Last week, Congress passed and the President signed the latest legislation to provide additional funding for Coronavirus relief programs, the Paycheck Protection Program and Health Care Enhancement Act.
This legislation is now commonly known as “Phase 3.5” of legislative coronavirus stimulus and relief packages.
First, Phase 3.5 adds an additional $310 billion to the Paycheck Protection Program (“PPP”). Low interest, forgivable loans available through the PPP were quickly exhausted when first made available.
Phase 3.5 also adds an additional $50 billion for Economic Injury Disaster Loans (“EIDLs”) and expands the scope of eligible businesses. EIDLs are now available to certain agricultural entities with less than 500 employees.
$75 billion is provided to support health care facilities to help offset additional costs and expenses due to the coronavirus. Finally, $25 billion is provided to support increased testing.
Small Business Protection and the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has been signed into law to aid against the economic impacts created by the spread of the coronavirus. One program under the CARES Act, known as the Paycheck Protection Program (“PPP”), provides protection to small businesses and nonprofits by providing low interest loans (with interest capped at 4%) with loosened requirements compared to those generally applicable to small business loans. The loans are made by private lenders and will be guaranteed by the Small Business Administration (“SBA”). The loans are nonrecourse loans, meaning there is no recourse against an individual shareholder, member, or partner so long as the proceeds are used for one of the reasons outlined below. There are no personal guarantee or collateral requirements for these loans. In addition, these loans may be fully forgivable, subject to certain requirements outlined below.
Beginning April 3, 2020, small businesses and sole proprietorships can apply for the loans under the PPP through existing SBA lenders. Applications can be submitted beginning April 10, 2020 for independent contractors and self-employed individuals through existing SBA lenders. Applications can be submitted through all other lenders once they enroll in the PPP. Although the PPP is open until June 30, 2020, borrowers are encouraged to apply as quickly as possible because there is a cap on the amount allotted for the loans.
These loans apply to businesses that employ no more than the greater of:
• 500 employees; or
• The size standard established by the SBA for the industry in which the business operates.
The loans also apply to certain restaurant, hotel, food and beverage service and hospitality industry businesses with an NAICS code beginning with 72 that employ fewer than 500 employees per physical location. For the purposes of determining the 500-employee threshold, applicants should include full time, part-time and other basis employees. General SBA affiliation rules apply, subject to certain waivers for NAICS 72 businesses, franchises, and businesses licensed under Section 301 of the Small Business Investment Act. This may preclude many companies owned by private equity from taking advantage of the program.
The maximum loan amount is determined as the lesser of:
• 2.5 times the average monthly payroll costs during the 1-year period prior to the date the loan is made plus the outstanding amount of certain SBA loans made on or after January 31, 2020; or
• $10,000,000.
The maximum loan amount equation outlined above varies for seasonal employers and those not in business during the period beginning 2/15/2019 and ending 6/30/2020.
These loans can be used for the following payments (subject to certain specified exclusions):
• Payroll costs;
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions, or similar compensations;
• Mortgage interest payments incurred before February 15, 2020;
• Rent under leases entered into before February 15, 2020;
• Utilities for which service began before February 15, 2020; and
• Interest or other debt obligations that were incurred before the covered period.
Guidance from the United States Treasury Department has indicated that the loans will be forgiven so long as they are used for the purposes outlined above over the 8 weeks after receiving the loan and employee headcount and compensation levels are maintained. Also, it is anticipated that no more than 25% of the forgiven amount can be used for non-payroll costs. Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between Feb. 15, 2020 and April 26, 2020.
In order to obtain a loan, the borrower must make the following certifications:
• The uncertainty of economic conditions makes necessary the loan request to support operations;
• The funds will be used for one of the above-listed uses; and
• Borrower has not previously submitted an application or received proceeds for the same purpose and amount.
Further, borrowers will need to have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes.
We understand the SBA has been working to create a streamlined loan application through an electronic portal to facilitate its and the participating lenders’ ability to move applications through the system and disburse the $349 billion as quickly as possible. We also understand that the SBA is working on regulations implementing the PPP and providing guidance in anticipation of the CARES Act enactment. The regulation may come out in stages, and we will attempt to provide further guidance to our clients as new information becomes available. If you have any questions regarding the PPP, please contact a member of our Corporate/Business Law group.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
Erickson | Sederstrom Welcomes New Attorney Blake S. Schneiderwind
Erickson | Sederstrom is pleased to announce that Blake S. Schneiderwind has joined the Firm as an associate representing primarily corporate clients in all aspects of business, from formation and start-up to mergers and acquisitions, and general counsel matters. Blake also aids clients in the health care field in the areas of licensure disputes, health care compliance, and data privacy and security.
Blake graduated magna cum laude in 2019 from Creighton Univerisity School of Law. While at Creighton, he was a member of Creighton’s International Trademark Association Moot Court Team. He received the Cali Excellence for the Future Award for Business Planning, Business Associations, Health Care Organizations, and HIPAA Privacy and Security.
