Legal Updates

PPP Loan Acceptance And Tax-Exempt Status Each May Trigger Title IX Compliance Obligations For Independent Schools

A number of recent federal district court decisions have both clarified and confused the analysis regarding the obligations of independent schools to comply with Title IX, which prohibits discrimination based on sex in educational programs or activities that receive federal financial assistance. The cases at issue concern what type of benefits available to non-profit independent schools qualify as federal financial assistance for the purposes of Title IX.

This article addresses the two types of benefits that have been litigated recently: accepting Paycheck Protection Program loans during the COVID-19 pandemic, and the tax-exempt status that is enjoyed by many independent schools.

This past June, in Karanik v. Cape Fear Academy, Inc., a federal district court judge in North Carolina concluded that an independent school’s acceptance of a Paycheck Protection Program (“PPP”) loan issued by the Small Business Administration (“SBA”) during the COVID-19 pandemic, under the federal CARES Act, qualified as “federal financial assistance” under the federal statute known as Title IX. Therefore, the court held, the school was subject to Title IX during the life of the PPP loan.

Two other recent cases in federal district court, one in Maryland, Buettner-Hartsoe v. Baltimore Lutheran High School Association d/b/a Concordia Prep, the other in California, E.H. v. Valley Christian Academy, also addressed the issue of Title IX compliance for independent schools. Those cases involved whether a school’s 501(c)(3) tax-exempt status alone qualifies as federal financial assistance under Title IX.

These three decisions carry important implications for independent schools, many of which accepted PPP loans during the COVID-19 pandemic and most of which enjoy tax-exempt status.

Karanik v. Cape Fear Academy, Inc.

In Cape Fear Academy, the plaintiffs were three female students of an independent high school in North Carolina, Cape Fear Academy (“CFA”). The plaintiffs filed suit against the school for sex discrimination and retaliation under Title IX, among other claims, based on allegations that they were subjected to sexual harassment by male classmates, and that the School refused to take action, and instead retaliated against some of the plaintiffs. CFA moved to dismiss the complaint, arguing, in part, that the School does not accept federal financial assistance and, accordingly, is not subject to Title IX.

The Cape Fear Academy decision centered primarily on whether the PPP loan received by CFA qualified as federal financial assistance under Title IX, and therefore, whether an entity that accepts PPP loans is subject to the statute.

The court found that “[a] PPP loan is ‘federal financial assistance’ subject to Title IX because it is ‘[a] grant or loan of Federal financial assistance.’” The fact that CFA received the funds through an intermediary (a bank) did not change the analysis, because, according to the court, the SBA guaranteed the loan and PPP borrowers like CFA “are Congress’s intended recipients.”

Accordingly, the court found that CFA was subject to Title IX for the period from when CFA first received PPP loan proceeds until the SBA forgave the entire PPP loan and repaid the lender, and the claims for the alleged violations that occurred during this period (the 2020-21 school year) could go forward.

Concordia Prep And Valley Christian

Although both Concordia Prep and Valley Christian involved suits by female students against the defendant schools for sex discrimination in violation of Title IX, the fact patterns were quite different from each other.

The plaintiffs in Concordia Prep were female students who alleged that they were subjected to sexual assault and verbal sexual harassment by a number of male students, and that despite the victims’ making numerous complaints to the school, the administration failed to take meaningful action to remedy the situation.

By contrast, the plaintiff in Valley Christian was a female football player from a different school who claimed that Valley Christian discriminated against her when Valley Christian refused to allow her to play against the Valley Christian team in football games.

Both courts focused on whether the defendant schools’ tax-exempt status qualified as federal financial assistance under Title IX. Although the question of what qualifies as federal financial assistance under Title IX in the independent school context has been heavily litigated, including at the Supreme Court, the issue of whether tax-exempt status constitutes federal financial assistance has rarely been raised. The court in Concordia Prep noted that neither the Supreme Court nor the Fourth Circuit Court of Appeals had decided the issue, and the court in Valley Christian noted that the Ninth Circuit has not yet “addressed whether tax exempt status confers ‘federal financial assistance’ under Title IX.”

