Renewed Emergency Motion — DV Diamond Club v. SBA (E.D. Mich.)
Summary
Plaintiffs' Renewed Emergency Motion for a Temporary Restraining Order and/or Preliminary Injunction in DV Diamond Club of Flint, LLC v. United States Small Business Administration, Case No. 4:20-cv-10899, in the U.S. District Court for the Eastern District of Michigan, filed April 17, 2020 as ECF No. 12. The motion asks the court to bar enforcement of 13 C.F.R. § 120.110(p) and SBA SOP 50 10 5(K), Ch. 2(III)(A)(15) in PPP loan applications. It asks that lending banks be notified to stop using them, that plaintiffs' applications be granted if they otherwise qualify, and that plaintiffs be restored to their place in the application queue if their applications have already been formally denied, derailed, or paused. Its brief in support argues the rules violate the First and Fifth Amendments and exceed the SBA's authority, and that no bond should be required.
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“Renewed Emergency Motion — DV Diamond Club v. SBA (E.D. Mich.).”
Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/court-filing-dv-diamond-club-of-flint-llc-v-u-s-small-business-adminis-ecdcb24652/
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Case 4:20-cv-10899-MFL-DRG ECF No. 12 filed 04/17/20 PageID.452 Page 1 of 54
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
DV DIAMOND CLUB OF FLINT, LLC
d/b/a Little Darlings, et al.
Plaintiffs, Case No. 4:20-cv-10899
Hon. Matthew F. Leitman
v. Hon. David R. Grand
by referral
UNITED STATES SMALL BUSINESS
ADMINISTRATION, et al.
Defendants.
__________________________________________________________________
James J. Gilligan
Bradley J. Shafer (P36604) James.gilligan@usdoj.gov
Brad@BradShaferLaw.com UNITED STATES DEPT. OF JUSTICE
Matthew J. Hoffer (P70495) Civil Division, Federal Prog. Bench
Matt@BradShaferLaw.com 1100 L Street, N.W., Room 11200
SHAFER & ASSOCIATES, P.C. Washington, D.C.
3800 Capital City Blvd., Suite 2 202-514-3358 – Telephone
Lansing, Michigan 48906
517-886-6560 – Telephone Peter A. Capalan (P30643)
Peter.Caplan@usdoj.com
Attorneys for All Plaintiffs MATTHEW SCHNEIDER
Unites States Attorney
211 West Fort Street, Suite 2001
Detroit, Michigan 48226
313-226-9784
Attorneys for All Defendants
__________________________________________________________________
PLAINTIFFS’ RENEWED EMERGENCY MOTION FOR ENTRY OF A
TEMPORARY RESTRAINING ORDER AND/OR PRELIMINARY
INJUNCTION AND REQUEST FOR TELEPHONIC OR VIDEO HEARING
PURSUANT TO 20-AO-021(6)
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NOW COME all Plaintiffs, by and through their undersigned counsel of
record, and pursuant to Fed. R. Civ. P. 65 hereby move this Honorable Court for
entry of An Emergency Temporary Restraining Order (“TRO”) and Preliminary
Injunction prohibiting the Small Business Administration (“SBA”) and Jovita
Carranza in her official capacity as the Administrator thereof; the United States of
America; and Steven Mnuchin in his official capacity as the United States Secretary
of Treasury (collectively “Defendants”) from enforcing 13 C.F.R. 120.110(p) and
SBA Standard Operating Procedure 50 10 5(K), Subpart B III (A)(15) against
Plaintiffs and their interests, under the Paycheck Protection Program (“PPP”) of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In support
thereof, Plaintiffs state the following:
1. The CARES Act creates a broad new business loan program titled the
Paycheck Protection Program (“PPP”), funds the same on a “first come, first served”
basis, provides two statutory criteria regarding a business’s eligibility, and tasks the
SBA with administering the program. The SBA’s promulgated guidance seeks to
incorporate and enforce 13 C.F.R § 120.110(p) (the “Regulation”), which was used
as the basis to numerous Plaintiffs and will effectively deny or otherwise prejudice
the remaining Plaintiffs and others who similarly engaged in presenting lawful
entertainment that is presumptively protected by the First Amendment.
2
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2. Given that the funding for the PPP is on a “first-come, first-served”
basis and the severe impact the near coast-to-coast government-mandated “shut
down” or “stay home” orders has on businesses, especially the service industry and
gig economy workers, the SBA’s enforcement of this Regulation is ruinous and
irreparable for Plaintiffs’ business.
3. As fully set forth in the accompanying Brief in Support, the
Regulation’s unquestionably fails Constitutional scrutiny. Content-based restrictions
on expression are presumed to be unconstitutional; therefore, the government bears
a heavy burden to demonstrate the Regulation is narrowly tailored to a compelling
interest. Both points, and others fully briefed in the accompanying brief, weigh
heavily in Plaintiffs’ favor on the likelihood of success factor.
4. Pursuant to E.D. Mich. LR 7.1 and E.D. Mich. LR 65.1, because of the
present pandemic and the business and governmental closures resulting, therefrom,
and because of the time-sensitive nature of the relief requested as set forth in the
accompanying brief, Plaintiffs have been unable to conduct the requisite conference.
5. In support of this motion, Plaintiffs rely upon the brief in support, the
exhibits submitted therewith; any reply to be filed; any oral argument taken by the
Court; and the record as a whole.
3
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PRAYER FOR RELIEF
For the reasons set forth above and in the incorporated Brief in Support of this
Motion, Plaintiffs respectfully request this Honorable Court:
A. Issue orders granting a Temporary Restraining Order, Preliminary, and
Permanent Injunction enjoining the Defendants, as well as their employees, agent
and representatives, including the SBA’s lending banks, from enforcing or utilizing
in any fashion or manner whatsoever, 13 C.F.R. § 120.110(p) and SBA SOP 50 10
5(K), Ch. 2(III)(A)(15) in regard to loan applications made pursuant to the Payroll
Protection Program of the CARES Act. As part of those orders, Plaintiffs further
request this Honorable Court to:
1. Order the Defendants, as well as their employees, agent and
representatives, to notify, as expeditiously as possible, all SBA lending banks
to immediately discontinue utilizing 13 C.F.R. § 120.110(p) and/or SBA SOP
50 10 5(K), Ch. 2(III)(A)(15) in their Payroll Protection Program loan
applications, and as criteria for determining Payroll Protection Program loan
application eligibility, and to fully process all Payroll Protection Program loan
applications without reference to such regulations and procedures;
2. Order the Defendants, as well as their employees, agent and
representatives, including their lending banks, to grant all Payroll Protection
Program loan applications of the Plaintiffs if they otherwise qualify for such
4
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loans if not for the provisions of 13 C.F.R. § 120.110(p) and/or SBA SOP 50
10 5(K), Ch. 2(III)(A)(15);
3. Order the Defendants, as well as their employees, agent and
representatives, including the SBA’s lending banks, to restore Plaintiffs to
their place in the application queue as they were at the time of application in
the event that their application has already been formally denied, derailed, or
paused because of the provisions of 13 C.F.R. § 120.110(p) and/or SBA SOP
50 10 5(K), Ch. 2(III)(A)(15);
B. Enter an award of attorneys’ fees and costs against the Defendants and
in favor of Plaintiffs; and
C. Enter such other and further relief as this Court may find to be
warranted in these circumstances.
Respectfully submitted,
Dated: April 17, 2020 /s/ Bradley J. Shafer
BRADLEY J. SHAFER (MI P36604)
Brad@BradShaferLaw.com
MATTHEW J. HOFFER (MI P70495)
Matt@BradShaferLaw.com
SHAFER & ASSOCIATES, P.C.
3800 Capital City Boulevard, Suite 2
Lansing, Michigan 48906
(517) 886-6560
Attorneys for All Plaintiffs
5
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Gary S. Edinger*
GSEdinger12@gmail.com
BEJAMIN, AARONSON, EDINGER &
PATANZO, P.A.
305 N.E. 1st Street
Gainesville, Florida 32601
(352) 338-4440
Co-counsel for Plaintiffs JCB of Gainesville,
Inc. and VC Lauderdale
Peter E. Garrell*
PGarrell@FortisLaw.com
FORTIS, LLP
650 Town Center Drive, Suite 1530
Costa Mesa, California 92626
(714)795-2363
Co-Counsel for Plaintiffs Brookhurst Venture, LLC; City of Industry Hospitality
Venture, Inc.; Farmdale Hospitality Services, Inc.; Inland Restaurant Venture I,
Inc.; Midnight Sun Enterprises, Inc.; Olympic Avenue Venture, Inc.; The Oxnard
Hospitality Services, Inc.; Platinum SJ Enterprise; Rouge Gentlemen’s Club, Inc.;
Washington Management, LLC; PNM Enterprises, Inc.; Rialto Pockets, Inc.; Santa
Barbara Hospitality Services, Inc.; Santa Maria Restaurant Enterprises, Inc.; The
Spearmint Rhino Adult Superstore, Inc.; High Expectations Hospitality, LLC;
Kentucky Hospitality Venture, LLC; K-Kel, Inc.; L.C.M., LLC; Nitelife, Inc.; Penn
Ave Hospitality, LLC; Sarie’s Lounge, LLC; World Class Ventures, LLC; W.P.B.