Nebraska Supreme Court Draws a Fine Line Between Federal and State Arbitration Laws in Home Sales
On any given day, millions of Americans are entering into contracts both big and small. Some of these contracts represent the terms and conditions for a major life decision for those people, while other contracts represent transactions that no one would give a second thought to. For example, as you are reading this article there is likely someone signing their name to a contract for a mortgage on the home they plan to raise their children in. Meanwhile someone somewhere else is agreeing to the terms and conditions of a mobile app designed to super impose animated animals over their face in a selfie. Regardless of the seriousness of the contract, people are more often than not agreeing to arbitration clauses that they never read.
Most people do not even realize that they are agreeing to arbitration clauses that will keep them out of the courthouse when they enter into these contracts. Even more people do not realize that arbitration is governed by one of two sets of laws in most cases, and parties who are not carefully drafting those clauses might find them unenforceable. Recently, in a nasty dispute between a property management company and a home buyer, the Nebraska Supreme Court in Garlock v. 3DS Properties, L.L.C., considered whether an arbitration clause found in the contract for the sale of a home was governed by Nebraska arbitration law or federal arbitration law.
In Garlock, the Garlocks purchased a home from 3DS Properties. The Garlocks later sued 3DS Properties for damages they alleged were caused by serious problems in the home which 3DS Properties did not disclose as required by law. The Garlocks brought this lawsuit in state court, and 3DS Properties sought to have it removed from state court and taken to arbitration. Both the Garlocks and 3DS Properties disagreed on where the Garlock’s claim should be considered. The dispute lasted several years until it eventually landed in the Nebraska Supreme Court. That dispute highlighted two important distinctions that should always be considered by anyone entering into a contract with an arbitration clause in Nebraska.
ATTENTION TO DETAIL REALLY MATTERS
Because the Garlocks wanted their case to be heard in state court rather than in an arbitration court, they argued that the arbitration clause in the contract between them and 3DS Properties was unenforceable under Nebraska’s Uniform Arbitration Act. The Garlocks based this argument on the fact that the contract between them and 3DS Properties contained a clause above the signature line that read:
THIS CONTRACT CONTAINS AN ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.
The Garlocks reasoned that because this notice was not underlined it was not enforceable under Nebraska’s Uniform Arbitration Act. The Nebraska Uniform Arbitration Act requires that all contracts with binding arbitration clauses include the above notice which must be capitalized and underlined in order to be enforceable. Because this notice was not underlined the Nebraska Supreme Court reasoned that, standing alone, the arbitration clause in the contract between the Garlocks and 3DS Properties was unenforceable on its face under Nebraska law.
This one minor detail was missed by 3DS Properties in the drafting of its real estate sale contract and highlights the importance of utilizing a qualified attorney in the contract review process. 3DS Properties was not without a strong counterargument, however.
ARBITRATION MATTERS ARE GOVERNED BY BOTH STATE & FEDERAL LAWS
3DS Properties badly wanted to have this dispute heard in arbitration court. To do this, 3DS Properties had to counter the Garlock’s argument that the arbitration clause was unenforceable because it failed to have an all capitalized and underlined notice. Rather than accepting Nebraska law as the governing choice of law, 3DS Properties argued that the arbitration clause governed by federal arbitration law and therefore did not have to include an underlined notice.
This argument was based on the Nebraska Supreme Court’s holding in Wilczewski v. Charter West National Bank where the Court held that federal arbitration laws applied to all contracts formed in interstate commerce under Title 9 of the United States Code. In cases where federal arbitration laws apply, contracts do not have to meet the requirements under Nebraska’s Uniform Arbitration Act. In Wilczewski, the sale of a home under foreclosure contained an arbitration clause which the buyers argued was unenforceable under Nebraska’s Uniform Arbitration Act. There, the Court reasoned that the arbitration clause did not have to comply with Nebraska’s Uniform Arbitration Act because the sale of homes in foreclosure are done by banks who are integral parts of the stream of interstate commerce.
3DS Properties tried to harness this reasoning in their dispute against the Garlocks. The Nebraska Supreme Court, however, disagreed when they determined that the simple sale of a home, rather than a foreclosure done by a bank, was purely an intrastate activity rather than an interstate activity. In other words, contracts governing the sale of real estate in Nebraska which do not involve parties from other states or lenders from other states is considered an intrastate activity and must conform to the requirements of the Nebraska Uniform Arbitration Act for arbitration to be binding.
IMPORTANT TAKEAWAYS FROM THE GARLOCK CASE
First, the details really do matter. Whether you are drafting a contract, or you are agreeing to a contract someone else has drafted it is important to fully understand all terms, conditions, and laws that govern those terms and conditions. In the case of Garlock, the parties could have avoided thousands of dollars in expenses, and years of litigation by simply underlining a single sentence in their sale contract. Moreover, the parties could have saved a great deal of trouble by having a qualified attorney review their sales contract prior to its execution.
Second, the context of a contract can completely change the arbitration laws it is governed by. If you are a party who prefers arbitration over traditional litigation, it is imperative that you understand the context in which your contract is being executed. In Garlock, the parties were selling a home in a simple real estate transaction and therefore the arbitration laws of Nebraska applied to the formation of their contract. However, had these parties been using an out of state lender, or selling the property in a foreclosure, the federal arbitration laws would have applied to the formation of their contract.
