As financial institutions begin to make the next round of Paycheck Protection Program (“PPP”) loans under the CARES Act, some would-be borrowers have begun suing lender financial institutions alleging the institutions have relied on improper criteria when making PPP loans, thereby violating the PPP and the CARES Act.
Some small businesses that applied for PPP loans with various financial institutions and did not receive the loans before the initial appropriated funding for PPP loans ran out have filed purported class action lawsuits against those financial institutions, alleging that they prioritized or favored large loans and preexisting client relationships, both in violation of the CARES Act.
The CARES Act provides that lender financial institutions receive fees for making PPP loans based on the size of the loan made. Lender financial institution fees for loans of up to $350,000 can be no more than 5.0% of the loan amount. Fees for loans of more than $350,000 and less than $2 million can be no more than 3.0% of the loan amount. Fees for loans of $2 million or more cannot exceed 1.0% of the loan amount. PPP loans are capped at $10 million. In many cases, the larger the loan made, the greater the fees generated.
The CARES Act, and the regulations promulgated by the Small Business Administration, or SBA, related to the PPP, generally provide that would-be borrowers must meet certain requirements to be eligible for a PPP loan, including but not limited to the following: (1) the borrower must be a small business according to SBA regulations (i.e. a business with no more than 500 employees, with exceptions based on the industry of a given business), (2) the borrower must have been in operation as of February 15, 2020, and (3) the borrower must pay employees and related employment taxes and expenses and/or independent contractors. In addition, borrowers must certify that present economic uncertainty makes the PPP loan necessary and that the proceeds of the loan will be used primarily to maintain payroll and pay certain permissible operational expenses.
Neither the CARES Act, nor the regulations to date promulgated thereunder, provide guidance regarding prioritizing the size of PPP loans made or prioritizing which applicants should first receive PPP loans.
In the recently-filed lawsuits, purported classes of would-be borrowers allege that lender financial institutions such as Bank of America, JPMorgan Chase, U.S. Bank, and Wells Fargo unfairly favored companies seeking larger loan amounts in order to maximize the fees generated. Other purported classes of would-be borrowers allege that those same financial institutions unfairly prioritize loan applicants that have or had preexisting lending relationships with the lenders. All litigants claim that such behavior is generally in violation of the CARES Act the regulations promulgated thereunder, and other related laws.
In an April 13, 2020 opinion denying a motion for temporary injunction sought by a purported class of would-be borrowers against Bank of America on the pre-existing relationship issue, federal district Judge Stephanie A. Gallagher held that neither the CARES Act nor any other related law creates an explicit right of action under which a private party may sue a lender or any other party. Judge Gallagher further reasoned that the laws do not create an implicit cause of action; private parties simply may not sue to enforce the provisions of the CARES Act or other related law.
Judge Gallagher, while acknowledging the difficulty that the purported class of would-be borrowers faced based on Bank of America’s requirement that a potential borrower have a preexisting lending relationship with the bank, also reasoned that granting the temporary injunction requested by the purported class of would-be borrowers would likely result in fewer lenders making PPP loans, harming all potential borrowers. She concluded that Congress and not the courts should remedy any defects in the CARES Act, including the one identified by the purported class of would-be borrowers, by passing additional legislation.
Obviously, the PPP loan program and the laws governing it are going to continue to be interpreted by the regulatory bodies and judiciaries. It is important that lender financial institutions keep up-to-date on the PPP loan-program related language in any new laws passed by Congress and related regulations promulgated by relevant regulatory bodies. Please regularly check Butler Snow’s COVID-19 Resource Hub to keep current on the latest PPP loan-related news.