Modrall Sperling COVID-19 Task Force Updated June 9, 2020
*This article is authored by Roberta Cooper Ramo with Nicole T. Russell, Haley B. Adams and other Modrall Sperling attorneys.
In a very short period of time, the COVID-19 virus already has made a lasting imprint on the daily lives of individuals. But it is important to recognize that the complicated and impactful implications of the virus on businesses have only just begun. Modrall Sperling lawyers have mobilized to deal with client issues as they arise and strive to be a resource for our clients as they strategize the near and long term effects of the shutdown and stay at home orders.
During our consultations with clients over the last several weeks, a pattern of frequently arising questions has emerged. We endeavor to summarize those questions and the corresponding answers in this article, and we hope that this will serve as a resource to our clients as we face the coming weeks and months of recovery. Please note that the law, the regulations and judicial interpretations are in a constant state of flux. Before acting upon any of the information contained herein, please consult with one of our attorneys to ensure that there have not been changes that might affect your planned course of action. Earlier archived versions of this Article may be accessed here. Though the information they contain is outdated, the history and fuller context of the issues discussed may be helpful.
1. What Federal Programs are aimed at helping business and individuals?
A. The CARES Act as Modified by the Paycheck Protection Program Flexibility Act of 2020.
The key federal program in place today is the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act (“CARES” or “CARES Act”), key elements of which have since been extended through the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”). The main purpose of CARES is to provide loans to businesses for specific expenses incurred during the period of February 15, 2020 through June 30, 2020 (extended by the PPP Flexibility Act to December 31, 2020). Some relief for individuals is also provided in the CARES legislation.
Although the Small Business Administration (SBA) issues CARES loans, the loans are serviced by banks authorized by the SBA. A list of authorized New Mexico Banks can be accessed here (SBA New Mexico Edition Resource Guide 2019-2020, page 30). Please be aware that some banks are imposing restrictions and choosing to work only with their existing business customers.
Though many businesses were unable to secure funding from the SBA in the initial round of funding, another round of funding—replenished with $310 billion— opened on Monday, April 27, and as of this writing is not yet exhausted. As of May 1, the second round of PPP lending has provided 10,001 loans to New Mexican businesses, totaling $758,792,852. Entities fortunate enough to secure funding will have received an SBA loan number. While most banks have been able to transfer the money to their approved borrowers quickly, the loan volume at some banks may have caused a delay. If you received an SBA loan number and have not yet been asked to sign a loan note, you should contact your bank to inquire.
There are stringent rules associated with an applicant’s ability to obtain forgiveness of the loan. The Rules for the CARES Act loans, especially the Paycheck Protection Program (“PPP”) portion, are quite specific and must be followed to have eligible amounts of the loan amount forgiven. Some of the initial dates and provisions set forth in the Rules and FAQs have since been changed by the PPP Flexibility Act; those changes are detailed below. The two initial PPP Interim Final Rules can be accessed here and here, and the Frequently Asked Questions (FAQs) can be accessed here. Please note that the FAQs clarified and in important ways enlarged definitions like “compensation” to include such things as payment of health insurance and many other benefits. Two more interim final rules, published June 1, 2020, address requirements for loan forgiveness (available here) and provide PPP loan review procedures and related borrower and lender responsibilities (available here).
Several of these requirements were adjusted on June 5, 2020, when the President signed into law a bill to amend certain provisions of the PPP. This law, called the Paycheck Protection Flexibility Act (the “Flexibility Act”), available here, changes the PPP in the following ways:
- Covered Period Extended: Borrowers may now choose to extend the period during which they may use the proceeds from their PPP loans from eight to twenty-four weeks (but in no instance later than December 31, 2020). Borrowers with an existing PPP loan may elect to continue using the eight-week covered period. June 30, 2020 remains the application deadline. If you wish to apply for a PPP loan and have not yet done so, please visit our archived page, available here, which provides links to applications and qualifying requirements.
