Federal Court: PPP Loan Applicants Can’t Sue the Bank over PPP Rules

by Brian Malcom

With the promise of low-interest or no-interest loans, and even the possibility of loan forgiveness, small businesses rocked by COVID-19 have recently turned to banks to apply for federally guaranteed funds. These funds are vital to many small businesses in order to help them stabilize their financial health during the widespread economic fallout from the pandemic. They are seeking these funds under the recently enacted CARES Act.

On March 27, the president signed into law the CARES Act, H.R. 748, P.L. 116-136, “to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.” The purpose of the CARES Act is to provide “immediate assistance to individuals, families, and businesses affected by the COVID-19 emergency.”

Section 1102 of the CARES Act, entitled “Paycheck Protection Program,” also known as the PPP, authorizes participating lenders to make general business loans available to eligible recipients in order to cover payroll and other expenses. CARES Act § 1102(a)(2), (b)(1). The PPP loans are federally guaranteed up to a maximum amount of $10 million and might be forgiven if the businesses meet certain conditions centered around encouraging businesses to maintain jobs and salaries for employees.

Congress allocated $349 billion for the PPP, but businesses quickly exhausted this pot of money during the first round. The small business PPP loan applicants that did not receive PPP funds were left frustrated and looking for someone to blame. If lawsuits are any indication, some businesses are blaming their bank.

One federal court recently considered an issue that will likely impact many lawsuits in the near future: whether Congress intended to provide a private right of action to allow for businesses to sue lenders under the CARES Act.

Profiles, Inc. filed a putative class action complaint against Bank of America Corp. alleging that BofA wrongfully imposed additional restrictions on borrowing under the PPP beyond those restrictions expressly mentioned in the CARES Act . The federal district judge denied the plaintiff-applicant’s motion for a TRO and held that “the CARES Act does not expressly provide a private right of action.”

The court also considered whether Congress intended for the statute to have an implied private right of action. In doing so, the court examined whether Congress intended to create both a private right for an applicant and a private remedy. The plaintiffs failed to convince the federal court that Congress intended to create a private right of action for applicants under the CARES Act.

In her memorandum opinion, the federal judge noted that the portion of the CARES Act containing the PPP amended the Small Business Act.  The court acknowledged that the issue of whether the CARES Act contained a private right of action was a matter of first impression, but she noted that courts have previously held that the Small Business Act does not contain an implied private right of action.

The court’s holding on the issue of whether applicants under the PPP have a private right of action signaled a strong defense for banks against PPP lawsuits in federal court, but it also warned all parties to stay tuned while acknowledging its own limitations under the Constitution.

The opinion reads:

“The plain language of the statute does not suggest an intent to confer the particular right alleged, nor a private remedy against participating [Small Business Act] lenders. To the extent Congress intends to create such a private right of action, it will be able to make its intent clear, if it ultimately amends the CARES Act, as is widely anticipated. Creation of that remedy, however, is not within the purview of this Court.”

For now, banks should seek dismissal of claims alleging violations of the PPP in federal court. Banks should also prepare for battle in state courts, as plaintiffs will likely seek to file claims in those courts to frustrate dismissal efforts.

Wells Fargo is now facing a putative class action from business owners in a federal court in Texas. The plaintiffs allege that Wells Fargo’s policy of allowing only its preexisting customers to apply for a PPP loan from the bank violates the CARES Act, and the plaintiffs seek injunctive relief. Wells Fargo, along with JP Morgan Chase, US Bank, and PNC Financial Services Group Inc., all face lawsuits alleging violation of the PPP rules in various courts throughout the nation. In these suits, plaintiffs are seeking monetary damages and to enjoin the conduct by the banks.

Brian Malcom is a partner at Waller Lansden Dortch & Davis LLP in Birmingham. Representing banks, lenders, financial institutions, and healthcare firms in litigation matters, Brian constantly seeks to insulate clients from liability, while minimizing the impact on their operations. Clients depend on Brian’s analytic abilities to resolve commercial disputes related to financial products liability, contractual agreements, and other business issues.