Supreme Court Update for Banking and Financial Services Professionals
by Charles W. Prueter
Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) one year ago this month, creating — among other stimulus programs — the Paycheck Protection Program (PPP). And like many other aspects of our lives over the past year, that which was intended to address a temporary emergency has turned into a longer-term proposition. As readers will recall, the PPP was designed initially to provide emergency assistance to small businesses (and, in turn, their employees) facing financial hardship as a result of the then-emergent pandemic. Because of all the havoc wrought by the virus, the PPP soon nearly doubled in size — going from $350 billion in funding to $670 billion in April, which lasted through the summer. Several PPP tweaks later, the American Rescue Plan (ARP), which has passed in House and now sits before the Senate, would provide billions more to businesses through similar programs.
Although the PPP has not yet made its way to the Supreme Court, don’t count it out. The creation of the PPP — a newfangled lending program for many of the financial institutions that participated in it — resulted in a flood of litigation. Here’s why.
An expansion of the Small Business Administration’s “7(a)” loan program, the PPP required private lenders to process and disburse the loans. Indeed, under the PPP, the lender — not the SBA — maintained responsibility for reviewing the applications, determining borrowers’ eligibility, and providing the capital to fund loans to small businesses. Provided that the lenders received the specified documentation and properly funded the loans, the loans are “100 percent guaranteed by the SBA, and the full principal amount of the loans may qualify for loan forgiveness.”
Although lenders were not allowed to accept fees from PPP borrowers, the CARES Act created a mechanism to compensate lenders who participate in the PPP. The PPP also contemplated some borrowers’ uses of “agents” to assist with applications. According to SBA guidance, an “agent” is “an authorized representative” and may be, for example, an attorney, an accountant, a consultant, or a broker.
A flurry of lawsuits ensued. Plaintiffs’ lawyers filed dozens of complaints in federal district courts around the country against all the banks they could find, alleging that the banks had improperly refused to pay “agent fees” to the accountants, consultants, et al. who had helped borrowers obtain PPP loans.
Some banks already were paying the so-called agent fees, making the lawsuits against them especially frivolous. Regardless of that key circumstance, all the federal judges to have considered the fundamental issue — Do the plaintiffs have an absolute right to receive “agent fees” from the banks? — have rejected the claims and dismissed the cases. First, the PPP did not create a private cause of action for plaintiffs in the first place. And even if such a cause of action existed, the overwhelming view of the federal courts has been that, absent an enforceable agreement between the purported agent and lender to pay agent fees, lenders are not obligated to voluntarily pay agent fees under the text of the CARES Act or the PPP regulations. See, e.g., M&M Consulting Grp., LLC v. JP Morgan Bank, N.A., 2021 WL 71436, at *6 (C.D. Cal. Jan. 6, 2021) (“Accordingly, the Court holds that, absent an agreement between agent and lender pursuant to the traditional Section 7(a) guidelines, lenders are not required to pay agent fees under the text of the CARES Act or its implementing regulations.”); Lopez v. Bank of Am., N.A., 2020 WL 7136254, at *7 (N.D. Cal. Dec. 4, 2020) (“[T]he PPP statute itself simply does not provide for the affirmative payment of agent’s fees. It merely establishes that there can be a ceiling on the amount of such fees if they are collected.”); Leigh King Norton & Underwood, LLC v. Regions Fin. Corp., 2020 WL 6273739, at *7 (N.D. Ala. Oct. 26, 2020) (“This language does not provide that anyone—the lender or the Administrator—must pay fees to agents that assist eligible recipients.”); Johnson v. JPMorgan Chase Bank, N.A., 2020 WL 5608683, at *7 (S.D.N.Y. Sept. 21, 2020) (“[A]gents are only entitled to receive fees for their work in connection with securing a loan where they first execute a ‘compensation agreement’ signed by the lender, agent, and applicant.”).
Although this iteration of the flood will almost assuredly not reach the Supreme Court because of the overwhelming uniformity of decisions in the district courts, further changes to the program could result in additional obligations or alleged obligations that prompt new lawsuits.
The SBA’s policy of excluding certain businesses from the PPP also resulted in litigation this past year. In In re Gateway Radiology Consultants, P.A., the Eleventh Circuit deferred to the SBA’s interpretation of the PPP that a debtor in an ongoing bankruptcy proceeding would not be entitled to relief.
In Gateway, the plaintiff applied for a PPP loan despite its status as a debtor in an active Chapter 11 bankruptcy proceeding. Because Gateway’s application paperwork failed to disclose this fact, a credit union agreed to make the loan, to be guaranteed by the SBA. When Gateway sought permission from the bankruptcy court to take on this new debt, the SBA filed an objection on the grounds that Gateway should not have received the loan under the SBA’s regulations. But the bankruptcy court declared that the SBA’s interpretation of the PPP was invalid, and it ordered the SBA to guarantee Gateway’s loan if Gateway otherwise met all other requirements notwithstanding its status as a current bankruptcy debtor.
On appeal, the Eleventh Circuit reversed, according deference to the SBA’s interpretation of the PPP and holding that the SBA had not acted arbitrarily and capriciously. Upholding the exclusion of bankrupt debtors from the PPP, the court pointed to a pre-PPP statutory requirement that loans “be of such sound value or so secured as reasonably to assure repayment.” In other words, given this basis, it was reasonable for the SBA to promulgate a rule excluding bankruptcy debtors from the program.
The Eleventh Circuit’s conclusion as to the SBA’s rulemaking authority arguably conflicted with that of an earlier district court case in DV Diamond Club of Flint, LLC v. U.S. SBA, which came out of the federal court in the Eastern District of Michigan. In DV Diamond Club, a group of sexually oriented small businesses sought a preliminary injunction against the SBA, asking a court to declare invalid the SBA’s rule for PPP eligibility that barred sexually oriented businesses from receiving guaranteed loans. Employing logic that differed in part from the Eleventh Circuit’s analysis, the district court found that both the text and surrounding context of the PPP unambiguously foreclosed the SBA’s ineligibility rule barring PPP loan guarantees to sexually oriented businesses. The district court reasoned that Congress established “only two criteria that a business concern must satisfy to qualify for loan guarantee eligibility: (1) during the covered period (2) it must have less than 500 employees or less than the size standard in the number of employees established by the Administration for the industry in which the business operates.” It further reasoned that, because the same language mandated that the SBA “shall” guarantee the loan to “any” business where those criteria are met, the statute’s text unambiguously foreclosed the SBA’s ability to create any exceptions through regulation.
If any of these or other PPP issues do make it to the Supreme Court, the Update will cover them.
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at charles.prueter@wallerlaw.com.
