In a landmark decision Monday, the United States District Court for the Northern District of Florida dismissed a putative class action involving “agent fees” for Paycheck Protection Program (“PPP”) loans under the federal Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. This lawsuit, Sport & Wheat CPA, PA v. Servisfirst Bank et al., No. 3:20-cv-05425-TKW-HTC (N.D. Fla.) claimed to represent a class of accounting firms and other consultants that allegedly worked as agents on behalf of applicants for PPP loans – typically small business clients. Plaintiff contended the CARES Act and implementing regulations required lenders to pay them “agent fees” for preparing loan applications.
This lawsuit was the first of its kind. Sixty copy-cat lawsuits followed in more than a dozen federal courts across the country. On August 6, 2020, the Judicial Panel on Multidistrict Litigation denied consolidation of these lawsuits in a multidistrict litigation (“MDL”). We reported on that decision here. In all of these cases, Plaintiffs attempt to twist regulatory language establishing caps on agent compensation (a one percent fee for loans of $350,000 or less, a .50 percent fee for loans of more than $350,000 and up to $2 million, and a .25 percent fee on loans over $2 million) into an ironclad obligation for banks to pay agents – even if the bank never heard of the agent, did not know the agent was preparing a borrower’s application, or did not ask for the agent’s assistance.
The Court correctly held neither the CARES Act nor its implementing regulations require lenders to pay agent fees absent a specific agreement to do so.
Hon. T. Kent Wetherell, II, United States District Judge for the Northern District of Florida – Pensacola Division correctly held neither the CARES Act nor its implementing regulations require lenders to pay agent fees absent a specific agreement to do so. The Court held preexisting Small Business Administration (“SBA”) regulations were applicable to the PPP, and these regulations required execution of an SBA Form 159 before an agent can receive any compensation. 13 C.F.R. § 103.5(a). Form 159 is the SBA’s form compensation agreement. It is used to identify agents and the fees or compensation to be paid on behalf of a small business applicant. It is signed by the lender, the borrower, and the agent. Form 159 serves to prevent fraud and abuse by requiring agents to certify that they have not been otherwise paid for these services, that they have “actually performed” these services “on the Applicant’s behalf,” that all information is accurate, and itemize services if the amount claimed is over $2,500. The Court held this indispensable requirement for SBA Section 7(a) loans was equally applicable to the PPP, which was enacted as a Section 7(a) loan product. See Pub. L. No. 116-136, § 1102(a). We predicted such a ruling was the only way to harmonize any fees permitted by the PPP with SBA’s existing regulatory structure. Many defendants have argued the Form 159 was required under this exact logic. Plaintiffs have resisted filling out the Form, arguing it conflicted with PPP requirements. But the Court correctly held nothing about the PPP conflicted with Form 159; if anything, the PPP only sets lower fee caps than those preexisting SBA regulations consider presumptively reasonable.
It was undisputed in Sport & Wheat that Plaintiff did not complete a Form 159. Consequently, the Court held the Defendant banks “ha[d] no legal obligation under the CARES Act or the [PPP] to pay Plaintiff an ‘agent fee’ for helping the borrowers get PPP loans[,]” and dismissed Plaintiff’s claim for a judicial declaration it was entitled to agent fees under federal law. The Court dismissed Plaintiff’s state law conversion claim for a similar reason: Plaintiff had no right to the agent fees it claimed it was owed. Finally, the Court dismissed Plaintiff’s unjust enrichment and breach of implied contract claims as duplicative and insufficient under state law because Plaintiff’s alleged work as agent only directly benefitted PPP borrowers – not the lenders that were sued. Thus, no equitable principles required lenders to compensate Plaintiff for work on PPP loans. The Court dismissed the lawsuit in its entirety.
This ruling has significant implications in the Sport & Wheat case and beyond. Judge Wetherell’s was the first opinion in the country to affirmatively require the Form 159 and dismiss a case for failure to complete the Form. This opinion is already being filed in courts across the country where agent fee cases are currently pending.
Despite two big wins in the last two weeks, banks should still remain vigilant.
Banks have scored big wins in the last two weeks in defeating the MDL and obtaining this favorable opinion in the first-filed case, they should still remain vigilant. Though this opinion may discourage new PPP agent fee class actions, it is by no means final: The Court granted Plaintiff leave to file another Amended Complaint if it had some good faith basis for pursuing other claims. It is difficult to imagine how Plaintiff could meet this standard in light of the Court’s thorough and well-reasoned opinion (even if the opinion stopped short of affirmatively holding there is no right of action under the CARES Act, as a federal court in Maryland previously held in a PPP loan priority case). Alternatively, Plaintiff could appeal this decision to the United States Court of Appeals for the Eleventh Circuit and seek reversal. It is also seems unlikely that an any appellate court would review the plain language of the CARES Act, the PPP, and SBA regulations and come to the contrary conclusion Form 159 is not required. Nevertheless, other hearings on motions to dismiss taking place this week and those scheduled in the near future may present the opportunity for contrary rulings on the merits of the claim the PPP requires payment of agent fees. Additionally, some states’ laws may be more favorable for quasi-contract and conversion claims than Florida law.