related to allegedly false claims of the effectiveness or side-effects of a vaccine or other health product).
• Wrongful death (e.g., due to incorrect and inadequate quarantine procedures at healthcare facilities). In fact, as explained below, a negligence/wrongful death action was just recently filed this week in Illinois against Wal-Mart.
• Malpractice (e.g., failure to inform at-risk individuals of the presence of infection in a healthcare facility).
• Securities fraud (e.g., falsely downplaying the impact of a spreading infection on the supply of raw materials, failure to disclose inadequacies in food safety program).
• Coverage (e.g., litigation related to coverage for bodily injury, property damage (particularly as to affected/unsold livestock), and business interruption).
• Bad Faith Breach of Contract (e.g., alleged bad faith denials of an influx of claims drawing on life insurance policies).
• OSHA (e.g., failure to provide a workplace free of recognized hazards by failing to comply with CDC guidance and precautions).
• Negligence (e.g., failure to take recommended or known-to-be-necessary precautions to reduce risk of infection and injury to customers and patrons).
• Breach of fiduciary duties (e.g., against directors of a company that took a wait-and-see approach and failed to create and implement a pandemic contingency plan, mismanagement of assets in the circumstances (corporate, as well as employee assets)).
• Ponzi schemes (recall that both the Petters and Madoff schemes unraveled in the wake of the 2008 recession).

Put simply, the claims we have seen in the past in similar situations share a common theme: companies and their officers and directors should have acted more responsibly and proactively.

What We Can Anticipate in the Future

Given what we’ve seen in the past, one can anticipate a large swath of analogous lawsuits this go-around. Recent legal trends suggest an increased focus on at least three general categories of claims: (1) claims against corporate officers and directors, (2) negligence, and (3) breach of contract/coverage.

Claims Against Corporate Officers and Directors

First, there is a greater likelihood of claims against officers and directors, most likely securities fraud and breach of fiduciary duties claims. These suits could allege that officers and directors are liable for failing to plan for crises such as pandemics, or failing to act quickly in response to the looming crisis. For example, plaintiffs may argue that the officers and directors “failed” to put in place a crisis management plan—or an adequate plan, by comparison to the industry. Claims alleging “should have” known/acted claims have been increasingly common in the past five years, and the current pandemic may exponentially exacerbate the current trend.

There may also be claims for failure to timely disclose the impact of the Coronavirus pandemic on all aspects of a business (and update those projected impacts as more information came to light), given investors are focused on day-to-day, and sometimes hour-to-hour, developments. These lawsuits are also more likely in response to the Coronavirus pandemic due to the increasing prevalence and recent investor interest in “environmental, social, and corporate governance” (ESG) disclosures. Companies must accurately disclose all material facts that affect a public company’s business, and investors are increasingly looking to ESG factors in measuring both the societal impact of a business, but also its going-concern. Pandemic preparedness and response implicates all three aspects of ESG.

Negligence

Second, there is a greater likelihood of negligence suits against businesses that fail to follow stay-at-home orders, fail to adhere to CDC and other health authorities’ guidance, and otherwise endanger the health and safety of employees or customers. Plaintiffs may point to such deficiencies as “negligence per se,” akin to violation of a statute or regulation, which can demonstrate negligence independent of establishing foreseeability or a reasonable standard of care. Sweeping stay-at-home orders may provide plaintiffs the legal hook needed to condemn as negligent a business’s conduct that is not in compliance.

In fact, just this week a claim was filed against Wal-Mart by an employee who died, alleging both negligence and wrongful death. Among other things, the complaint alleges management at the store in question allegedly knew that several employees were exhibiting symptoms of the Coronavirus, but failed to properly sterilize the store, promote and enforce social distancing guidelines, provide employees protective equipment (masks, gloves, etc.), warn the employees that certain persons were experiencing symptoms, develop an infectious disease preparedness and response plan as recommended by the CDC, and more. We can likely expect to see similar claims in the future, perhaps brought by customers as well.

Failure to disclose these issues and adequately address them could also open up businesses to securities fraud and breach of fiduciary duties claims like those addressed above.

Contract and Insurance Claims

Finally, we have already seen increased activity related to business interruption insurance coverage and force majeure clauses. For commentary on those issues, visit these linked articles and additional resources at our online COVID-19 Resource Center.

The Best Defense Is Always a Proactive Offense

Ignorance is certainly not bliss when it comes to crises, especially as to matters of public health. Companies and their leaders who proactively consider and implement informed and objective efforts will be better positioned to meet these legal challenges. Such efforts might include engaging experts and following government guidance, standards, and advice. While public relations campaigns can be effective, they should be backed by action. As with all emergent issues, companies should be up-front, keep information current, and act quickly to address any risks to business operations, recognizing that the potential claims and solutions will affect every organization and individual differently.

Published April 10, 2020

Timeline

February 27: Minnesota Management and Budget issued the forecast which the Governor and Legislature would use as the guide to making their taxing and spending decisions for the remainder of the session. The forecast showed a small increase in the expected surplus of $181 million dollars, for a total surplus of $1.53 billion for the FY 2020-21 biennium. Link to February Forecast Documents. The forecast summary stated:

• Minnesota’s budget and economic outlook remain stable. As in November, the economic outlook is stable but a slowdown remains in the forecast. The small budgetary improvement continues into the next biennium and the structural balance is improved, but budget challenges remain.
• IHS expects temporary and modest impacts on the US economy from COVID-19. Therefore, they do not include adjustment to the February outlook for disruptions caused by the disease.

March 12: Three weeks later, the Legislature cancelled in-person committee hearings.
March 13: Governor Walz declared a peace time emergency.
March 15: Governor Walz closed the schools.
March 16: Governor Walz closed all bars and restaurants.
March 19: Governor Walz prohibited all elective surgeries.
March 25: Governor Walz issues “Stay at Home” order to April 14.
April 8: Governor Walz issues “Stay at Home” order to May 4.

Thus, in just under four weeks, the state government, and the population at large, went from believing that COVID-19 was something akin to the Ebola virus, to understanding that this virus was something far more threatening in every possible way.

Since mid-March, approximately 350,000 people have filed for unemployment insurance. That represents 11.4% of the labor force, and in this four-week period more people than filed all last year. The February forecast indicated that the United States GDP would grow by 2.1%; the most recent estimates indicate that it will be a negative 4.5%.

Legislative Action

The legislature relatively quickly established ground rules on what items could be brought to the floor for a vote: only legislation that has been agreed to by all four caucus leaders and the Governor. Thus, the bar is very high. Additionally, rule changes were implemented in each body to allow for remote voting on the floor and in committees.

In general, the legislature is currently only considering legislation that is COVID-related. However, legislative leaders have indicated that they will also consider non-controversial legislation that is agreeable to all. One example of that type of legislation is an insulin bill that has been a source of friction since the 2019 session, where agreement was reached today. It will likely be voted on this coming Tuesday.

