The Coronavirus Aid, Relief and Economic Security Act (CARES Act), signed into law on March 27, authorizes the Small Business Administration (SBA) to make Paycheck Protection Program (PPP) loans to small businesses. These PPP loans are generally administered through banks authorized to make other types of SBA loans. The program has sparked recent claims by small businesses against participating banks related to the PPP. Notably, a recent decision by a Maryland federal district court held that the CARES Act does not provide a private right of action, effectively barring small businesses from bringing such claims against banks administering PPP loans.
A number of class action lawsuits have been filed against major financial institutions in recent days, all of which allege generally that the defendant banks violated the CARES Act and related rules regarding PPP loans.1 Some of the lawsuits allege that the defendant banks failed to process PPP loans on a first-come, first-served basis as required by applicable rules, while others assert that the defendant banks imposed eligibility restrictions on applicants inconsistent with the CARES Act. These claims generally share a common denominator in that they rely on the CARES Act to establish the applicable standard to which the defendant banks must adhere. On this issue, a recent decision out of the District of Maryland provides banks some security.
In Profiles, Inc., et al., v. Bank of America Corp., a group of small businesses filed a complaint on behalf of a putative class of similarly situated small businesses seeking a temporary restraining order against the bank. The plaintiffs sought to enjoin the bank from imposing restrictions on borrower eligibility under the PPP in addition to the eligibility requirements set forth in the CARES Act.
The plaintiffs complained that while the CARES Act generally provides that all businesses that (i) were in operation on February 15 and (ii) employed no more than 500 employees are eligible for PPP loans, the bank initially only made such loans available to existing credit customers, and later to existing depository customers to the extent such customers had no credit relationships with other banks. The plaintiffs argued that by imposing additional eligibility restrictions on PPP loans, the bank violated the CARES Act.
The court denied the plaintiffs’ request for a temporary restraining order, finding that the CARES Act does not provide a private right of action that can be used by applicants to sue PPP loan participating banks. Further, the court held that even if the CARES Act did contain an implied private right of action, nothing in the CARES Act prohibits banks from imposing additional eligibility restrictions on borrowers.2 The court noted that Congress is expected to amend the CARES Act in the near term, at which point it may include a private right of action, if appropriate.
Notably for businesses and banks operating in the Ninth Circuit, the PPP set forth in Title I of the CARES Act amends the Small Business Act. Just as the Profiles court ruled that no private right of action exists under the CARES Act, the Ninth Circuit has previously ruled that no private right of action exists under the Small Business Act. Crandall v. Ball, Ball and Brosamer, Inc., 99 F.3d 907 (9th Cir. 1996).
While the decision in Profiles is not binding in the Ninth Circuit, it is persuasive authority upon which courts may rely when analyzing similar claims made under the CARES Act. If this decision is followed, it should foreclose most claims against banks premised on alleged violations of the CARES Act and attendant PPP rules. However, the Profiles decision does not address the myriad of other state and federal claims that creative plaintiffs are likely to assert in future PPP loan litigation.
1 Law Office of Sabrina Damast, Inc., et al v. Bank of America Corp., Case No. 20-3591 (C.D. Cal. April 19, 2020); Law Office Irina Sarkisyan et al., v. U.S. Bancorp, U.S. Bank, N.A., Case No. 20-3590 (C.D. Cal. April 19, 2020); Cyber Defense Group, LLC et al. v. JPMorgan Chase Bank, N.A., Case No. 20-3589 (C.D. Cal. April 19, 2020); BSJA, Inc., et al. v. Wells Fargo Bank N.A., Case No. 20-3588 (C.D. Cal. April 19, 2020); Edward L. Scherer v. Frost Bank, Case No. 20-1297 (S.D. Tex. April 12, 2020); Profiles, Inc., et al., v. Bank of America Corp., et. al., Case No. 20-894 (D. Md. April 7, 2020).
2 The court stated that “[t]he statutory language 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.” Profiles, Docket No. 17 at 14.
Before proceeding, please note: If you are not a current client of Lane Powell PC, please do not include any information in this email that you or someone else considers to be confidential or secret in nature. Prior to the establishment of a lawyer-client relationship, unsolicited emails from non-clients containing confidential or secret information cannot be protected from disclosure.