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Court: Hagerstown shop owner, ex-con, can seek PPP loan

A Hagerstown small-business owner hammered by the pandemic-related store closures can reapply for an emergency federal loan after a U.S. agency eased its rule against extending loans to convicted felons on parole, a federal judge has ruled.

U.S. District Judge Catherine C. Blake last week decided in favor of the reapplication bid of Altimont Mark Wilks, whose earlier application had been denied under the U.S. Small Business Administration’s initial rule withholding Payroll Protection Program funds from applicants with a criminal history.

Wilks sued the SBA in federal court, arguing the agency exceeded its statutory authority in promulgating the initial rule. Congress provided no criminal-history restriction in enacting the $659 billion loan assistance in the Coronavirus Aid, Relief and Economic Security Act this year, stated Wilks’ attorneys from the New Civil Liberties Alliance in his lawsuit.

While Wilks’ lawsuit was pending, the SBA relaxed its rule that had prohibited loans to companies in which an owner of at least a 20% share was facing a criminal charge or was incarcerated or on probation or parole. On June 24, the agency revised its rule to exclude companies where the 20%  or greater owner was facing felony charges or was on parole or probation for fraud, bribery, embezzlement, or a false statement in an application for a loan or federal assistance.

The eased restriction would not bar a loan application from Wilks, who pleaded guilty in 2004 to drug and weapons charges, served about 14 years in prison and remains on parole until 2021, Blake said. She then ordered the SBA to give Wilks until July 21 to reapply for the loan program that had a June 30 deadline, saying the extra time was needed in light of the agency’s belated regulatory change.

Since Blake’s order last week, the PPP application deadline has been universally extended until Aug. 8.

“The court notes that the late revision of the rule on June 24, 2020, has put (Wilks) in a difficult situation and based on the record before the court, is likely to cause (Wilks) irreparable harm since (he) may not be able to obtain PPP funding,” Blake wrote.

“Here, the harm to the SBA (in extending the deadline) is negligible because it has promulgated the June 24 rule, which states that these previously excluded businesses should be able to get funding,” Blake added. “And the public has an interest in helping those businesses obtain funding when the only reason they have had to wait until the last minute is because the SBA has now changed the rule.”

Wilks’ attorney hailed his client’s willingness to take on the federal government.

“If he had not sued, the rule change would not have happened,” said Jared McClain, of the Washington-based New Civil Liberties Alliance.

The SBA did not immediately return a request for comment Monday on Blake’s decision.

Wilks owns two stores in Hagerstown: Carmen’s Corner Store, a convenience shop that sells food and non-alcoholic drinks, and Retail4Real, a logistics business that delivers automotive products.

Wilks opened the convenience store last July and has since garnered certificates of praise from the U.S. Congress, Maryland General Assembly, Washington County Board of Commissioners and Hagerstown Mayor Robert E. Bruchey II. Wilks reopened his automotive store shortly after his release from prison on June 14, 2018, his lawsuit stated.

This year, both stores have “suffered significant business losses” due to Gov. Larry Hogan’s pandemic-compelled stay-at-home orders, the complaint added.

Wilks applied for a $10,000 PPP loan for Retail4Real on April 8 at AmeriServ Financial Bank in Hagerstown. When that loan was summarily rejected because of his criminal history, Wilks declined to seek a $21,500 loan for Carmen’s Corner Store believing an application to be futile.

In permitting Wilks time to reapply, Blake upheld the SBA’s June 24 revision as a valid regulation under the CARES Act, saying the agency included a “reasoned explanation” for the updated “criminal history exclusion.”

Specifically, the updated rule specifically notes the agency’s reasonable concern that a business owner facing felony charges places the company’s creditworthiness in jeopardy, making it more likely that the loan will be misused and not repaid, Blake said. In addition, the SBA also noted in its new rule the agency’s concern that a person who has committed fraud, bribery, embezzlement or false statement in an application for a loan or federal assistance is too high a credit risk.

“The SBA … explained that the criminal history exclusion is meant to reduce the potential misuse of funds,” Blake wrote. “While there appears to be no specific evidence cited by the SBA that individuals convicted of crimes or facing felony charges, especially non-financial crimes or charges, are more likely to misuse SBA funds, the court must give some deference to the SBA’s determinations based on its lengthy history of administering the program.”

Blake added that the SBA’s initial, more restrictive criminal history rule is likely invalid because the agency provided no explanation for the regulation. Without a stated justification, the rule must be deemed arbitrary and capricious, the judge held.

She said the reason the SBA gave in its revision does not save its earlier rule because the update “did not explain the initial purpose of the criminal history exclusion, rather offering only a reason to ease it.”

The case is docketed as Carmen’s Corner Store et al. v. Small Business Administration et al., No. 1:20-cv-01736-CCB.

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