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Federal Court Confirms Schools Accepting PPP Loans Must Comply with Title IX

As of April 5, 2020, we warned independent schools that accepting COVID stimulus money in the form of loans could require you to comply with several federal laws that you may not be aware of, including Title IX . A federal court in North Carolina recently upheld that theory in a June 17 ruling that should put independent schools across the country on notice. What should you know about the Karanik vs. Cape Fear Academy, Inc. case – and what should your school do if you have accepted Paycheck Protection Program (PPP) loans or Economic Disaster Disaster Loans (EIDLs) under the CARES Act?

Unusual pursuit for unusual times

Cape Fear Academy, based in Wilmington, North Carolina, has found itself facing a federal lawsuit for gender discrimination and retaliation after three students alleged they were harassed by multiple classmates over the course of the year. school year 2020-2021. What made this lawsuit unique, however, was that the students alleged violations of Title IX of the Education Amendments of 1972 – commonly known as Title IX – which prohibits discrimination on the basis of sex in any educational program or activity.

The school asked the court to drop the lawsuit, arguing that it did not accept federal financial aid and, therefore, was not subject to Title IX. And while the school did not accept such financial aid in the usual way, it applied for a $1.2 million PPP loan in April 2020 and received the money on May 4, 2020.

Decision depends on PPP loan status

For those unfamiliar, the first COVID stimulus passed by Congress in late March 2020 (the CARES Act) allowed small and medium-sized businesses to apply for federal loans — in many cases forgivable — to cover payrolls. and other expenses. An easy-to-miss layout on page 4 of the Small Business Association (SBA) application that some members of the educational community may have forgotten (or misunderstood):

Civil Rights (13 CFR 112, 113, 117) – All companies receiving financial assistance from the SBA must agree not to discriminate in any business practice, including employment practices and service to the public based on the categories cited in 13 CFR Parts 112, 113 and 117 of the SBA regulations. All borrowers must display the SBA-mandated “Equal Employment Opportunity Poster”.

Although there is no doubt that the school accepted a PPP loan during the pandemic, she argued that the loan did not trigger Title IX compliance – while students argued that it put squarely school on the hook. And that was the crux of the legal dispute.

The school argument

Cape Fear Academy argued that the PPP loan was ineligible for “federal financial assistance” because a private bank issued the loan funds to the school and in turn submitted an application to the SBA for a guarantee. of his loan.

Under the terms of the CARES Act, the SBA ultimately waived the school’s entire PPP loan and repaid the entire amount to the private bank on June 15, 2021. The school thus argued that the loan PPP fell within an exclusion in the definition of “federal financier”. assistance” because she believed that the loan was in fact a “contract of guarantee.

Justice slams the door of the school

U.S. District Court Judge James Dever for the Eastern District of North Carolina was not buying what the school was selling. He denied the school’s motion to dismiss the lawsuit and said the case should proceed due to the school’s receipt of the PPP loan.

He concluded that a PPP loan is definitely considered “federal financial assistance” that subjects a recipient to Title IX because it is a “federal financial assistance grant or loan.” He said there were no legal consequences that a private bank actually disbursed the PPP loan funds. Instead, the critical fact was that the SBA, acting under the CARES Act, both authorized and guaranteed the funds. “And because PPP borrowers are the intended recipients of Congress,” the judge said, “they are not simply economic beneficiaries of someone else’s receipt of federal financial assistance.”

In addition to the plain language of the request, the judge could also have cited to the SBA FAQs for faith-based organizations who noted very clearly that acceptance of an SBA loan constitutes receipt of federal financial assistance. Again, this does not seem like a surprising result given that under many federal laws beyond Title IX, acceptance of such assistance requires the borrower to comply with certain rights laws. civilians.

How long does it last?

The next key question to ask was how long the coverage of Title IX coverage would weigh on the school. In that case, the judge found that the school should be held subject to Title IX from May 4, 2020 – the date the school first received loan proceeds – until June 15, 2021 – the date at which the SBA waived the school’s loan and repaid the Private Bank. In this specific case, that meant the student sexual harassment case (based on behavior that allegedly took place during the 2020-2021 school year) could be dealt with under Title IX.

What should your school do?

While this decision only binds beneficiaries of North Carolina schools, it would not be surprising if this same decision were repeated by other federal courts across the country. Therefore, if you received federal PPP (or EIDL) loans under a pandemic relief program, you should assume that there is a good chance that you are also subject to the grip of the title IX.

A few things to consider:

  • As we noted in April 2020, simply applying for an SBA loan seems unlikely to make the applicant a recipient of federal financial assistance. If you simply applied for a loan but did not receive or accept any funds, you are probably not liable for that reason alone.
  • If other courts follow the reasoning of the North Carolina court, a school will only be liable for federal wrongdoing under Title IX and similar statutes for actions that occurred during the time the loan was in progress. This is true even if you have no outstanding obligations (i.e. once the loan has been paid off or cancelled).
  • If your PPP or EIDL loan remains unpaid or unforgiven on this date, the period that you can remain subject to Title IX is likely ongoing – and will most likely remain in place until the loan is cleared from the books.

If you are learning for the first time that you may still be subject to the various laws involved in receiving federal financial assistance, you should seek the assistance of your education or employment attorney to determine the best way to comply with your obligations. This may include changing policies, procedures, postings and surveys. In addition to Title IX, your school may also have obligations under Section 504 of the Rehabilitation Act, the Education Rights and Family Privacy Act (FERPA), and other similar laws.

Conclusion

We’ll be monitoring these developments and providing updates as needed, so make sure you’re subscribed to Fisher Phillips’ Insights to get the latest information straight to your inbox. If you have further questions, contact your Fisher Phillips attorney, the author of this overview, or any attorney in our Education Practice Group.