The Paper Trail Saves the Day: Important Considerations in PPP Loan Civil Litigation

By LCA Fellow Matthew E. Feinberg

The Paycheck Protection Program (PPP) created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered much-needed financial relief to businesses directly impacted by the COVID-19 pandemic. Through the program, eligible businesses could obtain a loan designed to keep employees on the company payroll, even when company revenues were impacted by stay-at-home and social distancing orders. And, in many cases, PPP loans are eligible for total forgiveness, saving companies from the additional financial burden of paying back an often sizeable loan. Obtaining a PPP loan was not without risk, however, and the representations and certifications required to obtain PPP loan forgiveness could expose companies to liability under the civil False Claims Act (FCA)[1] or the Financial Institutions Reform, Recovery & Enforcement Act (FIRREA).[2]

The FCA is the government’s primary vehicle for recovering federal funds obtained or retained by fraud. Although there are a number of ways one can defraud the government for purposes of the FCA, PPP loan forgiveness primarily implicates false claim and false statement liability. Under the civil FCA, a violation occurs when any person knowingly or recklessly “presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the government or knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . .” In addition, liability exists where a person knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money . . . to the Government . . . .” Because PPP loans involve money received from—and ultimately not paid back to—the government, the statements made by a loan recipient to obtain forgiveness are critical to determining whether an FCA violation occurred.

Less well known, but equally dangerous for borrowers, FIRREA imposes civil penalties on a defendant for any one of several criminal violations affecting banking and lending institutions, including the U.S. Small Business Administration (SBA) loan programs. Notably, FIRREA makes it unlawful for an individual or entity to make a false statement for the purpose of obtaining a loan from or for the purpose of influencing SBA. Because the submission of a PPP forgiveness application is intended to influence SBA to forgive the PPP loan, FIRREA is directly implicated.

A violation of the FCA may result in triple damages, plus an additional statutory penalty per violation. In a PPP loan context, triple damages could mean three times the total amount of the loan received or three times the total amount of forgiveness sought, depending on the specific circumstances of each loan. Under FIRREA, a court can impose a penalty of up to $1,000,000 for a single violation or up to $5,000,000 for a continuing violation. Importantly, the FCA also includes a criminal component. Under certain circumstances, the same false statements made to the government to obtain PPP loan forgiveness could be used by the government to seek a criminal conviction.

The PPP loan forgiveness application requires applicants seeking forgiveness to certify, among other things, to the following:

  • that the loan amount for which forgiveness is sought “was used to pay costs that are eligible for forgiveness[,]” i.e., “payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments”;
  • that the proposed forgiveness amount “includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions”;
  • that at least 75% of the forgiveness amount requested was used to pay payroll; and
  • that the amount of forgiveness sought “does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner . . . .”

Many of these certifications require a fairly simple mathematical calculation, but there are hidden landmines for loan recipients. For instance, it is not entirely clear how the government will interpret the first certification, i.e., that the PPP funds received were used to pay costs eligible for forgiveness. This certification is a fact-specific inquiry that PPP loan recipients must make on a case-by-case basis.

Recently, SBA released its loan forgiveness questionnaire (for-profit entities), which raised additional risks regarding PPP loan forgiveness. The loan forgiveness application appears to indicate that SBA will not forgive PPP loans where the loan recipient was not negatively impacted by the COVID-19 pandemic, even where the loan was originally obtained in good faith due to business uncertainty surrounding the pandemic. Companies seeking loan forgiveness may also find themselves subject to scrutiny for the representations they make on the forgiveness application.

Despite these recent directives, SBA and the Department of Justice have not provided significant guidance about how they will assess PPP loan forgiveness under the FCA or FIRREA, leading to justifiable confusion and uncertainty. SBA previously announced a safe-harbor rule applicable to PPP loans, where borrowers obtaining loans under $2,000,000 would be considered to have sought the loan in good faith. Many PPP loan recipients assumed that the safe-harbor rule meant the government would not investigate any loan under $2,000,000 for violations of the FCA. This is not the case. Subsequent announcements by SBA have clarified that “SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion.” A more accurate understanding of the safe-harbor rule is that SBA will presume good faith at the loan application stage—not at the forgiveness stage. And, because the safe-harbor rule was established through an FAQ, as opposed to a formal rulemaking, it should not be construed as a blanket opportunity for loan recipients to rubber-stamp their certifications on PPP loan forgiveness applications.

So, what kind of evidence could help a company facing civil litigation as a result of it obtaining a PPP loan or loan forgiveness? As with many civil fraud cases, the paper trail saves the day.