March 16: First COVID Bill – $200 million. On the Monday after the Governor had declared a peacetime emergency, the legislature met and passed a bill to provide $200 million essentially for health care providers in need of support to fight COVID-19. Link to Story on Legislation; Link to Bill Summary

March 26: Second COVID Bill – $330 million. The legislature approved $330 million for a variety of items, including grants for small business loans and funding for food shelves. The largest item was an appropriation of $200 million for the Commissioner of Management and Budget to disperse “to state agencies as necessary to (1) protect Minnesotans from the COVID-19 outbreak, and (2) maintain state government operations throughout the duration of the peacetime emergency.” The legislation also included a number of policy changes to allow for increased flexibility for licensing issues that had specific timelines or licenses that were to expire. Link to Bill Summary

The Legislature has also met to address workers compensation for first responders impacted by COVID, and are expected to act on additional non-financial issues in the coming weeks.

Federal Action

On March 27, Congress passed a $2 trillion+ relief package, in what is the biggest economic rescue package in American history. For comparison, the stimulus package passed under President Obama was $831 billion. The legislation included the following:

• $150 billion to state and local governments. Each state receives at least $1.25 billion
• $58 billion to airlines
• $10 billion to airports
• $100 billion to hospitals
• $500 billion in loan guarantees

Real ID Deadline – The deadline to obtain a Real ID was extended until September 2021.

Local Units of Government – Of the $150 billion appropriated to state and local governments, Minnesota is expected to receive $2.187 billion. Of this amount, $1.8 billion goes directly to the state and $317 million goes to Hennepin and Ramsey Counties. MMB Commissioner Myron Frans has indicated that he expects more federal guidance for these dollars by April 14, and expects the dollars to be available by April 24. The current guidance is that these dollars can only be used for: 1) expenditure incurred as a result of COVID-19; 2) expenses that were not accounted for in the current budget; and 3) expenses that were incurred between March 1, and December 30, 2020.

Airports – Of the dollars appropriated to Airports, the Minneapolis-St. Paul Airport expects to receive approximately $100 million. Currently, the Airport is operating at about 5% of normal passengers. All revenues are off a minimum of 90%. The attached link is to a TSA site that shows a comparison of air travelers by day from 2019 to 2010. It is stunning. TSA 2020-2019 Comparison

Walz Administration

Since declaring the peacetime emergency, Governor Walz and cabinet members have had daily press conferences, which generally consist of Gov. Walz announcing any new executive orders and projecting command and optimism, very much like the coach he was in the past. Additionally, Health Commissioner Malcolm provides grim statistics as to the virus’ progress, Employment and Economic Development Commissioner Grove discusses unemployment statistics, and others provide relevant information.

The Administration has created a variety of links, which include:

Dashboard link – Department of Health link describing the virus’ progress and includes PPE, medical supplies, hospital capacity, more.

Executive Orders – New EOs may take several hours to be posted following announcement.

Modified List of Critical Sectors – Evolving list of industries that are exempt from the “Stay at Home” order. These employees should stay at home, but are not required to do so. This list has been updated several times.

On Sunday, April 5, the Governor gave a very short State of the State from the Governor’s Residence that essentially was an exhortation that we would get through this. He used the analogy that we are in a winter; that we had been through hard winters, but spring would come.

On Wednesday, April 8, the Governor extended the “Stay at Home” order to May 4. Governor’s press release; full text of the executive order.

Other Legislative Issues

Bonding Bill. All legislative leaders continue to indicate that there will be a bonding bill. However, there are a variety of considerations. On one hand, some argue that interest rates are very low, and we should borrow to help people to work, and thus the bonding bill should be robust. On the other hand, others argue that our finances are a mess as a result of COVID-19, and we should be very cautious about incurring debt. Most continue to believe that some sort of bonding bill will occur. However, it will occur very close to the end of the legislative session: May 18.

Tax Bill. The session started with Governor Walz and the Democrats stating that despite projected surpluses, a tax bill was not necessary. Republicans, by contrast, were pushing for a tax bill with tax reductions. While most still believe a tax bill will occur, it will likely neither contain any tax relief, nor provide local governments with any additional local government aid. All recognize that tax revenues will be significantly decreased and could be for some time.

Legislators are talking about tax provisions that may help businesses and state governments without spending state resources. Additionally, any items that do not have any fiscal impact may be considered. In the coming weeks, changes being considered include:

• Delaying quarterly estimated payments for 2020 income tax year
• Extending February and March sales tax deadlines
• Delaying May 15 statewide business property tax and local property tax

The Legislature will continue discussing other tax issues as well, including potential conformity with provisions in the federal CARES Act.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law by President Donald J. Trump. Representing “Phase III” of the sweeping economic stimulus and public health measures currently being undertaken by the U.S. federal government, the CARES Act includes a number of tax-related provisions designed to reduce the compliance burden for taxpayers and/or stimulate growth by putting more money in the hands of taxpayers. Several of these provisions are discussed in more detail below:

Modifications for Net Operating Losses (Sec. 2303)

 The Tax Cuts and Jobs Act (the “TCJA”) of 2017 generally eliminated net operating loss (“NOL”) carrybacks arising after 2017. NOLs could generally be carried forward indefinitely, but were limited to 80% of taxable income in a given taxable year.

The CARES Act changes these NOL limitations to allow NOLs arising in tax years 2018, 2019, and 2020 to be carried back five years; additionally, the 80% limitation on NOL carryforwards has been eliminated for tax years beginning before January 1, 2021. Accordingly, taxpayers with unused NOLs arising in tax years 2018, 2019, or 2020, and that paid tax in at least one of the preceding five taxable years, may file amended returns seeking a refund of taxes paid. Amended returns must be filed by the due date, including extensions, of the taxpayer’s return for the first taxable year ending after enactment of the CARES Act (i.e., for a calendar year taxpayer filing a Form 1120, March 15, 2021, without taking into account individual taxpayer extensions, or any potential broadly applicable extensions due to future COVID-19 legislation). For fiscal-year-end taxpayers that generated an NOL in tax year ending in 2018 (i.e., a 2017-2018 tax year) but who may have waived their carryback period, the CARES Act provides that such taxpayers have 120 days from the enactment of the legislation (i.e., July 27, 2020, given that July 25 falls on a Saturday) to file a carryback claim and revoke such election. These NOLs are subject to the pre-TCJA two-year carryback rules.

Special provisions are applicable for taxpayers required to were required by the TCJA to recognize a “toll charge” on certain types of deferred foreign income of subsidiaries (specifically, the taxpayer will be deemed to make an election to not have the NOL carryback offset the toll charge inclusion), and NOL carrybacks are denied for real estate investment trusts (“REITs”) for any year that the taxpayer qualified as a REIT.

