Lawsuit over minority-owned Colorado business relief prompts expanded COVID bill

Lawyer for white barbershop owner says program is still unconstitutional

Rep. Shane Sandridge
Rep. Shane Sandridge speaks before the House votes on Senate Bill 20B-1, on Dec. 2, 2020. Rep. Leslie Herod, D-Denver, is pictured to his right. (Faith Miller/Colorado Newsline)

During the legislative special session focused on COVID-19 relief, one of the top priorities for lawmakers was getting cash to the businesses that suffered most acutely from pandemic capacity restrictions and the economic downturn.

Through Senate Bill 20B-1, the Colorado General Assembly set aside $37 million for grants to restaurants and bars, many of which had to close indoor dining under public health orders. It also dedicated $7.5 million for grants to arts and culture organizations and $4 million to the Minority Business Office, which could be used for grants, loans and technical assistance for businesses owned by people of color. That $4 million could be accessed by business owners from a variety of industries, not just restaurants and bars.

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Etienne Hardre, a white Colorado Springs barbershop owner who’s been subject to COVID capacity restrictions, took issue with those eligibility requirements. He sued Gov. Jared Polis and the Minority Business Office on Dec. 8 in federal district court, alleging that by restricting some relief to certain racial and ethnic groups, the state was violating the equal protection clause of the U.S. Constitution.

But for Hardre’s race, his business, Locals Barbershop “would be qualified to apply for the economic benefits,” according to his complaint.

As of Jan. 15, the state attorney general’s office hadn’t yet filed an answer to Hardre’s complaint.

But when they met for what legislative leadership calls the “soft opening” to the 2021 regular session — three days to pass time-sensitive legislation before adjourning until February — state lawmakers quickly passed a follow-up to SB B-1 as a kind of response to that lawsuit. Pending Polis’ signature, Senate Bill 21-1 will move the relief for minority-owned businesses outside of the Minority Business Office and create additional ways for people to qualify.

Specifically, those eligible for the $4 million in loans, grants and technical assistance will now include:

• “Microbusinesses” with five or fewer employees
• Businesses owned by people of color
• Businesses located in an economically distressed area
• Businesses whose owner lives in an economically distressed area
• Businesses owned by people with low or moderate income
• Businesses owned by people with low or moderate personal wealth
• Business owners with “diminished opportunities to access capital or credit”

People who are part of two or more categories will be prioritized for the relief.

The bill’s sponsors — Sens. Faith Winter, D-Denver, and Kevin Priola, R-Henderson, along with Reps. Leslie Herod, D-Denver, and Shane Sandridge, R-Colorado Springs — also sponsored SB B-1 during the special session. They said that despite the revisions made to the $4 million program in SB-1, their goal was still to get aid to businesses owned by people of color, due to the disproportionate financial effects of the pandemic on those businesses.

“I look at the extra $4 million as an opportunity for minorities to obtain a little bit extra capital,” Sandridge said on the House floor Jan. 15. “Four million, (for) 64 counties. I think if anybody needs to be offended, they should be offended because it’s so little.”

Joslyn Reese, cofounder of Fit & Nu — a health club that offers “culturally informed fitness and nutrition services for women of color” — testified in support of the bill at the Senate Finance Committee.

She described the Aurora club she opened six years ago with her sister, Brittney Rae Reese, as “a fully equipped, boutique club that is not only positively impacting the health and wellness of hardworking women in our community, but employing, collaborating and contracting with state and local government agencies … other small businesses and entrepreneurs.”

“While we achieved these accomplishments through grit and determination, we could not have done this alone,” Reese continued, explaining that the sisters had been able to survive the economic impacts of the pandemic by accessing grants that were earmarked for minority-owned businesses from nonprofit organizations.

“We urge this committee to continue championing efforts that will eliminate longstanding racial and ethnic disparities in opportunities,” Reese said.

Legislation cites unequal access to capital

In his December complaint, Hardre claimed that Colorado “has not identified with specificity in SB1 or otherwise the racial discrimination to be remedied by making facial racial classifications,” referring to the bill passed during the special session. “In any event, Colorado does not have a strong basis in evidence upon which to conclude that remedial action is necessary with regard to any supposed racial discrimination that SB1 was intended to remedy.”

Perhaps as a response to that legal attack, SB-1 includes a “disparity statement” with research showing the unequal effects of COVID-19 on marginalized groups — writing statistics directly into Colorado statutes.

