Lawsuit by professionals seeking a cut of PPP money is tossed

Congress' emergency COVID-19 relief package does not create an entitlement for professionals who helped process loan applications to collect agent fees from lenders, a federal judge ruled Monday.

Earlier this year during the onset of stay-at-home orders, a proposed class of professionals -- attorneys, loan brokers, accountants and consultants -- sued banks for a cut of fees for the work they did helping borrowers process applications, which include tax preparation, legal advising, consulting and accounting services. The borrowers were small businesses seeking loans under the Coronavirus Aid, Relief and Economic Security Act which passed March 27. American Video Duplicating Inc., Tush Law LTD et al. v. Citigroup Inc. et al., 2:20-CV-03815 (C.D. Cal., filed April 27, 2020).

On Monday, U.S. Judge Otis D. Wright II of the Central District of California tossed out the lawsuit but gave the professionals a chance to amend their claims. Wright made several points about the plaintiffs' claims, stating that the complaint does not inform any defendant of its particular role in the alleged general harm.

In court papers, the professionals and lenders disagreed over the interpretation of the Small Business Administration's interim final rule that provided guidance on the administration of Paycheck Protection Program loans.

The federal agency's rules stated the loan agents would be paid by a lender out of fees it gets from the federal government and couldn't collect from borrowers or the government.

An existing section of the loan program initially stated parties have to agree on agent fees using a Fee Disclosure and Compensation Agreement, also known as Form 159.

The Small Business Administration's interim final rule, added April 15, said the program requirements of the PPP in the interim rule temporarily superseded any conflicting loan program requirements.

The interim final rule focuses on the question of who pays fees to an agent who helped a borrower. The question before courts the last several months was whether the interim final rule conflicts with the existing requirement that a Form 159 must be completed and submitted to the federal agency, Wright reasoned.

"From this language arises the central issue in this case: whether the Interim Final Rule calls for payment of agent fees on all PPP loans, thereby superseding the existing Section 7(a) requirement that agent fees be designated in a Form 159," Wright wrote. "This precise question has sparked over 50 similar lawsuits across the country with plaintiffs alleging agent fees under the PPP."

Each judge who had this question before them ruled the CARES Act did not require lenders to pay fees without an agreement to do so, "nor does it create a corresponding private right of action," Wright ruled. "The court sees no reason to depart from these conclusions."

Wright said he agreed with the other courts that decided Form 159 did not conflict with the interim final rule because nothing in the rule stops the SBA from requiring the use of the form or disclosure of agent fees. The form is to be used whenever a professional is paid by the borrower or the lender in connection with the small business loan application, other courts have decided.

"Indeed, the fact that the PPP lender application form asks whether the lender used an agent to assist with the application -- in a system where agent fees can only be recovered from lenders, not borrowers -- shows that the SBA contemplated certain PPP loans would not involve agent fees," Wright wrote.

Michael Adler, a partner at Graylaw Inc. who represents the proposed class, said Monday he would file an amended complaint, stating that SBA rules have changed overtime, which will show his clients had an agreement with borrowers where the borrower would pay the agent fees for PPP loans which will then be paid by the lenders.