In response to the severe economic disruptions caused by COVID-19, Congress took unprecedented fiscal steps to inject liquidity into the economy. One of Congress’ most significant actions was the CARES Act, which included the $349 billion Paycheck Protection Program (PPP), providing forgivable loans to businesses to cover payroll expenses.^[1] However, the program ran out of money within only two weeks of its launch ^[2]Congress then replenished PPP funds in a second round of PPP funding that started on April 27.^[3] Some reports indicate that a third wave of PPP funds might be on the way as part of anticipated future legislation. ^[4]

Frustration over the availability and distribution of PPP funds has begun sparking litigation. In one increasingly common type of such suits, small business owners have sued multiple big banks that administered the PPP funds, alleging various theories of liability. One such case recently was initiated in federal court in Maryland, and epitomizes one of the theories of liability being invoked. In that case, the plaintiffs (small businesses) alleged that Bank of America gave preferential treatment to its existing customers.^[5] Under this “gating” policy, BoA purportedly obtained PPP funding for its customers, but delayed processing non-customer applicants, causing them to miss out on funding altogether. ^[6] The Maryland federal judge, though, rejected the small businesses’ request to stop BoA from “gating” applicants based on its preferred eligibility requirements. The plaintiffs are now seeking to appeal that decision to the Fourth Circuit Court of Appeals.

Under a second theory advanced in several California federal suits and at least one suit in New York, small businesses assert that the banks allegedly prioritized “the applications that would make the bank[s] the most money.”^[7] This argument is central to cases against JPMorgan Chase and Bank of America, among others.^[8]Instead of relying on a private right of action under the CARES Act, plaintiffs in these cases base their claims on pre-existing statutory and common law rights, including unfair competition, false advertising, and fraud claims.^[9] Reports indicate that banks handling the first round of PPP funding earned over $10 billion in processing fees, a point that, if accurate, will likely be mentioned repeatedly in these suits.^[10]

A third avenue of attack has been antitrust law. As with the “gating” argument mentioned above, plaintiffs making antitrust claims contend that the banks illegally preferred existing customers. But instead of arguing that the CARES Act provides a private right of action, these plaintiffs invoke the venerable Sherman and Clayton Acts.^[11] In one such case, a plaintiff argues that JPMorgan Chase, Bank of America, Wells Fargo, and Citibank engaged in anti-competitive conduct and entered into a tacit agreement. This suit also singles out JPMorgan Chase for negligent conduct and misrepresentations.^[12]

If Congress continues to replenish PPP funds, it is possible that the plaintiffs in these suits ultimately will obtain loans under the program, thus potentially mooting their suits. Also, the Small Business Administration did temporarily restrict access to “Round Two” PPP funds to banks and other lending institutions with less than $1 billion in assets, in an effort to assist the smallest of small businesses.^[13]

A likely scenario, though, is that many small businesses will remain wanting for funds. Unable to obtain financial relief through the banks, many of these businesses will turn to the courts for aid. In response, the largest financial institutions are likely to continue responding, as they have in many of the suits filed to date, that they processed as many applications as they could under pressing time constraints and that they were afforded some discretion in prioritizing certain applications over others. Like so many other aspects of this coronavirus crisis, the circumstances giving rise to these legal claims and defenses are new. A new body of precedent, rooted in interpretation and application of the CARES Act, is thus likely to be added to lender liability jurisprudence.

[1] https://www.cnbc.com/2020/04/06/small-businesses-worry-paycheck-protection-program-money-will-run-out.html
[2] https://www.npr.org/sections/coronavirus-live-updates/2020/04/16/835958069/small-business-emergency-relief-program-hits-349-billion-cap-in-less-than-2-week
[3] https://www.forbes.com/sites/rohitarora/2020/04/29/cares-act-ppp-sequel-is-scarier-than-nightmare-on-elm-street-ii/#347d602244f9
[4] https://www.cnbc.com/2020/04/26/the-ppp-isnt-working-heres-a-better-idea-paycheck-guarantees.html
[5] https://www.law360.com/articles/1263910/battle-over-bofa-s-virus-relief-biz-lending-heads-for-appeal
[6] https://www.law360.com/articles/1263910/battle-over-bofa-s-virus-relief-biz-lending-heads-for-appeal
[7] https://www.politico.com/news/2020/04/20/small-business-sue-wells-jpmorgan-197456
[8] https://www.politico.com/news/2020/04/20/small-business-sue-wells-jpmorgan-197456
[9] https://www.jdsupra.com/legalnews/class-action-lawsuits-attack-banks-26474/
[10] https://www.npr.org/2020/04/22/840678984/small-business-rescue-earned-banks-10-billion-in-fees
[11] https://www.jdsupra.com/legalnews/class-action-lawsuits-attack-banks-26474/
[12] https://www.jdsupra.com/legalnews/class-action-lawsuits-attack-banks-26474/
[13] https://www.npr.org/sections/coronavirus-live-updates/2020/04/29/847940090/scram-big-banks-small-lenders-take-over-sba-lending-program-for-a-night