Latimer LeVay Fyock, LLCLatimer LeVay Fyock, LLC

LLF Obtains TRO and Recovers Pilfered PPP Loan Proceeds for Chicago Restaurateur

Alexander I. Passo

While the COVID-19 pandemic has caused unprecedented upheaval in every sector of the economy, few face more daunting challenges than those in the restaurant and hospitality industry. Shuttered doors, furloughed staff, unpaid rent and unused inventory, and a hazy vision of when they’ll be able to reopen and what that will look like are more than enough to keep restaurateurs up every night. But for one of our restaurant clients, these external threats were compounded by an internal one: a shareholder who misappropriated and absconded with desperately needed Paycheck Protection Program (PPP) loan proceeds.

Quick Action Provides Hope For New Start

Fortunately, Latimer LeVay Fyock litigators Alexander Passo and Robert Minetz took quick and successful action to right this wrong on behalf of shareholders of a Wicker Park restaurant and bar specializing in cuisine inspired by the Mississippi Delta. Overcoming both an inherently high burden as well as additional obstacles imposed by a dramatically curtailed court system, they secured the relief they sought in a motion for a temporary restraining order and recovered over $150,000 in PPP funds which were withdrawn by a fellow shareholder of the restaurant.

“This money was the restaurant’s lifeline. It was what could keep the doors open and employees on the payroll,” Passo says. “Instead, someone our client trusted took it upon himself to claim the money for himself in the middle of the night, leaving our client not only shellshocked but also exposed to potential liability since he couldn’t use the proceeds as intended and required by law. We are extremely gratified that we could help correct this injustice and give our client a fighting chance to restart his dream.”

Unauthorized Withdrawal of PPP Funds From Company Bank Account

Like so many small business owners forced to close due to the pandemic, the president of this restaurant applied for a PPP loan as well as an Economic Injury Disaster Loan (EIDL). He was fortunate enough to have his PPP application approved, and he received $145,000 in loan proceeds which were to be used to cover payroll, rent, and utilities. If he applied the funds as intended, the president would be eligible to have the entire loan forgiven.  

The PPP funds, as well as $10,000 in EIDL proceeds, were deposited into the restaurant’s bank account. But without the president’s knowledge or approval, and before he could spend a dime on his employees or his restaurant, another of the restaurant's three shareholders transferred all $155,000 in federal financial assistance to an undisclosed account. The shareholder, who had no authority to transfer the funds, claimed that he did so to pay himself back for a loan he allegedly provided the restaurant.

The diversion of the PPP proceeds not only put at risk the business and the ability to obtain loan forgiveness, but it also exposed the president of the restaurant to potential federal criminal liability for fraudulent conduct in connection with those funds.

After the shareholder did not respond to demand to return the money, LLF attorneys sued the shareholder and sought a temporary restraining order to require him to return the stolen loan and grant funds. Ultimately, the funds were returned.

A Cautionary Tale

While the wrongdoing in this case raised unique issues because of the nature and purpose of the diverted proceeds, it can serve as a cautionary tale for all business owners who share authority and control with other partners, shareholders, investors, or co-owners.

Owners should prepare operating agreements/shareholder agreements that carefully and explicitly delineate the powers and responsibilities each such party has over the business’ finances and accounts, including who has the authority to withdraw or transfer funds. This can include requiring the written approval of multiple or all shareholders for any transactions over a certain dollar amount. Additionally, it is prudent to limit the authorized signers to business bank accounts, or utilize joint signature cards.

As to PPP loan proceeds and other pandemic-related financial assistance, borrowers must ensure that they disburse those funds for designated purposes only if they want to preserve their ability to obtain forgiveness. For payroll expenses, in particular, this can involve complex calculations that will determine whether and how much of the loan will be forgiven.

“If ever there was a case of adding insult to injury, this was it,” Passo says. “Fortunately, our client will have those loan funds back and can return to focusing on his plans for the future.”

We’re Here For Your Small Business During These Challenging Times

This crisis is both unprecedented and unpredictable. We know the worry and uncertainty the pandemic is causing for business owners and their employees alike. Throughout this period, the lawyers of LLF remain committed to helping our small business clients navigate these uncharted waters and obtain the financial assistance they need to weather the storm.

If you have questions or need assistance with commercial litigation, please contact Alex, Bob, Rich, or Saskia.