Modification of Limitation on Losses for Taxpayers Other than Corporations (Sec. 2304)

The TCJA limited the ability of non-corporate taxpayers (e.g., individuals, estates, and trusts) to deduct “excess business losses,” which are generally defined as the excess of aggregate business gross deductions over aggregate business gross income. The availability of such deductions was limited to $250,000 annually ($500,000 annually individual taxpayers using a married, filing jointly status). Unused excess business losses could be carried forward as NOL (see the discussion of NOL limitation changes above).

The CARES Act delays the application of the excess business loss limitation until tax year 2021, meaning that non-corporate taxpayers may deduct all excess business losses through the end of the 2020 tax year. Taxpayers may amend their 2018 and (if filed) 2019 returns to take advantage of deductions previously disallowed due to the excess business loss limitation rules. For taxpayers in the real estate business, this may provide significant advantages, removing limitations on losses arising from the “full expensing” (i.e., 100% bonus depreciation) allowed by the TCJA. Passive real estate investors, however, should exercise caution, as the CARES Act does not override passive loss and at-risk limitations, and guidance on such topics has not yet been released.

Modification of Credit for Prior Year Minimum Tax Liability of Corporations (Sec. 2305)

The TCJA eliminated the alternative minimum tax (“AMT”) for corporate taxpayers. Corporate taxpayers were able claim refundable AMT credits in tax years 2018 to 2021, subject to a limitation that, in effect, limited taxpayers to claiming 50% of their remaining AMT credits in a given taxable year (e.g., a taxpayer with $10 million in refundable AMT credits generated pre-TCJA was limited to a $5 million refund in 2018, $2.5 million in 2019, and so on).

The CARES Act removes this limitation, allowing corporate taxpayers to accelerate their entire refundable AMT credit to tax years 2018 and 2019 (a taxpayer may elect to claim the entire AMT credit in tax year 2018). The CARES Act additionally provides for accelerated refund procedures related to claiming the accelerated refundable AMT credit specifically. For the purposes of the AMT credit, a taxpayer may file an application for a tentative refund with the Internal Revenue Service, which must review the application and issue a refund (if applicable) within 90 days.

Modifications of Limitation on Business Interest (Sec. 2306)

Under the TCJA, taxpayers were limited with respect to deductions for interest expense paid on loans, with such deductions limited to 30% of the taxpayers “adjusted taxable income” (“ATI,” generally equivalent to EBITDA) for taxpayers with average gross receipts of an inflation-adjusted $25 million or more ($26 million for tax years beginning in 2019 and 2020).

The CARES Act generally increases this 30% limitation to 50% for taxable years 2019 and 2020. In the case of partnerships specifically, the TCJA 30% limitation continues to apply for taxable year 2019 only, and a partnership must apply the existing 30% limitation for the 2019 taxable year. However, partners allocated excess business interest in a tax year beginning in 2019 will be treated as having fully deductible business interest in the following tax year equal to 50% of such allocated business interest amount, and the remaining 50% of excess business interest will continue to be deductible under the existing rules of the TCJA (unless a partner elects out of the application of these provisions).

Additionally, the CARES Act allows taxpayers to elect to use their 2019 ATI for the purposes of calculating their 2020 interest expense limitation. This increase in the interest expense limitation should be particularly useful for highly leveraged businesses, and any businesses expecting to take an earnings hit in 2020 that would otherwise be constrained by the TCJA’s 30% limitation. This may additionally create additional NOLs during taxable year 2020, which may be carried back due to the previously discussed NOL adjustments made by the CARES Act.

Technical Amendments Regarding Qualified Improvement Property (Sec. 2307)

The CARES Act makes an important technical correction to the TCJA to allow businesses to fully deduct the cost of improvements to the interior of a non-residential building (so called qualified improvement property, or “QIP”) back to the 2018 taxable year. QIP includes the installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical, and plumbing (excluded from the definition are improvements attributable to internal structural framework, enlargements to a building, elevators, and escalators).

When the TCJA was enacted, the availability of expensing (through the mechanism of 100% bonus depreciation) was expanded to cover not only equipment and certain other capital assets, but also improvements made to commercial property. However, due to a drafting error that was beyond the authority of Treasury to correct, this expansion did not cover QIP, as the recovery period for QIP was tied to the 39-year ordinary life of a building, and the expanded expensing provisions of the TCJA covered only property with a recovery period of 20 years or less (this drafting error is referred to as the so-called “Retail Glitch”). The CARES Act retroactively fixes the Retail Glitch by rendering QIP 15-year property eligible for 100% bonus depreciation, back to taxable year 2018. This technical correction should be particularly useful to businesses in the retail, restaurant, and hospitality industries given the rate at which these sectors have brought new, improved real estate assets online during 2018 and later.

Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer (Sec. 2308)

Taxpayers subject to regulation by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) (e.g., manufacturers and distributors of alcohol for beverage, scientific, medical, and industrial uses) are subject to federal excise on the sale of alcohol (such excise taxes are administered by the TTB on a slide scale based on the concentration of alcohol in the finished product and on the overall production volume of the taxpayer). The CARES Act suspends these excise taxes for distilled spirts “removed” (that is, removed from the control of the taxpayer’s warehouses/distribution centers, or from a U.S. customs facility) after December 31, 2019, and before January 1, 2021, and are for us in or contained in a hand sanitizer product that is produced and distributed in compliance with the COVID-19 guidance promulgate by the U.S. Food and Drug Administration (which incorporates formulation guidelines from the World Health Organization, and requires that denatured ethyl alcohol or isopropyl alcohol is the active ingredient).

Forgiven Loan Amounts under U.S. Small Business Administration Paycheck Protection Program Not Included in Taxable Income (Sec. 1106(i))

Title I of the CARES Act, the Keeping American Workers Paid and Employed Act, appropriates $349 billion to the Small Business Administration (“SBA”) to be made available as loans to small business under the “paycheck protection loan” (“PPP”) program. Under the PPP program, SBA loans are eligible for forgiveness up to an amount equal to the total of certain costs incurred and/or payments made during the eight-week period following the origination of the loan, including compensation and other payroll cost, payment of interest on certain mortgage obligations, payment of certain rent obligations, and payment of certain utilities. The CARES Act specifies that any PPP loan amounts so forgiven are excluded from the gross income of the taxpayer otherwise obligated under such loan.

Note: State Conformity with CARES Act Tax Provisions

For states with “rolling conformity” (i.e., those states which conform to the Internal Revenue Code, or IRC, as currently in effect), their tax statutes generally will update automatically to incorporate the tax provisions of the CARES Act unless a state adopts legislation to opt out of one or more of the provisions.  States with “static conformity” (i.e., those states which generally conform to the IRC as enacted on a specific date) will need to adopt legislation conforming with one, some, or all of the CARES Act tax provisions.  States with “selective conformity” (i.e., those states which conform only to specific IRC provisions and on a rolling, static, or combined basis) may or may not need to adopt legislation, depending on whether they have conformity with one or more of the IRC sections that the CARES Act tax provisions amend and, if they do, whether they want to act differently from what otherwise will occur automatically.

