Small Business Owners COVID-19 FAQ

Small Business Owners COVID-19 FAQ

As of this article about 0.1% of the U.S. population has contracted the coronavirus since it first reached our country. https://coronavirus.jhu.edu/map.html (6 April 2020, 16:41). The U.S. has a population of roughly 327,000,000 people. The virus has affected not only our physical health and daily routines, but also our important business interests. For many businesses, particularly in the fitness, tourist, entertainment, and hospitality industries, the results have been catastrophic. In just two weeks, over ten million Americans have filed for unemployment (which is the highest weekly rise the U.S. has ever seen). https://fortune.com/2020/04/02/us-unemployment-numbers-jobs-layoffs-economy/

As dismal as that number is, there may be some federal assistance for small businesses—the Federal government has made available more than $3 trillion in loans and asset purchases in an attempt to fight the rising unemployment rate. Of that $3 trillion, nearly $350 billion is to go directly to small businesses to help with payroll and overhead as part of the Paycheck Protection Program.

Struggling small business owners are understandably eager to get their relief, but many still have important questions: what qualifies as a small business? If an organization qualifies, what does it get? If it receives money, what strings are attached? Luckily, some of these questions have answers.

At the outset, the U.S. Small Business Administration (SBA) has published a comprehensive table of standards, setting forth the criteria to be met in order to qualify as a small business—if you have more than 500 employees, you will generally be excluded. 15 U.S.C. 636(a). Depending on your industry, either average annual receipts for the organization or the average number of employees will determine whether a business qualifies. In addition, the SBA also looks at the following:

• Whether the company is headquartered in the U.S.;
• Where it primarily operates;
• Whether it’s for-profit;
• Whether it’s independently owned and operated; and,
• Whether it’s a minority company in a larger industry.

Qualifying businesses share in a pool of cash and may receive up to $10 million at 1% interest.

Despite this, the help provided may not be enough. It’s equally important to understand which traditional lending obligations small business owners must fulfill if they take the aid given that some may be unable to repay any loan principal due to their hardships. One of the designed conditions for receipt of money, and forgiveness, is to encourage employers to retain their workers and not cut wages—organizations who retain employees will likely be forgiven most or all the loan amount, and the government will pay the banks in the business’ stead (75% or more of the loan amount must go to pay workers).

It’s also important to understand just how businesses may use the funds received; the money is not given without restriction. The text of the stimulus bill provides some guidance: qualifying payroll support, salaries, mortgages, rent payments, utilities, and interest on pre-existing debt obligations all qualify as acceptable areas in which business owners may spend the funds. C.A.R.E.S. Act of 2020, S. 3548, 116th Cong. §1102.7(d). Further, the funds may not be used in a way which may affect a partial change in business ownership if it might not benefit the business. Finally, the loans must not be used to offset more than eight weeks of eligible payroll expenses.

If small businesses are unable to qualify, or if the loans above are not enough, they may be eligible for other SBA programs: small business owners may also apply for an EIDL Loan Advance from the SBA. The Economic Injury Disaster Loan Emergency Advance could advance up to $10,000 of relief to businesses experiencing a temporary loss of revenue, and it will not have to be repaid. To qualify, your business must have fewer than 500 employees or must be a 501(c)(19) nonprofit veterans organization.

$10,000 not enough? The SBA is offering up to $25,000 to small businesses who currently have a business relationship with an SBA through their Express Disaster Bridge Loan Pilot Program. This is intended to be used to fill the gap in time while waiting for the EIDL loan to come through—it must be repaid in full or in part by proceeds from the EIDL loan.

The SBA is providing another cushion to small businesses. The Debt Relief program will automatically pay any principal, interest, and fees on any of the above mentioned loans (§7(a) loans). Under this program, the principal/interest/fees on any current loan will be paid for six months. Additionally, if your home/business disaster loan was in “regular servicing” by March 1, 2020, the SBA will provide an automatic deferment until December 31, 2020. This means that after the deferment period, borrowers will be expected to continue making payments on the loan—the relief program does not reduce the amount owed and will not cancel any preauthorized debt or recurring payments. Businesses may still make payments during the deferral period.

