Cloakroom, which advertises itself as D.C.’s premier adult entertainment venue, was one of about 730 local businesses approved for a Restaurant Revitalization Fund grant designed to replenish businesses’ coffers after pandemic-related losses. The Small Business Administration approved the strip club for $4.3 million despite the administration having stated in court documents that these sorts of establishments don’t exist “for the primary purpose of being served food or drink.”
The SBA approved the grant for “476 K LLC.” Official city documents confirm the business is Cloakroom and its owner, Antonios “Tony” Cavasilios, is listed as executing officer.
The $28.6 billion RRF program, which Congress added to its $1.9 trillion American Rescue Plan Act, was underfunded and left many bars and restaurants without needed financial resources. More than 370,000 businesses applied for about $75 billion in aid, but the SBA only approved grants for 105,000 businesses.
According to the SBA’s website, businesses eligible for a RRF grant include restaurants, food trucks, caterers, bakeries, bars, saloons, lounges, and taverns. Brewpubs, wineries, distilleries, and inns are also eligible with additional stipulations. Inns, for example, must be able to show that 33 percent of their gross receipts come from food and drink. There’s no explicit mention of adult entertainment venues or strip clubs. Cloakroom applied under the category of “bar, saloon, lounge, tavern.” It holds a nightclub C/N license according to D.C.’s Alcoholic Beverage Regulation Administration.
City Paper reached Cavasilios, but he declined to comment for the time being on his business’s potential eligibility issues, whether he’s received the funds, or how he plans to use the money. He says he’s unplugged and on vacation and will respond next week. One can assume that Cloakroom suffered the same devastating financial losses as other nightlife venues as a result of the closures necessitated by the COVID-19 pandemic. The club was just getting back on its feet after reopening in 2018 following a construction collapse that forced it to close for four years.
It’s hard to know how the venue was able to secure an approval for a sizable $4.3 million grant while other similarly situated businesses were shut out. (RRF grants maxed out at $5 million for standalone businesses.) The SBA is managing many relief programs simultaneously and the RRF program was thrown off track when the administration had to freeze pending payments to nearly 3,000 applicants after federal court rulings quashed the plan to prioritize certain groups, such as businesses owned by women or veterans.
One attorney was very happy to hear about the strip club’s approved grant because it might help his case. Attorney Bradley J. Shafer is representing a group of strip clubs whose addresses span from Pennsylvania to California. They’ve joined together to sue the SBA in the U.S. District Court for the Eastern District of Pennsylvania.
In the lawsuit filed May 14, the strip clubs challenge their lack of eligibility for RRF grants arguing, among other things, that the SBA is discriminating against them because of the nature of their businesses. They want to force the SBA to process their applications and award them funds. Shafer says the case is ongoing and their motion for a preliminary injunction is still pending. They’re in a holding pattern for two weeks to permit the SBA to make any formal eligibility determinations that it desires. A number of the strip clubs were able to submit applications and are awaiting the results. There’s a conference scheduled for July 26, which City Paper plans to listen to.
Shafer doesn’t expect the SBA to include strip clubs voluntarily. “They’re saying our bars are not even bars, our taverns aren’t taverns, our lounges aren’t lounges, and our restaurants aren’t restaurants,” he says. “That’s one of their arguments so they’ve already made their decisions.”
Legal representatives defending the SBA and its administrator kicked off their response to the suit saying: “Larry Flynt’s Hustler Club is not a restaurant. People don’t go to strip clubs for the food, any more than they go to the movies for popcorn. Yet Plaintiffs’ entire case is based on the unspoken premise that ‘patrons assemble’ at their establishments ‘for the primary purpose of being served food or drink.’”
“These businesses are facing the exact same problems,” Shafer says. “What we’re talking about here is not bar and restaurant owners going out and buying Lamborghinis. This is to pay back rent that is due, to pay mortgage payments, to pay payroll and benefits of employment as they struggle through these very early times of the reopening. … These are licensed bars and restaurants. They have bar and tavern licenses that they’re obligated to get. Some have restaurant licenses they’re obligated to get. The RRF statute does not differentiate one type of bar from another.”
