By Hailey Konnath

Law360 (May 11, 2020, 11:14 PM EDT ) The U.S. Small Business Administration must provide COVID-19 relief loans for strip clubs, a Michigan federal judge ruled Monday, saying that Congress "did not pick winners and losers" in its legislation intended to help small businesses cover employees' paychecks during the pandemic.

DV Diamond Club of Flint LLC, which operates as Little Darlings, sued the SBA last month, claiming the agency violated the Constitution by implementing regulations barring Paycheck Protection Program loans for establishments that have "live performances of a prurient sexual natural." Specifically, the ban on loans for strip clubs runs afoul of the First and Fifth amendments because it discriminates against businesses that are abiding by the law, the club said.

U.S. District Judge Matthew F. Leitman on Monday agreed, granting a temporary restraining order blocking the agency from enforcing those regulations, which also deny eligibility to banks, political lobbying firms and "certain private clubs with restrictive admissions practices."

"Congress provided temporary paycheck support to all Americans employed by all small businesses that satisfied the two eligibility requirements — even businesses that may have been disfavored during normal times," Judge Leitman said.

Congress intended for the SBA to make PPP loan guarantees widely available to small businesses across the commercial spectrum, despite the SBA's habit of declaring certain classes of businesses ineligible for SBA lending, the judge said.

"While Congress may have once been willing to permit the SBA to exclude these businesses from its … lending programs, that willingness evaporated when the COVID-19 pandemic destroyed the economy and threw tens of millions of Americans out of work," Judge Leitman said.

He added that his order wasn't a nationwide injunction and "does not affect in any ways actions that defendants may take in connection with applications for PPP loans by any entity other than the plaintiffs and intervenors in this action."

Also on Monday, a Chicago-based gentleman's club claimed that its PPP application had been unlawfully denied because the SBA misinterpreted the nature of its business. Admiral Theatre Inc. is alleging that SBA's regulations and operating procedures surrounding its PPP program, which was enacted to provide businesses relief amid the ongoing COVID-19 pandemic, conflict with the text outlining the program itself and violate its and its workers' First and Fifth amendment rights.

And the SBA is defending at least one other suit over the issue in Wisconsin as well. In that case, the SBA has requested a stay while it appeals a preliminary injunction blocking the regulations.

According to the Michigan suit, DV has been closed since March 23, when Michigan Gov. Gretchen Whitmer issued an order suspending "activities that are not necessary to sustain or protect life" and ordering all employees not designated as critical infrastructure workers to stay home.

The strip club said it had applied for a loan from the $349 billion Paycheck Protection Program included in last month's $2 trillion Coronavirus Aid, Relief and Economic Security, or CARES, Act. DV hasn't yet heard back on its loan application, but it's learned that "numerous other similar businesses ... have had their applications for PPP loans rejected by their SBA lending banks, or derailed, on their bank's belief that the business is disqualified by the regulations," it said.

"All of the entertainment provided by DV is non-obscene, appeals to healthy human interests and desires, and is in full compliance with the numerous licenses and permits held by DV," the club said.

DV is seeking to permanently strike down the regulations, and it also wants costs and attorney fees. It filed an amended complaint on Sunday that added more than 50 other clubs as plaintiffs.

In addition to the $349 billion Paycheck Protection Program, another provision called the Coronavirus Economic Stabilization Act of 2020 empowers the Treasury Department to fund $500 billion in loans to larger businesses that have not "otherwise received adequate economic relief" through the act.

The SBA has argued that the court's construction of the PPP would lead to "absurd results" that Congress couldn't have intended. In particular, the agency said Congress could not possibly have intended to support businesses that have historically been denied SBA financing, per the case.

But Judge Leitman on Monday said the pandemic had "decimated the country's economy," calling the PPP "an unprecedented effort to undo that financial ruin."

"Defendants are correct that it would ordinarily be absurd to conclude that Congress meant to provide financial assistance to, among others, certain sexually oriented businesses and private clubs that discriminate," he said. "But these are no ordinary times, and the PPP is no ordinary legislation."

Counsel for the parties and an SBA representative didn't immediately return requests for comment late Monday.

The club is represented by Bradley J. Shafer and Matthew J. Hoffer of Shafer & Associates PC.

The SBA and Treasury Department are represented by Joseph H. Hunt, David M. Morrell, John R. Griffiths, Eric Womack, James J. Gilligan and Indraneel Sur of the DOJ's civil division.

The case is DV Diamond Club of Flint LLC v. Small Business Administration et al., case number 4:20-cv-10899, in the U.S. District Court for the Eastern District of Michigan.

--Additional reporting by Mike LaSusa, Lauraann Wood, Emma Cueto, Linda Chiem and Braden Campbell. Editing by Emily Kokoll.

For a reprint of this article, please contact reprints@law360.com.