Minnesota, for example, is a static conformity state.  The most recent conformity date is as of December 31, 2018.  As such, unless Minnesota enacts legislation relating to the CARES Act tax provisions, none will apply for purposes of determining Minnesota income taxes.

Taxpayers should monitor in their relevant states legislative developments for tax conformity to the CARES Act tax provisions.

Paycheck Protection Program

• The CARES Act increases the federal guarantee of loans made for the Payment Protection Program under section 7(a) of the Small Business Act to 100 percent through December 31, 2020. Eligibility for loans is defined as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by U.S. Small Business Administration (“SBA”), if higher.
• For businesses in the hospitality and dining industries with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (“NAICS”), the business is eligible to receive a loan. In addition, the CARES Act waives entity affiliation regulations for business concerns, non-profits, and veterans’ organizations: (a) in Sector 72 under the NAICS with 500 or fewer employees; (b) franchise businesses with SBA franchisor identifier codes; and any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.
• Under the Paycheck Protection Program, borrowers can receive up to 2.5 times their average total monthly “payroll costs” incurred in the one-year period before the loan is made, plus the outstanding amount of a loan that was made under the SBA’s Disaster Loan Program on or after January 31, 2020 and that is refinanced as part of the Paycheck Protection Program.
• Amounts borrowed are subject to forgiveness based on the number of employees retained (note, employers can rehire employees who have already been laid off due to the COVID-19 crisis). Amounts eligible for forgiveness are equal to the amount spent by the borrower during an 8-week period after the origination date of the loan compared to the previous year or time period, on payroll costs and eligible rent, mortgage interest and utility expenses.
• More information that may be useful to potential borrowers is available here, here and here. Information that may be useful to lenders is available here and here.

United States Treasury Program Management Authority

• All 7(a) lenders can opt in to participate in the Paycheck Protection Program. The Act also establishes the authority of the U.S. Department of Treasury, the Farm Credit Administration, and other federal financial regulatory agencies to authorize bank and non-bank lenders to participate, including insured credit unions in loans made under the Paycheck Protection Program. For financial institutions under this section, Treasury has authority to issue regulations and guidance for terms concerning lender compensation, underwriting standards, interest rates, and maturity. Interest rates set under this authority may not exceed the maximum permissible rate of interest set on loans made under Section 1102 of this Act. The Act requires that Treasury ensure that terms and conditions provided by this section are the same as the terms established for loans under Section 1102 of this Act for borrower eligibility, maximum loan amount, allowable uses, fee waivers, deferment, guarantee percentage, and loan forgiveness. The Act allows Treasury to issue regulations and guidance as necessary, including to allow additional lenders to originate loans and establish terms. Prohibits borrowers from applying for this loan if that borrower has a previously pending application for a 7(a) loan for the same purpose. Establishes that the SBA will administer the program, including purchasing and guaranteeing loans, with guidance from Treasury.

SBA Disaster Loan Refinancing

• A loan that was made under the SBA’s Disaster Loan Program for purposes other than the permitted loan uses under this program on or after January 31, 2020, may be refinanced as part of a covered loan under the Paycheck Protection Program.

Entrepreneurial Development

• The CARES Act provides authorization to the SBA to provide additional financial awards to resource partners (Small Business Development Centers and Women’s Business Centers) to provide counseling, training, and education on SBA resources and business resiliency to small business owners affected by COVID-19. It further authorizes the SBA to provide an association or associations representing resource partners with grants to establish an online platform to consolidate resources available across multiple Federal agencies and to implement a training program to educate Small Business Development Center, Women’s Business Center, Service Corps of Retired Executives, and Veteran’s Business Outreach Center counselors on the various federal resources available to ensure counselors are directing small businesses appropriately.

Minority Business Development Agency

• This section authorizes $10 million for the Minority Business Development Agency within the Department of Commerce to provide grants to Minority Business Centers and Minority Chambers of Commerce for the purpose of providing counseling, training, and education on federal resources and business response to COVID-19 for small businesses. This section also eliminates the Minority Business Center program’s non-federal match requirement for a period of three months and allows for centers to waive fee-for-service requirements through September 2021.

Emergency Economic Injury Disaster Loans (“EIDLs”)

• The CARES Act expands eligibility for access to Economic Injury Disaster Loans (EIDL) to include Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Private non-profits are also eligible for both grants and EIDLs. Requires that for any SBA EIDL loans made in response to COVID-19 before December 31, 2020, the SBA shall waive any personal guarantee on advances and loans below $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the credit elsewhere requirement. During the covered period, the new law allows the SBA to approve and offer EIDL loans based solely on an applicant’s credit score, or use an alternative appropriate alternative method for determining applicant’s ability to repay. Establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an emergency advance on that loan, of not more than $10,000, which the SBA must distribute within 3 days.

Subsidy for Certain Loan Payments

• This Section requires the SBA to pay the principal, interest, and any associated fees that are owed on the covered loans for a six-month period starting on the next payment due. A covered loan means any existing 7(a) (including Community Advantage), 504, or microloan product, however, Paycheck Protection Program loans are not covered. Loans that are already on deferment will receive six months of payment by the SBA beginning with the first payment after the deferral period. Loans made up until six months after enactment will also receive a full 6 months of loan payments by the SBA. SBA must make payments no later than 30 days after the date on which the first payment is due. This Section also requires the SBA to still make payments even if the loan was sold on the secondary market. The SBA is required to encourage lenders to provide deferments and allows lenders, up until one year after enactment, to extend the maturity of SBA loans in deferment beyond existing statutory limits.

Bankruptcy

• This Section amends the Small Business Reorganization Act to increase the eligibility threshold to file under subchapter V of chapter 11 of the U.S. Bankruptcy Code to businesses with less $7,500,000 of debt. After one year, this increase sunsets and the threshold amount returns to $2,725,625. This section amends the definition of income in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy. Explicitly permits individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due; this accommodation sunsets after 1 year.

Emergency Rule Making Authority

• SBA is required to establish regulations no later than 15 days after enactment of this title. There has been some initial guidance, but expect there to be more comprehensive regulations published in the coming days.

$500 Billion Emergency Stabilization Fund

The Coronavirus Economic Stabilization Act of 2020 (“CESA”) provides $500 billion to Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments, distributed as follows: (a) direct lending, including: (i) $25 billion for passenger air carriers, certain certified eligible businesses that are approved to perform inspection, repair, replace, or overhaul services, and ticket agents; (ii) $4 billion for cargo air carriers; and (iii) $17 billion for businesses important to maintaining national security and (b) $454 billion, as well as any amounts available but not used for direct lending, for loans, loan guarantees, and investments in support of the Federal Reserve’s lending facilities to eligible businesses, states, and municipalities.

