Good News on PPP Lender Liability for Agent Fees: What You Need to Know

COVID-19 Update

A panel of judges has now made it far more likely that a recent wave of class action litigation will be resolved without huge litigation costs for lenders. In this post, we explain why.

What happened

The COVID-19 crisis has spurred litigation across the country arising from pandemic-related events. The plaintiffs’ class action bar thought they found an opening for litigation after Congress passed the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help small businesses and their employees suffering from COVID-19-related closures. Under the CARES Act, Congress appropriated billions of dollars for forgivable small business loans under what it named the Paycheck Protection Program (PPP).

Starting in April 2020, plaintiffs began filing putative class actions across the country alleging that lenders throughout the banking industry refused to pay (or only partially paid) what plaintiffs maintain are mandatory “agent fees” owed to “agents” (e.g., accountants and financial consultants) who somehow assist small businesses in applying for loans under the PPP. In total, there are now several dozen such filings in at least 30 different U.S. district courts, from Hawaii to Florida, from Illinois to Texas, and in numerous states in between.

One set of lawyers who filed a dozen or more of these actions then filed a motion to transfer all similar cases (on an industrywide basis) to a single federal district court. Nearly all lender defendants opposed the motion. The named defendants who challenged consolidation before the Judicial Panel on Multidistrict Litigation (JPML) represented hundreds of PPP lenders big and small, including numerous community, regional and nationwide banks—two of which supported centralization (one for the entire industry, another for itself alone). The opposing defendants also argued that if centralization was ordered over their objections, any single multidistrict litigation (MDL) should be lender-specific and established only for the largest or most frequently sued lenders.

The JPML heard oral arguments on July 30, 2020, and the panel questioning took note of the difficulties in accomplishing what plaintiffs sought to do. The movants were largely uniform as to their reasoning for why they felt consolidation was appropriate, differing only as to their preferred transferee district(s)—including the District of Arizona, Northern District of California, Southern District of Florida, Northern District of Illinois, Southern District of New York, Southern District of Ohio, District of South Carolina and Western District of Washington—and with most opposing lender-specific MDLs. One counsel for plaintiffs opposed consolidation.

It took just a week for the panel to decide. On August 5, 2020, the JPML rejected the hotly contested bid to consolidate several dozen PPP putative class actions pending in nearly 30 federal districts into a single MDL.

In its order denying consolidation, the JPML rejected the motion, ruling that while “[t]he actions undoubtedly allege similar policies and practices by the defendant banks”—for example, whether the defendant banks were obligated but failed to pay agent fees under the CARES Act— “[t]he actions involve dozens of different lenders, and there is no common or predominant defendant across all actions.” Consequently, the panel found that “[c]ommon factual questions are lacking, as the policies and practices for paying agent fees are unique to each lender which differ significantly across the actions” and that “[t]he vast majority of defendants are named in only one action, further indicating a lack of common questions of fact.” In other words, according to the panel, the existence of a “central common legal issue in these actions—whether agents have a legal entitlement to agent fees under the CARES Act or implementing regulations—alone is not enough to merit consolidation of PPP litigation as an MDL under 28 U.S.C. § 1407.

The JPML also held that “lender-specific MDLs would create significant inefficiencies” despite the existence of “some common factual questions” on a “lender-specific basis” because doing so “would require extensive separation and remand of claims to ensure that (1) the claims against the various lenders are transferred to the correct MDL, and (2) the claims against unrelated lenders are simultaneously separated and remanded to their transferor courts.” The JPML concluded that this would “have the effect of significantly multiplying the number of judges presiding over the claims in a single action” and thus would “diminish, rather than enhance, efficiencies.”

Lastly, the panel noted there are several “[a]lternatives to centralization available to minimize duplicative pretrial proceedings” and to promote efficiency, such as consolidating multiple PPP actions pending in a single district before a single judge, which has already occurred in some instances, or informal coordination between the parties.

To read the panel’s decision, please click here.

Why it matters

The ruling effectively prevents plaintiffs from leveraging a single ruling or the litigation delays common with MDL proceedings to force defendants into cost-of-defense settlements that will only enrich the plaintiffs’ bar.

Perhaps Congress, Treasury or the Small Business Administration will make even more clear what was plainly intended by the CARES Act itself: Agent fees are paid, if at all, only when all the parties (applicant, agent and lender) have agreed to them in advance. This is consistent with federal laws and regulations governing small business loans under Section 7(a) of the Small Business Act, and nothing in the CARES Act provides otherwise.

The COVID-19 pandemic has been a hardship for everyone on many levels, there is no immediate end in sight, and it will surely continue to spawn a wide variety of litigation across many business sectors, particularly in the financial services industry. PPP agent fee litigations will now be heard wherever they are filed and, given the overall scale, may take many more months to be resolved, probably by motions to dismiss but certainly on summary judgment. Stay tuned.

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