Bad news for plaintiffs in CARES Act cases? A federal court just ruled lenders don't have to pay PPP agent fees
The case was among the first of at least 50 pending around the country raising the same issue.
A federal district court judge just made one of the first major decisions in litigation over agent fees under the Paycheck Protection Program.
And agents for borrowers likely won’t be happy.
This case is significant because it was the first of at least 50 cases pending around the country raising the same issue, since the Judicial Panel on Multidistrict Litigation denied a motion to transfer these cases into a single MDL proceeding.
The decision came from the U.S. District Court for the Northern District of Florida, which ruled that the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, “does not require lenders to pay the agent’s fees absent an agreement to do so.”
The CARES Act, a $2.2 trillion economic stimulus bill signed into law in March 2020, provided small businesses with funds to pay up to eight weeks of payroll costs, including benefits.
No federal avenues/?
In the Florida litigation, plaintiff Sport & Wheat CPA alleged Servisfirst Bank did not pay about $4,500 in agent fees.
The small accounting firm claimed it had compiled borrower information that the bank had used for the PPP. But without a written agreement between the agent or the borrower and the lender, the court denied that the accounting firm was entitled to the requested agent fees.
Now, Graham Ryan, a partner at Jones Walker in New Orleans, said the district court’s decision provided insight into how federal courts are likely to interpret the CARES Act, which could have billion-dollar implications for pending cases.
“This decision continues a trend of chipping away at the ability of private litigants to sue lenders under federal law,” said Ryan, who is not involved in the Florida litigation. “Going forward, it will create or force a more heavy reliance on state law claims.”
‘Courts are picking apart the CARES Act’
In Florida, U.S. District Judge T. Kent Wetherell found that the CARES Act mandated that the Small Business Administration reimburse the lender authorized to make the loan, and detailed the amount that a lender would be compensated as a fee for brokering the loan.
The judge found the CARES Act also provides that an agent who assists in the loan application process may not “collect a fee in excess of the limits established” by the SBA.
The district court’s order dismissing the plaintiff’s amended complaint cited the total amount that an agent may collect, which is 1% for loans less than $350,000, 0.50% for loans of more than $350,000 and less than $2 million, and 0.25% for loans over $2 million.
In the order, Wetherell stated that Section 7(a) of the Small Business Act required an agent to execute a compensation agreement on SBA Form 159, specifying the portion of the agent fee to be paid by the borrower and the lender.
But neither Sport & Wheat nor the borrower filed the form, nor did Sport & Wheat have an agreement with the lenders regarding their claimed agent fees. Based on that omission, the court held that the lenders had no legal obligation to pay any agent fees.
The court also dismissed the plaintiff’s state law claim of unjust enrichment based on similar reasoning. It also dismissed the state law claim based on conversion and contract implied in law, because the plaintiff failed to allege any direct benefits conferred on the lenders, finding that the fees the lenders earned were only indirect benefits.
Ryan said this court opinion means people cannot view the CARES Act in a vacuum.
“You have to look at it in the context of a broader regulatory scheme under the SBA,” Ryan said. “Now, we have more insight with this opinion of how courts are picking apart the CARES Act and the regulations, and how they are going to rule in future cases under this line of thinking.”
READ MORE: