1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

On April 23, 2020, pursuant to Section 4003(b)(3) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (“CARES Act”), the U.S. Department of Treasury (“Treasury”) released a loan application form for “businesses critical to maintaining national security.” While the application form is “for informational purposes only” to allow prospective borrowers to begin to prepare their respective submissions, Treasury announced on April 25, 2020 that applications may be submitted online beginning on April 27, 2020.

Interested companies are advised to prepare and submit their applications promptly as applications are due at 3:00 P.M. EDT on May 1, 2020. Applications received after that time may not be considered. However, Treasury maintains discretion to consider late applications for approval subject to the availability of funds. Prospective borrowers are reminded that, unlike under the Paycheck Protection Program available to small businesses, loan forgiveness is not available under this loan program.

Specifically, the CARES Act authorizes the Treasury to make available up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security.” Section 4003(a), (b)(3). During an interview on April 23, 2020, Treasury Secretary Steven Mnuchin, in describing the intended beneficiaries of this loan program, stated that, “[t]his pot of money was designed to consider the needs of defense contractors, key suppliers to [the Department of Defense], and other companies that carry classified information.”

The purpose of the loan program is to provide liquidity to offset covered losses, which include losses incurred directly or indirectly as a result of the coronavirus (COVID-19) pandemic. Importantly, an applicant is eligible only if it has “not otherwise received adequate economic relief in the form of loans or loan guarantees” provided under the CARES Act. Section 4002(4)(B).

Treasury has defined a “business critical to maintaining national security” as one that, at the time of the loan application, is either:

  • Performing under a DX-priority rated contract or order under the Defense Priorities and Allocations System regulations (15 CFR Part 700); or
  • Operating under a valid Top Secret facility security clearance under the National Industrial Security Program regulations (32 CFR Part 2004).

Dep’t of Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security Businesses (updated as of Apr. 10, 2020).

The application requires applicants to submit detailed information supporting either of the above. If an applicant does not satisfy either threshold requirement, it may nevertheless be considered for a loan if the Secretary of Treasury, based on a recommendation and certification by the Secretary of Defense or the Director of National Intelligence, determines that the applicant is critical to maintaining national security.

In addition to requiring information supporting either of the above criterion, the loan application requires applicants to provide information regarding their:

  • Corporate structure;
  • Debt, asset, and equity positions;
  • Operations in the United States;
  • Covered losses;
  • Most recently completed IRS Form 941 (“Employers Quarterly Federal Tax Return”);
  • Various consolidated financial statements; and
  • Any outstanding liens with the U.S. Government.

Applicants must also submit a financial plan. Two company officials must certify that the information and certifications provided in the application are true and correct.

Importantly, prior to submitting an application for a loan under this program, potential borrowers should be aware that such loans will be subject to certain conditions and restrictions, including:

  • If the borrower is a public company, then the borrower “must provide a warrant or equity interest in the [b]orrower” to the U.S. Government, unless the Secretary of Treasury determines, in his discretion, that issuance of such warrant or equity interest would not be feasible;
  • If the borrower is a private company, then the borrower may, at the discretion of the Secretary of Treasury, issue a senior debt instrument to the U.S. Government instead of a warrant or equity interest;
  • The borrower must maintain employment levels as of March 24, 2020 to the extent practicable, and in any case not reduce its employment levels by more than 10 percent from the levels on such date, at least until September 30, 2020;
  • Neither the borrower nor any affiliate of the borrower may purchase an equity security of the borrower or any parent company that is listed on a national securities exchange (this restriction does not apply if the borrower or affiliate is required to purchase such a security under a contractual obligation in effect as of March 27, 2020);
  • Effective until 12 months after the borrower has repaid the loan, the borrower must not pay dividends or make other capital distributions with respect to the borrower’s common stock;
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation (i.e., salary, bonuses, awards of stock, and other financial benefits) exceeded $425,000 but was less than $3 million in 2019 must not receive: (1) total compensation during any consecutive 12-month period that exceeds the total compensation received in 2019; and (2) severance pay or other benefits upon termination of employment that exceeds twice the compensation received in 2019; and
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation exceeded $3 million in 2019 must not receive total compensation during any consecutive 12-month period that exceeds the sum of $3 million and 50 percent of the excess over $3 million of the total compensation received in 2019.

Businesses interested in applying for a loan under this program should carefully evaluate the applicable conditions and restrictions. Prospective borrowers are also advised that recipients of Treasury funds may be subject to increased government oversight and investigations, especially with respect to the certifications required in the application.

Further, any companies interested in applying should prepare their materials promptly to ensure submission in advance of the 3:00 P.M. EDT on May 1, 2020 deadline.

, , , ,

Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

Government Contracts Legislative and Regulatory Update – March

Regulation update

The March edition of Dentons’ monthly legislative and regulatory update is available!

