Millions of businesses received hundreds of billions in forgivable loans under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and the Paycheck Protection Program (PPP). These forgivable loans allow businesses to make payroll and pay certain other operating expenses during the COVID-19 crisis. Unfortunately, many banks that have made loans pursuant to this program through the Small Business Administration are now facing class-action lawsuits from individuals and companies alleging unfair preferences by the banks in providing the loans, consumer fraud, anti-competitive conduct, and false advertising.
Suits Alleging Prioritizing Existing Customers
The day PPP loans were first made available, Bank of America was sued in Maryland federal court. Profiles, Inc. et al., v. Bank of America Corp. et al., 1:20-cv-00894-SAG (D. Md.) (filed April 3, 2020). The complaint initially alleged that BofA violated the CARES Act by prioritizing borrowers with existing loans and was subsequently amended (four days later) to allege that BofA later revised its policy to allow existing depositors to apply for PPP loans. Plaintiffs claim that these practices violate the CARES Act. Not surprisingly, multiple copycat lawsuits followed the filing of the Profiles, Inc. matter in Maryland, each premised on the idea that the CARES Act includes a private right of action. See, e.g., Scherer et al. v. Frost Bank et al., 4:20-cv-01297 (S.D. Tx.) (filed April 12, 2020).
Shortly after the filing of certain of these copycat lawsuits, the theory that the CARES Act provided a private right of action was rejected by the court in Profiles. On April 13, Judge Stephanie Gallagher held that the Act did not contain a private right of action and, in doing so, denied plaintiffs’ motion for preliminary injunction. Profiles, Inc. et al., v. Bank of America Corp. et al., 1:20-cv-00894-SAG (D. Md.) (memorandum opinion (ECF No. 17) filed April 13, 2020) [link]. In Judge Gallagher’s words, "the plain language of the statute does not suggest an intent to confer the particular right alleged or a private remedy against participating SBA lenders."
Not only did Judge Gallagher reject the assertion that the CARES Act provided a private right of action, she went one step further, noting that even if such a private cause of action had been intended under the statute, the language of the Act “does not constrain banks such that they are prohibited from considering other information when deciding from whom to accept applications, or in what order to process applications it accepts."
Suits Alleging Prioritizing More Valuable Customers
Following the order denying preliminary injunctive relief in Profiles, the plaintiffs’ bar began to search for alternative theories of relief, including claims under state law and an allegation that the participating banks prioritized or reordered applications from individuals and entities seeking larger loan amounts, which in turn would generate higher loan origination fees, allowing the lender to unjustly enrich itself at the expense of those small businesses most in need of funds. See, e.g., Shiny Strands, Inc. et al. v. JPMorgan Chase & Co. et al., Case No. 20-cv-02547 (N.D. Ill. filed Apr. 27, 2020); Informatech Consulting, Inc. et al. v. Bank of America Corporation et al., Case No. 3:20-cv-02892-DMR (N.D. Cal. Filed April 27, 2020). These cases allege unfair competition in violation of state consumer protection statutes, false advertising, and fraudulent concealment.
Suits Alleging Anti-Competitive Conduct
Another set of cases has pushed a theory focused on anti-competitive conduct by the major banks (including JPMorgan Chase, Bank of America, Wells Fargo, and Citibank), alleging an agreement among these banks to unlawfully limit PPP applications to existing customers, which (it is alleged) constitutes "anti-competitive conduct" and a violation of the Sherman Act and the Clayton Act. See, e.g., Legendary Transport, LLC et al. v. JPMorgan Chase & Co. et al., No. 2:20-cv-03636-ODW-JC (C.D. Cal. filed April 20, 2020).
What Happens Next?
The legal landscape is likely to be besieged with suits similar to those noted above, as well as with suits testing new legal theories and recovery models. The sheer number of dollars in the program, the number of businesses (nearly 30 million small businesses exist in the United States) applying for such assistance, and the likelihood that there will not be enough resources to satisfy every application nearly guarantees that we will see additional developments in this area. Indeed, the number of plaintiffs’ firms who are currently searching for a class representative increases on a daily basis.
What to do?
Even banks that comply with the guidance from Treasury and the Small Business Administration may find themselves in litigation. Judge Gallagher’s decision in Profiles, which held that there is no private right of action under the CARES Act and found that the Act allows banks to consider other information in accepting and processing applications, should provide some comfort; however, one well-reasoned decision is no guarantee that a judge in another jurisdiction will not see things differently, either under a theory of state-law liability or a different federal statute. Alternatively, Congress may wade back into these waters to address some of all of the concerns raised in these lawsuits. Judge Gallagher indicated that would be the most appropriate body to address such issues:
[G]iven the competing policy interests, the need to balance the desire to assist the widest swath of small businesses with the need to incentivize lender participation, and the overall fluidity of this epidemic, Congress is better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis.
On April 24, 2020, an expansion of the PPP program was signed into law, providing an additional $310 billion for the PPP program. Although there are no provisions in this new legislation specifically addressing the concerns expressed in the above-referenced cases, this additional money (and possibly more to come) may affect (and in some cases moot) certain arguments put forward by the plaintiff classes in these matters.
Banks participating in these programs should continue to adhere to sound banking practices, including without limitation, monitoring complaints from applicants, maintaining communication with applicants (applicants who have been funded and applicants who have not), and documenting all such communications.