A PPP loan recipient that segregated the PPP funds; used the funds to pay employee payroll; and kept detailed records of the source, location, and transmission of those payments may not have much to worry about in seeking forgiveness. This type of documentary evidence would help rebut any claim that a company intended to deceive the government or acted in bad faith. Even if the documentation is not contemporaneous to the receipt and use of the PPP funds, so long as the documentation existed well prior to any investigation or civil claim commencing, it will offer some relief to accused loan recipients.

Take, for an alternative, a government contractor or private company that applied for a PPP loan shortly after the CARES Act was passed. At the time, when the impact of the COVID-19 pandemic was left up to substantial speculation, the company may have had credible concerns that the government would issue a stop-work order on a major existing federal contract or a client would terminate or be unable to pay on a large commercial contract. Based on those concerns, the contractor obtained a PPP loan, which it deposited into its operating account. Ultimately, however, the catastrophe never came, and the government or client continued to pay on the contract throughout the ongoing pandemic. This example presents a potential FCA and FIRREA risk. It may be difficult for the company to certify that PPP loan funds were used “to retain employees” or that at least 75% of the loan proceeds went to payroll if the company’s business was not ultimately impacted by COVID-19. That risk is compounded if the company failed to segregate PPP funds or did not keep detailed records about what was done with PPP loan funds received.

In most jurisdictions, a civil fraud claim often requires proof of wrongdoing by clear and convincing evidence. Thus, a lack of a paper trail is unlikely to be dispositive for a company. However, a lack of documentary evidence could place companies at far more significant risk than if they had clearly documented the justification for receiving the loan, the treatment of those funds, and the reasons for seeking forgiveness.

Companies should take into consideration the following when determining whether to seek PPP loan forgiveness; evaluating the amount of forgiveness a PPP loan recipient seeks; revisiting whether previous loan forgiveness was justified; or preparing for PPP loan litigation:

  • How was your business impacted by COVID-19? Companies should consider whether they lost government or commercial contracts, suffered substantial delays in payment or non-payment from customers or teaming partners, or encountered revenue losses as a result of COVID-19. Companies should ask whether—but for the receipt of the PPP loan—they would have had to lay off one or more employees or would have missed or delayed payments on mortgage or rent. A PPP loan recipient that can point to a documented financial impact on business operations as a result of COVID-19 is less likely to incur FCA or FIRREA liability if it seeks forgiveness.
  • Did you segregate PPP funds? Although SBA’s loan programs did not require loan recipients to segregate the funds they received, documented segregation of PPP funds helps establish the kind of paper trail that can help avoid liability for PPP forgiveness. For instance, if PPP loan funds were deposited into a separate account, it may be easier to track transactions from that account to show they were used for payroll, rent, mortgage, or utility payments.
  • Did you keep detailed documentation? Companies that can provide detailed, contemporaneous documentation to show how PPP funds were allocated for business purposes are less likely to incur liability for PPP loan forgiveness. If no contemporaneous documentation was maintained, documentation created during an internal audit performed at the time of forgiveness application submission can go a long way toward limiting any potential liability. Ultimately, if the government elects to audit or investigate a company’s eligibility for PPP loan forgiveness, documentation that creates a streamlined narrative can be particularly compelling.

Companies that can show a financial impact on business operations due to COVID-19, segregation of funds, and detailed documentation are in the best position to seek PPP loan forgiveness. That is not to say that companies that faced no financial impact as a result of COVID-19, did not segregate funds, and cannot produce detailed documentation about how PPP funds were used would automatically violate the FCA or FIRREA by seeking forgiveness of a PPP loan. However, those companies may be at greater risk of an SBA audit, a government investigation, a whistleblower suit, or, ultimately, FCA liability. For companies in that position, the decision whether to seek forgiveness, and in what amount, may turn on a risk-benefit analysis. Given the risk of triple damages and substantial civil penalties under both the FCA and FIRREA, individuals and companies seeking PPP loan forgiveness should be especially vigilant when filling out the PPP loan forgiveness application to ensure that all representations and certifications are accurate and well supported. And, if litigation does arise, they should ensure that the paper trail supporting their representations to the government is long, wide, and thorough.


If you have questions regarding FCA considerations for PPP loan forgiveness applications, please contact the author of this article, Matt Feinberg (, or a member of PilieroMazza’s False Claims Act Group.

Matt Feinberg is an accomplished litigator with over a decade of experience in state and federal civil and appellate litigation, as well as in arbitration. As the Practice Group Chair for PilieroMazza’s Litigation & Dispute Resolution Group and Chair of the firm’s False Claims Act and Audits & Investigations teams, Matt’s advocacy for government contractors and commercial businesses on a wide range of topics, across many industries, gives him a unique perspective on successful litigation strategies for achieving the best possible outcome for clients.

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[1] 31 U.S.C. § 3729.

[2] 12 U.S.C. § 1833(a).