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Lenders Gain Big Win Resisting MDL Consolidation in PPP Agent Fees Class Action Litigation

On August 5, 2020, the Judicial Panel on Multidistrict Litigation rejected consolidation of 62 class actions involving Paycheck Protection Program (“PPP”) loans under the federal Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in a multidistrict litigation (“MDL”).  These actions claim to represent a class of accounting firms (and other consultants) that allegedly worked as agents on behalf of applicants for PPP loans – typically small business clients. Plaintiffs contend the CARES Act and implementing regulations require lenders to pay them “agent fees” for preparing loan applications.

In these cases, Plaintiffs attempt to twist regulatory language establishing caps on agent compensation into an ironclad obligation for banks to pay agents – even if the bank never heard of the agent, did not know the agent was preparing a borrower’s application, or did not ask for the agent’s assistance.

A handful of groups of Plaintiff firms sued more than 133 banks and their holding companies in 62 class actions filed in 20 federal courts across the country. Over two-thirds of all actions were filed by just two groups of Plaintiff firms. Some attorneys sued the same defendants multiple times in the same states.

The Judicial Panel on Multidistrict Litigation comprises seven judges who decide whether to consolidate different cases from across the country in a single federal court as an MDL. The Panel held a hearing on the motion to transfer on July 30, 2020 after reviewing 350 pleadings filed on the docket.

Balch and Bingham attorneys Gregory C. Cook (Birmingham), L. Conrad Anderson, IV (Birmingham), and Tyler P. Bishop (Atlanta) authored a brief in opposition to the MDL on behalf of two Balch clients. Numerous other banks joined Balch’s brief. At the hearing, Mr. Cook argued on behalf of Balch’s clients as well as seven other banks.

The Panel rightly held there were no common questions of fact among the claims against each banks.

The Panel issued its decision denying consolidation in an MDL on Wednesday. This decision came just three business days after the hearing. The timing signaled a resounding rebuke from the Panel to the Plaintiff firms. In its ruling, the Panel correctly held the basic elements of an MDL were not met. MDLs require common questions of fact to exist between the cases and a showing that an MDL would be more efficient than allowing the cases to proceed individually. The Panel rightly held there were no common questions of fact among the claims against each banks.  Each claim would vary by alleged agent, by loan, by borrower, and by bank, as one Plaintiff counsel appeared to admit during the hearing. The Panel also held consolidation would not increase efficiency, reasoning that informal coordination between cases was achievable since the same Plaintiff firms filed most of the lawsuits, and this informal coordination would provide any needed efficiency.

The Panel’s ruling will likely have several practical effects. First, Plaintiff firms will likely be forced to reduce the total number of cases currently filed. It is difficult to see how the same Plaintiff firms can continue litigating so many separate actions, many of which have overlapping defendants. Some cases (and defendant banks) may be voluntarily dismissed. Second, because the cases will remain in local federal courts, the judges will soon rule on pending motions to dismiss in the coming months and dispose of additional cases and claims. For instance, it seems clear that there is no private right of action under the CARES Act.  Also, some banks are actually paying agent fees, even though there is no legal obligation to do so, contingent only on receipt of a completed SBA Form 159 and a W-9. This form is generally required for agent compensation in connection with an SBA Section 7(a) loan and should be equally applicable to the PPP.

Even if some claim were to survive past a motion to dismiss, it seems hard to imagine how a class could be certified.  The banks keep their records by borrowers – not by alleged agents.  Further each claim should vary by agent, by loan, and by borrower.  For instance, did the defendant bank even know that an agent was involved; was there ever a demand by the agent; did the borrower agree that the alleged agent was its agent; did the bank ever agree to pay a fee; what work (if any) was done by the alleged agent; was the alleged agent paid by other means.

It appears that the fastest resolution of these cases would come from Congress or the SBA

It appears that the fastest resolution of these cases would come from Congress or the SBA clarifying that the banks do not owe fees to the agents of borrowers or that the SBA Form 159 is required, or reaffirming that agent fees are not mandatory. This clarification may be forthcoming. In testimony before the House Financial Services Committee on June 30, 2020, Secretary of the Treasury Steven Mnuchin reaffirmed that “[Treasury] guidance [said] that banks could pay agent fees out of the fees that they received. That was intended to be based upon a contractual relationship between the agent and the bank.”

While defeating the MDL was a big victory for banks, the battle is not over. Banks should remain vigilant in defending against any remaining or new class actions. Please contact Gregory C. Cook if you have questions.