CLIENT ALERT
By: Michael Stanley
April 27, 2020
The Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116–136 (“CARES”), and in particular the Paycheck Protection Program (“PPP”) has been viewed as a lifeline for small business struggling with cash flow during the COVID-19 pandemic. Its purpose is “to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.” If used for authorized purposes, the federal government will forgive the loan principal, which, under CARES would not be a taxable event. It is no wonder that the $349 billion originally allotted as PPP funds were exhausted in 13 days and countless applicants did not receive any PPP funds.
But what if the lender failed to properly process PPP applications or prioritized applicants giving preference to those with whom it had a significant banking relationship, potentially placing smaller businesses at the end of the line. Does CARES provide private entities or individuals with the right to enforce it and the PPP’s statutory terms? A recent decision from the Federal District Court for the District of Maryland says the answer is no. But that may not be the end of the inquiry.
CARES and the PPP’s Statutory Structure
CARES was enacted to “to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.”[1] To achieve this goal, CARES authorized the Small Business Administration to modify existing loan programs and establish new loan programs to assist small business reeling from the COVID-19 emergency. As part of this authority, CARES established the PPP under the Small Business Act, 15 U.S.C. § 636. On April 2, 2020, the Administrator of the Small Business Administration issued an Interim Final Rule regarding the implementation of the PPP.
CARES sets forth PPP eligibility requirements. Lenders “shall consider” two conditions for lending PPP funds. First, the applicant must have been “in operation on February 15, 2020.” Second, the applicant must have “had employees for whom the borrower paid salaries and payroll taxes,” or “paid independent contractors.” Id. § 1102(a)(2). The Interim Final Rule sets forth reasons why a potential borrower would be ineligible for a PPP loan. Neither CARES nor the Interim Final Rule define how a lender must process PPP loan applications.
Implied Right of Action?
But what happens when a loan applicant alleges that the lender fails to properly process a PPP loan application? That is what the class plaintiffs in Profiles, Inc. v. Bank of America, N.A., 20-cv-00894-SA (D. Md.) alleged, claiming that Bank of America prioritized customers or refused to accept PPP applications from applicants with whom it did not have an existing borrowing relationship or where the applicant had a borrowing relationship with another lender. The class plaintiff claimed these internal bank rules violated CARES because it added eligibility requirements not in the Act and sought an injunction to stop these practices.
While the court eventually reached the merits of this dispute, concluding that Bank of America did not violate CARES, because CARES’ “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 accept,” the interesting part of the court’s opinion was its evaluation of whether CARES actually allows private individuals to sue in the first place.[2] The court found no private right of action—resting its ruling on three factors: (1) the CARES Act statutory provisions; (2) the placement of the PPP program in the Small Business Act; and (3) rejecting use of 42 U.S.C. § 1983 as a private remedy.
First, the Court noted that CARES does not contain an express private right of action. This fact is important, where a statute does not contain an express private right of action, a private right of action will be implied only when Congress’ intent to do so is clear.[3] The focus is not just on Congress’ establishment of a right, but on the existence of a remedy.[4] In reviewing the language of the CARES Act, the Court found no language to support an implied private right of action.
Second, the Court found that the PPP’s placement within the Small Business Act further undermined any claim that CARES can be privately enforced because “no private right of action exists for a violation of the [Small Business] Act or the regulations.”[5] Additionally, by placing the PPP under the authority of the Small Business Administration, the “Administrator has authority to institute a civil action against lending companies for violations of the Small Business Act, which ‘tend[s] to contradict a congressional intent to create privately enforceable rights.’”[6]
Third, the Court reviewed whether any other statute, particularly 42 U.S.C. § 1983 could be used as a means to enforce the PPP and provide a remedy. It rejected the notion for two reasons. First, enforcement through 42 U.S.C. § 1983 is not the same as a private right of action to directly enforce the statute.[7] To enforce 42 U.S.C. § 1983 other factors must be present. That leads to the second point, 42 U.S.C. § 1983 cannot be used to enforce the PPP because private lenders that process PPP applications are not state actors.[8] Accordingly, 42 U.S.C. § 1983 provides no remedy for a violation of CARES.