Hospitality, LLC; The Spearmint Rhino Companies Worldwide, Inc.; and Spearmint
Rhino Consulting Worldwide, Inc.
*Pending admission pro hac vice
6
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CERTIFICATE OF SERVICE
I certify that on April 17, 2020, I electronically filed the foregoing document
and accompanying briefs, exhibits, and attachments, with the United States District
Court for the Eastern District of Michigan via the Court’s CM/ECF system, thereby
causing service upon all parties of record by operation of the Court’s CM/ECF
system.
/s/ Matthew J. Hoffer
Matthew J. Hoffer (MI P70495)
SHAFER & ASSOCIATES, P.C.
7
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
DV DIAMOND CLUB OF FLINT, LLC
d/b/a Little Darlings, et al.
Plaintiffs, Case No. 4:20-cv-10899
Hon. Matthew F. Leitman
v. Hon. David R. Grand
by referral
UNITED STATES SMALL BUSINESS
ADMINISTRATION, et al.
Defendants.
__________________________________________________________________
Bradley J. Shafer (P36604) James J. Gilligan
Brad@BradShaferLaw.com James.gilligan@usdoj.gov
Matthew J. Hoffer (P70495) UNITED STATES DEPT. OF JUSTICE
Matt@BradShaferLaw.com Civil Division, Federal Prog. Bench
SHAFER & ASSOCIATES, P.C. 1100 L Street, N.W., Room 11200
3800 Capital City Blvd., Suite 2 Washington, D.C.
Lansing, Michigan 48906 202-514-3358 – Telephone
517-886-6560 – Telephone
Peter A. Capalan (P30643)
Attorneys for All Plaintiffs Peter.Caplan@usdoj.com
MATTHEW SCHNEIDER
UNITES STATES ATTORNEY
211 West Fort Street, Suite 2001
Detroit, Michigan 48226
313-226-9784
Attorneys for All Defendants
__________________________________________________________________
PLAINTIFFS’ BRIEF IN SUPPORT OF PLAINTIFFS’ RENEWED
EMERGENCY MOTION FOR TEMPORARY RESTRAINING ORDER
AND PRELIMINARY INJUNCTION
TELEPHONIC OR VIDEO ORAL ARGUMENT REQUESTED
Case 4:20-cv-10899-MFL-DRG ECF No. 12 filed 04/17/20 PageID.460 Page 9 of 54
CONCISE STATEMENT OF ISSUES PRESENTED
Whether 13 C.F.R 120.110(p) and the Small Business Administration
Standard Operating Procedure – Lender and Development Company Loan
Programs, SOP 50 10 5(K)(B)(3)(15) (Apr. 1, 2019) are unconstitutional, both
facially and as applied to Plaintiffs, and whether they exceed the regulatory authority
provided to the Small Business Administration and the United States Department of
Treasury by the Payroll Protection Act component of the Coronavirus Aid, Relief,
and Economic Security Act (CARES ACT) to broadly address the economic
catastrophe caused by the current pandemic?
ii
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MOST APPROPRIATE AUTHORITY
Miller v. California, 413 U.S. 15 (1973)
Smith v. United States, 431 U.S. 291(1977)
Reed v. Town of Gilbert, 135 S. Ct. 2218 (2015)
Reno v. ACLU¸ 521 U.S. 844 (1997)
iii
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TABLE OF CONTENTS
INTRODUCTION .....................................................................................................1
STATEMENT OF FACTS ........................................................................................4
ARGUMENT .............................................................................................................8
I. TRO AND PRELIMINARY INJUNCTION STANDARDS .................... 8
II. THE REGULATIONS AND SOP ARE REVIEWABLE BY THIS
COURT .......................................................................................................9
III. PLAINTIFFS ARE ENTITLED TO A TRO AND PRELIMINARY
INJUNCTION TO PRECLUDE THEM, THEIR EMPLOYEES
EMPLOYEES, AND THE ENTERTAINERS WHO PERFORM ON
THEIR PREMISES, FROM SUFFERING IRREPARABLE HARM .... 11
a. Plaintiffs Have A Substantial Likelihood of Success of Prevailing
on Their Constitutional Claims ......................................................11
i. The Regulations and SOP Violate the First Amendment .......... 11
1. The Regulations and SOP are Content-Based Restrictions on
Speech that Do Not Pass Constitutional Scrutiny .................. 11
2. The Regulations and SOP Fail to Conform to the Constitutional
Standards of Obscenity ...........................................................14
3. The Regulations and SOP Violate the Doctrine of
Unconstitutional Conditions and Effectuate a Prior Restraint
Upon Speech and Expression .................................................21
ii. The Regulations and SOP are Impermissibly Vague ................. 23
iii. The Regulations and SOP Violate the Equal Protection and
Occupational Liberty Components of the Fifth Amendment .... 26
iv. The SBA Lacks the Authority to Limit the Type of Business
Loans Which are Eligible for a PPP Loan .................................28
iv
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b. Plaintiffs Will Suffer Irreparable Harm if this Court does Not Issue
an Injunction...................................................................................30
c. An Injunction Would Cause No Harm to Others and the Public
Interest Weighs in Favor of the Entry of an Injunction ................. 31
IV. NO BOND SHOULD BE REQUIRED ...................................................32
CONCLUSION ........................................................................................................33
v
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INDEX OF AUTHORITIES
Cases
A.C.L.U. of Ky. v. McCreary Cty., Ky., 354 F.3d 438 (6th Cir. 2003) ..................30
Allgeyer v. La., 165 U.S. 578 (1897) ......................................................................27
Ass'n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d 545 (6th Cir. 2007)
.......................................................................................................................24
Bailey v Callagan, 715 F.3d 956 (6th Cir. 2013).......................................................9
Barnes v. Glen Theatre, Inc., 501 U.S. 560 (1991) .................................................11
Bennett v. Spear, 520 U.S. 154 (1997) ....................................................................11
Book Friends, Inc. v. Taft, 223 F.Supp.2d 932 (S.D. Ohio 2002)...........................15
Books, Inc. v. Pottawattamie Cty., 978 F. Supp. 1247 (S.D. Iowa 1997) ..............32
Brockett v. Spokane Arcades, Inc., 472 U.S. 491 (1985) .......................................16
Camelot Banquet Rooms, Inc. et al. v. Small Business Administration, et. al., 20-cv-
601 (E.D. Wis. 2020) .......................................................................................2
Carey v. Populations Services Int’l, 431 U.S. 678 (1977).......................................15
Chevron, U.S.A., Inc., v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984) .........29
Chi. & S. Air Lines, Inc. v. Waterman S.S. Corp., 333 U.S. 103 (1948) ................11
Cincinnati v. Discovery Network, Inc., 507 U.S. 410 (1993) .................................13
Citizens United v. Fed. Election Comm'n, 558 U.S. 310 (2010).............................12
City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432 (1985) ....................27
vi
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City of Erie v. Pap’s A.M., 529 U.S. 277 (2000) ....................................................11
Connection Distrib. Co. v. Holder, 557 F.3d 321 (6th Cir. 2009) .............................8
Crowley v. Local No. 82, 679 F.2d 978 (1st Cir. 1982) ..........................................33
Ctr. for Bio-Ethical Reform, Inc. v. Napolitano, 648 F.3d 365 (6th Cir. 2011) ......27
Detroit Int'l Bridge Co. v. Fed. Highway Admin., 666 F. Supp. 2d 740 (E.D. Mich.
2009) ..............................................................................................................10
Diaz v. Brewer, 656 F.3d 1008 (9th Cir. 2011) .......................................................33
Elrod v. Burns, 427 U.S. 347 (1976) .......................................................................30
Esquival-Quintana v. Sessions, 137 S. Ct. 1562 (2017) ..........................................29
F.C.C. v. Pacifica Foundation, 438 U.S. 726 (1978) ...............................................15
FW/PBS, Inc. v. City of Dallas, 493 U.S. 215 (1990) .............................................22
G&V Lounge v. Michigan Liquor Control Comm’n, 23 F.3d 1071 (6th Cir. 1994)
.......................................................................................................... 21, 22, 31
Gannett Co., Inc. v. DePasquale, 443 U.S. 368 (1979) ...........................................31
Ginsberg v. New York, 390 U.S. 676 (1968) ..........................................................18
Grayned v. City of Rockford, 408 U.S. 104 (1972) ......................................... 23, 24
J-R Distributors, Inc. v. Eikenberry, 725 F.2d 482 (1984) ......................................16
Keyishian v. Board of Regents, 385 U.S. 589 (1967) .............................................23
Kolender v. Lawson, 461 U.S. 352 (1983) ..............................................................23
Lakewood v. Plain Dealer Publishing Co., 486 U.S. 750 (1988) ............................22
Llewlyn v. Parkland Cty. Pros., 402 F. Supp. 1379 (E.D. Mich. 1975) ..................32
vii
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Luke Records, Inc. v. Navarro, 960 F.2d 134 (11th Cir. 1992)...............................18
McCullen v. Coakley, 573 U.S. 464 (2014) ............................................................12
Miller v. California, 413 U.S. 15 (1973) ......................................................... passim
Moore v. Johnson, No. 14-11903, 2014 WL 4924409 (E.D. Mich. May 23, 2014)
.......................................................................................................................33
NAACP v. Button, 371 U.S. 415 (1963) .................................................................27
Ne. Ohio Coal. for Homeless & Serv. Employees Int'l Union, Local 1199 v.
