CHICAGO -- The federal Payroll Protection Program has hit a few bumps in the road since its rollout last month, from blowback over alleged preferential treatment for larger businesses to growing concern over loan forgiveness requirements.
Now it's navigating a legal challenge from adult nightclubs including Chicago's Admiral Theatre alleging the Small Business Administration shut them out of PPP funding.
At issue is a long-standing SBA restriction on loans to businesses that present live performances of a "prurient sexual nature." Lawsuits brought by adult clubs in Illinois, Wisconsin and Michigan argue they should be eligible for federal emergency relief, just like any other small business.
"This is not an adult entertainment issue," said Luke Lirot, a Florida attorney representing the Admiral Theater in the lawsuit, which was filed May 8 in Chicago federal court. "This a guy that sweeps the floor that's not getting a paycheck issue."
On Wednesday, the 7th U.S. Circuit Court of Appeals in Chicago handed the adult nightclubs a major victory, refusing to block a Wisconsin federal court decision that the SBA couldn't deny a PPP loan to a Milwaukee gentlemen's club based solely on the prurient ineligibility standard.
Last week, the 6th Circuit in Cincinnati issued a similar order in a case involving a Flint, Michigan, adult nightclub, which also sued the SBA to become eligible for a PPP loan. In both cases, the SBA had sought to put a hold on the lower court rulings while pursuing the appeals.
"The SBA will follow what the court rules," Andrea Roebker, a spokeswoman for the SBA's Great Lakes Region, said Wednesday.
Both decisions may bode well for the Admiral's lawsuit.
The Admiral has been closed since March 15, as the COVID-19 pandemic and the state's stay-at-home order shuttered nonessential businesses across Illinois.
The Admiral's nearly $407,000 PPP loan application covering 42 employees was submitted to the SBA on April 15, according to the lawsuit. The application has been held up since then, pending an agency ruling on eligibility, the lawsuit alleges.
Launched April 3, the federal paycheck program offers businesses with fewer than 500 employees forgivable loans of up to $10 million to cover eight weeks of payroll. The initial $349 billion in funding ran out in less than two weeks, with many smaller businesses shut out, as banks allegedly prioritized larger clients ahead of mom-and-pop stores.
The $310 billion second round of PPP, which began April 27, has been more inclusive, with banks and the SBA pushing out loans to smaller businesses. The funding also isn't being depleted as quickly, with nearly $147 billion left as of Wednesday.
In fact, the amount of available PPP funding has increased in the last week, according to the SBA, as some businesses returned the money under pressure from the government, which said it would not forgive the loans if companies had access to alternative sources of capital. Chicago-based Potbelly Corp. is among the companies that have returned funds.
While there may still be plenty of money to go around, that doesn't diminish the urgency of the lawsuits brought against the SBA by adult nightclubs, Lirot said.
On May 11, a Michigan federal court ruled that the DV Diamond Club of Flint could not be denied a PPP loan based on the prurient sexual nature provisions of the original SBA ineligibility rule, which went into effect in 1996. The decision noted that Congress expanded the PPP to include other previously ineligible businesses, such as nonprofit organizations and small casinos.
"While Congress may once have been willing to permit the SBA to exclude these businesses from its lending programs, that willingness evaporated when the COVID-19 pandemic destroyed the economy and threw tens of millions of Americans out of work," the Michigan judge ruled. "Simply put, Congress did not pick winners and losers in the PPP."
The SBA filed an appeal with the 6th Circuit in Cincinnati on May 13. Two days later, the appellate ruling opened the door to a PPP loan for the DV Diamond Club and other adult nightclubs.
The lawsuit filed April 13 in Wisconsin federal court by Camelot Banquet Rooms, which owns and operates the Silk Exotic Gentlemen's Club in Milwaukee, may be even more relevant for the Admiral.
The court ruled May 1 in favor of the Milwaukee gentlemen's club, saying nude dancing is a form of expression protected by the First Amendment, and the SBA "has singled them (adult nightclubs) out for unfavorable treatment based solely on the content of their speech."
The SBA appealed the ruling May 4 in Chicago's 7th Circuit Court.
The appellate decision Wednesday not only allows the Milwaukee club to move forward with its PPP loan application, it lays the groundwork for how other cases in the region will be decided, according to Admiral attorney Lirot.
Meanwhile, the corporate owner of another Chicago gentlemen's club has secured millions of dollars in PPP loans -- by excluding its adult properties from the application.
RCI Hospitality Holdings, a publicly traded Texas chain, owns 40 upscale gentlemen's clubs, restaurants and bars, including Rick's Cabaret, formerly VIP's, on the city's Near North Side.
The company said it received $4.2 million in PPP loans for 10 Bombshells restaurants in Texas, $1.1 million for a "shared-services" subsidiary and $124,000 for a lounge.
"None of our adult nightclub and other non-core business subsidiaries received funding under the PPP," the company said in a May 11 news release announcing its second-quarter earnings.
An RCI spokesman did not return a request for comment.
RCI furloughed 1,900 workers as the COVID-19 pandemic brought operations to a full stop in March. It began reopening its Texas restaurants in May, but Rick's Cabaret in Chicago remains closed.
The Admiral, a former 1920s-era vaudeville house and longtime Northwest Side adult entertainment venue, could be among the last businesses in Chicago to welcome back customers under the state's five-phase reopening plan.
Entertainment venues can open with limited capacity in phase four, which would likely not come until at least the end of June, according to state targets. The Chicago area is currently in phase two, which reflects a flattening of the COVID-19 infection curve.
If the Admiral does get its PPP loan, the dancers will not necessarily benefit directly. Like many adult clubs, the Admiral treats dancers as independent contractors, not employees, and they don't receive paychecks, working primarily for tips and fees paid by customers.
Instead, the money would be used to pay the other staff at the Admiral as an eight-week bridge to reopening the club.
"The dancers would have the right to make their own application, since in the gig economy, they'd be the same as the Uber driver or the cosmetologist that owns her own chair," Lirot said.
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