Camelot Banquet Rooms, Inc. v. U.S. Small Bus. Admin.

555 F.Supp.3d 598

CAMELOT BANQUET ROOMS, INC., et al., Plaintiffs,

v.UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants.

Case No. 21-C-0447

United States District Court, E.D. Wisconsin.

Signed August 19, 2021

Bradley J. Shafer, Zachary Youngsma, Shafer & Associates PC, Lansing, MI, Jeff Scott Olson, Jeff Scott Olson Law Firm SC, Madison, WI, for Plaintiffs Camelot Banquet Rooms Inc., Downtown Juneau Investments LLC, Midrad LLC, PPH Properties I LLC, Heritage Management Services Inc., Vonch LLC, East Coast Restaurant & Nightclubs LLC, Benelux Corporation, Filosadelfia LLC, MAG Pitt LP, MAG Enterprises Inc., 2740 Corporation, MAG Entertainment LLC, Oasis On Essington LLC, Burch Management Company Inc., BDS Restaurant Inc., DB Entertainment Inc., T and N Inc., Millennium Restaurants Group Inc., Club Sinrock LLC (Alaska), Club Sinrock LLC (Washington), Club Sinrock LLC (Oregon), Club Sinrock DT LLC, Kimmico Inc., Polmour Inc., Sisyphian LLC, Syzygy LLC.

Bradley J. Shafer, Zachary Youngsma, Shafer & Associates PC, Lansing, MI, Jennifer M. Kinsley, Kinsley Law Office, Cincinnati, OH, Jeff Scott Olson, Jeff Scott Olson Law Firm SC, Madison, WI, for Plaintiff 689 Eatery Corp.

Bradley J. Shafer, Zachary Youngsma, Shafer & Associates PC, Lansing, MI, Peter E. Garrell, Fortis LLP, Costa Mesa, CA, Jeff Scott Olson, Jeff Scott Olson Law Firm SC, Madison, WI, for Plaintiffs Brookhurst Venture LLC, City of Industry Hospitality Venture Inc., Farmdale Hospitality Services Inc., High Expectations Hospitality LLC, Inland Restaurant Venture I Inc., Kentucky Hospitality Venture LLC, LCM LLC, Midnight Sun Enterprises Inc., Nitelife Inc., Olympic Ave Venture Inc., The Oxnard Hospitality Services Inc., Penn Ave Hospitality LLC, Platinum SJ Enterprise, PNM Enterprises Inc., Rialto Pockets Inc., Rouge Gentlemens Club Inc., Santa Barbra Hospitality Services Inc., Santa Maria Restaurant Enterprises Inc., Saries Lounge LLC, Spearmint Rhino Companies Worldwide Inc., Spearmint Rhino Consulting Worldwide Inc., Washington Management LLC, WPB Hospitality LLC, K-Kel Inc.

Carter Bryan Stewart, United States Department of Justice (ED-WI) Office of the US Attorney, Milwaukee, WI, James J. Gilligan, United States Department of Justice, Washington, DC, for Defendants.

DECISION AND ORDER

LYNN ADELMAN, United States District Judge

I am asked to revisit the question of whether the U.S. Small Business Administration ("SBA") may exclude strip clubs from the Paycheck Protection Program ("PPP"), a small-business loan program that Congress enacted as part of its response to the COVID-19 pandemic. In a previous case, see Camelot Banquet Rooms, Inc. v. U.S. Small Bus. Admin. , 458 F. Supp. 3d 1044 (E.D. Wis. 2020), I granted a preliminary injunction to five Wisconsin strip clubs that the SBA had deemed ineligible for PPP loans based on a decades-old regulation that denied eligibility to businesses that "[p]resent live performances of a prurient sexual nature." 13 C.F.R. § 120.110(p). I reasoned that Congress had not authorized the SBA to apply this regulation to the PPP and that, even if it had, denying the plaintiffs access to the PPP because they offered a form of entertainment protected by the First Amendment would be unconstitutional. After I issued the injunction, the Camelot plaintiffs received loans under the PPP on the same terms as other eligible small businesses.

In the present case, forty-nine entities that operate strip clubs (plus three entities that provide support services to strip clubs) join as plaintiffs to prevent the SBA from applying the regulation to their applications for "second draw" PPP loans. Under legislation that Congress passed since I issued the preliminary injunction in Camelot Banquet , second-draw PPP loans are available to small businesses that received loans under the original PPP. See 15 U.S.C. § 636(a)(37). Each plaintiff in this case received an original PPP loan and applied for a second-draw loan. Based on an initial review of the plaintiffs’ business activities, the SBA determined that none of them are eligible for second-draw loans because they present live performances of a prurient sexual nature. After learning of the SBA's position regarding second-draw loans, the plaintiffs commenced this action and filed a motion for a preliminary injunction to prevent the SBA from using the regulation to deny their applications for second-draw loans. I address the motion in this order.

