DOJ Settles PPP Case Based on Economic Necessity Certification

On December 18, 2024, the U.S. Attorney’s Office for the Western District of Texas announced a $680,000 False Claims Act (FCA) settlement with Lafayette RE Management LLC (Lafayette) in connection with the real estate investment firm’s receipt of a Paycheck Protection Program (PPP) loan at the height of the pandemic.  Crowell has previously reported on DOJ’s steady pursuit of PPP cases which have resulted in FCA settlements based on issues such as affiliation (discussed here) and ineligibility under the program’s rules (discussed here), but the Lafayette settlement is the first time that the government has intervened in a case based on the economic necessity certification that all PPP borrowers had to make on the initial loan application.  

According to the qui tam complaint filed in U.S. ex rel. Nunez-Unda v. Lafayette RE Management LLC, et al., No. 5:22-cv-000659 (W.D. Tex.), Lafayette is one of the nation’s largest single-family residential real estate asset managers with more than $900 million in assets under management.  In 2020, when completing an application for a $335,000 PPP loan, Lafayette certified that current economic uncertainty made the loan request necessary to support its ongoing operations.  The qui tam relator, a former partner at Lafayette, alleged that the company could not make this economic uncertainty certification in good faith because Lafayette had access to real-time data showing high occupancy rates and rents within its property portfolio.  Moreover, Lafayette allegedly had access to information about market trends which showed that single-family residential real estate would perform well during the pandemic.  The complaint also alleged that Lafayette was so confident in the performance of single-family property rentals during the pandemic that the company was actively investing in public securities in the residential real estate sector, which the relator alleged was evidence that Lafayette was not facing economic uncertainty and therefore should not have certified that it needed the PPP loan.

The government intervened in the suit for purposes of settlement, and Nunez-Unda will receive a relator’s share of $129,200.  The Nunez-Unda complaint is far from the first time that allegations about the economic uncertainty certification have been raised in a qui tam suit, but in prior instances the government has always declined.  In prior PPP cases, the government has targeted black-and-white conduct (e.g., claiming nonexistent employees) whereas the accuracy of the economic necessity certification is inherently more subjective.  Indeed, following the announcement of the FCA settlement, Nunez-Unda sat for an interview on the Fraud in America podcast in which he acknowledged the difficulty of proving that an economic uncertainty certificate is false because defendants only need to establish that they did not know what the future held at the time of the loan application at the height of the pandemic.  In contrast, for a relator or DOJ to prevail in an economic uncertainty case, they must establish that the applicant did not actually believe that economic uncertainty made the PPP loan request necessary—and yet applied for it anyway.  

As seen in the Nunez-Unda settlement, the potential for liability in economic necessity cases will be fact-specific and require attention to the loan applicant’s financial state-of-play and outlook at the time of the application.  The liability analysis will also require an assessment of the economic prospects of the applicant’s particular industry, and with PPP-related FCA cases arising from a broad range of industries (from advertising agencies to health plans to manufacturers), the sector-specific nature of these economic necessity cases will make them a trend worth following in the year ahead.  

We would like to thank Jessica Longoria for her contribution to this alert.