As a result of the COVID-19 pandemic, millions of businesses have suffered devastating economic consequences. In response to this suffering, the Paycheck Protection Program (PPP), was implemented through the Coronavirus Aid, Relief, and Economic Act (CARES Act). This legislation was enacted into law on March 27, 2020, and administered through the Small Businesses Administration to provide loans to qualifying small businesses affected by COVID-19. If the business met certain requirements, such as requiring the funds for payroll costs, interest on mortgages, rent, and utilities, the loans could be totally forgivable. To date, over five million businesses have received loans under the PPP for a combined total of $521 billion. However, not all loans were obtained without issue nor were all qualifying businesses able to borrow.
Since its enactment, a number of qualifying business owners have filed class action lawsuits against the PPP’s lenders, alleging, among other claims, that their loan applications were wrongfully denied and not fairly processed. The agents acting on behalf of these plaintiffs—typically, attorneys and accountants—have also begun filing lawsuits against the lending banks, alleging that they were owed compensation for providing their professional assistance to the prospective borrowers during the loan application process. With over 80 class actions pending and likely more lawsuits to come, it is unclear how the relationship between the applicants and prospective lenders will play out—to what extent the PPP will aid small businesses impacted by COVID-19.
Applicants Allege Lender Violations
Some of the first lawsuits filed were by small businesses seeking loans under the Paycheck Protection Program. Per the program, the loans were supposed to be issued on a “first-come, first-serve basis” to any business that fit the eligibility requirements. However, some businesses have alleged that they were not obtaining loans as easily as described. In April, a class action filed against Bank of America in the U.S. District Court for the District of Maryland, alleged that the lenders violated the CARES Act by permitting only businesses that had an existing lending relationship with the bank to apply for a loan. In Profiles Inc. v. Bank of America Corp. et al., 20-CV-00894 (D. Md. 2020), the Court denied the plaintiffs’ motion for injunctive relief and held that the CARES Act did not create a private cause of action. This decision was affirmed by the Fourth Circuit and was later voluntarily dismissed.
A similar proposed class action was filed in the U.S. District Court of the Northern District of California against Wells Fargo Bank. In Marselian, v. Wells Fargo, et al., 20-CV-03166 (N.D. Cal. 2020), the plaintiffs allege that the bank, motivated by hefty commissions and a federal guarantee of the loan amounts by the Small Business Administration, sought to process “the largest dollar value loans from its largest customers in the quickest amount of time.” The complaint further alleges that Wells Fargo focused on its bigger customers to maximize its own profits, resulting in smaller businesses going to the back of the line and receiving no priority, in violation of federal regulations. As a result, the plaintiff’s loan application was delayed because Wells Fargo had run out of money to fund the loans and was waiting for additional approved funds from the Small Business Administration. The plaintiff alleges that as a consequence, their business irreparably suffered. Among other causes of action, the plaintiff alleges violations of the California Unfair Competition Laws and that Wells Fargo was unjustly enriched by the Paycheck Protection Program at the detriment to small businesses.
There are approximately 39 pending class actions filed by borrowers against larger banks, such as JPMorgan Chase and Citibank, with plaintiffs alleging negligence, fraud, unlawful business practices, and violations of antitrust laws. Allegations claiming antitrust violations are based on the theory that PPP lenders conspired with each other to provide loans to larger clients to protect market share and limit competition for the PPP’s funds. These lawsuits allege that smaller businesses were not granted loans because bigger companies and existing customers were wrongfully prioritized.
Agent Allegations of Unpaid Commission Fees
Small businesses aren’t the only entities suing banks under the Paycheck Protection Program. Those acting as agents for the small businesses, such as law firms and accounting firms, have filed suits as well. Amongst their claims are allegations that the PPP entitles them to a 1% commission fee collected from the lender for assisting the borrower in the loan application process. According to over 55 lawsuits already filed by agents across jurisdictions, under the CARES Act and the Small Business Administration’s 7(a) loan program, they were entitled to agent fees to “be paid out of lender fees” according to the PPP Information Sheet.
The larger lending banks have countered that no written agreement existed which established the agents’ right to fees. The banks explained that the agents are misinterpreting the 1% commission language, which establishes the fee cap but does not impose a required fee. They have asserted that the agents have no private cause of action under the statute, and even if there existed such a right, the Small Business Administration had no authority to enact such a mandate.
During a June 30, 2020 hearing before Congress, Treasury Secretary Steven Mnuchin noted that the agent-fee guidance “was intended to be based on a contractual relationship between the agent and the bank,” and stated that there would soon be guidance concerning these fee disputes. The Treasury Secretary’s words indicate that any reference to fees in the CARES Act referred to the banks’ ability to enter into agreements to compensate agents, but that it did not create a mandate of a 1% commission fee. Although his statements suggest that the Treasury’s position supports the bank, more information and guidance will likely dictate the progress of agent lawsuits.
The Future of PPP Loans
Interestingly, the U.S. Judicial Panel on Multidistrict Litigation recently declined to consolidate either of these two types of lawsuits. In the cases of borrower class actions, the Panel found that there would be no benefit in consolidation for pre-trial purposes since each case’s facts were separate and distinct. Likewise, in the cases involving agents, the Panel found that the actions involved dozens of different lenders, and that there was “no common or predominant defendant across all actions.” Although the actions “undoubtedly allege similar policies and practices by the defendant banks, the policies and practices for paying agent fees are unique to each lender which differ significantly across the actions.”
With various unconsolidated class actions against multiple banks throughout the country, it will undoubtedly take ample time for any relevant discovery review or dispositive motion practice to take place. As a result, it will also take some time for small businesses and their agents to obtain answers concerning their pending claims and loans under the Paycheck Protection Program.