I. BACKGROUND

All fifty-two plaintiffs are participants in the adult entertainment industry. Forty-nine of them operate night clubs that could fairly be described as strip clubs, and the remaining three offer support services to such clubs. Each club presents live dance entertainment that the plaintiffs describe using one or more of the following terms: "scantily clad," "topless," "fully nude," "fully clothed (in the form of pasties)," "fully clothed (bikini)." See Compl. ¶¶ 112–884. The plaintiffs allege that all the dance entertainment at their clubs, although intended to be sexually arousing, "appeals to normal, healthy sexual desires." See, e.g., id. ¶ 112.

On March 27, 2020, in response to the COVID-19 pandemic and the public-health measures taken to reduce spread of the virus, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act, which is generally known as the "CARES Act." Pub. L. No. 116-136, 134 Stat. 281. Among other things, the CARES Act created the Paycheck Protection Program ("PPP"), see CARES Act § 1102, a loan program designed to assist small businesses experiencing financial distress caused by the pandemic. See 85 Fed. Reg. 20811, 20811–12 (April 15, 2020). The CARES Act created the PPP by adding new provisions to Section 7(a) of the Small Business Act, 15 U.S.C. § 636(a), which confers authority on the SBA to provide financial assistance to small businesses. Specifically, the CARES Act added paragraph 36 to Section 7(a). See CARES Act § 1102(a)(2). The provisions of this paragraph authorized the SBA to guarantee PPP loans under the same terms, conditions, and processes as ordinary Section 7(a) loans but specified ways in which PPP loans would differ from ordinary loans. See 15 U.S.C. § 636(a)(36)(B), (D)–(R). The differences from ordinary loans generally made PPP loans more favorable to borrowers. Among other things, Congress capped the rate of interest at four percent, id. § 636(a)(36)(L), and waived various fees and borrower requirements, id. § 636(a)(36)(H)–(J). The Act also contained a provision forgiving the indebtedness on a covered loan up to the full principal amount to the extent the borrower paid certain expenses, such as payroll, during the months following the loan's origination. See CARES Act § 1106.

Congress initially authorized the SBA to guarantee up to $349 billion in PPP loans. See CARES Act § 1102(b)(1). In April 2020, Congress increased this authorization to $659 billion. See Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620, § 101(a)(1).

In administering the CARES Act, the SBA determined that businesses deemed ineligible to receive ordinary Section 7(a) loans under an existing SBA regulation, 13 C.F.R. § 120.110, should also be deemed ineligible for PPP loans. See 85 Fed. Reg. at 20812. The regulation identifies 18 types of businesses that are ineligible for Section 7(a) loans. They include, among others, nonprofits, legal gambling establishments, government-owned entities, faith-based concerns, businesses owned or managed by persons with criminal histories, and businesses engaged in political activities or lobbying. Most relevant to this action is 13 C.F.R. 120.110(p), which excludes from Section 7(a) eligibility "businesses which (1) [p]resent live performances of a prurient sexual nature; or (2) [d]erive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature."

When the SBA decided to apply § 120.110 to PPP loans, it immediately made an exception for nonprofit concerns, to which the CARES Act expressly extended eligibility. See 85 Fed. Reg. at 20812. Further, during the months after the CARES Act's passage, the SBA waived or modified three other eligibility exclusions under § 120.110. First, the SBA waived § 120.110(g) ’s exclusion of legal gaming businesses. See 85 Fed. Reg. 23450, 23451 (April 28, 2020). When the SBA waived this part of the rule, it stated that "[o]n further consideration," it believed that the waiver was "more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses." Id. Second, the SBA modified § 120.110(j) ’s exclusion of government-owned entities to allow PPP loans to certain government-owned hospitals. Id. The SBA determined that this exception was "appropriate to effectuate the purposes of the CARES Act." Id. Third, the SBA relaxed § 120.110(n) ’s exclusion of businesses owned or operated by persons with criminal histories. See 85 Fed. Reg. 38301, 38302–03 (June 26, 2020).

In April 2020, four of the plaintiffs here that operate strip clubs in Wisconsin, plus a fifth Wisconsin strip club that is not a plaintiff in this action, brought suit in this court and moved for preliminary injunctive relief on the grounds that denying strip clubs PPP loans based on the nature of their entertainment exceeded SBA's authority under the CARES Act and violated the Free Speech Clause of the First Amendment and the equal-protection component of the Fifth Amendment's due-process clause. In an order issued on May 1, 2020, I agreed with the plaintiffs on these matters and enjoined the SBA from using 13 C.F.R. § 120.110(p) to make eligibility determinations for PPP loans under 15 U.S.C. § 636(a)(36). See Camelot Banquet , 458 F. Supp. 3d at 1065. The government appealed my order to the United States Court of Appeals for the Seventh Circuit. After the court of...