For some businesses, the above loans and financial tools may be enough to get them back on their feet. Not everyone will be that lucky, so what happens if failure is inevitable? In other words, can landlords evict commercial tenants if they are no longer able to make rent due to decreased revenues? In short, maybe. On the same day the stimulus passed, CA’s governor banned landlords from evicting tenants for failure to pay rent if the failure was due to the coronavirus, but that only applied to residential tenants.

At the Federal level, the restriction on evictions is less limiting on landlords than California’s—primarily families with federally backed mortgage loans will enjoy this privilege. https://www.nhlp.org/wp-content/uploads/2020.03.27-NHLP-CARES-Act-Eviction-Moratorium-Summary.pdf The Government has incentivized commercial landlords not to evict, offering forbearance on business loans in exchange for not evicting. The state level is more restrictive on evictions, but isn’t absolute: Newsom’s order protects residents, but does nothing for commercial tenants. Instead, it’s a county-by-county issue; some have banned evictions on commercial tenants, and some have not. Check here to see if your county is included in the ban.

Naturally, some landlords will be dissatisfied with this; since they have to pay rent/mortgages too, and now their monthly rental income is no longer guaranteed. They may want to retaliate in one of the only ways they can—a rent increase. There are state protections in California available (although not much past the previously discussed incentives at the federal or local level). Because California is in a state of emergency, California Penal Code § 396 kicks in to prohibit excessive and unjustified rent increases. Cal. Penal Code § 396. This means commercial tenants can expect to see no higher than a 10% increase on rent. A violation of this is a misdemeanor, punishable by a fine of up to $10,000.

In some cases, the eviction bans, small business loans, and commercial tenant protections may not be enough. Some small business owners running non-essential operations may be wondering if they can still call non-essential employees in to work. What’s more, the employees themselves may wish to continue working for their own sake. Unfortunately, this is a purported crime, at least at the California state level. While there is not yet a federal order in place, and there are nuances to what counts as “essential,” California has taken it upon itself to restrict who may work and who may not, and various localities have been working to enforce this order. Newsom’s order requires “all individuals … to stay at home … except as needed to maintain continuity of operations of … critical infrastructure …” as outlined here. Cal. Exec. Order No. N-33-20 § 1. The order goes on to impose liability under the Government Code on those who disobey—they may face six months in prison and up to a $1,000 fine (or both). Cal. Gov. Code § 8665.

So, apparently, as the orders have been written you must stay in your house, possibly lose your ability to generate income, and not make use of any public parks or facilities which have been closed (there is a “well-being” clause, so exercise is ok to an extent, if you stay on the street, and don’t use a public beach, park, etc.). While everybody wants to help first responders, and do their part to avoid unnecessary suffering of fellow citizens, certainly, there are unprecedented constitutional aspects of such orders being issued from state, federal, or local governments, and these may be studied for years to come. While there are instances of martial law being declared by governments in various states of emergency, using those vast authorities to broadly close private businesses, and essentially put them out of business, while making it a crime for healthy people and business to operate and walk freely about, feels foreign to many of our historical notions of life, liberty and the pursuit of happiness—concepts in the Declaration of Independence. Hopefully these drastic actions save lives, and the fatality rates will stay under 1%. The impact to the lives and families are devastating and general social distancing should be heeded for the benefit of all and is largely a good idea. However, because of the catastrophic impact to the rest of the population and the economy, we might be wary of getting too accustomed to use of the powers to address threats of unknown scope.

