Showdown: California Firm Zumasys Sues SBA And Treasury Over PPP Loan

As the deadline looms for businesses to return Paycheck Protection Program (PPP) loans they were ineligible for, a California software company is suing the Small Business Administration (SBA) and the U.S. Treasury Department.

Zumasys Inc. filed the suit Monday (May 4) in response to guidance from the agencies issued last week, Bloomberg News reported.

The SBA and Treasury have ordered companies applying for the forgivable bailout money to certify federal assistance was necessary. The regulators reminded owners to consider whether the business has access to other sources of liquidity.

Zumasys Inc. argues it is entitled to its $750,000 loan under the original terms. The San Clemente-based firm has asked a judge to cancel the April 23 directive and prevent the government from enforcing it, the news service reported. Companies have until May 14 to repay the cash.

In addition, the suit said Zumasys is worried that it must return the forgivable loan the company and two subsidiaries received last month. Some of it, the company said in the lawsuit, has been spent to keep about 70 employees on payroll.

Per the report, the SBA and Treasury did not respond to requests for comment.

The attorney representing Zumasys, Mona Hanna of Michelman & Robinson in Irvine, California, told Bloomberg many companies would likely terminate workers or shut down rather than take on more debt.

“And that’s why we filed this lawsuit,” she said. “We want the court to tell us whether or not this guidance, given by the SBA and Treasury, is valid, or is it in fact invalid and unenforceable. We need to know.”

The $2.2 trillion CARES Act passed by Congress included PPP loans to keep businesses afloat during the coronavirus pandemic. The initial $310 billion program launched on April 3 was exhausted in 13 days, small businesses alleged they were shut out as publicly traded companies, nationwide franchises and preferred bank customers got the funds. The second round of funding was approved late last month for $349 billion, designated for smaller firms. The loans are forgivable if 70 percent of the proceeds are spent on salaries and certain other expenses.

A handful of large companies that took PPP loans, including the Los Angeles Lakers, Shake Shack Inc. and Ruth’s Chris Steak House Inc., have returned them in response to criticism from small and medium-sized businesses (SMBs) that the smaller firms were being excluded.