NYC whistleblower attorney Timothy J. McInnis announced a $354,085 settlement against The Raleigh Racquet Club, Inc. (RRC), a non-profit social and recreational club located in Raleigh, North Carolina and its former president, Kurt Harrison Ihly concerning COVID-19 pandemic relief funds. The settlement resolves FaIse Claims Act allegations in a qui tam whistleblower complaint filed under seal in April 2023 in the U.S. District Court for the Eastern District of North Carolina by former club member Lindsey Flower. On June 21, 2024, the case was unsealed by order of United States District Judge Terrence W. Boyle. Today, Flower filed a notice to dismiss the action, as required by the Settlement Agreement. The United States Attorney’s Office for the Eastern District of North Carolina, which did not formally intervened in the action, spearheaded a government investigation and oversaw the settlement negotiations, according to Attorney McInnis.
Flower’s qui tam complaint alleged that RRC unlawfully applied for and received a loan under the Payment Protection Program (“PPP”), and falsely certified in the submitted application for the PPP loan, that it was eligible to obtain a loan under the PPP. Specifically, the complaint alleged that on April 15, 2020, RRC improperly received a first-draw PPP loan in the amount of $307,900. It subsequently applied for and obtained complete forgiveness of the loan sum plus accrued interest. According to the complaint, RRC was organized as a tax-exempt private club under Section 501(c)(7) of the Internal Revenue Code, a category of non-profit organization explicitly excluded from PPP first draw eligibility. Additionally, the qui tam complaint alleged that not only was the SBA’s rule barring 501(c)(7) social clubs from participating in the PPP program “clear and unambiguous” but also “widely disseminated trade publications and websites covering the 501(c)(7) social club industry repeatedly advised such clubs that they were not eligible for such loans.” According to the Settlement Agreement, the bank that processed RRC’s PPP application, North State Bank, checked a box on the application form wrongly stating RRC was a for profit “S-Corp,” suggesting this was why the SBA approved RRC’s unlawful loan application since S-Corps were permitted to obtain PPP loans.
According to the Settlement Agreement, the PPP program was established pursuant to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was enacted in March 2020, and was designed to provide emergency financial assistance to millions of Americans suffering economic effects caused by the COVID-19 pandemic. This included authorizing forgivable loans to small businesses for employee payroll and certain other expenses through the PPP. To obtain a PPP loan, a qualifying organization was required to submit a PPP loan application signed by an authorized representative. The loan application required the authorized representative to acknowledge the PPP rules and make certain affirmative certifications regarding the organization’s eligibility to obtain a PPP loan. PPP loan applications were processed by participating lenders, which received processing fees from the SBA. Following the approvals of loan applications, the participating lenders funded the loans, which were 100% guaranteed by the SBA. Non-profit corporations organized under Section 501(c)(7) of the Internal Revenue Code were not eligible to receive first-draw PPP loans pursuant to SBA, Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, 20812 (Apr. 15, 2020).
Attorney McInnis noted that PPP fraud was rampant because so much PPP money was given out to so many people during the height of the pandemic without normal lending controls and oversight. A Government Accounting Office report has acknowledged that the government sacrificed safeguards for speed in disbursing funds. PPP loans were granted on a first-come, first served basis and the initial PPP appropriation was depleted after just 13 days. In this haste, many small businesses hardest hit by the pandemic were shut out of the program.
One way PPP fraud is now being addressed, according to McInnis, is through False Claims Act qui tam lawsuits by private citizens who can not only redress PPP fraud but also receive a reward for prompting a government investigation. In this case, under the Settlement Agreement Flower received $46,185.
On behalf of Flower and her attorneys, McInnis expressed appreciation for the efforts of the U.S. Attorney’s Office for the Eastern District of North Carolina and the SBA’s Office of Inspector General in recouping the PPP loan proceeds from RRC.