CARES Violations as Evidence of Other Causes of Action
If it feels like lenders have been down this road before, it’s because they have. In 2009, Congress passed the Emergency Economic Stabilization Act.[9] This act created the Troubled Asset Relief Program (“TARP”), which allowed the Secretary of the Treasury to create a program to minimize foreclosures. From TARP came the Home Affordable Modification Program (“HAMP”), which required banks and mortgage servicers who received TARP funds to review distressed borrowers for loan modification using certain criteria. From the get go, borrowers claimed that mortgage servicers failed to properly process HAMP applications and sought to enforce HAMP through the courts—a fight that continues eleven years later.[10] Courts, however, refused, and almost immediately held that there was no private right of action under HAMP.[11] These rulings did not stop creative plaintiffs. Instead of bringing claims directly under HAMP, plaintiffs brought common law and consumer protection claims using noncompliance with HAMP asevidence of liability. These theories gained traction and HAMP violations could be used as evidence of common law liability and violation of G.L. c. 93A.[12]
Expect CARES plaintiffs to make similar arguments. For instance, interactions, representations, promises made by lenders’ representatives during the application process regarding eligibility, funding, and size of PPP loan could be used by plaintiffs to support breach of contract, fraud, negligent misrepresentation, and G.L. c. 93A claim. Additionally, statements regarding the use of the loan fund vis-à-vis loan forgiveness could also prove to be a claim.
Put simply, it appears that CARES may be the new HAMP and lenders could be regularly brought to court to justify its handling of PPP applications.[13] Time will tell if this bears out.
[1] Interim Final Rule, 13 C.F.R. Part 120.
[2] Profiles, Inc. v. Bank of America, N.A., 20-cv-00894-SA slip op. at 14-15 (“Order”).
[3] Order at 7.
[4] Id.
[5] Bulluck v. Newtek Small Bus. Fin., Inc., No. 19-10238, 2020 U.S. App. LEXIS 9509, at *7-8 (11th Cir. Mar. 27, 2020)
[6] Order at 12 (citing Sandoval, 532 U.S. at 289–90) (explaining that a separate enforcement regime “tend[s] to contradict a congressional intent to create privately enforceable rights”).
[7] Order at 9-10.
[8] Id.
[9] 12 U.S.C. §§ 5201, et seq.
[10] See Jeanty v. Deutsche Bank Nat. Tr. Co., 2020 U.S. Dist. LEXIS 51756 *17 (D.N.H. Mar. 24, 2020); Grundy v. HSBC Bank United States, No. 17-11449-PBS, 2020 U.S. Dist. LEXIS 51402, at *90 (D. Mass. Feb. 10, 2020).
[11] See Markle v. HSBC Mortg. Corp.(USA), 844 F. Supp. 2d 172, 184 n.12 (D. Mass. 2011) (collecting cases)
[12] See In re Bank of Am. Home Affordable Modification Program (HAMP) Contract Litig., No. 10-md-02193-RWZ, 2011 U.S. Dist. LEXIS 72079, at *12 n.4 (D. Mass. July 6, 2011) (even though HAMP did not contain a private right of action, this fact did not “foreclose” common law causes of action based upon HAMP violations); Morris v. BAC Home Loans Servicing, L.P., 775 F. Supp. 2d 255, 259 (D. Mass. 2011) (violations of HAMP that are unfair and deceptive can violation G.L. c. 93A).
[13] Indeed, numerous class actions have already been filed against the nation’s largest banks alleging that they violated CARES and the PPP, the Small Business Act and conducted unfair and deceptive business practices in handling PPP applications. See Outlet Tile Center v. JPMorgan Chase & Co. et al. 20-cv-03603 (C.D. Cal. filed on Apr. 20, 2020); Law Office of Sabrina Damast, et al. v. Bank of America et al, 20-cv-03591 (C.D. Cal. filed on Apr. 19, 2020); Cyber Defense Group, LLC, et al. v JP Morgan Chase & Co . et al., 20-cv-03589 (C.D. Cal. filed on Apr. 19, 2020); See Law Office of Irina Sarkisyan, et al. v. U.S. Bancorp . et al., 20-cv-03590 (C.D. Cal. filed on Apr. 19, 2020); BSJA, Inc. v. Wells Fargo & Co. et al, 20-cv-03591 (C.D. Cal. filed on Apr. 19, 2020); Scherer v. Frost Bank, 20-cv-01297 (S.D. Tex. filed on Apr. 12, 2020); Scherer v. Wells Fargo Bank, N.A., 20-cv-01295 (S.D. Tex. filed on Apr. 12, 2020).