• The loans made under this program are only available to businesses organized in the U.S. and that have significant operations and a majority of their employees in the U.S. To be eligible, such businesses must not have reasonable access to credit at the time of the transaction. In addition, unlike loans to small businesses under the Paycheck Protection Program, loans under this program are not forgivable and will include terms compensating the government for its investment. For example, the government will likely expect to receive warrants, equity or, in certain cases, a senior debt instrument. The loans may also be secured and will bear interest at rates that reflect the risk and are based on market conditions for comparable obligations prior to the outbreak of COVID-19.
• Loans under this program will subject the borrower to restrictions on executive compensation (which are described below), dividends and stock buybacks during the term of the loan plus one year.

Assistance to Mid-Size Businesses

• CESA directs the Treasury Secretary to “endeavor to seek the implementation of a program or facility” to provide financing to banks and other lenders that make direct loans to mid-size businesses and nonprofit organizations with between 500-10,000 employees. These loans would be originated from private lenders at an interest rate not to exceed 2%. Principal and interest payments would be delayed for at least the first six months of the loan term. These loans would only be available to businesses organized in the U.S. with significant operations and employees located in the U.S.
• The borrower cannot be a debtor in bankruptcy and the borrower must certify that the uncertainty of current economic conditions make a loan necessary to support ongoing operations. In addition, the loans issued under this program would include several material restrictions, including requirements that the borrower certify that it: (a) will not buy back stock or pay dividends for the term of the loan plus one year; (b) intends to restore at least 90% of its workplace in existence as of February 1, 2020 and restore all compensation and benefits to its workers within four months of the termination of the COVID-19 public health emergency; (c) will use the funds to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020; (d) will not outsource or offshore jobs for the term of the loan and two years thereafter; (e) will not abrogate collective bargaining agreements for the term of the loan plus two years; and (f) will remain neutral in any union organizing efforts for the duration of the loan.

Executive Compensation Restrictions

• Borrowers that participate in lending programs under CESA (i.e., loans from the Emergency Stabilization Fund or for mid-size businesses), must agree to cap all employee compensation (including salary, stock, and bonuses) for the term of the loan plus one year. Officers or employees that receive more than $425,000 per year cannot receive more compensation than they received in 2019, and severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees that receive more than $3 million per year cannot receive total compensation in excess of: (a) $3 million plus (b) 50% of the excess over $3 million of the total compensation received by the officer or employee in calendar year 2019.

Expanded Authority of Lenders to Enter

The CARES Act established the authority of the U.S. Department of Treasury, the Farm Credit Administration, and other federal financial regulatory agencies to authorize bank and non-bank lenders to participate, including insured credit unions in loans made under the Paycheck Protection Program. For financial institutions under this section, Treasury has authority to issue regulations and guidance for terms concerning lender compensation, underwriting standards, interest rates, and maturity. Interest rates set under this authority may not exceed the maximum permissible rate of interest set on loans made under Section 1102 of this Act.

Debt Guarantee Authority

Authorizes Federal Deposit Insurance Corporation (“FDIC”) to temporarily establish a debt guarantee program for solvent insured depositories and depository institution holding companies. Noninterest-bearing transaction accounts may be treated as a debt guarantee program. Authorizes National Credit Union Administration (“NCUA”) to temporarily increase share insurance coverage for noninterest-bearing transaction accounts. Such authorities, programs, guarantees, and increases shall terminate no later than December 31, 2020.

Temporary Lending Limit Waiver

Temporarily provides non-bank financial companies an exception to the office of the Comptroller of the Currency’s lending limits aligned with exception for financial companies, and temporarily authorizes Comptroller of the Currency to exempt any transaction from the lending limits, if the exemption is in the public interest. The temporary exemption from lending limits and authorization to exempt transactions expires at the earlier of December 31, 2020, or the date on which the national emergency declaration related to coronavirus is terminated.

Temporary Relief for Community Banks

Requires Federal banking agencies to temporarily – by interim rule – reduce the Community Bank Leverage Ratio (“CBLR”) for qualifying community banks from 9 percent to 8 percent, and provide for a reasonable grace period if a community bank’s CBLR falls below the prescribed level. The interim rule expires at the earlier of December 31, 2020, or the date on which the national emergency declaration related to coronavirus is terminated.

Temporary Relief from Troubled Debt Restructurings

A financial institution may elect to suspend requirements under U.S. Generally Accepted Accounting Principles for loan modifications related to the coronavirus pandemic, and suspend any such determination regarding loans modified as a result of the effects of the coronavirus. Federal banking agencies and the NCUA must defer to a financial institution to make a suspension. Such election may begin on March 1, 2020 and last no later than 60 days after the lifting of the coronavirus national health emergency.

Optional Temporary Relief from Current Expected Credit Losses

An insured depository institution (including a credit union), bank holding company, or any of its affiliates has the option to temporarily delay measuring credit losses on financial instruments under the new Current Expected Credit Losses methodology. Such option to delay expires at the earlier of December 31, 2020, or the date on which the national emergency declaration related to coronavirus is terminated.

Non-Applicability of Restrictions on ESF During National Emergency

Temporarily suspends the statutory limitation on the use of the Exchange Stabilization Fund (Section 131 of the Emergency Economic Stabilization Act of 2008) for guarantee programs for the United States money market mutual fund industry. Any guarantee shall be limited to the total value of a shareholder’s holdings in a participating fund as of the close of business on the day before the announcement of the guarantee. Any guarantee established as a result of the application of this Section shall terminate not later than December 31, 2020.

Temporary Credit Union Provisions; Expanding Liquidity

Temporarily enhances access to the Central Liquidity Facility, including for corporate credit unions, to meet liquidity needs. Increases resources available to meet liquidity needs through the Facility. The amendments provided under this section sunset on December 31, 2020.

Increasing Access to Materials Necessary for National Security and Pandemic Recovery

Waives for two years the requirement for a separate act of Congress to authorize certain projects exceeding $50 million and the requirement that any amounts unused in the Defense Production Act Fund at the end of the fiscal year that exceed $750 million be swept and returned to the Treasury’s General Fund. This Section also waives for one year following enactment the requirement for a 30-day layover after Presidential notification to Congress before a project may start and the requirement that Congress separately authorize certain projects exceeding $50 million in aggregate cost.

Foreclosure Moratorium and Consumer Right to Request Forbearance

Prohibits foreclosures on all federally-backed mortgage loans for a 60-day period beginning on March 18, 2020. Provides up to 180 days of forbearance for borrowers of a federally-backed mortgage loan who have experienced a financial hardship related to the COVID-19 emergency. Applicable mortgages included those purchased by Fannie Mae and Freddie Mac, insured by HUD, VA, or USDA, or directly made by USDA. The authority provided under this section terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.

Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans

Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.

• Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD.
• The authority provided under this section terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.

Temporary Moratorium on Eviction Filings

For 120 days beginning on the date of enactment, landlords are prohibited from initiating legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.

NOTE: The information in this Alert is current as of April 7, 2020, 8:00 am Central Time. This is a rapidly-evolving situation and circumstances and guidance may change.

President Trump signed The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law on March 27, 2020. The CARES Act provides $2.2 trillion of support for families and businesses, partially through additional unemployment benefits, some of which will be available through July 31, 2020 and some of which will be available through December 31, 2020 due to COVID-19. This Alert provides a summary of the unemployment insurance benefits available within the CARES Act and refers to Minnesota unemployment benefits as an example; employers who operate outside of Minnesota should check the applicable state employment office for relevant information.

As set forth in more detail below, the CARES Act increases and expands current state unemployment insurance benefits by:

1. Providing for an additional $600 weekly payment;
2. Extending unemployment benefits for an additional thirteen weeks;
3. Including individuals who might otherwise be ineligible for unemployment benefits under normal circumstances; and
4. Covering 100% of states’ short time or shared work unemployment compensation.

These additional benefits are funded at the Federal level, but will be managed at the state level. Minnesota will implement these benefits once additional guidance is received from the Department of Labor, but Minnesota expects the benefits to be available by the end of April and the additional $600 weekly payment will be back-paid to the week of March 29, 2020. Governor Walz already waived the eligibility waiting period so unemployed workers are eligible for benefits immediately upon losing employment. The Minnesota Unemployment Insurance updates can be accessed here.

Additional $600 Weekly Payment: Federal Pandemic Unemployment Compensation

The CARES Act provides a $600 weekly payment in addition to the unemployment benefits which an individual receives pursuant to state law. It is intended to provide full wage replacement for the average worker and is not subject to reduction if it exceeds the wages actually earned by the individual prior to becoming eligible for unemployment benefits. This weekly payment will be available through July 31, 2020.

The Minnesota Unemployment Insurance website states that eligible individuals will receive the $600 weekly payment in back-pay to the week of March 29, 2020 once available and that the $600 weekly payment will be paid separately.

Additional Thirteen Weeks of Unemployment: Pandemic Emergency Unemployment Compensation

The CARES Act provides an additional thirteen weeks of unemployment benefits once an individual exhausts the 26 weeks generally provided by state law, for those individuals who are able to work, available to work, and are actively seeking work. These extended benefits will be paid at the same weekly rate the individual is otherwise eligible to receive under state law and will be available through December 31, 2020. Qualifying workers will also be eligible to receive the $600 weekly payment during the additional thirteen-week period through July 31, 2020. States must offer flexibility in meeting eligibility requirements related to “actively seeking work” if an applicant’s ability to do so is impacted by COVID-19.

Unemployment for Those Generally Ineligible: Federal Pandemic Unemployment Assistance

The CARES Act provides benefits for individuals who are self-employed, seeking part-time employment, or who otherwise would not qualify for unemployment benefits under state or Federal law, such as “gig” workers, freelancers, and independent contractors. To be eligible, individuals must demonstrate that they are otherwise able to work and available for work within the meaning of applicable state law, except that they are unemployed, partially unemployed, or unable or unavailable to work because of COVID-19. The individual is eligible for up to 39 weeks of unemployment compensation with state benefits from January 27, 2020 through December 31, 2020 as well as the $600 weekly payment through July 31, 2020, as long as the unemployment, partial unemployment, or inability to work caused by COVID-19 continues. Ineligible individuals include those who can telework with pay, who are already receiving paid leave under their employer’s plans or policies, who are already receiving paid leave under an applicable Federal, state or local law, and new entrants to the workforce who cannot find employment.

The Minnesota Unemployment Insurance website states that those who are eligible for this assistance should apply for regular unemployment benefits and provides a special guide for self-employed individuals for them to qualify for these benefits quicker once available, which may be accessed here.

Short Time or Shared Work Benefits

Short time or shared works benefits are an alternative to layoffs, which allow employers to retain experienced employees, avoid future hiring and training expenses, and avoid a layoff which creates financial stability for the workforce and goodwill in the community. Employers divide available work amongst a group of employees so the employees are retained at a reduced schedule and receive partial unemployment benefits to offset their reduced wages under the state short time or shared work programs. The Federal government will cover 100% of the unemployment compensation paid under existing state programs. The CARES Act also creates incentives for states that have not yet created programs to do so. These benefits are available through December 31, 2020. Individuals receiving benefits under the shared work program also are eligible for the additional $600 weekly payment through July 31, 2020. Therefore, an individual whose hours and wages are reduced by 40% as part of the short time or shared work program will receive 60% regular wages, 40% of their weekly unemployment benefits, and the $600 weekly payment. Without the additional benefits, the normal short time and shared work benefits usually pay about half of the employee’s lost income due to reduced hours.

Information and updates for the Minnesota shared work program can be accessed here.

Supply Shortages 

• Provides for the National Academies to examine and report on the security of the U.S. medical product supply chain in order to assess U.S. dependence on critical drugs and devices sourced outside of the U.S., and to develop recommendations to improve resiliency of the U.S. supply chain for critical drug and devices.
• Requires the Strategic National Stockpile to include certain types of medical supplies, including personal protective equipment (PPEs), and identifies respiratory protective devices as covered countermeasures for use during a public health emergency.
• Prioritizes the review of drug applications to mitigate emergency drug shortages.
• Creates additional reporting requirements for drug manufacturers to report a discontinuation and disruption of the sourcing of active pharmaceutical ingredients.
• Requires manufacturers of certain drugs and medical devices critical to public health during a public emergency to develop, maintain, and implement risk management plans related to shortages, creating an annual notification requirement of the same. Such manufacturers are also subject to shortage-related inspections by the Secretary of Health and Human Services (“HHS”).