Blackwell, 467 F.3d 999 (6th Cir. 2006) .........................................................9
Nebraska Press Ass’n v. Stuart, 427 U.S. 539 (1976) .............................................32
Nightclubs, Inc. v. City of Paducah, 202 F.3d 884 (6th Cir. 2000) .........................22
Pennsylvania v. Trump, 281 F. 3d 553 (E.D. Penn. 2017) ......................................10
Penthouse Intern., Ltd. V. McAuliffe, 610 F.2d 1353 (5th Cir. 1980) ............. 15, 18
Perry v. Sindermann, 408 U.S. 593 (1972)..............................................................21
Planned Parenthood Ass’n v. City of Cincinnati, 822 F.2d 1390 (6th Cir. 1987)..31
Pope v. Illinois, 481 U.S. 497 (1987) ......................................................................15
Port of Bos. Marine Terminal Assn. v. Rederiaktiebolaget Transatlantic, 400 U.S.
62 (1970) ........................................................................................................11
Reed v. Town of Gilbert, 135 S. Ct. 2218 (2015) ...................................... 12, 13, 27
Reno v. ACLU¸ 521 U.S. 844 (1997) .............................................................. passim
Roth v. United States, 354 U.S. 476 (1957) ............................................................16
Sable Commc’ns of California, Inc. v. FCC, 492 U.S. 115 (1989) .........................15
viii
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Schad v. Borough of Mt. Ephraim, 452 U.S. 61 (1981) ..........................................11
Schickel v. Dilger, 925 F.3d 858 (6th Cir. 2019) ....................................................12
SEIU Health Care Mich. v. Snyder, 875 F. Supp. 2d 710 (E.D. Mich. 2012) ........31
Sidney Coal Co. v. Soc. Sec. Admin., 427 F.3d 336 (6th Cir. 2005) ......................10
Smith v. Goguen, 415 U.S. 566 (1974) ...................................................................23
Smith v. United States, 431 U.S. 291 (1977).................................................... 15, 17
Se. Promotions, Ltd. v. Conrad, 420 U.S. 546 (1975) .............................................22
Speech First, Inc. v. Schlissel, 939 F.3d 756 (6th Cir. 2019) ....................................9
Speiser v. Randall, 357 U.S. 513 (1958) .................................................................21
Sunrise Coop., Inc. v. United States Dept. of Agric., 891 F.3d 652 (6th Cir. 2018)
................................................................................................................ 28, 29
Thomas v. Bright, 937 F.3d 721 (6th Cir. 2019) .....................................................12
United States v. Bamberg, 478 F.3d 934 (8th Cir. 2007) ........................................24
United States v. Playboy Entm’t Grp., Inc., 529 U.S. 803 (2000) ..........................13
Virginia v. Black, 538 U.S. 343 (2003) ...................................................................12
Williams v Rhodes, 393 U.S. 23 (1968) ..................................................................27
Statutes
15 U.S.C § 636 ...........................................................................................................4
15 U.S.C. § 634 ........................................................................................................29
28 U.S.C § 1391 .......................................................................................................10
ix
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28 U.S.C. § 1402 ......................................................................................................10
28 U.S.C. § 2201 ........................................................................................................9
5 U.S.C. § 553 ..........................................................................................................29
5 U.S.C. § 701 ............................................................................................................9
5 U.S.C. § 702 ............................................................................................................9
5 U.S.C. § 704 ......................................................................................................9, 10
Other Authorities
Congressional Record of the Bill, see Summary on H.R. 748,
https://www.congress.gov/bill/116th-congress/house
bill/748/actions?q={%22search%22:[%22hr+748%22]}&r=1&s=1&KWI
View=false (last visited Apr. 4, 2020).............................................................4
Standard Operating Procedure for Lender and Development Company Loan
Programs 50 10 5(K) ...................................................................... 1, 6, 24, 33
The President’s Corona Virus Guidelines for America / 30 Days to Slow the Spread,
https://www.whitehouse.gov/wpcontent/uploads/2020/03/03.16.20_coronavr
us-guidance_8.5x11_315PM.pdf (Last accessed 4/6/20) ..............................30
Rules
Fed. R. Civ. P. 65 .....................................................................................................32
SBA Interim Final Rule, Business Loan Program Temporary Changes; Paycheck
Protection Program, RIN 3245-AH34 ............................................ 5, 6, 10, 29
Regulations
13 C.F.R. § 120.110 ......................................................................................... passim
x
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60 Fed. Reg. 64356 ................................................................................................9, 6
60 Fed. Reg. 64360 ....................................................................................... 6, 13, 20
xi
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INDEX OF EXHIBITS
Exhibit A The Coronavirus, Aid, Relief, and Economic Security Act, Pub. L. No.
116-136 §§ 1101-03, 1107, 1114 (2020)
Exhibit B Business Loan Program Temporary Changes; Paycheck Protection
Program, RIN 3245-AH34 (Interim Final Rule Apr. 1, 2020)
Exhibit C Members of Congress’ Letter to SBA Administrator Jovita Carranza
and Secretary of the Treasury Steven Mnuchin (Apr. 10, 2020)
Exhibit D Camelot Banquet Rooms, Inc. et al. v. Small Business Administration,
et. al., 20-cv-601 (E.D. Wis. 2020) Ordering TRO, ECF 13
Exhibit E List of Plaintiffs Denied PPP Benefits
Exhibit F House Committee on Small Business Letter to Secretary of the
Treasury Steven Mnuchin and SBA Administrator Jovita Carranza
(Apr. 7, 2020)
Exhibit G House Committee on Agriculture Letter to SBA Administrator Jovita
Carranza (Apr. 9, 2020)
Exhibit H Business Loan Program, 60 Fed. Reg. 64356 et seq. (proposed Dec. 15,
1995) (to be codified at 13 C.F.R. § 120.110)
Exhibit I SBA Business Loan Ineligible Businesses Rule, 13 C.F.R § 120.110
(2020)
Exhibit J SBA Standard Operating Procedure 50 10 5(K) – Lender and
Development Company Loan Programs (Apr. 1, 2019)
Exhibit K DV’s SBA Paycheck Protection Program Borrower Application, Form
2483 (Apr. 6, 2020)
Exhibit L Sample Bank Paycheck Protection Program Supplemental Information
Form (current as of Apr. 7, 2020)
xii
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Exhibit M Plaintiff DB Entertainment, Inc.’s (“DB”) PPP Loan Application
Denial Letter (Apr. 5, 2020)
xiii
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INTRODUCTION
The coronavirus pandemic has affected virtually every business operating in
our country, and every person employed thereby. This Court needs no supporting
authority to know that this is nothing short of an economic catastrophe. As a result
of these financial difficulties, Congress recently passed, among other things, the
Paycheck Protection Program (“PPP,” and attached as Ex. A) of the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act” or simply “the Act”) to
permit continuity of the payment of wages by small businesses (fewer than 500
employees).
This action was initiated to obtain an immediate injunction against: A) two
short provisions of 13 C.F.R. §120.110 (and in particular subsections (p)(1) and (2)
thereof; those subsections being referred to hereinafter as the “Regulations”) that bar
general Small Business Administration (“SBA”) loans to businesses that present, or
derive a non-de minimus portion of their gross revenues from, entertainment that is
of an undefined “prurient sexual nature”; and B) a provision of the Standard
Operating Procedure for Lender and Development Company Loan Programs (the
“SOP”) identified as Ch.2(III)(A)(15) promulgated to apply the Regulations to PPP
loan (“PPL) applications. 1
1
To the best of Plaintiffs’ knowledge there are a number of suits filed in sister courts
seeking similar relief. See Camelot Banquet Rooms, Inc. et al. v. Small Business
1
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These prohibitions are not contained in emergency legislation and were
imposed upon PPLs by the Department of Treasury (“Treasury”) and SBA through
emergency regulations that bypassed the normal rulemaking procedures and that
were released only hours before PPP loan applications could be submitted.
As is demonstrated here, the Regulations are being applied by lending banks,
largely, in the absence of clear guidance, [see Exs. B & C], and the SBA to deny
desperately needed financial assistance to businesses that undeniably receive
protections under the First Amendment. 2 Most importantly, the withheld benefits
would be used primarily (no less than 75% of the full loan amount) to pay their
employees during these desperate times.
The Regulations and SOP violate the First Amendment on their face because
they require content-based decision-making and are justified based on the content of
a speaker’s communications, because they do not conform to the legal standards of
obscenity; because they violate the doctrine of unconstitutional conditions; because
they effectuate an impermissible prior restraint; they are impermissibly vague and
Administration, et. al., 20-cv-601 (E.D. Wis. 2020) (E.D. Wis. Order granting a TRO
attached hereto as Ex. D) and Am. Ass’n of Political Consultants Ridder/Braden,
Inc. v. United States SBA, 20-cv-00970 (D.D.C 2020) (political lobbyists
challenging PPP loan denial based on 13 C.F.R. § 120.110(r)).