The crux of the case centers around whether the SBA has the ability to impose eligibility restrictions that are more stringent than what Congress intended when it passed the American Rescue Plan Act. In April, the administration issued additional eligibility guidance on its website that Shafer says the SBA called an “interpretive rule.”
There are three parts of the lawsuit, one that looks at more wonky eligibility aspects like whether certain strip clubs can be considered too large for RRF funding (large chains couldn’t apply). The second examines whether it’s fair to ask businesses to withdraw their applications for a second round of Paycheck Protection Program funding before they can receive RRF grants. The third prong focuses on whether it’s legal or constitutional to make strip clubs ineligible for grants by classifying them as “prurient.”
“The SBA’s actions defy Congress’s words in the statute, exceed the SBA’s authority, contradict the SBA’s enabling act, discriminate against First Amendment-protected businesses, and are otherwise invalid under the Administrative Procedures Act,” the suit says.
The lawsuit recaps relevant history. When Congress created the SBA in 1953, the SBA issued a rule known as the “Opinion Molder Rule,” that said they wouldn’t give loans or grants to communications and media enterprises for a number of reasons. They wanted to avoid accusations like the government trying to control editorial freedom for propaganda purposes or otherwise tinkering with freedom of the press and freedom of speech.
But on April 5, 1994, the SBA repealed the Opinion Molder Rule so they could support a wider variety of businesses, including those related to communications. Congress responded by tacking on a Statutory Obscenity Loan Ban that President Bill Clinton signed into law in October of the same year. It prohibited the SBA from assisting businesses engaged in the production or distribution of any product or service that has been determined to be legally “obscene,” and thus not protected by the First Amendment.
Then in 1995, SBA instituted a new rule about business loan programs. It said they could exclude small businesses engaging in lawful activities “of an obscene, pornographic, or prurient sexual nature,” even though “obscenity” is actually illegal. The lawsuit filed by the strip clubs argues that the venues are protected under the First Amendment and other parts of the Constitution and that their entertainment is neither obscene nor even “prurient” under Supreme Court definition because the activities in the clubs appeal only to “normal, healthy, sexual desires.”
None of this, according to the defense led by Assistant United States Attorney Matthew Howatt argues, is really in play. The government’s defense brief filed July 9 asserts repeatedly that the only relevant factor for determining eligibility is that eating and drinking are secondary reasons why patrons visit strip clubs.
How these businesses advertise themselves is telling, according to the brief: “The SBA reasonably could conclude that patrons frequent their places of business for the primary purpose of watching live erotic nude and semi-nude female dancing, and enjoying other forms of “entertainment” such as “lap dances” and “one-on-one time” with “showgirl[s]” in “Champagne Suites.”
When you open Cloakroom’s website, after you confirm that you’re over 21 years old, you don’t see pictures of tantalizing surf and turf. There isn’t a link to a food or drink menu other than a list of spirits that you can select as a part of bottle service with prices.
The SBA did not immediately respond to City Paper’s request for comment about Cloakroom’s eligibility. In the past, the administration hasn’t been able to comment on the status of individual businesses’ applications. They did, however, say they cannot comment on the lawsuit.
City Paper asked the Independent Restaurant Coalition the same question. The group lobbied Congress to create the Restaurant Revitalization Fund act as a part of the American Rescue Plan Act. IRC Executive Director Erika Polmar simply offers, “This money was meant for businesses whose primary purpose is serving food and drink.”
Locally, Restaurant Association of Metropolitan Washington CEO Kathy Hollinger is frustrated with the RRF program writ large. She had also heard that Cloakroom got an RRF grant.
“This program, while good in its intention, has created so much discord and anxiety for operators who are counting heavily on trying to get the relief they needed coming out of a 15-month pandemic,” she says. “This was not a fully loaded program, positioning it to be a failure. … If businesses who did not necessarily meet the qualifiers received funding, that is concerning. Everyone and everyone deserves relief. But if a program was designed for a particular industry that suffered so significantly, and there are now concerns as to whether businesses that didn’t necessarily qualify received funding, that adds to the myriad concerns we have around this program.”