- Required Payroll Percentage Lowered: The Flexibility Act reduces the percentage of the PPP loan—from 75% to 60%–that must be used for payroll costs in order for the applicant to qualify for loan forgiveness. Consequently, up to 40% of the loan proceeds may now be used for interest on mortgage debt, rent and utilities. What qualifies as a forgivable expense has not changed.
- Loan Forgiveness Timeline: For new and existing loans, if a borrower does not apply for loan forgiveness within ten months after the end of the borrower’s covered period, payments of principal and interest on the loan will begin at the end of that 10-month period.
- Spending and Repayment Periods Extended: prior to the Act’s passage, spending of the loan by borrowers had to occur within the “covered period,” which was eight weeks of receipt of the loan proceeds. Now, the covered period for new and existing loans will be:
- Beginning on the origination date of the loan (which SBA has indicated will be the date loan proceeds are disbursed), and ending the earlier of:
- the date that is 24 weeks (168 days) after the loan origination date, or
- December 31, 2020.
- Borrowers who received loans before June 5 may elect to continue to use their eight-week covered periods under the original CARES Act provision.
- Beginning on the origination date of the loan (which SBA has indicated will be the date loan proceeds are disbursed), and ending the earlier of:
- Workforce Restoration Timeline Extended: Borrowers now have until December 31, 2020, to restore their workforce levels and wages to qualify for full loan forgiveness. The prior deadline was June 30, 2020.
- Forgiveness Requirements Loosened: If borrowers can in good faith document that from February 15, 2020 to December 31, 2020 they could not: (1) rehire individuals who were employees on February 15, 2020, or hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (2) return to the same level of business activity at which such business was operating before February 15, 2020, because of COVID-19-related operating restrictions, they may still have their loans fully forgiven without fully restoring their workforces. The borrower can seek forgiveness as soon as their funds are expended.
Importantly, the borrower is required to certify its own eligibility to receive a PPP loan. To this end, an applicant generally must: (1) have fewer than 500 employees whose principal place of residence is in the United States, or (2) be a “small business” under the applicable NAICS code employee size standard to be eligible for a PPP loan. A business otherwise ineligible can qualify for the PPP as a small business concern if it meets the SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. The FAQs setting forth this information can be accessed here.
Loan forgiveness, for which applications are now available here, may be limited under the PPP as follows:
- No more than 40 percent of the loan forgiveness amount may be attributable to non-payroll costs (i.e., mortgage interest, rent and utilities)
- Proceeds from any advance up to $10,000 on an Economic Injury Disaster Loan will be deducted from the loan forgiveness amount
- Though the PPP Flexibility Act loosened requirements for forgiveness, loan forgiveness still could be proportionately reduced if the business has reduced its number of full-time equivalent employees or has reduced the salary or wages of certain employees. The potential for proportional reduction remains unclear until further guidance is received from the federal government. Applicants should continue to maintain detailed records, ask for receipts, and keep all supporting information, from the beginning of the covered period and for six 6 years after the date that the loan is forgiven or repaid in full. Applicants should draft memos—reviewed by counsel—to document and analyze the rationale for certification to be eligible to obtain funds through the PPP.
- See Question 3, below, for further information.
If you are uncertain of the status of your application, it is very important that you check with your bank and not assume that if your loan application is already in the hands of the bank that that application will work under any new funding act. Every item required to be documented must be complete for a bank to submit a loan application to the SBA.
A second source of federal help is the Economic Injury Disaster Loan Advance (EIDLA). SBA resources regarding this program can be found here. While the loans under PPP can be largely forgiven if certain criteria are met, the loans under the SBA Economic Injury Disaster Loan program are low interest loans that must be paid back. Those funds are also currently all expended and the amount to be allocated under the new bill under consideration in Congress is unknown.