2
As of the date of this filing, Plaintiffs listed in Ex. E have had their applications
formally denied citing or indicating the Regulations and SOP as reasons.
2
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provide no standards whatsoever to permit personnel at lending banks and at the
SBA to determine whether a loan application should be denied based on their
proscriptions; they exceed the statutory limitations on the SBA’s authority because
they purport to circumscribe the near-universal availability of loans vital to the
Nation’s economy; and they violate both the Equal Protection Clause (“EPC”) and
the occupational Liberty Clause of the Fifth Amendment.
Injunctive relief is warranted because infringement of Plaintiffs’ First
Amendment rights is irreparable as a matter of law. Plaintiffs also present a
compelling case of economic injury in support of this application. Because the total
amount of money available for PPP loans is limited by statute, and because that
amount is quickly being depleted by the loan applications of others, unless this Court
immediately grants the emergency relief requested herein, the Plaintiffs, literally
thousands of other businesses across the country, and more importantly their
employees, will be irreparably harmed in that they will be forever denied the payroll
protections afforded under the broad relief as ordered by Congress.
3
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STATEMENT OF FACTS
Plaintiffs own and operate venues that present clothed, semi-nude, and/or
nude performance entertainment, similar retail establishments, and businesses that
service those establishments. Verified First Amended Complaint for Declaratory and
Injunctive Relief (“FAC”), ¶¶ 75, 87, 98, 109, 121, 133, 145, 157, 167, 177, 187,
198, 208, 217, 228, 239, 249, 259, 269, 279, 289, 299, 309, 319, 329, 339, 349, 359,
369, 379, 389, 399, 409, 419, 429, 439, 449, 459, 469, 479, 489, 499. Neither
Plaintiffs’ businesses nor the entertainers who perform there have ever been charged,
let alone convicted, of any crimes of obscenity. Id. at ¶¶ 76, 88, 99, 110, 120, 134,
158, 168, 178, 188, 199, 209, 218, 229, 240, 250, 260, 270, 280, 290, 300, 310, 320,
330, 340, 350, 360, 370, 380, 390, 400, 410, 420, 430, 440, 450, 460, 470, 500.
The CARES Act became law on March 27, 2020.3 Section 1102 thereof
created the PPP (Ex. A, codified as 15 U.S.C § 636), funds the same to a maximum
of $349,000,000,000, and generally grants the Administrator of the SBA oversight
authority of the program. The PPP also explicitly increases eligibility for small
businesses and organizations to be able to obtain SBA loans, prescribes certain
allowable uses for Payroll Protections Loans (“PPL’s”), delegates authority to
3
For a complete Congressional Record of the Bill, see Summary on H.R. 748,
https://www.congress.gov/bill/116th-congress/house-
bill/748/actions?q={%22search%22:[%22hr+748%22]}&r=1&s=1&KWICView=f
alse (last visited Apr. 4, 2020).
4
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lenders to approve loans, provides factors for evaluating a borrower’s eligibility,
outlines certification requirements for borrower/applicants, and provides the SBA
15 days to promulgate regulations to carry out the new law. See generally Ex. A, pp.
6-7, 11.
Those regulations (Ex. B), adopted without the normal rulemaking process
because of the pandemic emergency, were issued literally hours before PPL
applications could be submitted (beginning at 12:01 a.m., April 1, 2020). This
Interim Final Rule (an oxymoron itself), titled “Business Loan Program Temporary
Changes; Paycheck Protection Program” and identified as RIN 3245-AH34
(hereafter “SBA 3245”), provided, among other things, the following:
c. How do I determine if I am ineligible?
Businesses that are not eligible for PPP loans are identified in 13 CFR
120.110 and described further in SBA’s Standard Operating Procedure
(SOP) 50 10, Subpart B, Chapter 2 . . . .
SBA 3245(III)(2)(c) (pp.6-7) (emphasis added). Within a week of enactment,
Congressional oversight committees began sending letters to the SBA expressing
concern that “these programs are [not] being implemented as Congress intended,”
[Ex. F], and informing the SBA that “the PPP . . . transcends the purposes and
limitations of the old program” and should be “unencumbered by the limitations that
ought to no longer apply because they hinder rather than help the economic
recovery.” Ex. G.
5
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SBA 3245 also provides that because of the limited funds available, PPL’s
will be issued on a “first-come, first-served basis.” Id. at (II)(2)(l) (p. 13).
Following the promulgation of a Proposed Rule (see generally, 60 Fed. Reg.
64356 et seq., and in particular 60 Fed. Reg. 64360; Ex. H), 13 CFR 120.110 was
adopted in 1996 as applicable to all then-existing SBA loans On Dec. 15, 1995, and
provided in part:
The following types of businesses are ineligible:
...
(p) Businesses which:
(1) Present live performances of a prurient sexual nature; or
(2) Derive directly or indirectly more than de minimis gross revenue
through the sale of products or services, or the presentation of any
depictions or displays, of a prurient sexual nature
13 C.F.R. § 120.110(p) (Ex. I) (emphasis added and in original) (again, the
“Regulations”).
In 2019 the SBA also promulgated its Standard Operating Procedure for
Lender and Development Company Loan Programs, SOP 50 10 5(K), Ch.
2(III)(A)(15), which apparently sought to provide guidance for administering the
Regulations (hereafter the “SOP”; Ex. J). These are now arguably applicable to
PPLs and have certainly been accepted by lenders as mandatory guidelines.
On April 6, 2020, Plaintiff DV Diamond Club of Flint, LLC (“DV Diamond”)
submitted an application for a PPL to its bank using the PPP “Borrower Application
6
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Form,” SBA Form 2483 (Apr. 2020).4 Ex. K. DV Diamond was required to certify
that it is eligible for a PPL. Id. at p. 7. DV Diamond believed, based on the
Constitutional issues set forth in this Brief, it is eligible, id. at pp. 7-12, however,
based on denials in similar businesses, among other factors, it believed denial and/or
disqualification for loan forgiveness was inevitable and instituted this action.5 FAC,
¶85. On April 9, 2020, this Court held a telephonic conference to discuss the basis
for DV Diamond’s claims with the parties. [Dkt. 7]. Following the conference, DV
Diamond withdrew its motion for TRO without prejudice, [dkt. 8], until such time
as DV Diamond’s application was denied. However, since April 9, 2020, other
businesses have been denied PPLs based upon the Regulations and SOP and reached
out to DV Diamond to join this action. As of the filing of this Brief, the Plaintiffs
listed in Ex. E, which were all otherwise eligible for PPL’s, but for the regulations
and SOP, have had their PPL applications denied or rejected by the SBA. Plaintiff
4
In an attempt to fill the void and apparently fearful of violating the Regulations,
some banks are taking it upon themselves to include in their application process, in
addition to SBA Form 2483, questionnaires that mirror the language in the
Regulations. See Ex. L, p. 1.
5
Worse, the SBA may initially grant these PPP loans only to use the Regulations
and SOP as bases to decline loan forgiveness; another benefit the CARES Act
provides to small businesses. See FAC at ¶513.
7
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BD and others received a formal written denial from its SBA qualified bank. 6 Ex.
M. [FAC at ¶ 118 and Ex. I thereto (same document)].
In addition, Plaintiffs are not the only affected party; 7 they have scores of
employees and, also at issue, are the professional entertainers who perform on their
premises and some of whom can file their own applications for PPL’s as self-
employed individuals. Thus, Plaintiffs bring this challenge on behalf of themselves,
their employees, and the entertainers who perform on their premises. 8
ARGUMENT
I. TRO AND PRELIMINARY INJUNCTION STANDARDS
6
All information relating to the applicant bank has been redacted based on Plaintiffs’
well-founded fear of retaliation for participating in this action. See FAC, ¶515.
Plaintiffs wish to emphasize the blame lies with the SBA and Treasury as, it believes,
the banks with whom they do business were simply attempting to apply the limited
and confusing SBA and Treasury guidance. Id.; see also Ex. C.
7
Indeed, other businesses have contacted Plaintiffs wishing to be added; however,
Plaintiffs’ counsel has been required to ‘close’ the addition of other businesses as
plaintiffs in order to freeze the pleadings and; thereby, seek immediate emergency
relief as prayed for herein. Plaintiffs anticipate that additional plaintiffs will join this
action at a later date. See FAC, ¶517.
8
See Connection Distrib. Co. v. Holder, 557 F.3d 321, 335–36 (6th Cir. 2009)
(“facial challenge permitted magazine producer to have standing to assert the rights
of those in its publication. The First Amendment allows “the claimant to strike the
law in its entirety based on its application to other individuals not before the court”).
8
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When determining whether to grant or deny a motion for preliminary
injunction, this Court must weigh: (1) whether the movant has a strong likelihood of
success on the merits; (2) whether the movant would suffer irreparable injury
without the injunction; (3) whether issuance of the injunction would cause
substantial harm to others; and (4) whether the public interest would be served by
the issuance of the injunction. Speech First, Inc. v. Schlissel, 939 F.3d 756, 763 (6th
Cir. 2019) (quoting Bailey v Callagan, 715 F.3d 956, 958 (6th Cir. 2013)). “[T]he
same factors [are] considered in determining whether to issue a TRO or a preliminary
injunction.” Ne. Ohio Coal. for Homeless & Serv. Employees Int'l Union, Local
1199 v. Blackwell, 467 F.3d 999, 1009 (6th Cir. 2006). These standards demand the
entry of a TRO and preliminary injunction here.