Access to Healthcare

• Permits group health plans and insurers to cover and reimburse providers of diagnostic testing relating to COVID-19 at pre-emergency-period negotiated rates, and sets reimbursement rates in instances without previously negotiated rates equal to the cash price for services listed on a publicly-available website, or the plan or insurer can negotiate with a provider for a rate lower than such cash price. All providers of a diagnostic test for COVID-19 are required to publicize cash price for such tests. Failure to comply with these requirements could result in HHS assessing a civil monetary penalty of up to $300 per day.
• Requires health plans and issuers to provide for rapid coverage of “qualifying coronavirus preventative services” – an item, service, or immunization intended to prevent or mitigate coronavirus—and vaccines for coronavirus.
• Appropriates $1.3 billion for FY 2020 for supplemental awards to health care centers for the prevention, diagnosis, and treatment of COVID-19.
• Amends Section 330I of the Public Health Service Act, relating to Telehealth Network and Telehealth Resource Centers Grant Programs, and Section 330A of the Public Health Service Act, relating to the Rural Health Care Services Outreach, Rural Health Network Development, and Small Healthcare Provider Quality Improvement Grant Programs—an individual or entity affected by these grant programs should seek out an attorney to examine the effect of such amendments.
• Limits potential state and federal liability for volunteer health care professionals—who provide services without compensation or other thing of value—for harm caused to patients relating to the diagnosis, prevention, or treatment of COVID-19. This provision expressly preempts more restrictive state or local law.
• Amends certain federal regulations governing the confidentiality and disclosure of substance use disorder patient records (Part 2), including allowing certain re-disclosures to covered entities, business associates, or other programs subject to HIPAA after obtaining the patient’s prior written consent.
• Permits a state agency or area agency on aging to transfer, without prior approval, not more than 100% of the funds received by the agency to meet the needs of the state or area served, and provides that the same meaning shall be given to an individual unable to obtain nutrition due to social distancing as one who is homebound due to illness.
• Provides that within 180 days of the passage of the Act, the Secretary of HHS shall issue guidance on the sharing of patients’ protected health information (PHI) related to COVID-19, including guidance on compliance with HIPAA regulations and applicable policies.
• Provides that the Secretary of HHS shall carry out a national awareness campaign relating to the importance and safety of blood donation, and the need of for donations for the blood supply during a public health emergency.
• Reauthorizes grant programs that promote the use of telehealth technologies, including the expansion of telehealth access, insurance coverage, rural telehealth access, Medicare reimbursement for services, and others.

Medicare and Medicaid Provisions

• Allows for accelerated Medicare payments.
• Creates a 20 percent add-on payment for inpatient treatment.
• Increases payments for the work component of physician fees in areas where labor cost is determined to be lower than the national average through December 1, 2020.
• Extends funding for quality measure endorsement input, and selection increased to $20 million for each of the years 2020 and 2021.
• Extends funding for beneficiary outreach and counseling related to low-income programs through November 30, 2020.
• Increases Medicare Access to Post-Acute Care.
• Delays scheduled reductions in Medicaid disproportionate share hospital payments through November 30, 2020.
• Extends the Medicaid Community Mental Health Services demonstration that provides coordinated care to patients with mental health and substance use disorders, through November 30, 2020.

Yesterday, April 2, the Small Business Administration issued an interim final rule providing additional guidance on implementing its Paycheck Protection Program. While questions still remain, here is the new information that lenders need to know:

1. Lenders who are already SBA 7(a) lenders may begin accepting and processing applications today.  Other lenders can become eligible upon meeting certain conditions.
2. A new form of borrower application was released yesterday and the lender application form for loan guaranty was released this morning.
3. Interest rates are fixed at 1% with a 2 year term; 75% of the loan amount must be used for payroll costs.
4. Underwriting examples are provided in the guidance, but the examples leave some uncertainty regarding calculations and requirements.   The four primary criteria set forth in the guidance state that lenders shall:
   • Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration;
   • Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
   • Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and
   • Follow applicable BSA requirements:
     • Federally insured depository institutions and federally insured credit unions should continue to follow their existing BSA protocols when making PPP loans to either new or existing customers who are eligible borrowers under the PPP. For existing customers, PPP loans will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.
5. Each lender’s underwriting obligation under the PPP is limited to the items above and reviewing the “Paycheck Protection Application Form.” Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
6. Lenders may rely on borrower documentation for loan forgiveness.
7. Clarification on SBA’s “affiliation” rules was not provided, but additional guidance may be issued.

While there are still many open questions with respect to this latest guidance, we are actively monitoring any updates and will continue to provide additional information to you as it becomes available. If you have any questions do not hesitate to contact our team, we are happy to talk through the guidance available to date, what it means for your financial institution and discuss best practices in light of current uncertainty. We are also available to prepare loan documents for a flat fee that you could utilize for the PPP loans.

Late Thursday, April 2, the Small Business Administration (“SBA”) released a highly anticipated Interim Final Rule and a new form of borrower application for the Paycheck Protection Program which was established as part of the CARES Act.  Small businesses and banks were hopeful that the SBA would provide additional guidance on how to interpret several vague, confusing, or even contradictory provisions in the CARES Act. Although the Interim Final Rule provided clarification on a few points, which we summarize below, many important issues remain unsettled. Further, the most notable change made by the Interim Final Rule – that businesses will not be permitted to borrow funds based on payments to independent contractors – will require many borrowers to recalculate their average payroll costs prior to submitting their loan applications.

We previously prepared a summary of the Paycheck Protection Program.  That summary has now been updated to reflect the guidance provided by the Interim Final Rule.

To help small businesses navigate this confusing situation, here are our key takeaways from the Interim Final Rule.

When can I apply?

Applications may be submitted beginning April 3, 2020 for small businesses and sole proprietorships.  Beginning April 10, 2020, independent contractors and self-employed individuals may submit applications. As noted above, the SBA also released a new form of application. Borrowers who already completed and submitted the “old” application (the one that the SBA released earlier this week), should expect that they will need to complete this new application.

When can I expect to receive funds?

You should not expect your lender to fund the loan on April 3, or otherwise on the same day that you submit your application.  Policies and procedures will vary from bank to bank. We anticipate that many banks will submit your application to the SBA as soon as possible. Due to anticipated volume, the systems for submitting applications to the SBA may become overburdened. Once the application has been “accepted” by the SBA (meaning that the SBA has agreed to reserve funds for the loan; not that the loan application has been “approved”), the bank will still need to complete its underwriting process and prepare actual loan documents for you to sign. Our expectation is that banks will only fund the loans once they have completed their underwriting process and received fully executed loan documents from the borrower. This could take several days, if not weeks. It likely depends on the bank, the borrower, and how quickly the borrower can respond to the bank’s requests for information. As a borrower, your best course of action is to submit an application that is as complete and correct as possible to ensure that your loan may be processed efficiently.

What do I need to know about the Application?

• The “new” form of application may be signed by a legally authorized representative of the borrower, rather than by each 20% owner of the business, as in the previous application.
• The Interim Final Rule provides that banks must comply with the Bank Secrecy Act for these loans.  This means that a borrower will most likely need to provide the information and documentation typically required upon opening a new account, unless you have a preexisting relationship with the bank.  If you are working with a new bank, have the information typically required to open an account handy.

What has changed in these rules that impact my calculation of the amount I may borrow?