, ,

Government Contracts Legislative and Regulatory Update – March

Existing Federal Economic Assistance Options for Small Businesses Affected by the Coronavirus (COVID-19)

While the existing federal economic assistance option with the U.S. Small Business Administration (“SBA”), called Economic Injury Disaster Loans (“EIDLs”), have existed for some time, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (P.L. 116-123) increases the amount made available to the SBA to use for EIDLs to $197.2 million.

EIDLs are low-interest federal disaster loans of up to $2 million offered by the SBA to small businesses, as well as private, non-profit organizations in all U.S. states and territories to help alleviate economic injury directly caused by COVID-19. EIDLs may be used to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid due to the impact of COVD-19. See 13 C.F.R. § 123.303(a).

Importantly, loan proceeds may not be used to:
• Refinance existing debt;
• Repay other SBA loans or loans from another federal agency;
• Pay, directly or indirectly, any taxes, fines or penalties;
• Repair physical damage; or
• Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.

13 C.F.R. § 123.303(b).

Small businesses that need working capital to help meet their financial obligations should consider applying for an EIDL. For more information on EIDLs, what constitutes an eligible “small business,” and how to apply for EIDLs, please see the full client alert here.

, ,

Existing Federal Economic Assistance Options for Small Businesses Affected by the Coronavirus (COVID-19)

US DoD Issues Class Deviation Regarding an Increase in Progress Payment Rates in Response to the Coronavirus National Emergency

March 22, 2020

On March 20, 2020, the Department of Defense (“DoD”) issued Class Deviation 2020-O0010 (the “Deviation”) providing that, effective immediately, in response to the coronavirus national emergency, the progress payment rates at Defense Federal Acquisition Regulation Supplement (“DFARS”) § 232.501‑1 are increased to 90% for large business concerns and 95% for small business concerns.  Pursuant to the Deviation, DoD contracting officers (“COs”) are required to use the following clauses attached to the Deviation:

  • DFARS § 252.232-7004, DoD Progress Payment Rates (DEVIATION 2020-O0010), in lieu of the clause at DFARS § 252.232-7004;
  • Federal Acquisition Regulation (“FAR”) § 52.232-16, Progress Payments (DEVIATION 2020‑O0010), in lieu of the clause at FAR § 52.232-16; and
  • Alternate II (DEVIATION 2020-O0010), in lieu of Alternate II of FAR § 52.232-16.

The Deviation affects all DoD contracts, that is, it applies to existing and future DoD contracts. 

The Deviation constitutes a modification to the terms of affected contracts that already exist.  Because the DoD CO assigned to the existing contract is the only individual with the actual authority to execute and memorialize the change in progress payment rates pursuant to the Deviation, the Deviation is effective only upon the DoD CO issuing a contract modification. See FAR § 43.102(a) (providing that only COs with authority are empowered to execute contract modifications on behalf of the government); see also Winter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339, 1344 (Fed. Cir. 2007) (stating that an agent of the government must have actual authority to bind the government to modify contracts; apparent authority is not sufficient).  Accordingly, contractors are advised to request a block change modification from their assigned DoD CO to implement the Deviation on all existing DoD contracts.

US DoD Issues Class Deviation Regarding an Increase in Progress Payment Rates in Response to the Coronavirus National Emergency

COVID-19 – Addressing the Risks of Disease Delays and Disruptions Under Federal Contracts

Dentons has formed a COVID-19 Client Special Situations Team that stands ready to assist contractors in addressing the full range of issues that may arise in connection with the COVID-19 outbreak. Over the next several weeks, we will provide updates regarding the various aspects in which the contracting community may be affected. This advisory focuses on what contractors must show to support excusable delay. Future advisories will focus on other contracting-related facets of the COVID-19 issue. Among the issues that may be addressed are managing supply-chain risks; the government’s issuance of stop-work or suspension-of-work orders; the government’s use of the Defense Production Act and its related authorities to acquire goods and services that may be necessary to combat COVID-19; and how to seek schedule and compensatory relief in the event the government is unable to support contracting activities, such as performing delivery inspections and providing access to facilities and government furnished equipment.

The COVID-19 outbreak is disrupting business around the world. The disruption stems from sick personnel unable to report to work, declines in the capital markets, and actions taken by governments and companies alike directing workers to stay home or ordering the closure of manufacturing plants or offices until the disease is under control.  Yesterday, U.S. financial markets triggered a “circuit-breaker” that required a short suspension of trading and the Italian government ordered a quarantine of its northern provinces. As this client advisory is being drafted, the United States is facing reports of virus outbreaks in different locations around the country, including states of emergency in several U.S. States. The continued spread of COVID-19 could affect performance of federal contracts in various ways. Contractors could experience unexpectedly high levels of claimed sick leave or absenteeism, government-imposed or voluntary quarantines, cancelled travel, supply chain interruptions, and a number of other significant performance obstacles leading to dramatically reduced productivity and increased performance costs.

