PPP Loan Subjects Private K-12 School to Title IX: What You Need to Know About Karanik v. Cape Fear Academy, Inc.

Last week, a federal court issued a ruling that could have significant implications for private K-12 schools that took out a Paycheck Protection Program (“PPP”) loan under the federal CARES law. On June 17, 2022, Judge Dever of the United States District Court for the Eastern District of North Carolina found that Cape Fear Academy (“the School”), a private school in Wilmington, North Carolina , could be subject to Title IX because it borrowed PPP funds.

The Small Business Administration (“SBA”) administers the PPP loan program under the federal CARES Act that Congress passed during the COVID-19 pandemic. When an educational program or activity, including a private school, accepts “federal financial assistance,” it is subject to Title IX. Title IX prohibits sex discrimination, exclusion from participation, and denial of benefits from any educational program or activity that receives “federal financial assistance.”

involved in Karanik vs. Cape Fear Academy, Inc. was whether Cape Fear Academy was receiving federal financial assistance when, as borrower, he received money from a bank (an intermediary lender) via an SBA-backed loan. The Court ruled that the school had received federal financial assistance and had to comply with Title IX for the duration of the loan. The underlying facts relate to the School’s PPP loan and the experiences of the Applicants-Students at the School during the 2020-21 school year and the summer of 2021.

The school obtained the PPP loan from May 4, 2020 (when the bank asked the SBA for a guarantee of its school loan) until June 15, 2021 (when the SBA waived the entire PPP loan of the school and reimbursed the bank). In the loan agreement, the school agreed to comply in all material respects with “all laws, rules, regulations and requirements of any governmental authority, including the SBA, applicable to its business.”

Three high school girls have sued the school alleging that during the 2020-2021 school year, they were subjected to offensive remarks about women, sexual assaults against women and violence against women. towards women, from male students who continued to make offensive remarks, causing one of the students to suffer panic attacks. The students raised their concerns with the school’s dean of students, but were unsure whether the school had conducted an investigation. Furthermore, the Dean did not meet with one of the students, despite that student’s attempts to meet with him on several occasions.

There are two key takeaways from Justice Dever’s decision:

First, many of our private school clients who do not otherwise receive federal financial support have borrowed PPP loans and may be grappling with the implications raised by this decision. The Court determined that a PPP loan is “federal financial assistance” subject to Title IX because it is “[a] federal financial aid grant or loan. Although the bank, a private lender, issued the loan, the school’s loan documents indicated that the bank issued the loan pursuant to the SBA’s lending authority under the CARES Act, making the PPP loan the school a “federal financial aid”. As the Court held, PPP borrowers are the intended recipients of Congress, and the PPP loan is not itself the security but the instrument that creates the debt to be secured, subjecting even private school borrowers – like the School – to Title IX. For this reason, we recommend that all educational institutions that have applied for a PPP loan and received disbursements from the loan review their policies governing reports of sexual harassment as defined by and under Title IX.

Second, the Court rejected the school’s arguments that one student-plaintiff had not plausibly alleged a complaint of student-to-student sexual harassment and that other student-plaintiffs had not made claims of retaliation under of title IX. The Court found that the student sexual harassment and retaliation allegations were plausible and that the school could be held liable as it was subject to Title IX for the relevant period (the term of the borrowed PPP loan). The students’ Title IX claim, as well as a claim for breach of contract, will continue through trial. The SBA has made it clear that once the PPP loan is paid or cancelled, independent schools are no longer required to comply. An important caveat, however, is that the duration of compliance with federal laws and regulations depends on the purpose for which federal assistance was used. For example, federal funds used with respect to real property can extend the duration of compliance with federal regulations as long as the property or building is used to deliver educational programs or activities. In the event of Title IX non-compliance, the SBA may accelerate the maturity of the loan, suspend or refuse any financial assistance not yet granted, or seize the United States Department of Justice. People who believe they have been discriminated against on the basis of gender can rely on Title IX to bring a private lawsuit against the school. For these reasons, independent schools should review their policies and procedures, as they may need to comply with Title IX.

Like the applicants in Karanik proceed with their respective claims and we will learn more about the implications of this decision and what it will mean for our customers, our Investigations and Resolutions Team will update this guide.

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