B. The Main Street Lending Program
The Federal Reserve has announced that it will establish a Main Street Lending Program (Program) to support lending to small and medium-sized businesses in sound financial condition before the onset of COVID-19. The Federal Reserve Board and U.S. Department of the Treasury released instructions for borrowers and lenders in advance of the opening of the Program, available here, which aims to provide up to $600 billion in loans for small and midsize businesses. No definitive launch date for the Program has yet been announced, but recent comments by Federal Reserve Board members have indicated that the Program will launch in early June.
2. Is there any guidance regarding loan forgiveness under the PPP?
Yes, although the SBA has yet to provide the more intensive required regulations governing forgiveness. The loan forgiveness application is now available here. Though the passage of the Flexibility Act may introduce a new regulatory framework, based on current guidance and interim rules, we know the following:
Loan forgiveness will be based upon the business’ actions during the covered eight or twenty-four week period. From there, forgiveness will be determined by certain costs incurred and payments made throughout the covered period. Payroll costs are the primary eligible cost, and include:
- Salary, wages, commission or similar compensation (limited to $100,000.00 compensation or less per employee)
- Payments for vacation, parental, family, medical or sick leave (this may be limited if the Employer got benefits under the Families First Corona Virus Response Act, FCRA)
- Allowance for dismissal or separation
- Payments for the provision of group health care benefits, including insurance premiums
- Payments for retirement benefits
- State or local payroll taxes
Under the Flexibility Act, available here, no more than 40 percent of the loan forgiveness amount can be attributable to non-payroll costs. Those non-payroll costs eligible for forgiveness include:
- Interest payments on mortgages incurred in the ordinary course of business on real or personal property in existence as of Feb. 15, 2020
- Rent payments under leasing agreements in existence as of Feb. 15, 2020
- Utility payments for electricity, gas, water, transportation, telephone or internet for which service was in existence as of Feb. 15, 2020.
It is possible the borrower’s forgiveness amount could still be proportionately reduced if the business has reduced its number of full-time equivalent (FTE) employees, or if the business has reduced the salary or wages of certain employees, though the PPP Flexibility Act has loosened those restrictions (see Question 1). We will provide regulations promulgated under the Flexibility Act as they become available.
At least one company has offered PPP loan forgiveness calculators to those seeking further guidance. NAV’s free tool, available here, is not to be construed as a legal opinion or as legal advice, but rather provides a helpful starting point for the calculation of potential forgiveness amounts.
3. What do PPP Recipients Need to Know?
After several publicly-traded companies reportedly received PPP loans, the SBA and the Treasury Department on April 23 and on April 28, 2020 issued FAQ No. 31, which seems to add to the loan requirements. The FAQ, available here, effectively amends the certification to supplement the factors businesses are required to consider when making the certification. Notwithstanding the Question’s reference to “businesses owned by large companies,” the answer states that “all borrowers must assess their economic need under the standard established by the CARES Act and the PPP regulations at the time of the loan application.”
Though the Department of the Treasury’s recent Interim Final Rule—available here—extends “safe harbor with respect to certification concerning need for the PPP loan request,” and, in so doing, allows borrowers who may have been mistaken about the Certificate Requirement to return their loans, the FAQ and subsequent regulation may be confusing to borrowers. Recognizing this confusion, the Department of the Treasury added FAQ No. 43, which extended the safe harbor provision to May 14, 2020. That date was subsequently extended to May 18, 2020, per FAQ 47. FAQ 47 also provides that “the SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.” Borrowers should, at a minimum, document in detail upon application:
- the economic uncertainty necessitating the loan, including as many figures and contract obligations as possible;
- the absence of alternative sources of liquidity;
- requests already received to reduce charges;
- any limitations on the ability to use working capital;
- any inability to borrow additional funds;
- any business risks to using existing working capital or taking on new debt to fund current operations;
- any plan for reducing staff and payroll costs and the extent to which such plan is put on hold due to forgiveness expectations;
- any pre- and post-application assessments of the threats and/or impacts to your business from the COVID-19 situation.