II. THE REGULATIONS AND SOP ARE REVIEWABLE BY THIS
COURT
Plaintiffs invoke the Declaratory Judgment Act and ask the Court to declare
their constitutional, statutory, and regulatory rights in relation to the SBA’s
enforcement of the Regulations and SOP. 28 U.S.C. § 2201. Further, pursuant to 5
U.S.C. § 702, Plaintiffs seek immediate emergency injunctive relief against
Defendants. 5 U.S.C. § 701 et seq. provides a waiver of federal sovereign immunity
under certain circumstances. One such waiver is for “final agency actions for which
there is no other adequate remedy in a court . . . .” 5 U.S.C. § 704. Under this waiver,
9
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Plaintiffs request this Court to “hold unlawful and set aside” the Regulations and
SOP as “contrary to constitutional right, power, privilege, or immunity . . . in excess
of statutory jurisdiction, authority, or limitations, or short of statutory right [and]
without observance of procedure required by law.” 5 U.S.C. § 706(2)
SBA 3245, as an Interim Final Rule which mandates enforcement of the
Regulations, constitutes a final agency action and is reviewable by this Court under
5 U.S.C. § 704, see Pennsylvania v. Trump, 281 F. 3d 553, 565-66 (E.D. Penn. 2017)
(noting the plaintiff’s “special solicitude in suing the federal government under the
APA for injunctive relief” when “su[ing] to halt affirmative conduct made by a
federal agency”). Venue in this Court is appropriate for all Plaintiffs as Plaintiff DV
Diamond Club of Flint, LLC resides within the Eastern District of Michigan. 28
U.S.C §§ 1391(c)(2) & (e)(1)(C); 1402(a). 9
9
A corporation is deemed to be a resident of “the judicial district in which it
maintains its principle place of business.” 28 USC § 1391(c)(2). See also Sidney
Coal Co. v. Soc. Sec. Admin., 427 F.3d 336, 341–42 (6th Cir. 2005) (“With regard
to venue, the district court found that, since 1971, all federal courts interpreting the
applicable venue statute, 28 U.S.C. § 1391(e)(3) [now 28 U.S.C. § 1391(e)(1)(C)]
found it required only one plaintiff to reside in the selected district. . . . the district
court’s holding with regard to venue is AFFIRMED.”) (emphasis added); Detroit
Int'l Bridge Co. v. Fed. Highway Admin., 666 F. Supp. 2d 740, 743 (E.D. Mich.
2009) (“In an action where the United States is named as a defendant—as in this
case—the lawsuit may be prosecuted where the plaintiff resides.”) (emphasis added).
10
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Therefore, this Court may properly hear this matter and issue the requested
relief. 10
III. PLAINTIFFS ARE ENTITLED TO A TRO AND PRELIMINARY
INJUNCTION TO PRECLUDE THEM, THEIR EMPLOYEES, AND
THE ENTERTAINERS WHO PERFORM ON THEIR PREMISES,
FROM SUFFERING IRREPARABLE HARM
A. Plaintiffs Have A Substantial Likelihood of Success of Prevailing
on Their Constitutional Claims
i. The Regulations and SOP Violate the First Amendment
1. The Regulations and SOP are Content-Based
Restrictions on Speech that Do Not Pass Constitutional
Scrutiny
The live performance dance entertainment at issue falls within the protections
of the First Amendment. See, e.g., Barnes v. Glen Theatre, Inc., 501 U.S. 560, 565
(1991) (even fully nude dance receives protections under the Constitution).11
10
For an agency action to qualify as final, the action must 1) not be tentative or
interlocutory in nature, but must be the “‘consummation’ of the agency’s decision-
making process,” Bennett v. Spear, 520 U.S. 154, 178 (1997) (quoting Chi. & S. Air
Lines, Inc. v. Waterman S.S. Corp., 333 U.S. 103, 113 (1948)), and 2) must be an
action “by which ‘rights or obligations have been determined,’ or from which ‘legal
consequences will flow.’” Id. (quoting Port of Bos. Marine Terminal Assn. v.
Rederiaktiebolaget Transatlantic, 400 U.S. 62, 71 (1970)).
11
Accord, City of Erie v. Pap’s A.M., 529 U.S. 277, 289 (2000) (same); Schad v.
Borough of Mt. Ephraim, 452 U.S. 61, 65-66 (1981) (“Nor may an entertainment
program be prohibited solely because it displays the nude human figure. ‘[N]udity
alone’ does not place otherwise protected material outside the mantle of the First
Amendment. . . . Furthermore, . . . nude dancing is not without its First Amendment
11
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“[A] law regulating speech is facially content-based if it ‘draws distinctions
based on the message,’ if it ‘distinguishes among different speakers, allowing speech
by some but not others,’ or if, in its application, ‘it require[s] enforcement authorities
to examine the content of the message that is conveyed to determine whether a
violation has occurred. Thomas v. Bright, 937 F.3d 721, 729 (6th Cir. 2019) (quoting
Reed v. Town of Gilbert, 135 S. Ct. 2218, 2227 (2015)); Citizens United v. Fed.
Election Comm'n, 558 U.S. 310, 340 (2010); and McCullen v. Coakley, 573 U.S.
464, 479 (2014)). A facially content-neutral law will still be categorized as content-
based if “it cannot be ‘justified without reference to the content of the regulated
speech’ or was ‘adopted by the government because of a disagreement with the
message the speech conveys.’” Schickel v. Dilger, 925 F.3d 858, 876 (6th Cir. 2019).
It is obvious that the Regulations and SOP are content-based on their face;
they distinguish loan applications based upon whether the content of entertainment
is of a “prurient sexual nature.” Moreover, a cursory glance at the administrative
record of the Regulations demonstrates the SBA’s clear disagreement with
Plaintiffs’ message, stating that “the public interest in granting or denying
applications for financial assistance” empowered it to “exclude small businesses
protections from official regulation”). See also Virginia v. Black, 538 U.S. 343, 358
(2003) (“the First Amendment affords protection to symbolic or expressive conduct
as well as actual speech”).
12
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engaging in lawful activities of an obscene, pornographic, or prurient sexual nature.”
60 Fed. Reg. 64360 (Dec. 15, 1995) (emphasis added).
Content-based distinctions “are presumptively unconstitutional and may be
justified only if the government proves that they are narrowly tailored to serve
compelling state interests.” Reed, 135 S. Ct. at 2226-27 (emphasis added). “A law
that is content based on its face is subject to strict scrutiny regardless of the
government’s benign motive content-neutral justification, or ‘lack of animus
towards the ideas contained’ in the regulated speech.’” Id. (citing Cincinnati v.
Discovery Network, Inc., 507 U.S. 410, 429 (1993)).
Businesses engaged in “live or recorded performances of a prurient sexual
nature” are excluded from eligibility for a PPL. This determination must be made
based upon a review of the content of the entertainment, and because the SBA cannot
justify this differential eligibility criterion, the Regulations and SOP are
unconstitutional under strict scrutiny. Moreover, Plaintiffs are not obligated to
establish the unconstitutionality of the Regulations and SOP; rather, the burden in
this action is upon the Defendants to prove their legality. See e.g., United States v.
Playboy Entm’t Grp., Inc., 529 U.S. 803, 816-17 (2000) (“When the Government
restricts speech, the Government bears the burden of proving the constitutionality of
its actions. . . . [T]he Government bears the burden of identifying a substantial
interest and justifying the challenged restriction . . . . [this] imposes an especially
13
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heavy burden on the Government to explain why a less restrictive provision would
not be as effective. . . .” (citations omitted)).
There is no compelling governmental interest here. The coronavirus puts
everyone in the same boat. Nor are the Regulations and SOP narrowly tailored. A
narrowly tailored law might prohibit, for example, loans to businesses purveying
illegal materials which have been determined to be obscene by a jury (and, in fact,
it does; see 13 C.F.R. §120.110(h) (precluding loans to any business “engaged in
any illegal activity)). However, the government cannot throw the protected baby out
with the prurient bathwater. Risqué entertainment still finds substantial protection
under the First Amendment and may not be infringed by a law which, at most, might
target obscene speech. These are content-based restrictions on speech and
expression, they are presumed to be unconstitutional, and they are.
2. The Regulations and SOP Fail to Conform to the
Constitutional Standards of Obscenity
Separating lawful expression from what is not requires the legal test of
obscenity. “Sexual expression which is indecent but not obscene is protected by the
First Amendment.” Sable Commc’ns of California, Inc. v. FCC, 492 U.S. 115, 126
14
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(1989).12 The obscenity standard has developed over time, but is generally
considered to be at present the following:
Whether the average person, applying contemporary community
standards, would find that the work, taken as a whole, appeals to the
prurient interest;
Whether the work, applying contemporary community standards,
depicts or describes, in a patently offensive way, sexual conduct
specifically defined by applicable state law; and
Whether a reasonable person would find that the work lacks serious
literary, artistic, political, or scientific value.
