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Department of Justice Ramps Up Investigations of Private Clubs that Received PPP Loans

April 8, 2024

As Varnum’s government investigations team has previously discussed, the COVID-era Paycheck Protection Program (PPP) resulted in millions of businesses receiving emergency loans. The PPP’s hurried implementation, coupled with confusion among recipients over eligibility requirements, created an environment ripe for both fraud and the issuance of loans to ineligible recipients. Over the past few years, the Department of Justice (DOJ) has focused on fraud by among other things, opening civil investigations under the False Claims Act and bringing criminal charges against PPP loan recipients who misused loan proceeds on luxury items. But recently, the DOJ has shifted its focus to a new category of PPP recipients: social clubs that may have been technically ineligible for the loans they received.

The opportunity for improper loans to social clubs comes about because of a technical wrinkle in how Congress wrote the American Rescue Plan Act of 2021. In this Act, Congress made social clubs (i.e. golf clubs, tennis clubs, yacht clubs) organized under 26 U.S.C. § 501(c)(7) eligible for PPP loans. However, Congress incorporated an agency regulation that prohibited loans to “private clubs and businesses which limited the numbers of memberships for reasons other than capacity.” Accordingly, social clubs that limit their membership for a reason other than capacity may be ineligible for PPP loans.

In recent months, the DOJ has issued Civil Investigation Demands (CIDs) to clubs that it believes might not have been eligible for PPP loans. Commonly, CIDs are issued following a whistleblower tip or the filing of a Qui Tam lawsuit, which is a lawsuit filed by an individual “on behalf of the United States” alleging that the United States was defrauded. The focus of the United States’ current investigation is on country clubs in Florida. These CIDs are demands for documents and interrogatory answers and often relate to employment records, income statements, the membership admission process, prospective members’ applications, the club’s governance, and membership information. CIDs are expansive and the government can use the club’s answer in future civil or criminal proceedings.  

Given the DOJ’s new focus, clubs should review their PPP paperwork now and consult with an attorney to determine whether their loan was properly issued. If the clubs find technical violations, proactively approaching the government through counsel may be beneficial. If a club receives a CID, it should immediately contact an attorney to begin preparing the appropriate response.

If you have received a CID or would like more information about PPP loan eligibility and enforcement issues, contact a member of Varnum’s government investigation team.

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