Little Darlings Scores First Appellate Victory in SBA Loan Case

FLINT, Mich.—A lot has happened in the case of DV Diamond Club of Flint, LLC, et al v. Small Business Administration, et al, since it was filed on April 8. For one thing, a shitload of plaintiffs have joined the suit, including the well-known club group Spearmint Rhino, for a total of 52 parties, as well as three plaintiff-intervenors, seeking relief from the Small Business Administration’s (SBA) refusal to allow adult cabarets (or, really, any adult-related business) to apply for the SBA’s Paycheck Protection Program (PPP). U.S. District Judge Matthew Leitman issued an Order on May 13 granting the plaintiffs’ Motions for a Temporary Restraining Order (TRO) and for a Preliminary Injunction, but stayed his order so that the SBA would have time to appeal the Order to the appellate court. But the big news is that just three days after Judge Leitman’s ordered stay, a three-judge panel of the Sixth Circuit Court of Appeals has ruled that the clubs’ lawsuit may go forward, deciding 2-1 that the SBA may not ban adult enterprises from applying for PPP loans despite an exemption written into the application process that bans any business whose profits come from activities of a “prurient sexual nature” from applying. In the majority’s opinion, Congress’ creation of the Paycheck Protection Program, funded by the CARES Act, included language that specified that “any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 657a(b)(2)(C) of this title shall be eligible to receive a covered loan” as long as the business was otherwise qualified, with the Sixth Circuit itself italicizing the crucial words “any” and “shall.” The ruling goes on to note that, “Plaintiffs are sexually oriented businesses that own and operate (1) venues that present clothed, semi-nude, and/or nude performance entertainment, (2) adult novelty stores, and (3) businesses that service those establishments. They represent that their businesses are not unlawful and operate in conformity with various licenses and permits. The SBA does not argue otherwise.” The court stated that it evaluated four factors in deciding whether to grant the SBA its requested stay of the proceedings: “(1) the likelihood that the party seeking the stay will prevail on the merits of the appeal; (2) the likelihood that the moving party will be irreparably harmed absent a stay; (3) the prospect that others will be harmed if the court grants the stay; and (4) the public interest in granting the stay.” The opinion then goes on to discuss each of those possible barriers to the lawsuit going forward, and concludes that there was no legal basis for applying any of them. “We obviously agree with the decision of the Sixth Circuit,” said lead attorney Brad Shafer in a phone conversation with AVN. “It is the first of the circuits to rule on this. We are awaiting a decision from the Seventh Circuit on a similar case [the Silk Exotic v. SBA suit], and then from the D.C. Circuit on the lobbyist case, but we’re hopeful now that we have put this issue to rest. “As part of the district court’s order, the SBA was required to provide notification by midnight Friday night/Saturday morning to the lending banks not to be using these regulations against our clients, and so we were happy with that,” he continued. “We had a conference call with the SBA attorney yesterday to confirm that that has been done. We’ve been assured that it was done, and so while we do not have a definitive win—this is an order on a preliminary injunction and an order from the Court of Appeals denying the government’s request for a stay of the district court order, and we are not only pleased with that but we are very pleased with the haste that both the district court and the court of appeals acted on our various requests, because time is of the essence given the finite period of time for this program, and we all know that the first tranch of guarantee money was used up very quickly, and we’re getting close to the end of the second pool of guarantee money as well.” Shafer also stressed that the PPP loans must be used for payroll, rent, mortgage interest and utilities in order to eventually qualify for loan forgiveness, “so these are not loans that are going to these companies for these companies to keep or use however they want. The employees of these businesses have to buy food just like everybody else out there and they’re going to put that money into the stream of commerce to keep our economy going.” Shafer also noted that neither Judge Leitman nor the appeals panel reached the substantive constitutional issues raised in the lawsuit, and that while he would have liked for that to happen, in this case, it wasn’t necessary at this stage. “It’s a pure issue of law,” Shafer explained. “You have to understand Judge Leitman’s ruling. It’s a very limited ruling although it’s very long. He only addressed and decided one of maybe eight issues that we raised, and what he concluded in his opinion was that because he could decide the case on non-constitutional grounds, which was that the SBA had exceeded its congressional authority. He did not have to reach all of our constitutional questions, which were that this regulation precluding loans to businesses that engage in or present entertainment of a prurient sexual nature—that that violated both the First and Fifth Amendments to the United States Constitution. So he never reached those issues, the Sixth Circuit never reached those issues, and as long as his decision is ultimately upheld on appeal, he will not have to reach those decisions.” Shafer stressed that while the Sixth Circuit’s opinion is very good for the whole concept of adult businesses obtaining PPP loans, much will depend on the Seventh Circuit and D.C. Circuit opinions, neither of which court is under any deadline to issue an opinion. Just what will happen with the suit from this point forward is unclear, but apparently the SBA has complied with Judge Leitman’s order to furnish the plaintiffs’ banks with the necessary application approval information, and together with the judge’s previous ruling maintaining the clubs’ “place in line” for the loans, they may actuallly see some of that money in the not-too-distant future.

written by: Mark Kernes

source: Little Darlings Scores First Appellate Victory in SBA Loan Case | AVN