Keith Mack
The COVID-19 pandemic caused a global economic downturn, and law firms, big and small, were not immune. With courtrooms shuttered and a reduction in business, law firms lined up to receive economic relief through the federal government's Paycheck Protection Program (PPP). The PPP provided forgivable loans to small businesses to help them keep their employees on the payroll and cover other operating expenses. Over 14,000 law firms received PPP loans, with some firms borrowing up to $10 million. While the loans provided a lifeline to many firms, there are concerns about civil liability claims and criticism that larger companies may have taken advantage of the program, making it challenging for smaller businesses to obtain funds.
| Characteristics | Values |
|---|---|
| Number of law firms that received PPP loans | 14,363 |
| Total amount borrowed by law firms | $12 billion |
| Average loan size | $100,000 |
| Maximum loan amount | $10 million |
| Firms that received the maximum loan amount | Cole Scott, Fredrikson & Byron, Robins Kaplan, Thompson & Knight, Kasowitz Benson, Ice Miller, and 4 others |
| Purpose of the loans | To help businesses keep their workforce employed during the COVID-19 crisis |
| Eligibility criteria | Firms with 500 or fewer employees |
| Loan forgiveness criteria | Funds must be used for eligible payroll costs, business mortgage interest payments, rent, or utilities |
| Loan forgiveness status | Many of the loans have been forgiven |
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What You'll Learn
Law firms and misuse of PPP loans
The COVID-19 pandemic resulted in a global economic crisis. To help small businesses, the US government passed the CARES Act in April 2020, which authorized forgivable loans under the SBA's Paycheck Protection Program (PPP). Law firms with 500 or fewer employees were eligible for these funds. However, despite the PPP's intention to support small businesses, larger companies with significant resources, including law firms, also participated in the program.
Law firms borrowed nearly $12 billion from PPP loans. However, several law firms still laid off employees or reduced salaries despite receiving substantial PPP loans. This misuse of funds resulted in investigations, with the SBA releasing a list of companies that received loans between $150,000 and $10 million. Law firms were among the top recipients.
The Bloom Firm, a California law firm, and its senior managers, Lisa Bloom and Braden Pollock, were accused of violating the False Claims Act by knowingly providing false information to obtain PPP loan forgiveness. They settled the allegations by paying $274,000. Whistleblowers and Qui Tam lawsuits play a crucial role in exposing fraud and misuse of PPP funds, with rewards and legal protection offered to those who come forward.
Due to the higher standard of care expected from law firms, they face a significant risk of potential civil liability claims related to their receipt of PPP loans. To mitigate this risk, law firms should conduct thorough due diligence and consider internal reviews to address any vulnerabilities that could lead to further government scrutiny or liability.
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Civil liability from PPP loans
The COVID-19 pandemic caused a global economic crisis, with small businesses being the worst hit. To help these businesses, the Small Business Administration (SBA) introduced the Paycheck Protection Program (PPP) to provide forgivable loans to help them retain their employees and continue business operations.
The PPP loans were quickly snapped up, with the first $349 billion being exhausted in early April. While the PPP loans were targeted at small businesses, many larger companies with significant resources also participated in the program. This made it more difficult for smaller businesses to obtain funds. Law firms were among the businesses that applied for and received PPP loans, with over 14,000 law firms receiving pandemic-related financial assistance.
However, despite their eligibility, law firms could face an unfair risk of potential civil liability claims in connection with their receipt of PPP loans. This is because law firms are viewed by the Department of Justice and other enforcement agencies as gatekeepers subject to a higher standard of care, making them easy targets for scrutiny. Law firms should, therefore, conduct an internal review or a privileged internal investigation to identify and address any potential vulnerabilities that could subject them to further government examination and/or liability. For instance, lenders have been accused of profiting off the taxpayer-funded loan program and failing to approve loans on a "first-come, first-served" basis.
Additionally, lenders could face civil liability if they are found to have inaccurate "verifications" provided to the SBA, or if they have actual knowledge about borrowers that conflicts with the information provided by those borrowers when applying for PPP loans. Law firms that received PPP loans could also be scrutinized for optimistic year-end financial forecasts and subsequent year-end profits, which could indicate that they did not truly need or qualify for the loan.
To mitigate the risk of civil liability, law firms can take several precautions, including supplementing their initial due diligence with an internal review or investigation to identify and address potential vulnerabilities. They should also be cautious about relying on any relaxed underwriting rules, as there is limited guidance on how regulators will interpret the intersection of CARES Act obligations with other lending standards.
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PPP loan eligibility for law firms
The Paycheck Protection Program (PPP) was created by Congress in March 2020 through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It provided emergency financial assistance in the form of low-interest loans to small businesses suffering from the economic effects of the COVID-19 pandemic. The program was designed to help businesses keep their employees on the payroll and avoid layoffs.
