April 11, 2021

Volume XI, Number 101

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April 09, 2021

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April 08, 2021

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DOJ Exercised Leniency With a Borrower Who Self-Disclosed His Error on His PPP Loan Application

Recently, the U.S. Attorney’s Office for the Eastern District of California settled a Paycheck Protection Program (“PPP”) fraud investigation with Slidebelts, Inc. and its owner Brigham Taylor not by arresting Mr. Taylor, but by requiring him to pay a $100,000 civil penalty payment pursuant to the FIRREA civil penalty provision, 12 U.S.C. Section 1833a, and the False Claims Act, 31 U.S.C. Section 3729 et. seq.  The FIRREA civil penalty statute, 12 U.S.C. Section 1833a, permits DOJ to civilly prosecute bank and loan fraud cases with a lower burden of proof and no resulting criminal conviction.  To date, DOJ publicly has disclosed approximately 100 PPP criminal loan fraud prosecutions.  Until now, DOJ has either declined to prosecute or criminally charged all other borrowers it has investigated – this is the first case publicly disclosed in which DOJ has concluded a PPP investigation by a civil settlement. 

So why is this case different?  The key difference appears to be that Mr. Taylor corrected the record with the lender before the lender or the government found the problem.  Mr. Taylor’s error was that he falsely represented that the borrower, his company Slidebelts, Inc., was not in bankruptcy at the time of the loan application when in fact it was in bankruptcy.  But what Mr. Taylor did differently than most borrowers faced with having submitted an erroneous loan application was that he “wrote an email to [the second lender] explaining that SlideBelts ‘just realized that we may not have answered [Question 1] correctly since we filled out the application quickly and wanted to bring it to your attention[.]’” Mr. Taylor did not disclose that SlideBelts was in bankruptcy until after the lender had disbursed a $350,000 loan to SlideBelts. SlideBelts did not return the loan to the lender at that time.

On its face, the facts look similar to other cases that the Department of Justice has criminally charged. The borrower certified that its business was not in bankruptcy, when, in fact, the business was before the Bankruptcy Court.  The first lender that the borrower approached knew about the bankruptcy because it was a creditor, and that lender told the borrower that it was not eligible for a PPP loan because of the bankruptcy.  The borrower applied to a second lender at the same time as it applied to the first lender.  Moreover, after the first lender denied the borrower’s PPP loan application, the borrower applied to a third lender.  The second lender approved the PPP loan prior to the third lender.  Eventually, Mr. Taylor returned the loan after multiple demands from the SBA and the PPP lender, and unsuccessful litigation in the Bankruptcy Court.

This case teaches at least two important lessons.  First, a borrower that has erred in its PPP loan application can improve its chances of a better outcome with the Department of Justice by coming forward to the lender and disclosing the problem before the SBA or the lender discovers the problem.  This is especially important in quickly changing situations such as occurred with the PPP loan program.  It could be the case that what seemed permissible under earlier guidance now seems wrong.  In those cases, being direct by raising the issue in a forceful way could be the right approach, sometimes known as a “noisy” disclosure, depending on the facts and circumstances.  In other cases, where the issues may be more gray, one may consider simply writing a letter to inform the lender of the situation to hopefully simply be placed in the file; this is sometimes referred to as a “quiet disclosure.” Of course, both options should be analyzed under the facts and circumstances of the individual case, including the status of any government investigation.  As the saying goes, timing is everything.  Second, if the facts favor leniency, there now is precedent for the Department of Justice settling its PPP investigation for a civil penalty. 

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© 2021 Foley & Lardner LLPNational Law Review, Volume XI, Number 35
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Pam Johnston, Trial Attorney, Foley Lardner Law Firm
Partner

Pamela L. Johnston is a partner and trial lawyer with Foley & Lardner LLP, where she is chair of the firm’s Government Enforcement, Compliance & White Collar Defense Practice, a member of the Securities Enforcement & Litigation Practice, and a member of the Health Care Industry Team. Ms. Johnston focuses in the areas of white collar criminal defense, False Claims Act and whistleblower actions, securities enforcement and other governmental enforcement actions. She represents companies and individuals in parallel civil and criminal proceedings involving a...

213-972-4632
Lisa Noller, Trial Lawyer, Foley Lardner Law Firm
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Lisa Noller is a trial lawyer and investigator with Foley & Lardner LLP, where she is chair of the Government Enforcement, Compliance & White Collar Defense Practice. She has spent almost 20 years investigating, litigating and trying complex criminal and civil cases, including responding to government investigations, conducting corporate internal investigations, and persuading the government not to pursue clients. When cases proceed to trial, Ms. Noller also has significant experience successfully trying a wide variety of over 30 civil and criminal matters in...

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Thomas F. Carlucci, Foley Lardner, Health Care Fraud Lawyer, Off Label Marketing Attorney,
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Thomas F. Carlucci is a partner and litigation attorney at Foley & Lardner LLP where he is managing partner of the San Francisco office. Mr. Carlucci represents corporations, organizations and individuals in white-collar matters and internal investigations with an emphasis on potential health care fraud, tax fraud, off-label marketing, and false claims. He also focuses on civil state and federal tax litigation.

415-984-9824
Erin L. Toomey, Foley Lardner, Government Contracts Attorney
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Erin L. Toomey is a partner and government contracts attorney at Foley & Lardner LLP, where she assists companies to reduce their risk and maximize their recovery when contracting with the government. Ms. Toomey represents clients in a range of industries, including automotive, aerospace, construction, and health care, and counsels such clients in all areas of government procurement, employing innovative and effective legal strategies to protect and promote her clients’ objectives. In recognition of Ms. Toomey’s and her colleagues’ work in this area, Foley’s...

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