As more class actions are filed every day related to the COVID-19 pandemic, a growing number of plaintiffs are asserting claims against banks that acted as participating lenders in the Paycheck Protection Program (PPP). The PPP was established through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and is administered by the Small Business Administration (SBA) with support from the Department of the Treasury.
To date, more than five million businesses have received a combined $521 billion in loans to pay their employees and certain other operating expenses during the COVID-19 crisis, which have been distributed through more than 5,400 lenders. These lenders are now facing actual and threatened class action litigation arising out of those PPP loans. The complaints filed to date came in two waves, first claiming that lenders allegedly have failed to administer loans on a “first-come, first-served” basis, and most recently asserting that lenders allegedly have failed to pay fees owed to “agents” of borrowers under the program. For our earlier analysis of the first wave of PPP class actions, please see our alert from April discussing the litigation risks that PPP lenders continue to face: COVID-19 Payment Protection Program: Lender Guidelines Subject to Litigation Risks.
As of this writing, more than 80 class actions have been filed against PPP lenders, distributed between the two main theories:
Borrower Cases: “First-Come, First-Served”
Borrowers and banking clients that applied to the PPP program have brought class action complaints against banks for allegedly using “gating” policies that prioritized larger loans and existing customers in administering PPP loans. These complaints assert claims under consumer protection statutes as well as tort claims including breach of fiduciary duty and fraud. At least one court has already denied a request for injunctive relief, and ruled that a lender’s gating policy to accept PPP applications from only small-business checking customers that either are already borrowers at the bank or are not borrowers at any other bank “does not run afoul of the CARES Act.” Profiles Inc. v. Bank of America Corp. et al., No. 1:20-cv-00894 (D. Md. 2020). After an unsuccessful appeal of that ruling, this case was voluntarily dismissed. This interpretation of the CARES Act is one of many defenses available to institutions in these cases that have yet to be tested through dispositive motion practice.
These early cases have been mostly limited to larger, national banks, with five plaintiff’s firms responsible for the majority of them. There are 39 cases currently pending, and plaintiffs have petitioned the Judicial Panel on Multidistrict Litigation to consolidate actions against three national banks. Class action claims have been filed across the country, with a majority filed in Texas, California, and New York. Recently, the pace of these filings has dramatically decreased, down from 20 cases filed in April, 12 in May, four in June, and three in July.
A number of plaintiffs claiming to have acted as agents (primarily law firms and accounting firms) have asserted claims against both large and small banks alleging that they are owed compensation under the PPP program for assisting borrowers with their loan applications. These plaintiffs have asserted tort, implied contract, and declaratory judgment claims, arguing that the text of the CARES Act requires banks to pay them 1% of the loan amounts for which they assisted borrowers. In their defense, banks have made the following arguments:
- There is no private cause of action for agent fees under the PPP.
- Agents are mischaracterizing the text of the statute and regulations, as the 1% language establishes a cap on agent fees but does not impose a requirement of payment.
- Under current SBA regulations, agents are required to execute a written agreement and show agency authority in order to be entitled to compensation.
- The text of the CARES Act imposing restraints on agents’ ability to collect fees is contrary to any mandatory payment obligation.
- Even if there is such an obligation to pay fees under the PPP, the SBA exceeded its authority in enacting that obligation.
In addition to the above legal defenses, banks have also asserted that the “agents” have failed to allege sufficient facts to state a claim of entitlement to any fee payment. As of today, there is at least one pending motion to dismiss that addresses these issues, but no court has yet ruled on any challenges to these pleadings. See Sport & Wheat CPA PA v. ServisFirst Bank Inc., No. 20-cv-05425 (N.D. Fla. 2020).
As of July 28, at least 55 of these cases have been filed, with a steady increase in filings in recent months and one petition to the Judicial Panel on Multidistrict Litigation pending. The pace of these filings has recently increased: in April, only four cases were filed, compared with 15 in May, 18 in June, and 16 in July. These claims have been brought against institutions of all sizes. The named plaintiffs that are responsible for more than one-third of these claims have been Fahmia, Inc., Prinzo & Associates, LLC, and Ratliff CPA Firm, PC. The cases are distributed nationally, with a regional breakdown as follows: Northeast (16), Southeast (14), West (13), Midwest (6), Southwest (4), and Pacific Northwest (2). Only two such claims have been filed in New England.
Class action cases against PPP lenders are still in their early stages, and more filings are anticipated over the coming months. The many defenses available to banks may be shaped by court rulings later this year on motions to dismiss. These cases highlight the litigation and compliance risks that exist for lenders, and can serve as guidance for others as they implement their programs for offering PPP loans.