• The maximum loan amount (2.5 times average monthly payroll costs) for a business must now be calculated based on employee payroll costs only, excluding compensation to independent contractors.  Independent contractors must apply for these loans on their own behalf.
• A borrower must submit documentation necessary to establish eligibility based on payroll costs, which may include payroll processor records, payroll tax filings, or other supporting documentation such as bank records.
• The Interim Final Rule contradicts the application with respect to the time period for measuring average payroll costs (the application says 2019 and the Interim Final Rule refers to the last 12 months).  We anticipate that banks will request the information identified in the application.  Contact your lender to ensure that you are providing them with the information they require.
• The SBA clarified that federal employment taxes, FICA and income tax withholdings may not be included in payroll costs.  As stated in the CARES Act, only state and local taxes may be included.
• A borrower may refinance an Economic Injury Disaster Loan (EIDL), but only if the loan was made between January 31, 2020 and April 3, 2020, less the amount of an advance under an EIDL COVID-19 Loan. Presumably, this means that EIDL loans that have been approved (but not yet funded) as of April 3, 2020 are not eligible for refinancing, but you should confirm with your lender.

What are the changes that will affect how I may use funds and obtain forgiveness?

• As indicated in the fact sheet released by the Treasury Department on March 31, the rule provide that 75% of the forgiveness amount must be payroll costs (i.e. employee compensation).  Your rent, mortgage interest and utilities expenses may together only constitute 25% of the forgiven amount in the aggregate.
• Eligible uses of proceeds and forgiveness are also limited to compensation paid employees, but may not include compensation paid to independent contractors.
• The final interest rate for the program has been set at 1.0%, as opposed to the 0.5% rate initially suggested by the Treasury Department.
• Accrued interest on the loan amount may also be forgiven. Accordingly, a borrower may be able to obtain full forgiveness of this loan without ever making a payment.

Do any of the changes in the Interim Final Rule Affect My Eligibility for a Loan? 

• Despite much attention to the affiliation rules, there was no clarification on whether the SBA would further relax the affiliation rules under the PPP program, although the SBA intends to promptly issue further guidance on this issue. This means that, for the time being, the affiliation rule still apply when determining whether your business is eligible for the PPP loan program.
• The Interim Final Rule uses different language to describe eligible borrowers, and it’s not clear whether there are any changes to the eligibility standards set forth in the CARES Act. If you are unsure of your eligibility, consult your lender, or an attorney or accountant who is familiar with this program.

On March 26, the Minnesota legislature returned from its extended break to pass H.F. 4531, legislation addressing the most pressing needs. The requirement for any provision to be included in the bill was to have agreement from each of the four caucus leaders, ensuring that each had broad bi-partisan support.

Despite the bi-partisan support, many have criticized the approach for the lack of public input in the process. While appropriating more than $330 million, there were no hearings to discuss the legislation, and neither an overview of the legislation nor the bill text was released to the public until minutes before debate began on the floor of the House of Representatives.

COVID-19 Minnesota fund

By far, the largest expenditure was the newly created COVID-19 Minnesota fund. Described by some as a COVID-19 slush fund, the $200 million appropriated to this new account is available for the commissioner of management and budget to disperse “to state agencies as necessary to (1) protect Minnesotans from the COVID-19 outbreak, and (2) maintain state government operations throughout the duration of the peacetime emergency.”

Also established is the Legislative COVID-19 Response Commission, comprised of 10 legislators, to review individual expenditures from the fund that exceed $1 million. If a majority of commission members from the House and a majority of commission members from the Senate object to a proposal within 24 hours, the expenditure may not be made. There is no similar mechanism to stop expenditures that do not exceed $1 million.

All expenditures must be reported to the commission on the 15^th and the last day of each month.

Human Services

Of the remaining $130 million appropriated, more than half is allocated to help struggling families and individuals.

• $30 million: Child care assistance through the state’s Child Care Aware emergency grants. This money is available for programs that prioritize spaces for children of essential workers, not for individual families.
• $6.2 million: Veterans and their surviving spouses impacted by COVID-19. Funds can be used for “emergency financial relief, hospitalization assistance, medical care or treatment, or any other COVID-19-related assistance as determined by the commissioner.”
• $9 million: Food assistance through food shelf programs. Funds will be provided to Hunger Solutions, which will in turn allocate funds to “food banks, food shelves, and transportation organizations” to assist in distribution.
• $5.53 million: Housing assistance. These funds provide a temporary 15% increase for the county housing assistance program under Minnesota Statutes, section 256I.05.
• $26.5 million: Emergency services. $15.2 million is available for shelter for homeless individuals; $5 million is for “hygiene, sanitation, and cleaning supplies” for sheltered individuals; and $6.3 million is for staffing for this population.

Help for small businesses and farmers

Recognizing the need to provide immediate help to vulnerable businesses, the legislature funded programs for small business loans, as well as made policy changes to help farmers and others.

• $30 million: Small business emergency loan program. This funding is made available for an emergency small business loan program established through Executive Order 20-15, with the intent of more quickly providing help to small businesses than is possible through federal SBA loans.
• $10 million: Small business loan guarantee program. In addition to providing funding for this program, the legislature reduced the maximum size of the business from 500 to 250 employees in order to be eligible for this program.

In addition to the loan programs above, certain local governments are authorized to issue loans to “retail stores, service providers, and hospitality businesses,” potentially making available millions of additional dollars to provide relief for struggling local businesses.

For farmers, the legislature expanded when farmers could access the disaster recovery loan program. Previously, funds through this program were only available when damage was due to “high winds, hail, tornado, or flood, or the weight of snow, sleet, or ice.” Additionally, the program now covers “the loss of revenue when the revenue loss is due to an infectious human disease for which the governor has declared a peacetime emergency.”

Tribal governments

$11 million was made available to tribal governments across the state “for activities that mitigate the immediate health and economic impacts of COVID-19.” Each of the state’s 11 tribal nations may access $1 million. If any nation does not seek the funds, the remaining money is to be distributed equally among the participating tribes.

Driver and vehicle services

In order to increase the turnaround time for issuing drivers’ licenses and identification cards, $2.4 million was allocated for temporary staffing. Additionally, residency documentation requirements for REAL ID applications were eased and expiration dates for drivers’ licenses and identification cards were extended until after the peacetime emergency expires.

Additional policy changes

• Elimination of the 30-day maximum prescription for opioids;
• Reduction of application fees for licensure, registration and renewal for medical gas manufacturers and wholesalers;
• Establishment of emergency powers to the Commissioner of Commerce and the Office of Higher Education during the peacetime emergency;
• Temporarily waiving the requirements regarding emergency purchasing and equal pay certificates for certain state contracts;
• Codification of changes to unemployment insurance during the pandemic; and
• Delay of submission of fingerprints for background checks for essential workers during the peacetime emergency.

This Alert was authored by Andrea Rau, Government Relations Manager.

Andrea L.
Rau

P  /  612.604.6526
E  /  [email protected]

Additional resources

Governor Walz Executive Orders

HF 4531

Minnesota Department of Economic Development (DEED) Guide for MN Small Businesses Who Need Help

List of Minnesota Department of Human Services (DHS) Waivers