It is possible that this list of recipients will be disclosed to the public, as the Associated Press accessed, combed through, and publicized regulatory filings following the first round of PPP loans.
On April 28, Secretary Mnuchin announced that the SBA would conduct a “full review” of all loans over $2 million before there is loan forgiveness. Further, the SBA may review any PPP loan, regardless of size, to determine if the borrower is eligible for PPP loans under the CARES Act, whether the borrower calculated the loan amount correctly and used the funds for eligible costs, and whether the borrower is eligible for the amount of loan forgiveness it requests. For this reason, it is critical that borrowers keep all paper and electronic records related to loan disbursement and spending for 6 years after the date that the loan is forgiven or repaid in full. However, FAQ 46, available here, provides that if the SBA in the course of its forgiveness review comes across a mistake on the part of the borrower, the SBA will notify the borrower, who can return the loan without penalty. We will continue to update the Modrall Sperling website with federal guidance as it develops.
4. Is there a New Mexico Loan Program to aid businesses harmed by the COVID-19 shutdown?
Yes, the New Mexico Investment Council has established a New Mexico Recovery Fund managed by Sun Mountain Capital. That program and the rules for application may be found here. Note that these loans must be repaid under the terms of the program. These are the lawyers familiar with the program: Meg Meister and Robin James.
5. What is the Status of New Mexico’s Re-opening?
As in many other states, New Mexico continues to re-open in phases. New Mexico’s Guide to COVID-Safe Practices for Individuals and Employers may be accessed here. Masks continue to be required of everyone in public places (except for when eating, drinking, exercising, or subject to other medical requirements). As of May 28, 2020, however, Governor Lujan Grisham has loosened several business-related restrictions. Per the Governor’s press release, available here, the loosened restrictions are as follows:
- Restaurants can offer indoor seating at 50% capacity;
- Gyms can open at 50% but group fitness classes are still not permitted;
- Indoor malls, hair and nail salons, barber shops, tattoo parlors and massage services may reopen at 25% capacity. In some cases, these businesses must operate only by appointment;
- Drive-in theaters may reopen;
- Hotels may operate at 50% capacity;
- More state parks will open, some with capacity limits; and
- The 14-day quarantine order for air travels will be amended to make allowances for some business travel.
The following restrictions remain intact:
- All retailers may operate according to COVID-Safe Practices (“CSPs”) at 25 percent fire code occupancy. (A “retailer” is any business that sells goods directly to the ultimate consumer or end-users and does not include wholesalers or suppliers, not does it include entertainment venues such as movie theaters, concert halls, or amusement parks);
- Large retailers like big-box stores and grocery stores may also operate at 25 percent capacity as determined by fire code.
- Non-essential businesses (other than retailers; such as office spaces, call centers) generally may operate according to CSPs at up to 25 percent of pre-crisis staffing levels. All employees should continue to work from home wherever possible;
- Houses of worship may operate at 25 percent occupancy;
- Masks will be required of everyone in public places, with exceptions for eating, drinking and exercising and medical requirements.
- Mass gatherings and congregations are still unsafe and prohibited.
- However, the Governor has noted that “the state of New Mexico will stand ready to assist local governments in facilitating peaceful protests.” Her statement is available here.
- New Mexicans are still urged to stay home, especially if sick or in a high-risk group, and to maintain a 6-foot physical distance from others if you must go out.
The following restrictions from Secretary of Health Kunkel’s May 15 Order, available here, remain in place:
- All large grocery and large retail spaces (those greater than 50,000 square feet in size) and all restaurants currently operating curbside and delivery service must ensure that all employees have at least cloth face coverings.
- All employees must wear their face coverings in the workplace at all times when in the presence of others.
- As of May 11, all essential businesses of any size currently operating under the public health order must also comply with the face covering requirement.
- All employers are strongly encouraged to acquire face coverings for all employees over the next week so as to comply with the face covering requirements upon opening.