For many decades federal contracting regulations have recognized “epidemics” and ”quarantine restrictions” as force majeure bases for excused performance. FAR 52.249-8(c), Default (fixed price supply contracts) (“[the] Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor” and citing among those causes “epidemics” and “quarantine restrictions”); FAR 52.212-4(f) (same for commercial item contracts); see also Clause 11, Default, Procurement Division Contract Terms No. 1, CCH War Law Services (1945) (same). A key point before relying on these “safe harbors” in the Default context is to remember that they are not a per se defense to nonperformance. The existence of an “epidemic” or imposition of a “quarantine restriction” does not necessarily mean performance is excused in the absence of showing causation and a lack of fault or negligence by the contractor (as well as other standard factors such as the amount of delay attributed to the specific cause).

Case law interpreting these specific bases for excusable delay have focused on the clause’s language and the requirement that there must be causation between an “epidemic” or “quarantine restriction” and nonperformance. In certain cases, that causation was proven. See, e.g., Big State Garment Co., ASBCA No. 337, 4 CCF ¶ 60,946 (1950) (contract performance extension granted due to employees’ need to recover from typhoid injection). However, in the majority of cases addressing these issues, contractors have failed to show excusable delay. In Ace Electrical Associates, Inc., the Armed Services Board of Contract Appeals (ASBCA) confronted a contractor’s contention that nonperformance was due to the excusable delay of a flu epidemic that had “passed through its plant causing a 30% to 40% rate of absenteeism over a period several weeks.” ASBCA No. 11781, 67-2 BCA ¶ 6,456. The board rejected the contractor’s position, explaining “[i]llness occasioned by the onset of a flu epidemic is in general an excusable delay provided it can be shown that performance was in fact delayed by reason of such epidemic. It is incumbent upon [the contractor] to establish not only the existence of an excusable delay as well as the actual extent of delay so caused.” Id. The Board concluded that the contractor had failed to present that evidence.  See id.; see also Crawford Dev. and Mfg. Co., ASBCA No. 17565, 74-2 BCA ¶ 10,660 (appeal for excusable delay based on absence of several key employees due to flu-induced illness denied where contractor failed to show epidemic in surrounding community resulted in absence of a sufficient number of employees to cause delay). 

The Default clause for fixed-price supply contracts emphasizes not once, but twice, that “the failure to perform must be beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-8(c). Whether stated in the relevant clause or not, this element of proof generally is accepted as a predicate to showing excusable delay. In the context of an asserted excusable delay due to an epidemic, the Government Printing Office Board of Contract Appeals (GPOBCA) emphasized that the contractor’s burden in such situations is to show that it took every reasonable precaution to avoid foreseeable causes for delay and to minimize their effect. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995). In the context of the COVID-19 virus, and its present level of outbreak in the US, contractors should be examining and implementing today precautionary measures to ensure the ability to perform in the future. In Yarling, the Agriculture Board of Contract Appeals (AGBCA) noted that the government had been amenable to the contractor entering into a subcontract arrangement or novation to ensure continued performance. AGBCA No. 382, 75-2 BCA ¶ 11,540. The board denied the appeal because the contractor had options—such as subcontracting or novation—to continue performance even in the face of an epidemic. It makes sense to consider (and document) advance planning on ideas to deal with COVID-19 related performance delays. Even if those ideas are ultimately unsuccessful in ensuring continued timely performance, the record of a contractor’s reasonable efforts to prepare for a COVID-19-related disruption will support later entitlement to schedule relief in the context of default.

Epidemics and quarantine restrictions are longstanding bases for excused performance. However, contractors must be mindful of equally longstanding requirements to show that (i) any asserted delay in performance was, in fact, caused by the asserted epidemic or quarantine restriction; and (ii) the delay was beyond the control and without the fault or negligence of the contractor (and any relevant subcontractors). Contractors will not know in advance the facts on the first prong of these requirements, but as to the second prong, contractors may be well-served to set in motion contingency planning to meet performance requirements. This could include setting up alternative supply chain arrangements, tasking human resource departments with identifying alternative staffing plans and taking steps in operations to mitigate the effect of a COVID-19 outbreak in manufacturing facilities and offices. Being proactive today will help the contractor make the requisite showing later that it took reasonable precautions to meet performance deadlines in the event COVID-19 asserts itself as a disruptive epidemic in the coming weeks and months.

COVID-19 – Addressing the Risks of Disease Delays and Disruptions Under Federal Contracts

The Most Important Contract Disputes Decisions of 2019

In the attached article, we summarize and discuss the impacts of disputes decisions that are likely to have sustained impacts on contractors and the Government alike into the foreseeable future in connection with our “Feature Comment: The Most Important Contract Disputes Decisions of 2019,” in The Government Contractor (Vol. 62, No. 5).

The Most Important Contract Disputes Decisions of 2019