Federal CARES Act Opinion Is Significant Win for Payroll Protection Program Lenders

April 17, 2020

On April 13, 2020, the U.S. District Court for the District of Maryland denied a motion brought by a number of small business owners seeking to enjoin Bank of America from imposing eligibility restrictions on borrowing under the Payroll Protection Program (PPP), established by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This decision in Profiles, Inc., et al. v. Bank of America Corp., et al.,  issued only two weeks after the passage of the CARES Act, is a case of first impression analyzing the PPP — and a significant win for all lenders.

The plaintiffs’ putative class action challenges Bank of America’s initial policy of accepting PPP loan applications only from customers that were existing Bank of America borrowers, and its revised policy of also accepting applications from depository customers that were not borrowers at other banks. The plaintiffs contend that these policies were too restrictive, blocking them from funds for which they are otherwise eligible under the express provisions of the CARES Act. Bank of America countered that these policies allowed it to streamline the application process so it could provide relief to as many businesses as quickly as possible.

District Judge Stephanie Gallagher denied the plaintiffs’ motion for temporary restraining order (TRO) and preliminary injunction. To obtain a TRO or preliminary injunction, plaintiffs must demonstrate that: (1) they are likely to succeed on the merits; (2) they will likely suffer irreparable harm if the court does not grant immediate relief; (3) the balance of equities favors preliminary relief; and (4) injunctive relief is in the public interest. The court held that the plaintiffs in this case failed to satisfy any of these factors.

Under the first prong analyzing the likelihood of success, the court held that the recently enacted CARES Act does not provide either an express or an implied private right of action. The court explained that the SBA administrator is the proper party to file any civil suit against any lending companies for alleged violations of the PPP. Therefore, contrary to the plaintiffs’ argument, lenders do not have “free reign to exploit the CARES Act for their own purposes.” This initial finding previews that the court does not believe the plaintiffs will ultimately succeed and that Bank of America would likely succeed on a motion to dismiss or on summary judgment.

Second, the court held that the bank’s policy “does not run afoul of the CARES Act.” The court looked to the legislative history of the CARES Act, noting that an earlier version of the bill stated that “a lender shall only consider” certain criteria. The qualifier “only” was omitted from the final version of the statute. Therefore, the court concluded that, although the CARES Act provides certain criteria for lenders’ processing of loan applications, those criteria were not exhaustive and lenders were free to consider other information and prioritize certain applications.

Third, the court held that the plaintiffs are not facing actual and imminent harm necessitating immediate court intervention. The plaintiffs argued that, without a TRO and preliminary injunction, they will not be able to access the “first-come-first-serve” PPP loans through Bank of America. The court found this alleged harm to be “uncertain” and “speculative.” The court noted that the loan application of at least one of the plaintiffs is currently being processed by Bank of America and that the other plaintiffs could apply for a PPP loan through another PPP lender. Furthermore, the plaintiffs failed to demonstrate that, even if Bank of America processed their loan applications, they would be approved for a PPP loan and that the loan would save their businesses. “Given the unpredictability of COVID-19, and the uncertain duration of governmental orders shutting down non-essential businesses, it would be quite extreme to attribute the dire plight facing American small businesses to one lender’s eligibility criteria.”

Lastly, the court concluded that competing public interest factors and equities weighed against issuing any injunction. Issuing such a ruling “would have consequences reaching far beyond the litigants in this particular case,” particularly since multiple lenders have similar policies. Such a ruling would disincentivize lenders from participating in the voluntary PPP program, which would undermine the purpose of the CARES Act — “to maximize relief for American small businesses.” Moreover, the court found Bank of America’s argument that its eligibility policies allow it to more efficiently process loan applications to be “compelling.” The court recognized the hardships caused to plaintiffs by Bank of America’s policies. However, the court concluded that “given 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 14, 2020, the day after the district court issued its decision, the plaintiffs filed an interlocutory notice of appeal to the 4th U.S. Circuit Court of Appeals and an emergency motion for interlocutory relief pending appeal. On April 17, the district court denied the emergency motion.  The court first reiterated that there is no private right of action under the CARES Act, which should be fatal to the entire lawsuit.  The court also found there was no irreparable harm, particularly in light of new developments over the past week in which many new lenders offered the PPP loans and the funding for these loans was exhausted as of April 16.  The district court stated: “Plaintiffs had opportunities, through entities other than [Bank of America], to apply for PPP loans, and imposing an emergency stay at a point in which the PPP funding has been exhausted may have no practical effect whatsoever.”  Lastly, the court restated that issuing an injunction against the bank would cause the public much more harm than allowing the bank to continue its policy to quickly process the applications, which was akin to many other lenders’ policies.

This opinion is a significant victory for all lenders. The court is cognizant of the difficulties facing lenders in responding quickly to a flurry of legislative action arising from the COVID-19 pandemic.  This Maryland case, however, has not concluded. As for the appeal, even if the 4th Circuit affirms the District Court’s decision, the plaintiffs may seek to amend their complaint to try to establish standing for their putative class action, and the parties will still proceed with litigating the other causes of action. Moreover, this decision is not binding on district judges in the District Court, and even if the 4th Circuit affirms, that decision will not be binding on other appellate circuits. Lenders, unfortunately, should expect to see variations of these arguments within the next year as courts slowly start to reopen and plaintiffs develop their theories of the case. 

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.