If you are in the middle of trying to sort out the contents of an important contract, please do not go it alone unless you fully understand the legal ramifications of what you are drafting or agreeing to. If you have questions about contracts, the clauses in those contracts, or arbitration and arbitration clauses make sure you get in touch with a qualified attorney before it becomes a mess you cannot get out of.
Title Defect Renders Collateral Useless; Bank Unable to Cover Losses from Loan Default
A recent Nebraska Supreme Court decision illustrates why individuals should always seek advice of counsel before entering into a financial agreement. In Foundation One v. Svoboda, the Nebraska Supreme Court affirmed a lower court’s ruling that a Bank could not recover vehicles pledged as collateral to secure a loan because a gap in title indicated the Borrower did not own the vehicles. 303 Neb. 624, ___ N.W.2d ___ (2019).
Foundation One loaned $200,000 to Jason Svoboda upon Svoboda pledging two Mack trucks as collateral to secure the loan. In order to maintain the priority of its claim to the vehicles the Bank paid $85,141.40 to remove several preexisting liens on the truck titles. When the Svoboda defaulted on the loan, the Bank repossessed both trucks, eventually selling one for $95,000. Before the Bank could sell the second truck, however, the legal owner intervened in the case.
The trial to determine the legal owner of the trucks brought some startling facts to light. Prior to obtaining the loan, and unbeknownst to the Bank, Svoboda had engaged in a scheme to fraudulently transfer title from the legal owner, Lehr, Inc., back to Svoboda, to use the trucks as collateral for his loan. This scheme left a gap in the trucks’ chain of title. Lehr, Inc. presented evidence at trial showing that the trucks were, at all relevant times, the legal property of Lehr, Inc., and not Svoboda.
The jury verdict ordered the Bank to return the truck remaining in its possession, and to pay an additional $95,000 to Lehr (the amount the Bank received for the sale of the other truck). The jury verdict left the Bank with the full $200,000 amount of the loan, less any payments made before the Borrower’s default. Reviewing the case on appeal, the Nebraska Supreme Court commented that the Bank is required to show a clear chain of title from any previous owners of the trucks to the Borrower, and from the Borrower to the Bank. Id. at 633, ___ N.W.2d at ___. Ultimately, the Bank could not claim an interest in either truck because “the evidence, on its face, . . . showed a break in the chain of ownership between Lehr and [the Borrower] and did not show clear title in [the Bank].” Id.
If the Bank had conducted a more thorough investigation regarding the vehicles offered by Svoboda, it would have avoided the loss in question.
Personal Assets are Not Protected If Corporate Formalities Are Not Followed
A recent Nebraska Supreme Court case illustrates the need for your business to comply with basic corporate formalities to protect yourself from personal liability. In Thomas Grady Photography v. Amazing Vapor, the Nebraska Supreme Court held that a business owner must disclose his or her capacity as an agent of a corporation to escape personal liability for contracts made. 301 Neb. 401 (2018). Grady Photography filed suit against Amazing Vapor, MCJC Companies, Manuel Calderon, and Thomas Anderson for breach of contract for failing to pay on two contracts for photography services. The court ultimately held that Anderson was individually liable for breach of both oral contracts because Anderson did not inform Grady of the corporate status of Amazing Vapor throughout the entirety of their business relationship.
Erickson | Sederstrom’s attorneys have significant experience working with entities of all sizes to ensure that their corporate structure protects them from personal liability. If you have any questions about whether your entity is in fact protecting you from personal liability or if you need assistance in forming a corporation, limited liability company or other entity to protect your personal assets, attorneys Paul Heimann, Bill Foley, Andrew Collins and Michelle Elkin would be happy help.
Bitcoins and the Law
Last year Bitcoin and other cryptocurrencies went “mainstream” with regular financial reporting of prices and tales of fortunes made or lost. This has prompted many ordinary investors to try their hand at cryptocurrency investing. This has fed an ever widening set of cryptocurrency products being offered to consumers and businesses alike. These products range from Wall Street backed crypto currency exchanges like coinbase.com to initial coin offerings (“ICOs”) now being used by start-ups to attempt to bypass the regulations that normally apply to the capital-raising process.
The sheer exuberance surrounding cryptocurrencies and the often inaccurate depiction of cryptocurrencies as not subject to ordinary laws is fertile ground for fraudsters and high-risk unsound investment schemes. For example, numerous market players still promote their ICOs as not subject to state or federal securities regulation despite convincing and sound conclusions to the contrary. In fact, use of an ICO may very well expose the entity (and its individual managers) using it as a capital-raising device to potential civil and criminal charges, sanctions, and personal liability to individual investors.
Due diligence requires that before you or your business involves yourself in any crypto currency undertaking that you consult with competent and experienced business counsel so you can fully understand the true risk of the undertaking. Investors who have already lost money in a crypto currency scheme should also exercise due diligence by consulting with counsel because, under existing law, those who involved them in the scheme may be personally obligated to repay for the lost investment.