What is the Paycheck Protection Program?

The Paycheck Protection Program was signed into law as part of the CARES Act on March 27, 2020. On April 3, 2020 the program began accepting applications, however, the $349 billion in initial funding ran out after just 13 days. In that short window, the loan application process was dominated by confusion and frustration. Many business owners turned to the banks where they already had existing relationships to apply. But for others, the path to apply was not so clear. Bank of America initially turned away any applicants that were not current account holders. Wells Fargo told customers to apply to other institutions. Other large banks would not accept applications from new customers. The result of a hastily prepared loan program was mismanagement of applications and roadblocks to many businesses that needed funds the most.


Allegations Against Loan Processing Banks

Class action lawsuits have quickly emerged related to bank conduct while processing PPP loan applications. The largest area of complaint has been the process—or lack thereof—banks used to process applications. A common thread among the plaintiff parties has been the influence of financial gains banks stand to gain by prioritizing larger loans for larger companies—larger within the small business scale.

Lawsuits have also called into question the validity of prioritizing current bank customers or simply refusing new customers. Banks, both big and small, are key agents in securing a PPP loan. As a result, many business owners have been left frustrated by the opaque application process and are seeking answers from these financial institutions.


Active PPP Loan Lawsuits

Maryland Business Owners vs. Bank of America

Several Maryland small businesses filed one of the first class action lawsuits against a bank, seeking a temporary restraining order and a preliminary injunction against Bank of America. The class sought to prevent Bank of America “from imposing restrictions on borrowing under the Payroll Protection Program.” The plaintiffs alleged that, despite being Bank of America customers, the bank had refused to process PPP loan applications for at least two plaintiffs because neither business had a borrowing relationship with Bank of America.

The Maryland district court, however, rejected the plaintiffs’ request for a temporary restraining order and an injunction. The court noted that there is no private cause of action under the CARES Act, which meant that the plaintiffs were unlikely to succeed on the merits of this claim.

California Business Owners vs. PNC

In California, a business owner filed a class action lawsuit against PNC Bank in the Northern District of California. In the complaint, the plaintiff and proposed class alleges that PNC delayed submitting plaintiffs’ applications. The bank then claimed it could not process those applications at all. The lawsuit also claims that PNC gave high-value loans and certain clients preferential treatment in order to maximize its own fees generated from processing the PPP loan applications.

Additional class action lawsuits have since been filed in California courts against Bank of America, JPMorgan Chase, U.S. Bank, and Wells Fargo. These complaints, filed by common representation, attack the banks’ alleged preference for larger origination fees generated by larger loan requests. This, the lawsuits argue, are in violation of California’s Unfair Competition Law and False Advertising Law for “fraudulent concealment” of loan processes.

Florida CPA Firm vs. ServisFirst Bank

In the Northern District of Florida, an accounting firm filed a class action lawsuit against ServisFirst Bank and financial planning company, Synovus Trust Corporation. The complaint alleges that these financial institutions had violated terms of the CARES Act by failing to pay the accounting firm for its role in preparing PPP applications.

The complaint further asserts that the CARES Act explicitly states that “agents,” including accountants, attorneys, loan brokers, and similar financial consultants, who help small businesses apply for PPP loans are owed a fee by the lender who then processes the application. The plaintiff accounting firm states that they acted as such an agent for certain clients, only to have the defendants refuse to pay the required fee.

Texas Lawyer vs. Frost Bank

In Texas, a lawyer filed a class action suit against Frost Bank. Here, the plaintiff is a lawyer representing his own firm and other small firms similarly situated. The proposed class applied for PPP funding, only to face problems such as loan applications that were not processed before the funding ran out on April 16, 2020.

The complaint also alleges that the defendant violated the Texas Deceptive Trade Practices Act by prioritizing certain loan applications and refusing to process others. The Texas Deceptive Trade Practices Act allows for a private cause of action for plaintiffs. It covers a broad range of “false, misleading, or deceptive acts or practices in the conduct of any trade or commerce.”


What Constitutes PPP Loan Fraud

The uproar associated with the PPP loan process has turned a critical eye on just who has secured these loans—and their eligibility. In response, the SBA released additional guidelines on qualifications for receiving loans including business size standards and review protocols for loans over $2 million. The agency also tightened up terms of loan “forgivability” and repayment schedules. Businesses such as Ruth’s Chris Steakhouse, the Los Angeles Lakers, and Shake Shack have since voluntarily returned millions in PPP loans.

In a less voluntary instance, two men were arrested in Rhode Island and charged in the first case of PPP fraud. David A. Staveley and David Butziger were charged for seeking $544,000 in PPP loans. The duo falsely claimed to employ employees at four different business locations. There were, in fact, zero employees. The men have been charged with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud. Assistant Attorney General Brian A. Benczkowski, who is leading enforcement on this front, stated his team is investigating a number of similar fraud claims “in the double digits.”

Expert insights have never been more important.


PPP Class Action Outlook

The Maryland district court’s memorandum opinion has set an important precedent for cases attempting to use a similar “private cause of action” argument. While not a binding ruling outside of Maryland, it does present an initial hurdle for attorneys seeking to bring PPP claims to court.

The Texas case, however, may offer a solution to the problem. While the CARES Act may provide no private cause of action, statutes like the Texas Deceptive Trade Practices Act often do. Many states have such laws, which may provide grounds for arguing that the claim should be allowed to proceed.

A single unified strategy for dealing with PPP claims nationwide may be difficult to achieve. However, PPP claims may have greater viability under state trade laws. The approach taken in each case should be tailored to that state’s trade practices act and any related precedent.


Expert Witnesses in PPP Class Action Lawsuits

Lawsuits seeking to hold banks accountable for their approach to the Paycheck Protection Program will rely on the assistance of expert witnesses as well. Experts may be needed to explain how the Paycheck Protection Program was intended to be administered, how banks allegedly deviated from those intentions, and how those deviations affected the plaintiffs. Experts in finance, accounting, and lending will be critical to establish the mechanics of banking relationships and lending programs. Experts in the administration of government programs will also be key for exploring the setup and potential errors in the creation of the PPP.

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