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SBA sidesteps ban to forgive strip clubs' pandemic relief loans

3 minute read

REUTERS/Jason Reed

(Reuters) - The U.S. Small Business Administration has said it will disregard a regulatory ban on assistance to adult businesses and take applications for pandemic relief loan forgiveness from strip clubs.

According to a filing in Michigan federal court on Friday, the agency has said it will process loan forgiveness applications from dozens of adult businesses "without regard" to its rule banning businesses of a "prurient sexual nature" from receiving the agency's assistance.

The ban has been challenged in multiple lawsuits by adult businesses, which argued it unconstitutionally blocked their access to pandemic relief under the Paycheck Protection Program.

The $800 billion program offered government-backed, forgivable loans to small businesses that needed help meeting payroll and other expenses amid the COVID-19 pandemic.

DV Diamond Club, which operates a strip club in Flint, Michigan, said in the filing that the SBA notified it by email in early June that it will process loan forgiveness applications by it and dozens of other adult businesses that sued the SBA last year.

The businesses involved in the case collectively received more than $10.7 million in loans, according to public records.

U.S. District Judge Matthew Leitman in Flint had issued a preliminary injunction last May barring the SBA from enforcing its rule to shut those businesses out of the PPP program.

The SBA appealed Leitman's ruling to the 6th U.S. Circuit Court of Appeals, but the case was put on hold to await the agency's decision on loan forgiveness.

According to the recent filing in the Michigan case, the SBA has said it will forgive loans for adult businesses that filed lawsuits and "obtained first‐draw PPP loans under preliminary injunctions issued by the courts."

Bradley Shafer, an attorney who represents DV Diamond Club and others, said that the SBA has not yet made a similar decision about PPP loans made in the second round of the program or grants under the Restaurant Revitalization Fund, another relief program Congress created this year.

Shafer represents adult businesses seeking relief under those programs and has argued the SBA's relaxed stance in the Diamond Club case indicates the agency has no compelling governmental interest in upholding the ban.

"If you are giving exceptions to that, it means it is not that important," he said on Monday.

A spokesperson for the agency did not immediately reply to a request for comment on Monday.

Strip clubs have argued in court that the ban on SBA assistance to sex-related businesses amounts to an unconstitutional restraint on speech. In one case, the 2nd Circuit ruled the SBA could enforce the ban against a New York club.

The case is DV Diamond Club Of Flint LLC v. Small Business Administration, U.S. District Court, Eastern District Of Michigan, No. 20-cv-10899.

For the plaintiffs: Bradley Shafer, Matthew Hoffer and Zachary Youngsma of Shafer & Associates

For the SBA: James Gilligan of the U.S. Department of Justice

Read more:

Strip clubs, other 'disfavored' businesses entitled to emergency loans in pandemic: U.S. judge

Strip-club stimulus reveals lingering uncertainties over U.S. small-business aid

2nd Circuit says SBA can bar strip clubs from pandemic relief

Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com

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