Miller v. California, 413 U.S. 15, 24 (1973), as clarified by Smith v. United States,
431 U.S. 291, 300 n.6 (1977); and Pope v. Illinois, 481 U.S. 497, 500-01 & n.3
(1987) (collective here, the “Miller Test”).
“. . . [T]he three prongs of the Miller test are conjunctive, rather than being
disjunctive; therefore . . . [entertainment] is not obscene unless all three prongs have
been established.” See, e.g., Book Friends, Inc. v. Taft, 223 F.Supp.2d 932, 936 (S.D.
Ohio 2002) (emphasis added), citing Reno v. ACLU¸ 521 U.S. 844, 873 (1997)
(emphasis added). Accord, Penthouse Intern., Ltd. V. McAuliffe, 610 F.2d 1353,
1363 (5th Cir. 1980).
12
See also F.C.C. v. Pacifica Foundation, 438 U.S. 726, 745 (1978) (“[T]he fact that
society may find speech offensive is not a sufficient reason for suppressing it.”); and
Carey v. Populations Services Int’l, 431 U.S. 678, 701 (1977) (“[W]here obscenity
is not involved, we have consistently held that the fact that protected speech may be
offensive to some does not justify its suppression”) (emphasis added).
15
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The Regulations are obviously keyed to the first prong of the Miller test;
prurient appeal. The Supreme Court defines prurient subject matter as appealing to
a “shameful or morbid,” and “unhealthy,” interest in sex, as opposed to a normal,
healthy, sexual desire. Roth v. United States, 354 U.S. 476, 487 n.20 (1957); and
Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 498-99 (1985).
In Brockett, the Court clarified that the Roth standard should not be construed
to extend obscenity to expression that invoked merely “lustful thoughts,” or that
appealed to “normal, healthy sexual desires.” Brockett, supra (emphasis added).
The Court clearly held that the government may not outlaw expression which, “taken
as a whole, does no more than arouse, ‘good, old fashioned, healthy’ interest in sex.”
Id. at 499 (emphasis added) (quoting the opinion being reversed there; J-R
Distributors, Inc. v. Eikenberry, 725 F.2d 482, 492 (9th Cir. 1984)).
The Regulations fail to satisfy these constitutional standards.
First, they do not even comport with the first element of the obscenity test
(prurient appeal). Even assuming that “prurient sexual nature” has the same meaning
as “prurient interest” under the Miller Test,13 the Regulations do not require the
reviewing official to consider the entertainment as a “whole” (for example, here,
13
If Miller does not apply, then there is effectively no definition of this term at all
and, thus, no guidance for the SBA’s content-based decisions.
16
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where much of the live entertainment is clothed). Neither do they require that
“prurience” be considered in the context of the relevant contemporary community
standards as mandated by the Miller Test. Cf. Reno 521 U.S. at 873 (invalidating a
section of the Communications Decency Act (“CDA”) because, inter alia, while it
included part of the second component of the Miller Test – patent offensiveness – it
did not require, as the Miller Test requires, the evaluation to be restricted to
depictions “specifically defined by applicable state law”).
These failings are critical because of the constitutional protections that are
intentionally built into every component of the Miller test, including the “prurient
appeal” element. Reno 521 U.S. at 873 (“Each of Miller’s additional two prongs . .
. critically limits the uncertain sweep of the obscenity definition.”) (emphasis added).
In addition, courts have made clear that a jury, selected from the community at large,
is presumed to know—as a collective body—what the contemporary community
standards are. See, e.g., Smith, 431 U.S. at 302.
Accordingly, whether entertainment appeals to a “prurient appeal” as
measured by the contemporary community standards is a question of fact for a jury
to decide, where the substantive limitations of the obscenity test “are passed on to
the jury in the form of instructions.” Id. at 293, 300-302 (emphasis added). There is
nothing to presume that a single bank employee or SBA representative administering
these loan applications, individually, has any knowledge or concept of the relevant
17
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community standards (and there is nothing in that law that permits the assumption
that they do), let alone that they even know that they are constitutionally required to
apply them in considering eligibility for these PPLs. Nor are they given any guidance
concerning how the phrase “prurient sexual nature” is to be defined or applied
(discussed in the next subsection below).14
The legal presumption that a jury inherently knows the community standards,
is subject to an additional “check” to protect speech. The overseeing judge must
independently evaluate, irrespective of the jury’s finding of obscenity, the obscenity
vel non of the entertainment in question. See, e.g., Ginsberg v. New York, 390 U.S.
676, 707 (1968) (Harlan J. concurring) (“. . . the question of whether particular
material is obscene inherently entails a constitutional judgement for which the Court
has ultimate responsibility, and hence that is incumbent upon us to judge for
ourselves, de novo as it were, the obscenity vel non of the challenged matter”)
(emphasis added, numerous citations omitted). Accord Penthouse, 610 F.2d at 1363-
64.
14
Compare Luke Records, Inc. v. Navarro, 960 F.2d 134, 135 (11th Cir. 1992)
(obscenity determination reversed where Sheriff only introduced a copy of the audio
recording and Judge determined the issue without a jury based only on his own
conception of community standards). Here, a bank or SBA official may make a
determination on the “prurient sexual nature” of the entertainment with no factual
evidence whatsoever to guide his or her decision.
18
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The Constitution requires that a determination of obscenity be arrived at
through a carefully constrained, sophisticated inquiry involving multiple factors, all
of which must be present in order to confirm that the speech is unprotected. That
searching inquiry should be contrasted with the Regulations and SOP, which
envision that a small business can be barred from emergency PPP funds based on
the opinion of a single bank employee (or SBA administrator) who may have no
legal expertise whatsoever and who receives no particularized instructions in regard
to these difficult constitutional concepts. Simply put, there is absolutely none of the
judicial oversight mandated by the First Amendment, rendering this process
constitutionally deficient.
Second, the Regulations unconstitutionally relax the stringent three-part
standard to differentiate fully-protected (albeit even indecent) expression from the
extremely limited class of obscene materials that the government may
constitutionally discourage or prohibit. The Regulations completely ignore the
potential patent offensiveness and the “serious value” of the entertainment and, as
stated above, expression is relieved of constitutional protection only if it violates all
three prongs of the Miller Test. Here again, Reno is instructive. Whereas the CDA
included an incomplete patent offensive inquiry, it did not require evaluation of
either the prurient appeal of the material or its “value.” “Just because a definition
19
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including three limitations is not vague, it does not follow that one of these
limitations, standing by itself, is not vague.” 521 U.S. at 873 (emphasis added).
There is no question that the Regulations are at least premised on the Miller
Test for obscenity. See 60 Fed. Reg. 64360 (proposed Dec. 15, 1995) (citing Miller)
(Ex. H). It is also equally clear that the SBA did not have a full understanding of
obscenity jurisprudence when it considered the adoption of the Regulations. See id.
(“. . . SBA has determined that it may exclude businesses engaged in lawful activities
of an obscene, pornographic, or prurient sexual nature”) (emphasis added). That’s a
non-sequitur. If something is obscene it is illegal, plain and simple, and can’t qualify
for an SBA loan anyway. See 13 C.F.R §120.110(h). Plaintiffs make no challenge to
that provision.
Moreover, while the administrative commentary leading up to the adoption of
the Regulations states that applicants’ First Amendment rights would not be
jeopardized by the rules because they may “exercise their freedoms, operate their
businesses, and obtain any other aid available to them” (60 Fed. Reg. 64360, supra)
(emphasis added), here Plaintiffs and others similarly situated cannot get “other aid”
regarding the pandemic because SBA has barred them from doing so; there are no
alternative sources of funding. And, without this emergency relief, they may never
open their doors again and will then be deprived of their ability to continue to engage
in protected expression.
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Third, the Regulations fail to provide any standards whatsoever to
differentiate otherwise protected expression from illegal obscenity, other than a
single undefined word (“prurient”) taken completely out of its usual constitutional
context.
3. The Regulations and SOP Violate the Doctrine of
Unconstitutional Conditions and Effectuate a Prior
Restraint Upon Speech and Expression
Plaintiffs are faced with a stark choice by the Regulations and SOP: Abandon
their chosen form of expression or forgo a government benefit available to nearly
every other small business in America. That is not a choice. Rather, it represents a
blatant violation of the doctrine of unconstitutional conditions:
For at least a quarter-century, this Court has made clear that even
though a person has no ‘right’ to a valuable governmental benefit and
even though the government may deny him the benefit for any number
of reasons, there are some reasons upon which the government may not
rely. It may not deny a benefit to a person on a basis that infringes his
constitutionally protected interests—especially, his interest in freedom
of speech. For if the government could deny a benefit to a person
because of his constitutionally protected speech or associations, his
exercise of those freedoms would in effect be penalized and inhibited.
This would allow the government to ‘produce a result which (it) could
not command directly.’ Speiser v. Randall, 357 U.S. 513, 526 [(1958)].
Such interference with constitutional rights is impermissible.
Perry v. Sindermann, 408 U.S. 593, 597 (1972) (emphasis added). Accord, G&V
Lounge v. Michigan Liquor Control Comm’n, 23 F.3d 1071, 1077-78 (6th Cir. 1994)
21
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(municipal requirement of liquor license applicant that it waive its right to present
topless dancing as a condition of license approval violated this doctrine).