The authors of this article are currently unaware of any previous use of such drastic powers and martial law by governments at federal, state, and municipal levels to quarantine healthy citizens and shutter their private businesses. The United States and world have suffered a variety of infectious diseases including the flu pandemic of 1918, polio, tuberculosis, MERS, Marburg, diphtheria, plague, cholera, AIDS, SARS, Ebola, Zica, measles, mumps, rubella, yellow fever, smallpox, etc., but historically quarantines have been placed principally on those infected by the pathogen, as opposed to those who might be affected or who could spread the pathogen. Some might argue that the closing of private business without compensation would effect a “taking” under the 5th Amendment of the U.S. Constitution, which states, “private property [shall not] be taken for public use, without just compensation.” The clause is actionable against state governments via the 14h Amendment.

Constitutional issues aside, being fined for leaving home serves as a powerful incentive to ensure non-essential workers practice proper social distancing. Unfortunately, a natural consequence of a depleted workforce is that many small businesses will be unable to perform contractual obligations, so what can they do to protect themselves? Generally, a party may be excused from performing a contract when: (1) performance has become impossible, (2) the contract’s purpose has been frustrated, or (3) in some scenarios, certain actions or inaction can excuse performance.

Related to the impossibility is whether force majeure clauses will be enforced. These are contractual clauses specifically allocating duties and obligations in the contract should certain provisions become impossible due to unforeseen circumstances, or “Acts of God” such as pandemics. Cal. Civ. Code § 3526. The question then becomes whether the COVID-19 crisis is an ‘Act of God,’ or if the spread being propagated by human actors precludes such a clause’s enforceability. Unfortunately, there is not yet a published opinion on the issue, but California courts have interpreted this doctrine broadly, holding that it “…is not necessarily limited to the equivalent of an Act of God.” Pac. Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal.2d 238 (Cal. 1946). Whether these clauses will be enforceable in these circumstances is yet to be seen.

If performance of a contract becomes impossible due to some unforeseeable circumstance beyond the parties’ control—like a pandemic—they may have this defense. Importantly, the nonperforming party’s own negligence must not have caused the nonperformance; in that case, the defense will fail, and the party will be subject to liability. This includes circumstances where negligence was the cause of the nonperforming party’s inability to foresee the event. Further, in the event that the COVID-19 crisis ends in the near future, parties to contracts will be expected to perform right away as nonperformance due to a temporary hinderance is excused so long as that hindrance exists.

If performance is possible, but the contract’s purpose is substantially frustrated, then performance may also be excused. For example: a party who contracts for the right to occupy a booth space selling tickets to a specific concert where later the concert is cancelled (perhaps due to the virus) may be excused because the fundamental assumptions on which the contract was made have changed, and thus its purpose has been substantially frustrated.

Certain actions and inaction may also excuse performance. Aside from the obvious subsequent agreement between parties to excuse one another from performing, failing to respond to a breach may bar action. Contracting parties have a duty to notify each other in the event of a breach—failure to do so could preclude enforcing the contract as it may serve as a waiver of strict performance. This is the case regardless of whether the contract contains a force majeure clause.

A final thought it that some business may need to consider insurance clauses that might cover loss of income related to natural disasters of this variety. Some general insurance policies contain clauses for “business interruption,” and in some cases insurance providers might be on the hook to reimburse insured parties who paid premiums to guard against such occasions. Businesses such as restaurants, fitness, tourism, or hospitality industries who have such policies should look at them very carefully to assess whether they may apply in this situation. If claims have been denied wrongfully, there may be “bad faith” insurance claims to consider. If you have any questions about possible insurance claims, it is important to evaluate them carefully with a qualified attorney. Buche & Associates, P.C. will provide complimentary preliminary insurance policy reviews for you if you believe that you may have a business interruption claim.

This article was jointly written by Mike Jones, 2020 J.D. candidate and John Buche, J.D. The law firm handles a variety of business litigation and contractual matters. www.buchelaw.com For inquiries, contact jbuche@buchelaw.com Article ©2020 Buche & Associates, P.C.