In both cases, the courts found that the only case directly on point was Johnny’s Icehouse, Inc. v. Amateur Hockey Association, a 2001 federal district court case from the Northern District of Illinois. There, the court determined that the defendant, Amateur Hockey Association, was not subject to suit under Title IX, despite the defendant’s nonprofit status, primarily because the Title IX regulations do not specifically include income tax exemptions in the definition of federal financial assistance.

The courts in Concordia Prep and Valley Christian rejected the decision in Johnny’s Icehouse, instead concluding that tax-exempt status does qualify as federal financial assistance and, therefore, that the defendants could be sued for potential violations of Title IX. In doing so, each court relied on judicial decisions holding that tax-exempt organizations are subject to the requirements of Title VI of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, color, and national origin in programs and activities receiving federal financial assistance. Those cases determined that tax benefits do qualify as federal financial assistance under Title VI, even though neither the text of the Title VI statute nor its implementing regulations states so specifically.

Since Title IX was explicitly modeled on Title VI, the two recent decisions applied the logic from the line of Title VI cases to find that tax benefits should qualify as federal financial assistance under Title IX as well.

Takeaways For Independent Schools

The Cape Fear Academy decision was perhaps anticipated but no doubt has significant implications for independent schools. Although the decision is not binding on other federal courts, it seems likely that other courts could reach the same conclusion in similar cases. If so, independent schools that accepted PPP loans could face claims under Title IX stemming from the time period during which the loans were outstanding, or if the loans are still outstanding, on an ongoing basis until the loans are forgiven or repaid.

The holdings in Concordia Prep and Valley Christian could also have significant consequences for non-profit independent schools, including the threat of government regulation and possible exposure to individual lawsuits. In addition, if subject to Title IX, a school will be required to adopt a broad range of compliance measures. These include, for example, policies and procedures that schools must adopt and publish for addressing complaints of sex discrimination, sexual harassment, or sexual assault. Separately, although some exceptions apply for religious schools that accept federal funding, the Valley Christian decision makes it clear that simply being a religious organization does not automatically serve as a broad exemption from every Title IX requirement.

A few considerations as these cases move forward toward further resolution:

First, both the Concordia Prep and Valley Christian decisions can be viewed as outliers. In reaching their conclusions, both courts declined to follow the Johnny’s Icehouse decision that was directly on point and relied instead on decisions interpreting whether tax benefits qualify as federal financial assistance under Title VI, despite the absence of tax-exempt status in the definition of federal financial assistance in either Title VI or Title IX. Both courts observed that: (1) Title IX is modeled on Title VI, and (2) general congressional intent is to prevent discrimination in programs and activities benefiting from federal assistance and would be supported by requiring tax-exempt organizations to be subject to Title IX.

Second, for the moment, the decisions only apply to the specific defendants in the litigation. The litigation is ongoing in those cases, and the decisions will almost certainly be appealed. Numerous groups speaking on behalf of independent schools and other non-profits, including NAIS and NBOA among others, have already stated their intention to file friend-of-the-court briefs in the pending cases.

Third, although other courts could look to the three decisions and be persuaded to follow them, the decisions are not currently binding outside the jurisdiction of those courts. For now, the decisions potentially apply only to schools in California, Maryland, and North Carolina.

Fourth, there are more questions than answers at this moment. Each school needs to evaluate the risks -- perhaps in conjunction with the Board of Trustees -- and make its own decision about how to respond to these judicial decisions.

All three cases highlight that it is essential for independent schools to monitor these developments and seek the advice of experienced school counsel.

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We will continue to monitor these developments closely. Please feel free to reach out to one of us if you have any questions about any of these decisions, PPP loans, Title IX compliance obligations, or related matters.