In this context, the withholding of otherwise available government benefits
also represents a prior restraint on speech. “A ‘prior restraint’ exists when the
exercise of a First Amendment right depends on the prior approval of public
officials.” Nightclubs, Inc. v. City of Paducah, 202 F.3d 884, 889 (6th Cir. 2000)
(citing Se. Promotions, Ltd. v. Conrad, 420 U.S. 546, 553 (1975)). While not
unconstitutional per se, they “come to this Court bearing a heavy presumption
against [their] constitutional validity.” Id. at 558 (emphasis and clarification added).
A scheme that places “unbridled discretion in the hands of a government official or
agency constitutes a prior restraint and may result in censorship.” FW/PBS, Inc. v.
City of Dallas, 493 U.S. 215, 225-26 (1990), citing Lakewood v. Plain Dealer
Publishing Co., 486 U.S. 750, 757 (1988).
The Regulations and SOP undeniably constitute a prior restraint on
expression. For an applicant to qualify for a PPL, it must eschew its constitutional
right to engage in the presentation of entertainment that is of a “prurient sexual
nature” (whatever that may mean) in the future; a classic prior restraint. See, e.g.,
G&V Lounge, 23 F.3d at 1075 (municipal requirement of liquor license applicant
that it waive its right to present topless dancing as a condition of license approval
was a sufficient prior restraint to satisfy the “injury-in-fact” standard so as to warrant
22
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the entry of injunctive relief). Further, it will cause Plaintiffs to self-censor in order
to avoid running afoul of the nebulous “prurient” requirement, entertainers will
dance less provocatively; thereby, chilling their constitutionally-protected message
of eroticism.
ii. The Regulations and SOP are Impermissibly Vague
Statutes which are vague, and which are not subject to reasonable
interpretation by common men, inherently deny due process and are therefore
unconstitutional. Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). To be
constitutional, the law must “give the person of ordinary intelligence a reasonable
opportunity to know what is prohibited, so that he may act accordingly.” Id.; and
Kolender v. Lawson, 461 U.S. 352, 358 (1983). These constitutional concerns are
heightened when a vague statute “abuts upon sensitive areas of basic First
Amendment freedoms.” Grayned, 408 U.S. at 109. See also Smith v. Goguen, 415
U.S. 566, 573 (1974). Succinctly put, precision in draftsmanship is the touchstone
of constitutionality for a regulation that impacts upon First Amendment rights. See,
e.g., Keyishian v. Board of Regents, 385 U.S. 589, 603-04 (1967).
[T]he vagueness doctrine has two primary goals: (1) to ensure fair
notice to the citizenry and (2) to provide standards for enforcement by
police, judges, and juries. With respect to the first goal, the Supreme
Court has stated that “[a] statute which either forbids or requires the
doing of an act in terms so vague that men of common intelligence must
necessarily guess at its meaning and differ as to its application, violates
the first essential of due process of law.” Connally v. Gen. Constr.
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Co., 269 U.S. 385 (1925). With respect to the second goal, the Supreme
Court stated that “if arbitrary and discriminatory enforcement is to be
prevented, laws must provide explicit standards for those who apply
them. A vague law impermissibly delegates basic policy matters to
policemen, judges, and juries for resolution on an ad hoc and subjective
basis.” Grayned, 408 U.S. at 108–09.
Ass'n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d 545, 551 (6th
Cir. 2007) (some citations omitted); see also United States v. Bamberg, 478
F.3d 934, 937 (8th Cir. 2007).
The Regulations and SOP violate both aspects of the vagueness inquiry. They
fail to supply intelligible guidelines for businesses that may ultimately find
themselves in need of relief administered by the SBA, and they fail to provide the
objective guidance needed to avoid arbitrary application.
An individual seeking to apply or comply with the Regulations is first tasked
with what definition of “prurient” to apply. Is it the legal definition contained in the
Miller Test above, or something else? No one knows. Simply put, administering
officials are provided no guidance whatsoever as to what definition they should
apply and how they are to apply it.
Indeed, the SOP anticipates that this is too much to expect of the lender, who
is tasked with making an initial determination but is then required to submit its
analysis to the SBA “for a final Agency decision on eligibility.” SOP 50 10
5(K)(B)(3)(15)(b)-(c). The fact that a review process is supplied means that
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administering officials are not trusted with consistently applying the standard. But
how is the SBA to operationalize this phrase? Again, we have no idea.
The Regulations and SOP also suffer from the vagueness identified in Reno,
supra. In distinguishing the CDA before the Court from the law it upheld in Ginsberg
v. State of New York, 390 U.S. 629 (1968), the Court noted that the CDA lacked
any definition of “indecent” or “patently offensive.” 521 U.S. at 865, 871. This
parallels the undefined term “prurient” at bar. Importantly the Court rejected the
argument that such terms were no more vague than the Miller Test itself. The Court
explained:
Because the CDA's “patently offensive” standard (and, we
assume, arguendo, its synonymous “indecent” standard 15) is one part
of the three-prong Miller test, the Government reasons, it cannot be
unconstitutionally vague.
The Government's assertion is incorrect as a matter of fact. The second
prong of the Miller test—the purportedly analogous standard—
contains a critical requirement that is omitted from the CDA: that the
proscribed material be “specifically defined by the applicable state
law.” This requirement reduces the vagueness inherent in the open-
ended term “patently offensive” as used in the CDA.
* * *
The Government's reasoning is also flawed. Just because a definition
including three limitations is not vague, it does not follow that one of
those limitations, standing by itself, is not vague. (footnoted omitted).
Each of Miller 's additional two prongs—(1) that, taken as a whole, the
material appeal to the “prurient” interest, and (2) that it “lac[k] serious
literary, artistic, political, or scientific value”—critically limits the
uncertain sweep of the obscenity definition.
15
Nor do we know here whether the Regulation’s words are supposed to be identical
to the first prong concept of the Miller Test.
25
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* * *
In contrast to Miller and our other previous cases, the CDA thus
presents a greater threat of censoring speech that, in fact, falls outside
the statute's scope. Given the vague contours of the coverage of the
statute, it unquestionably silences some speakers whose messages
would be entitled to constitutional protection.
Id. at 873-74 (emphasis added; footnotes omitted).
The Regulations and SOP use similar types of words—substitute “prurient”
for “patently offensive”— yet the Supreme Court has ruled this to be inherently
vague when standing without the safeguards embodied in the other two prongs of
the Miller Test. Expecting a financial administrator to make these decisions rather
than a full and appropriately instructed jury (or knowledgeable judge) invites
arbitrary and subjective determinations unmoored by any meaningful statutory
guidance. 16
iii. The Regulations and SOP Violate the Equal Protection and
Occupational Liberty Components of the Fifth Amendment
The Fifth Amendment “incorporates, as against the federal government, the
Equal Protection Clause of the Fourteenth Amendment” and the same analysis is
applied in both contexts. Ctr. for Bio-Ethical Reform, Inc. v. Napolitano, 648 F.3d
16
Nor is the term “de minimus” clear as used in 13 C.F.R. §120.110(p)(2). The
failure to quantify that term is an independent basis to conclude that the regulations
are unconstitutionally vague and give total unbridled discretion.
26
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365, 379 (6th Cir. 2011). See also City of Cleburne, Tex. v. Cleburne Living Ctr.,
473 U.S. 432, 439 (1985).
The Regulations and the SOP do not treat all people alike. Those who are not
associated with entertainment of a “prurient sexual nature” (again, whatever that
may mean) are provided with financial assistance to hopefully survive this
pandemic. Those who engage in speech which a Lender views as “prurient” are
frozen out of the program and left to die in the wilderness. Strict scrutiny applies and
there is no compelling governmental interest to justify this distinction nor do the
Regulations utilize the least restrictive means of regulation. 17
Similarly, these provisions violate the occupational Liberty component as
found in the Fifth Amendment’s Due Process Clause. See, e.g., Allgeyer v. La., 165
U.S. 578, 590 (1897). This right allows an individual:
to live and work where he will; to earn his livelihood by any lawful
calling; to pursue any livelihood or avocation; and for that purpose to
enter into all contracts which may be proper, necessary, and essential
to his carrying out to a successful conclusion the purposes above
mentioned.
Id. at 589 (emphasis added).
17
“[T]he decisions of this Court have consistently held that ‘only a compelling state
interest in the regulation of a subject within the State’s constitutional power to
regulate can justify limiting First Amendment freedoms.’” Williams v Rhodes, 393
U.S. 23, 31 (1968) (quoting NAACP v. Button, 371 U.S. 415, 138 (1963); See also
Reed, 135 S.Ct. at 2231.