- Retailers will not be required to provide face coverings for customers but are encouraged to post signage encouraging customers to wear their own masks. Retailers at their own discretion may require customers to wear masks.
If you feel your business has not been allowed to fully open and are not clear whether it is allowed to do so, you may send inquiries to email@example.com. These are the lawyers who have been working in this area: Marco Gonzales, Walter Stern, Lynn Slade, Stuart R. Butzier, Brian Nichols and Christina C. Sheehan.
6. How has COVID-19 affected tax filings, tax matters and retirement plans?
The due date for filing individual income tax returns was automatically extended by the IRS and the State of New Mexico from April 15, 2020 to July 15, 2020.
The CARES Act has a number of very important exemptions or changes to rules concerning retirement plans of all kinds. These range from changes providing large loans and distributions from qualified plans for those qualifying for them to suspension of required minimum distributions. Other changes were made that might make a difference in your decisions about charitable gifts from IRA’s and certain estate planning matters. For Retirement Plan questions of all kinds, Karen Kahn is working on these matters. For other tax matters, including state taxes and estate tax questions the following lawyers are able to help: Vanessa Kaczmarek, Ian Bearden, Karen Kahn, Zack McCormick, Roberta Ramo, Marjorie Rogers and Nadine Shea. For State Gross Receipts Tax questions, please contact Zack McCormick or Ian Bearden.
7. Are there any health insurance or health plan issues?
Certain protection of continuation of health benefits are covered by the CARES Act. However, many depend upon the hour requirements of the employer’s plan and there may be state insurance rulings that have changed. The DOL and the IRS have waived health plan claims deadlines for both employees and employers, including deadlines for paying COBRA premiums. On May 13th, the IRS issued Notices that permit Employers the option of: 1) extending the grace period for unused amounts from 2019 in Health FSAs and DCRAs to December 31, 2020; 2) prospectively permitting changes to health plan coverage and to Health FSAs and DCRA amounts without a qualifying status change (although Employers can limit the amount and the election change period); 3) permitting use of telehealth services without disqualifying HSA contributions, and 4) increasing the Health FSA carryover to $550 and permanently indexing the carryover dollar amount. Amendments are not required until 12/31/2021. Also important are the requirements of HIPAA when an employer finds that an employee has been diagnosed with COVID-19. Kevin Pierce is ready to answer HIPAA questions and Karen Kahn can help with health plan and cafeteria plan questions.
8. How does COVID-19 affect employers?
The U.S. Department of Labor (DOL) is requiring employers to post a notice of the Families First Coronavirus Response Act (FFCRA). The FFCRA became effective on April 1, 2020. The current poster applicable to non-federal employees (as of March 26, 2020) can be found here. The DOL has provided additional information regarding the FFCRA and related posters on the DOL website here. Note that businesses that are currently open must follow many requirements in the Governor’s original and renewed Order, including the number of people that can be in their business and other requirements.
Employers are required to inform employees of the rights afforded by the FFCRA. The DOL counsels that an employer may satisfy this requirement by emailing or direct mailing this notice to employees, or posting this notice on an employee information internal or external website. Several attorneys in our Employment Group can help with these kinds of issues.
9. How has COVID-19 impacted real estate leases?
Both residential and commercial leases are impacted by the COVID-19 shutdown.
For commercial leases, look first to the language of the lease.
Many tenants have stopped paying rent during the shutdown and both landlords and tenants are looking at their leases. The result is in part dependent upon the language of the leases. However, many leases do not address a virus in a clear way. Additionally, tenants who were recipients of PPP loans may be required to pay rent under certain terms of that loan. Other loans may not have a similar requirement. Landlords should be clear about following the notice provisions of the default clauses in their leases and tenants would be well advised to get in touch with their landlords directly. Any written communication of either the landlord or tenant should be reviewed by your attorney. Meg Meister, Roberta Ramo and Robin James are working in this area.
