Early uncertainty and the initial lapse in appropriations for the U.S. CARES Act’s Paycheck Protection Program (PPP) set off a wave of litigation by disgruntled small businesses who have been unable to secure PPP loans. PPP loans were made available through various lenders to certain COVID-19-affected businesses meeting specific maximum size thresholds. These loans are forgiven in full if, amongst other requirements, the borrower uses the funds for “payroll costs, interest on mortgages, rent, and utilities,” and applies at least 75% of the amount forgiven to payroll costs. These attractive forgiveness promises caused many small businesses to apply for the PPP funding, which exhausted the first round of allocated funds within a matter of weeks.
The plaintiffs’ bar pounced on the opportunity, and filed several class action lawsuits within the past month claiming that lenders unfairly implemented the PPP. These lawsuits largely recycle the same general theories, which are highlighted below. Please also see Goodwin’s April 24, 2020 Client Alert, “Fair Lending Considerations in a COVID-19 World: U.S. Paycheck Protection Program Issues.”
REFUSAL TO ACCEPT PPP LOAN APPLICATIONS FROM BORROWERS WITHOUT PRE-EXISTING RELATIONSHIP WITH THE FINANCIAL INSTITUTION
As previously reported by Goodwin’s LenderLaw Watch blog, the first two PPP class action lawsuits were filed against Bank of America and Wells Fargo in early April. The plaintiffs in Profiles, Inc. v. Bank of Am. Corp., et al., No. 1:20-cv-00894-SA (D. Md.) claimed that the bank only permitted active Bank of America borrowers to apply for PPP loans. Similarly, the plaintiffs in Scherer v. Wells Fargo Bank, N.A., No. 4:20-cv-01295 (S.D. Tex.) and Scherer v. Frost Bank, No. 4:20-cv-01297 (S.D. Tex.) alleged Wells Fargo improperly restricted access to PPP loans to customers with a pre-existing business checking account. The theory is that this practice was more profitable for the institutions because they were able to make larger origination fees off of larger loan amounts for larger clients.
All of these plaintiffs asserted the following claims and requests for relief:
- CARES Act violation
- Small Business Administration’s 7(a) loan program violation
- Declaratory judgment
The court in the Bank of America case promptly denied the plaintiffs’ motion for a temporary restraining order and preliminary injunction, notably recognizing that the CARES Act does not provide a private right of action and that Congress did not intend to allow for one. The order also recognized that PPP lenders have the leeway under the CARES Act to consider additional criteria they deem appropriate when evaluating potential PPP borrowers.
FAILURE TO PROCESS PPP APPLICATIONS ON FIRST-COME, FIRST-SERVED BASIS
Expanding on the theories from the first two Bank of America and Wells Fargo cases, plaintiffs next asserted claims that lenders are failing to process PPP loan applications on a first-come, first-served basis as expected by the Small Business Administration (SBA). For instance, the named plaintiff in Outlet Tile Center v. JPMorgan Chase & Co., No. 2:20-cv-03603 (C.D. Cal.) claimed that Chase, prior to making its online PPP loan application portable available to the public, solicited applications from its more favored clients. Chase allegedly processed PPP loans for these clients, resulting in an inability to lend to smaller businesses by the time the initial round of PPP funding had dried up. The plaintiffs claim that they were harmed because they could have applied for loans with institutions that actually were processing loan applications on a first-come, first-served basis, but did not do so because they had applications pending with Chase. Markedly, while the SBA’s guidance explains that PPP is a first-come, first-served program, there is no requirement that applications be processed on a first-come, first-served basis. Plaintiffs’ theory was repeated in Ryan M. Kull Licensed Clinical Social Work LLC v. Chase Bank USA, N.A., No. 1:20-cv-03138 (S.D.N.Y.), Law Office of Sabrina Damast, Inc., et al. v. Bank of Am. Corp., No. 2:20-cv-03591 (C.D. Cal.), Legendary Transport, LLC v. JPMorgan Chase & Co., et al., No. 2:20-cv-03636 (C.D. Cal.), Hyde-Edwards Salon & Spa v. JPMorgan Chase & Co., No. 3:20-cv-00762-DMS-MDD (S.D. Cal.), Starwalk of Dallas, LLC v. JPMorgan Chase & Co., No. DC-20-05797 (Dallas Cty. Dist. Ct.), and Sha-Poppin Gourmet Popcorn LLC v. JPMorgan Chase Bank, N.A., No. 1:20-cv-02523 (N.D. Ill.).
Plaintiffs bringing these cases have asserted the following causes of action:
- Promissory estoppel
- Fraudulent concealment
- False advertising
- Unfair competition
- Breach of fiduciary duty
- Unjust enrichment
- Unfair and deceptive acts and practices
CONSPIRACY TO OVERTAKE PPP LOAN MARKET SHARE
One case so far has alleged that larger PPP lenders are conspiring with each other to provide PPP loans to their larger clients “to protect their market share and to limit competition with one another with respect to the $349b PPP-fund.” Legendary Transport, LLC v. JPMorgan Chase & Co., et al., No. 2:20-cv-03636 (C.D. Cal.).The named plaintiffs alleged that this conduct violated both the Sherman Act and Clayton Act. Unsurprisingly, the facts supporting the alleged conspiracy are not detailed in the complaint.
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It remains to be seen whether any of these lawsuits will be voluntarily dismissed now that President Trump signed legislation, on Friday, April 24, providing for an additional $484 billion in PPP funding. It is conceivable that some of these named plaintiffs now could apply for and receive PPP loans. In theory that should moot their current claims. Even so, it would be unsurprising to see these same theories and claims arise again from borrowers who are denied PPP loans. By contrast, the SBA and U.S. Treasury have stated that “[t]he U.S. government will not challenge lender PPP actions that conform to” PPP FAQs, the Interim Final Rule, and any subsequent rulemaking, though it remains to be seen how that plays out.