27
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By facially discriminating against Plaintiffs and professional entertainers in
denying them PPP benefits, which would be available to them but for their
engagement in a constitutionally protected activity, the Regulations and SOP violate
these constitutional concepts and should be enjoined.
iv. The SBA Lacks the Authority to Limit the Type of Businesses
Which are Eligible for a PPP Loan
Before the Court is the purely legal question of whether the adoption of
regulations limiting which businesses are eligible for PPP loans is a lawful
interpretation of the PPP by the SBA. See Sunrise Coop., Inc. v. United States Dept.
of Agric., 891 F.3d 652, 656 (6th Cir. 2018) (analyzing the validity of an agency rule
as being “based solely upon legal grounds”) (quotation omitted). In Sunrise Coop.,
the Sixth Circuit summarized the familiar Chevron analysis:
Under Chevron, courts defer to agencies’ reasonable readings of
ambiguous statutes. The first step of Chevron instructs courts to
analyze whether Congress has “directly spoken to the precise question
at issue.” Chevron, 467 U.S. at 842, 104 S.Ct. 2778. If it has, “that is
the end of the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress.” Id. at 842–
43, 104 S.Ct. 2778. We employ “traditional tools of statutory
construction” to determine whether Congress has “spoken to the
precise question at issue.” Id. at 842, 843 n.9, 104 S.Ct. 2778. If the
statute is unambiguous, then Congress has spoken to the precise
question at issue. See id. at 843, 104 S.Ct. 2778. In other words, if a
construction of a statute “follows from the unambiguous terms of the
statute,” the statute “leaves no room for agency discretion.” Nat’l Cable
& Telecomm. Ass’n v. Brand-X Internet Servs., 545 U.S. 967, 982, 125
S.Ct. 2688, 162 L.Ed.2d 820 (2005). If a statute is ambiguous, the
28
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interpretation might nevertheless be unreasonable under Chevron’s
second step, which asks whether “the agency’s [interpretation] is based
on a permissible construction of the statute.” Chevron, 467 U.S. at 843
Sunrise Coop., Inc., 891 F.3d at 656 (citing Chevron, U.S.A., Inc., v. Nat. Res. Def.
Council, Inc., 467 U.S. 837 (1984); Esquival-Quintana v. Sessions, 137 S. Ct. 1562
(2017).
Section 1114 of the CARES Act [Ex. A, p. 11] instructs the Administrator to
issue regulations “to carry out this title and the amendments made by this title”
within 15 days and without regard to the usual notice requirements in 5 U.S.C. §
553(b). Also, 15 U.S.C. § 634 authorizes the Administrator to “make such rules and
regulations as he deems necessary to carry out the authority vested in him by or
pursuant to this chapter.” The Regulations then issued, SBA 3245(III)(2)(c) state:
“Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and
described further in SBA’s [SOP] 50 10, Subpart B, Chapter 2 . . . .” [Ex. B, pp 7-
8].
SBA 3245(III)(2)(c) and 13 CFR 120.110 (at least as applied to the PPP
portion of the CARES Act) are invalid because the statute is unambiguous as to what
businesses are eligible for PPP Loans. Specifically, 15 U.S.C. § 636(a)(36)(F)(ii)(II)
states that, to determine the eligibility of a borrower, the lender “shall consider
whether the borrower – (aa) was in operation on February 15, 2020; and (bb)(AA)
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had employees for whom the borrower paid salaries and payroll taxes; or (BB) paid
independent contractors, as reported on a Form 1099-MISC.” No additional
qualifications are specified and no additional qualifications may be imposed on an
applicant.
B. Plaintiffs Will Suffer Irreparable Harm if this Court does Not Issue
an Injunction
When “a constitutional right is being threatened or impaired, a finding of
irreparable injury is mandated.” A.C.L.U. of Ky. v. McCreary Cty., Ky., 354 F.3d
438, 445 (6th Cir. 2003). In the First Amendment context, “[t]he loss of First
Amendment freedoms, for even minimal periods of time, unquestionably constitutes
irreparable injury.” Elrod v. Burns, 427 U.S. 347, 373 (1976).
Plaintiffs will surely suffer irreparable injury by both the deprivation of their
constitutional rights and the ruination of their—constitutionally protected—
businesses. Plaintiffs’ doors are shuttered due to an unprecedented pandemic, 18 and
the glimmer of hope Congress offered through the PPP will be denied based on the
nature of Plaintiffs’ protected expression. See SEIU Health Care Mich. v. Snyder,
18
While the COVID virus is the ultimate culprit, Plaintiffs’ businesses were closed
by direct state action in the form of Governors’ closure orders which in turn were
based on standards promulgated by the Federal Government. See, The President’s
Corona Virus Guidelines for America / 30 Days to Slow the Spread,
https://www.whitehouse.gov/wp-content/uploads/2020/03/03.16.20_coronavirus-
guidance_8.5x11_315PM.pdf (Last accessed 4/6/20).
30
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875 F. Supp. 2d 710, 723 (E.D. Mich. 2012) (“Irreparable injury based on financial
loss alone will only be found where the potential economic loss is so great as to
threaten the existence of the movant's business or “financial ruin” will result.”).
Moreover, money damages are likely unavailable based on immunity and are
incalculable. See U.S.C. § 702. The only remedies available to Plaintiffs are
declaratory and injunctive relief. Without the issuance of an injunction, Plaintiffs
risk the ruination of their businesses because the PPP funds provided by the Act are
to be issued on a ‘first-come, first-served’ basis. The money available is rapidly
being depleted as the Court reads this; once it is gone, Plaintiffs cannot recover even
if the Regulations and SOP are later invalidated. Plaintiffs, their employees, and the
entertainers who perform on their premises will undeniably experience irreparable
harm if an injunction is not granted.
C. An Injunction Would Cause No Harm to Others and the Public
Interest Weighs in Favor of the Entry of an Injunction
As the Sixth Circuit has long held, “it is always in the public interest to prevent
a violation of a party’s constitutional rights.” G&V Lounge, 23 F.3d at 1079, (citing
Gannett Co., Inc. v. DePasquale, 443 U.S. 368, 383 (1979); Planned Parenthood
Ass’n v. City of Cincinnati, 822 F.2d 1390, 1400 (6th Cir. 1987)). This concern is
particularly acute when a prior restraint is involved; “the most serious and the least
tolerable infringement on First Amendment rights.” Nebraska Press Ass’n v. Stuart,
31
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427 U.S. 539, 539 (1976). And, as this Court has noted, “it may be assumed that the
Constitution is the ultimate expression of the public interest.” Llewlyn v. Parkland
Cty. Pros., 402 F. Supp. 1379, 1393 (E.D. Mich. 1975) (emphasis added).
Consequently, the public interest clearly weighs in favor of granting the
requested injunction. This is particularly true when the Plaintiffs’ employees (who
are obviously part of the public) will likely be getting the lion’s share (75%) of the
loan funds, who can then use those monies to pay their bills (and, thus, sharing the
loan proceeds with other members of the public), and where the Regulations and
SOP are a “very probable violation of Supreme Court precedent.” Books, Inc. v.
Pottawattamie Cty., 978 F. Supp. 1247, 1256 (S.D. Iowa 1997).
Moreover, there would be no harm to others by entry of an injunction. In fact,
the failure to grant the injunction could result in the Plaintiffs’ financial, the
destruction of similar businesses, and the loss of all of their employees. That domino
effect could then place additional financial burdens on the rest of society to support
those employees through unemployment benefits, welfare, Medicaid, and the like.
All factors weigh in support of granting an injunction and TRO.
IV. NO BOND SHOULD BE REQUIRED
Fed. R. Civ. P. 65(c) permits requiring the posting of a bond as a condition
for the entry of a preliminary injunction. However, when, as here, constitutional
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rights are at issue, no bond should be required. See, e.g., Diaz v. Brewer, 656 F.3d
1008, 1015 (9th Cir. 2011) (holding no bond was required in a case concerning a
violation of constitutional rights); Crowley v. Local No. 82, 679 F.2d 978, 1000 (1st
Cir. 1982) (listing authorities establishing that “no bond is required in suits to
enforce important federal rights or ‘public interests’”), reversed on other grounds,
467 U.S. 526 (1984); Moore v. Johnson, No. 14-11903, 2014 WL 4924409, at *9
(E.D. Mich. May 23, 2014) (on a First Amendment challenge to a statute, “the Court
concludes that no security bond is necessary”).
CONCLUSION
For the reasons set forth above, Plaintiffs respectfully request this Honorable
Court issue a TRO and preliminary injunction barring enforcement of 13 C.F.R. §
120.110(p) and SBA SOP 50 10 5(K), Ch. 2(III)(A)(15), as requested in greater
detail in the Motion itself.. Moreover, this Court should also order the Defendants to
approve Plaintiffs’ loan applications if they are otherwise eligible but for
enforcement of the Regulations and SOP, to restore Plaintiffs to their places in the
application queue as they were at the time of application in the event that their
applications have already been formally denied or derailed, and to immediately
notify the SBA lending banks to immediately discontinue using the aforementioned
Regulations and SOP as criteria for determining PPL applications. Finally, no bond
should be required.
33
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Respectfully submitted,
Dated: April 17, 2020 /s/ Bradley J. Shafer
BRADLEY J. SHAFER (MI P36604)
Brad@BradShaferLaw.com
MATTHEW J. HOFFER (MI P70495)
Matt@BradShaferLaw.com
SHAFER & ASSOCIATES, P.C.
3800 Capital City Boulevard, Suite 2
Lansing, Michigan 48906
(517) 886-6560
Attorneys for All Plaintiffs
34
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