To be eligible for a PPP loan, a business must have fewer than 500 employees and must not have defaulted on a loan from the Small Business Administration (SBA) or any other federal agency in the last seven years. The business must also demonstrate that the loan is necessary to support ongoing operations due to economic uncertainty.
Law firms, like other small businesses, were eligible for PPP loans. Over 14,000 law firms applied for and received PPP loans, with the total amount borrowed by law firms reaching nearly $12 billion. However, some law firms that received PPP loans still ended up cutting employees or salaries, despite the program's goal of preventing layoffs.
While PPP loans provided much-needed financial relief to law firms, it's important to note that there were concerns about potential civil liability claims and allegations of misuse of funds. Some law firms may have been exposed to increased scrutiny and the risk of legal action in connection with their receipt of PPP loans due to their position as "gatekeepers" subject to a higher standard of care.
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PPP loan forgiveness for law firms
The Small Business Administration's (SBA) Paycheck Protection Program (PPP) was designed to help small businesses, including law firms, keep their workforce employed during the COVID-19 crisis. The PPP provided forgivable loans to eligible businesses to cover payroll costs, business mortgage interest, rent, and utilities.
While the PPP aimed to support small businesses, it has faced criticism for benefiting large companies and well-connected businesses. Law firms, both large and small, borrowed nearly $12 billion in PPP loans to prevent layoffs and continue operations during the pandemic. However, some law firms that received substantial PPP loans still proceeded with layoffs and salary cuts, sparking further criticism.
To ensure PPP loan forgiveness, borrowers must meet specific requirements. Firstly, recipients must demonstrate that the funds were primarily used for eligible expenses, with at least 60% of the loan amount allocated to payroll costs. Additionally, borrowers must retain employees for a certain period and prove that the loan was necessary due to the economic hardships caused by the pandemic. The SBA will scrutinize applications for loan forgiveness from borrowers who received more than $2 million, seeking detailed financial information and changes in liquidity.
The PPP loan forgiveness process has not been without controversy. A lawsuit filed against the SBA alleges that the organization made it challenging for companies to obtain loan forgiveness. The suit claims that a new questionnaire for businesses seeking forgiveness asks for extensive financial information, potentially raising the bar for loan forgiveness. This uncertainty around loan forgiveness has created challenges for law firm leaders in financial planning and partner distributions.
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Impact of PPP loans on law firms
The COVID-19 pandemic caused a lot of uncertainty for law firms. With courtrooms closed and most people unable to do business, law firms were faced with the prospect of dwindling revenue. As a result, over 14,000 law firms applied for and received pandemic-related financial assistance in the form of low-interest loans under the Small Business Administration's (SBA) Paycheck Protection Program (PPP).
The PPP was designed to help small businesses retain their employees during the pandemic. The loans were forgivable if the funds were used for eligible payroll costs, business mortgage interest, rent, or utilities. However, law firms that received PPP loans were faced with the risk of civil liability claims. This was because law firms are viewed by the Department of Justice and other enforcement agencies as "gatekeepers" subject to a higher standard of care, making them easy targets for investigations.
Despite receiving PPP loans, many large law firms still laid off employees or reduced salaries. According to Reuters, law firms borrowed nearly $12 billion from PPP loans, with some of the largest firms cutting the most jobs. This has led to criticism of the PPP loan program, as it was intended to prevent layoffs and salary cuts.
The long-term impacts of the PPP loans on law firms are yet to be seen. However, the loans may have helped law firms weather the economic downturn caused by the pandemic and allowed them to continue their business operations.
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Frequently asked questions
Yes, law firms can get PPP loans. Over 14,000 law firms applied for and received pandemic-related financial assistance through the SBA's Paycheck Protection Program (PPP).
PPP loans, or Paycheck Protection Program loans, were a part of the $2 trillion COVID-19 pandemic relief bill passed by Congress in March 2020. The program provided forgivable loans of up to $10 million to small businesses, generally defined as firms with 500 or fewer employees, to help them recover from government-ordered shutdowns and revenue losses.
PPP loans are intended to help businesses keep their workforce employed during the COVID-19 crisis. The loans can be used to cover payroll, rent, mortgages, and utilities.
PPP loans provided law firms with a financial boost and peace of mind during the uncertainty of the pandemic. While some firms used the funds to prevent layoffs and salary cuts, others still reduced their workforce or employee pay despite receiving substantial PPP loans.
A portion of the law firms that received PPP loans could face potential civil liability claims. This is because law firms are viewed by the Department of Justice and other enforcement agencies as gatekeepers subject to a higher standard of care, making them easy targets for investigations and liability claims.
