In response to the devastating economic impacts of COVID-19, Congress enacted the historic economic stimulus bill - Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among its provisions, the CARES Act set aside $349 billion in funding for the issuance of low interest forgivable loans pursuant to the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA). Under the PPP, eligible SBA lenders began accepting and processing applications purportedly on a “first-come, first-served” basis shortly after the CARES Act was signed into law on March 27, 2020. The popular lending program was quickly oversubscribed and many applicants were unable to secure loans, which has since led Congress to approve an additional $310 billion in funding.
In the meantime, certain small businesses, upset that they were unable to obtain loans from the initial wave of funding, initiated putative class action lawsuits against several of the largest financial institutions in the Country. The crux of the complaints is that these banks prioritized the applications of large companies over smaller business for whom the loans would constitute a more vital lifeline. The plaintiffs allege that banks: (a) limited applications to existing lending clients or depository clients with no debt at other lending institutions to improve the banks’ credit risk profile; (b) prioritized larger loans to maximize origination fees, and (c) submitted the applications of larger existing clients to the SBA before earlier-received applications from smaller borrowers.
The causes of action asserted in the putative class action lawsuits initiated to date include alleged violations of the CARES Act, alleged violations of the SBA 7(a) loan program, unjust enrichment, promissory estoppel, intentional misrepresentation, interference with contractual relationships, unfair/fraudulent/unlawful business practices, false advertising, and fraudulent concealment. The plaintiffs also seek injunctive and declaratory relief.
Key questions in these cases will be: (a) what representations, if any, were made to loan applicants regarding the banks’ procedure for processing PPP loan applications; (b) whether lending institutions followed appropriate procedures/processes for accepting/processing loan applications; and (c) whether lenders submitted applications to the SBA on an as-completed “first come, first served” basis. Given the limited guidance provided to lenders by the SBA, the processes and criteria for issuing PPP loans has varied widely from bank to bank and each lawsuit will require a detailed analysis of how loan requests were processed and the specific legal claims asserted.
To date, only one federal Court has issued a preliminary ruling on any of these issues. In Profiles, Inc. et al. v. Bank of America Corp., et al., on April 13, 2020, the District Court for the District of Maryland denied the motion for a temporary restraining order and preliminary injunction filed by the putative class plaintiffs. The Court ruled that no private right of action exists under the CARES Act or SBA Act. The Court went further, also concluding that the bank’s alleged decision to only accept applications from companies with existing lending or depository relationships was consistent with the CARES Act. This ruling does not address or resolve potential theories of liability premised on violations of state consumer protection statutes or common law.
In response to media reports that large publicly traded companies had obtained SBA loans, on April 26, 2020, the U.S. Treasury Department issued guidance indicating that public companies with access to other sources of liquidity are unlikely to certify the need for a PPP loan in good faith. The guidance instructs that companies who “repay the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” With the second infusion of PPP funding, we expect that some of the applicants closed out of the initial round of funding to obtain loans. Notwithstanding these developments, we still expect that additional lawsuits against financial institutions, large and small, that participated in the PPP program will continue to be filed. It is expected that businesses who missed out on the initial round of funding will assert that they were deprived of funding during a critical period, particularly as it is widely believed that the second allocation of funds is still not enough to meet the substantial business need. There is also a potential for discrimination claims by minority-owned businesses, which may claim to have not received proportional PPP funding or treatment in the application process.
