Loan Applicants Lack Standing to Sue Lenders for Claimed Violations of the CARES Act

April 17, 2020

Key Takeaways

  • The CARES Act did not explicitly or implicitly give private plaintiffs a right to sue lenders for supposed violations of that statute.  
  • The Small Business Administration has primary responsibility for ensuring that lenders comply with the CARES Act and the Small Business Act. 
  • The CARES Act does not bar participating lenders from establishing additional, non-statutory criteria in connection with loan applications under the Paycheck Protection Program.  

In a matter of first impression, on April 13, 2020, the U.S. District Court for the District of Maryland held that the CARES Act does not give a private plaintiff a right of action against a potential lender to contest the denial of a loan under the Small Business Administration-administered Paycheck Protection Program (the “PPP”).1  The decision, which follows established and recent precedent interpreting the Small Business Act, indicates that even under the extraordinary circumstances presented by the COVID-19 pandemic, the federal courts will not second-guess Congressional determinations on how best to administer emergency loan programs.  
Background on the Paycheck Protection Program
The Paycheck Protection Program is a US$350 billion loan program created by the CARES Act.  In establishing the PPP, Congress intended to incentivize small businesses to keep their workers on their payroll.  Accordingly, the CARES Act amended the Small Business Act and directed the SBA to guarantee loans made by participating lenders to eligible small businesses for the purposes of maintaining payroll or paying rent, mortgages, or utility expenses.2  The loans, which carry a 1% interest rate, are forgivable so long as the loan is used for qualifying expenses.3  The CARES Act limits eligibility for PPP loans to businesses that were in operation as of February 15, 2020, and that had paid payroll taxes for employees or reported payments to independent contractors.4  Certain participating lenders required loan applicants to meet criteria that were not included in the CARES Act or the Small Business Act. 
The Profiles, Inc. Putative Class Action
Named plaintiffs Profiles, Inc., Proline Products, Inc. and others filed suit against Bank of America Corporation and Bank of America, N.A. (“Bank of America”), claiming that plaintiffs were improperly prevented from applying for PPP loans because they did not qualify under the bank’s non-statutory criteria.  The suit was brought on behalf of a putative class of businesses that were similarly restricted from applying for PPP loans, and Plaintiffs moved for the entry of a temporary restraining order or a preliminary injunction to bar Bank of America from imposing any conditions on PPP loans other than those expressly included in the CARES Act.  
Plaintiffs Lack Standing to Sue
The Court denied Plaintiffs’ motion for a TRO or preliminary injunction.  The Court held that, as a threshold matter, Plaintiffs lacked standing because the CARES Act does not create any right of action against lenders.  While the interpretation of the recently-enacted statute was an issue of first impression, the Court based its holding on precedent interpreting the Small Business Act. The Court found that nothing in the CARES Act or the Small Business Act indicated that Congress intended to supplement the civil and criminal enforcement provisions of the statutes to allow businesses to sue lenders directly.  To the extent any lenders are violating the terms of the CARES Act or the Small Business Act, the Court held that the primary authority to enforce those statutes lies with the Administrator of the SBA.
The Court’s Interpretation of the CARES Act
While the Court primarily addressed the question of Plaintiff’s standing, it also went on to address the merits of Plaintiffs’ claim that Bank of America’s imposition of non-statutory criteria for PPP loans violated the CARES Act.  Specifically, the Court held that, even if Plaintiffs had standing, their claim would fail because nothing in the plain text of the CARES Act indicated that Congress intended the statutory criteria to be exhaustive.  Indeed, the Senate expressly rejected a proposal to limit PPP lenders’ discretion to impose additional conditions.
Although the Court recognized that the COVID-19 pandemic has had a “pernicious” effect on many small businesses, Plaintiffs failed to show that Bank of America’s loan criteria was wrongful or prevented them from applying for, or securing, PPP loans from other lenders.  The Court also expressed concern that an order imposing new restrictions on lenders could “disincentivize” lenders from participating in the PPP.  Ultimately, the proper balancing of competing interests between borrowers and lenders is a legislative function.  As with the question of who should have standing to sue to enforce the terms of the CARES Act, the Court determined that “Congress is better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis.”  While the Court’s decision is not technically a final disposition on the merits because it merely denied Plaintiffs’ request for preliminary injunctive relief, the Court’s legal analysis does not hinge on the particular factual circumstances, and is unlikely to change materially as a result of further litigation.  
What’s Next
Plaintiffs have appealed the decision to the U.S. Court of Appeals for the Fourth Circuit, so that court may have the next word on the proper interpretation of the CARES Act. The District of Maryland's opinion is available here.
Profiles, Inc., et al. v. Bank of America Corp., et al., No. SAG-20-0894, slip op. (D. Md. Apr. 13, 2020).
CARES Act § 1102, Pub. L. 116-136 (Mar. 27, 2020).    
Id. § 1106.    
Id. § 1102.

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