CARES Act Litigation: Stimulus Bill Decimates Agent Fee Class Action Lawsuits

COVID-19 Update

In its recent passage of the 2021 stimulus bill, Congress may have vanquished the last hopes of the plaintiffs’ bar seeking to require Paycheck Protection Program (PPP) lenders to pay agent fees for accountants in a wave of putative class action lawsuits. Assuming the bill becomes law, the legs of the pending PPP agent fee class actions will likely be knocked out from under them. We explain why below.

What Happened

In March 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in direct response to the COVID-19 pandemic. One component of the CARES Act was the PPP loan program, a large-scale stimulus of forgivable loans made broadly available to smaller businesses.

Lenders were invited to participate in the PPP lending platform, which was bolted onto preexisting lending processes developed by the Small Business Administration under its Section 7(a) loan program. Under Section 7(a) as modified by the CARES Act, lenders were entitled to receive a lender’s fee for closing the loan, and lenders or applicants could employ agents to assist them, with agent fees paid by the lender if the parties contracted to do so prior to loan closing.

Never one to miss an opportunity, however, plaintiffs’ class action lawyers quickly filed suits alleging that banks were wrongfully prioritizing their own customers in processing PPP loan applications. As we previously reported, in a second wave of class actions, many of the same lawyers filed suit on behalf of alleged agents for PPP applicants alleging that lenders were wrongfully depriving them of agent fees for assisting applicants to secure the PPP funds. But these agents were largely undisclosed ones, and the lenders defended these suits by noting the absence of any agreement to compensate them, among other defenses.

None of the suits have been successful to date. Federal district courts across the nation have universally and broadly rejected the lawsuits on a variety of grounds, including that the federal statute provides no private right of action. Further, the courts have concluded that, even if the statute provided standing, the law does not require agents to be paid if they have not first contracted with the lender to do so.

And yet numerous suits still remain, and the plaintiffs’ bar is taking some of the dismissals up on appeal, including some consolidated litigation pending in the Second Circuit.

If the President signs the $2.3 trillion Consolidated Appropriations Act, 2021 (Act), which includes about $900 billion in additional stimulus funds for the economy set forth in the separately titled Coronavirus Response and Relief Supplemental Appropriations Act, 2021, it will likely include the PPP provisions Congress passed.

For lenders intending to participate in the next round of PPP lending, the Act contains helpful language for lenders on agent fees in the form of amendments to the Small Business Act. Section 7(a)(36)(P)(ii) of the Small Business Act (15 U.S.C. 636(a)(36)(P)(ii)) is amended by adding at the end the following:

“If an eligible recipient [that is, the SBA loan applicant] has knowingly retained an agent, such fees shall be paid by the eligible recipient and may not be paid out of the proceeds of a covered loan. A lender shall only be responsible for paying fees to an agent for services for which the lender directly contracts with the agent.”

Further, Congress makes explicit that the change is intended to have retroactive effect:

“EFFECTIVE DATE; APPLICABILITY.—The amendment made by paragraph (1) shall be effective as if included in the CARES Act (Public Law 116–136; 134 Stat. 281) and shall apply to any loan made pursuant to section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) before, on, or after the date of enactment of this Act, including forgiveness of such a loan.”

In other words, Congress is making clear three things: (1) accountants may now ask their customers to pay reasonable agent fees that meet Small Business Act 7(a) requirements; (2) lenders have no obligation to pay agents unless they have contracted with them to do so, and, critically here, (3) this provision applies retroactively to the March 27 enactment of the CARES Act. As a result, whatever cases remain should now be dismissed, as Congress has spoken, and with clarity.

Why It Matters

The clarifications to the Small Business Act should logically be the final nail in the coffin for the hopes of plaintiffs’ class action lawyers seeking reimbursement for accountants and others that are alleged to have assisted PPP applicants. Likewise, the amendment plainly undermines plaintiffs’ baseless legal theories that somehow placed on lenders the onus to pay undisclosed agents or, even where disclosed, those that assisted borrowers without seeking an agreement from the lender to pay agents out of their own proceeds.

Plaintiffs’ lawyers will doubtless try to persuade judges of the seeming inequity in having borrowers pay agents when the original CARES Act made agent fees, where established, payable from lender fees alone. While there is traditionally a common law presumption against retroactivity, we expect courts to apply the language with full retroactive effect because Congress said so expressly. Likewise, we expect the statute will survive the usual constitutional challenges (due process, takings, contract clause).

Manatt’s financial service practitioners are currently advising numerous clients on PPP lending matters, including with respect to compliance as the program restarts in 2021. If you have any questions on this topic, please contact the authors or any other member of the team.

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