November 28, 2023
5 min read

Large San Diego HOA with Employees Loses Battle with US Department of Justice

In a recent development, a large HOA (a non-profit 501(c)(4) organization) in San Diego County has found itself in a challenging situation, necessitating the repayment of a Paycheck Protection Program (PPP) loan it obtained during the height of the pandemic in 2020. The HOA was notified of an investigation by the U.S. Department of Justice (DOJ) regarding the eligibility of the PPP loan. After extended negotiations and work by legal counsel, the DOJ concluded that the HOA was not eligible for the loan, leading to a settlement offer that includes repayment of the loan, interest, processing fees, and penalties, totaling over $2,000,000.

Good Faith Application

The HOA initially applied for the PPP loan in good faith, believing that it met the eligibility criteria based on the information available at the time. Its 501(c)(4) designation, typically associated with certain non-profit organizations, raised questions regarding eligibility. However, the HOA’s general legal counsel did not immediately disqualify it based on this status. In addition, the commercial bank involved in the loan process did not see any disqualifying factors and approved the loan application, albeit with an error in selecting the tax designation on the application form (it wrongly checked the box stating it was a C-corporation).

Loan Usage and Forgiveness

The organization was able to use the PPP funds for their intended purpose, covering employee payroll and utilities, which resulted in the loan being forgiven by December 2020. This utilization of funds aligned with the intent of the CARES Act, which aimed to provide support to businesses, including non-profits, during the COVID-19 crisis. The funds helped retain employees who might have otherwise been furloughed or laid off, allowing the HOA to continue providing essential services during lockdowns.

DOJ Investigation and Settlement

Despite the HOA’s proper use of the PPP funds, the DOJ investigation focused on its specific tax status as a 501(c)(4) non-profit entity. The absence of a checkbox for 501(c)(4) organizations on the PPP application form contributed to the assessment of a penalty. The investigation did not allege misuse of the funds but concluded that the HOA was ineligible due to its tax status.

After extensive negotiations and legal discussions, the HOA reached a settlement agreement with the Government, agreeing to repay the loan amount, interest, processing fees, and penalties. The settlement amount reached over $2,000,000, reflecting the organization's efforts to demonstrate good-faith eligibility verification.

Commitment to Transparency

The HOA is committed to transparency and learning from this experience. While the settlement and loan repayment have financial implications, the HOA intends to carefully manage its resources and prioritize essential services. Based on cash flow projections, they do not anticipate disruptions to service.

Being an employer in California comes with many drawbacks and challenges, not the least of which is complying with over 150 state laws regarding employees and the employer role.  California’s reputation as the least business friendly state in the nation derives from having to comply with the greatest number of employer/employee laws.  This case is a reminder that having direct employees instead of hiring vendors is very risky.  

This case also serves as a reminder of the complexities surrounding PPP loans and the importance of thorough eligibility verification, especially for non-profit HOAs with unique tax statuses. While this HOA faced the need to repay its PPP loan following a DOJ investigation, it is crucial for all HOAs to stay informed about the evolving regulations surrounding pandemic relief programs and to seek legal counsel when in doubt about eligibility criteria.

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