April 29, 2020
After the initial $349 billion in the CARES Act’s Paycheck Protection Program (PPP) was exhausted in only 12 days, lawmakers enacted the Paycheck Protection Program and Health Care Enhancement Act (also known as “Phase 3.5”) to inject an additional $310 billion funds into the program. The Small Business Association (SBA) began accepting new applications again on a first-come-first-serve basis beginning April 27, 2020. Many industry analysts expect this new round of funding to disburse just as quickly, leaving many small businesses still without aid.
The shortage in initial funding (and the expected continued shortage after the second round of funding) has led to a continued uptick in PPP-related litigation across the nation. Thus far, the litigation involves claims regarding alleged improper prioritization of certain PPP applications and alleged violations of the Fifth Amendment’s equal protection guarantee, and more lawsuits are expected.
Litigation Related to Prioritizing PPP Applications
Many complaints filed thus far allege that lenders improperly prioritized loan applications for their own customers or for higher-valued loans, at the expense of applications from small businesses without existing borrowing relationships. Plaintiffs allege such prioritization was unlawful because the CARES Act did not specifically include these eligibility restrictions.
Profiles, Inc. v. Bank of America Corporation was the first opinion analyzing such PPP lawsuits against lenders. See Case No. 20-CV-894-SAG, 2020 WL 1849710 (D. Md. Apr. 13, 2020), appealed to the 4th U.S. Circuit Court of Appeals, Case No. 20-1438. In denying the plaintiffs’ motion for temporary restraining order (TRO), the Maryland federal court held that there is no private right of action under the CARES Act. The court further held that the plaintiffs could not demonstrate likelihood of success on the merits since the eligibility factors set forth in the statute did not preclude lenders from including additional considerations, like the existence of a banking or borrowing relationship. Cases filed in California and New York seek to overcome this ruling by instead invoking state consumer protection statutes and citing violations of the CARES Act as evidence that state laws have also been violated. For detailed summaries of Profiles and subsequent cases, see McGuireWoods’ April 17 and April 22 alerts. These plaintiffs, however, will have to overcome the Maryland federal court’s holding vis-à-vis the non-exclusive nature of the CARES Act’s eligibility factors.
One week after the order in Profiles issued, the U.S. District Court for the Central District of California also denied a motion for temporary restraining order and preliminary injunction in a similar case alleging that the lenders’ prioritization policies for PPP loans were illegal. See Legendary Transport, LLC v. JPMorgan Chase & Co., et al., Case No. 2:20-CV-03636-ODW, 2020 WL 1975366 (C.D. Cal. Apr. 24, 2020). The court held that the plaintiff failed to provide proper notice to the defendants (as required for TRO orders), and that, even if notice had been given, the plaintiff failed to demonstrate irreparable harm absent the requested injunction. The court reasoned that, because the SBA had received additional funds from Congress, all claimed damages were speculative and conclusory, and any resulting damages were compensable.
In a case brought against the SBA, however, the U.S. Bankruptcy Court for the Southern District of Texas found sufficient basis to grant a TRO in favor of a potential borrower. See Hidalgo County Emergency Service Foundation v. Jovita Carranza, in her capacity as administrator for Small Business Administration, Adv. Case No. 20-2006 (Bankr. S.D. Tex. Apr. 25, 2020). The court found that the plaintiff established a substantial likelihood of success on the merits on both its claims that the SBA (1) exceeded its statutory authority and (2) violated the U.S. Bankruptcy Code in excluding from the PPP applicants presently seeking bankruptcy relief. The court found that, if a TRO were not granted, the plaintiff and the public interest would be harmed since the plaintiff’s business was a “‘front line’ health care provider.”
Accordingly, the Bankruptcy Court ordered that the plaintiff be allowed to submit a PPP loan application to any lender, even though the plaintiff was in bankruptcy. Notably, this TRO applies only to this individual borrower (not all borrowers) and is in effect only until May 8, when a hearing on the motion for preliminary injunction is scheduled. Although this order does not affect lenders directly, and does not address the private right of action argument (since the claims were not alleged under the CARES Act), the court’s order may be an early indication that courts may make individualized findings with respect to different borrowers in analyzing the PPP.
Litigation Relating to Alleged Discrimination
Litigation relating to alleged discrimination in the PPP application process is also underway.
On April 17, 2020, two plaintiffs filed a putative class action in federal court in Maryland, alleging violations of the Fifth Amendment’s equal protection guarantee and violations of the Administrative Procedure Act. See Infinity Consulting Group, LLC v. U.S. Dept. of the Treasury, Case No. 8:20-cv- 00981-GJH (D. Md.). Plaintiffs sued the SBA, the U.S. Department of the Treasury, Jovita Carranza in her official capacity as administrator of the SBA, and Steven Mnuchin in his official capacity as secretary of the Treasury Department. The plaintiffs also filed a motion for temporary restraining order and preliminary injunction on April 21, 2020, to prevent the named defendants from distributing additional funding under the PPP “until the Defendants comply with certain enumerated requirements that ensure the subsequent funding and loan application process will be administered in accordance with the provisions of the equal protection of the Fifth Amendment.”
On April 26, Judge George J. Hazel denied the plaintiffs’ motion for TRO, holding that the plaintiffs could not establish likelihood of success on their Fifth Amendment claim. The court explained that the plaintiffs’ vague allegations about “an invidious discriminatory purpose” in denying loans to minority-owned and women-owned businesses were insufficient; the plaintiffs had to provide evidence of a consistent pattern of discrimination. Without such evidence, the court questioned whether the plaintiffs had standing to bring suit in the first place and, in any event, the plaintiffs’ “attempt to equate a supposed policy preference for employer businesses with an intentional effort to discriminate against businesses owned by women and minorities falls woefully short of the mark.”
In the Profiles appeal pending before the 4th Circuit, a pro se individual moved on April 27, 2020, to file an amicus curiae brief on behalf of the public interest raising concerns about the discriminatory impacts the alleged prioritization policies have had on minority-owned businesses. See Profiles, Inc., Case No. 20-1438, Dkt. 18.
Lenders can anticipate similar litigation in the coming weeks, arising from alleged violations of lending obligations under statutes such as the Equal Credit Opportunity Act, the Fair Housing Act and the Dodd-Frank Act’s rule against unfair, deceptive or abusive acts or practices. As acknowledged in the Profiles district court opinion, there are a variety of legitimate business reasons for lenders prioritizing certain applications during the PPP loan review process. As a result, it will be important for lenders to have written business justifications for any such policies and procedures to defend against potential litigation.
Loan Terms and Loan Forgiveness
The PPP continues to develop, and many questions remain. For example, the SBA has continued to update its guidance on loan forgiveness through the Frequently Asked Questions section of its website. Generally, the PPP loans will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent and utilities, with at least 75 percent of the forgiven amount used for payroll. Forgiveness amounts will be reduced, however, if full-time headcount declines, or if salaries and wages decrease. Certain borrowers whose loans ultimately are not fully forgiven may initiate litigation against the SBA and/or lenders alleging that they were not properly apprised of the risks surrounding the reduced forgiveness, particularly in light of the rushed race to submit the applications. It will be important for lenders to update borrowers as the SBA releases additional guidance regarding specific loan terms.
Litigation regarding the CARES Act generally, and the PPP specifically, is expected to rise in the coming weeks as loans are funded. McGuireWoods will continue to track this PPP-related litigation and produce updates in the coming weeks.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.