Small businesses owned by people of color “suffered an unprecedented and disproportionate drop in the number of active businesses from February to April 2020, with a forty-one percent decline in African-American-owned businesses, a thirty-two percent decline in Hispanic American-owned businesses, and a twenty-six percent decline in Asian-American-owned businesses, as compared to a seventeen-percent decline for white-owned businesses,” the bill states, citing an August study published by the Stanford Institute for Economic Policy Research.

State Rep. Leslie Herod poses for a portrait in Denver’s City Park on Aug. 16, 2020. (Moe Clark/Colorado Newsline)

In committee hearings and speeches on the chamber floors, SB-1’s sponsors — and the witnesses who testified in support — echoed those statistics and others written into the new bill. They emphasized that plenty of national data exists to show that businesses owned by people of color suffered disproportionately during the pandemic. People of color were also less likely to get federal Paycheck Protection Program loans and other relief, due to historic and present-day discrimination in the banking system.

“Small businesses owned by people of color … experience higher loan denials and interest rates and lower profit margins than their counterparts,” Herod said before the House’s final vote Jan. 15. “They have limited opportunities to develop and grow thriving businesses, and had an average business value that is only a third, a third, the average of business values (of) white-owned businesses. These factors have impacted such businesses in their ability to weather the economic downturn on their own and in their access to federal financial support.”

SB-1 passed the Senate on Jan. 14 by a vote of 34-0, with one lawmaker excused. In the House, it passed 47-16, with two excused, the following day.

While the bill’s sponsors didn’t refer directly to Hardre or Locals Barbershop in committee hearings or on the House and Senate floors, Senate Majority Leader Steve Fenberg said during a pre-session news conference that the legislation was meant to “resolve” issues raised by the lawsuit, as well as extend deadlines for local jurisdictions to distribute the aid.

But Hardre’s attorneys didn’t indicate any plans to drop the lawsuit based on SB-1’s modifications to the relief program.

“The bill, if it were to be enacted, would still raise constitutional problems, and that’s because there’s still a provision in the bill that provides preferential treatment for minority-owned businesses,” said Wen Fa, an attorney with the Pacific Legal Foundation and member of Hardre’s legal team. “Our position is that the government should not discriminate against businesses on the basis of race, just as they should not discriminate against individuals on the basis of race.”

As an example of legislation with “racial set-asides” that was found unconstitutional, Fa pointed to a Virginia law struck down by the U.S. Supreme Court in 1989. The court’s 6-3 majority opinion stated that “generalized assertions” of discrimination did not justify awarding a certain percentage of construction contracts to businesses owned by people of color.

SB B-1, the original Colorado business relief bill, didn’t include much explanation of the pandemic’s disproportionate effects on minority-owned businesses. It simply directed Colorado’s Minority Business Office to use the $4 million for “relief payments to minority-owned businesses that have been most impacted by COVID-19 and have lacked meaningful access to federal loans and grants under the CARES Act” as well as “grants and loans to minority-owned businesses for start-up and growth capital.”

However, the language added by SB-1 does lay out present-day disparities faced by people of color. For example, it points to an August study by the Federal Reserve Bank of New York, which found that Black business owners have weaker relationships with traditional banks than their white counterparts — making it more difficult for them to gain access to federal Paycheck Protection Program loans.

Fewer Black-owned businesses have borrowing relationships with banks, the report explains, adding that “It is important to note these funding gaps are not due to differential rates in Black firms applying for financing. In fact, recent survey evidence indicates that Black-owned firms — both employer and nonemployer — apply for financing at equal or higher rates than white-owned firms but are denied at higher rates.”

Keisha Mathes, founder and chief herbalist at Herbal Honey, struggled to access capital during the pandemic. Her Denver-based business was two years old when COVID-19 hit.

“It was growing at a nice, steady rate,” she told the Senate Finance Committee during a Jan. 14 hearing on SB 21-1, but wasn’t bringing in enough profit, yet, to “pay for itself.” It’s normal for businesses to take a few years to break even, she pointed out.

The pandemic was devastating.

“I took over an 80% loss in my revenue this year, and even in the process of trying to make up for that with the programs that are available — the loans, the grants and everything else — I was continually denied,” Mathes testified. “And so I was looking at potentially closing my business, whether that be temporarily or permanently.”

But Herbal Honey survived with help from Sistahbiz Loan Fund, a business accelerator for Black women, Mathes said. Since then, she’s been able to hire additional staff and sponsor programs in the community.

“Funding is very critical, not just for us, but … to be able to contribute to our communities as a whole,” Mathes said.

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