For residential leases, the following information may be helpful:
The CARES Act contains a 120-day “moratorium” on landlords evicting tenants or imposing fees/fines due to a tenant failing to pay rent. The CARES Act eviction moratorium applies to “covered dwellings” and “covered properties”, which include any property that participates in a covered housing program including such as (among other programs) the Low Income Housing Tax Credit program (26 U.S.C. § 42) and programs pursuant to which the landlord’s mortgage is a HUD, VA, USDA or Fannie Mae or Freddie Mac loan. Additionally, before the enactment of the CARES Act, the New Mexico Supreme Court has issued an Order staying the execution of all writs of restitution under the Owner Resident Relations Act (even for landlords not covered by the CARES Act moratorium) for non-payment of rent, provided the resident “has demonstrated by a preponderance of the evidence a current inability to pay monthly rent established by the rental agreement.” The Order does not contain a termination date, and instead, “shall remain in effect until amended or withdrawn by future order of the Court.” Accordingly, it is feasible the Order could continue to apply even after the CARES Act moratorium expires.
10. What about creditors’ rights issues?
In addition to leases, COVID-19 has had a dramatic input effect on loans. Businesses that extend credit are being requested to forbear collection and the CARES Act has expanded certain bankruptcy relief. Moreover, the dramatic oil price reduction has hurt businesses and individuals within, and dependent on, the oil and gas industry for revenue. Creditors should understand their rights and the rights of their borrowers, including the revisions to the Bankruptcy Code under the CARES Act.
On Friday, June 5, the New Mexico Supreme Court handed down an order, available here, suspending any issuance of new writs of garnishment and writs of execution in consumer debt cases. Previously-issued writs and domestic support obligations are unaffected.
11. Is it possible to execute new Estate Planning Documents during the shutdown?
Yes. Documents that only need be witnessed by a notary may, until June 20, 2020 be notarized by video (i.e. Zoom or FaceTime), if certain requirements are satisfied. Additionally, and especially important now is letting someone in your family know where your original wills, trusts, durable powers of attorney and health care directives are kept. If you have questions about creating or updating your estate planning documents, the attorneys in our Trusts and Estates Group can help.
12. What employment issues exist in the context of reopening?
The Department of Labor and EEOC have issued guidance—available here—to help employers apply the sick leave and expanded Family Medical Leave Act and to avoid claims for discrimination, retaliation, and harassment in the workplace based on COVID-19, such as the ability for employers to take the temperatures of employees entering the workplace, limitations on disclosing the identity of a COVID-19 positive employee, and the duty to accommodate an employee’s request for accommodation based on a fear of contracting COVID-19. Modrall Sperling’s Employment Group is ready to navigate employers through these and other potential areas of exposure. These guidelines continue to change and you should consult with your attorney before you take action.
13. Risk management and related litigation.
The Long Term Care and Healthcare industries are facing regulatory and personal injury claims related to COVID-19. Our attorneys have handled regulatory and litigation matters for our clients in the Long Term Care and Healthcare industries, such as skilled nursing facilities and assisted living facilities, and hospitals, including regulatory proceedings, trials and appeals, and they are well-versed in recent COVID-19 developments. Should you be threatened with COVID-19 related litigation or regulatory enforcement matters, attorneys, Michelle A. Hernandez, Tomas J. Garcia, Tim L. Fields, Martha Brown, Susan Bisong and Jeremy Harrison can help you.
The most important advice of all: Stay safe, wash your hands, wear your masks and know that we all care about our whole community and are here now and in what we know will be a robust recovery for New Mexico.
 In a recent New Mexico bankruptcy decision here, the Bankruptcy Court deemed arbitrary and capricious the SBA’s “inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements” regarding bankruptcy ineligibility only after publishing a First Rule that made no mention of bankruptcy whatsoever. This opinion has no weight outside this case, but highlights one Judge’s objection to adding requirements not stated in the PPP statute.