PPP Litigation Update: Lender Relief on Agent-Fee Disputes
Congress has weighed in with another sign of relief for Paycheck Protection Program (PPP) lenders embroiled in court battles over agent-fee disputes by clarifying that no such fees are owed by lenders in the absence of a contract. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), signed into law December 27, 2020, now clarifies that, retroactive to March 27, 2020, a PPP “lender shall only be responsible for paying fees to an agent for services for which the lender directly contracts with the agent.”
Following the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, agent-fee lawsuits quickly became the fastest-growing category of PPP litigation in federal courts across the US and were poised for consolidation in multidistrict litigation.
PPP agents, such as accountants, who assisted a lender with originating and preparing a PPP loan application, filed lawsuits claiming that lenders unlawfully withheld fees owed to them for assisting in the application process. Many agents lacked a written agreement with lenders regarding compensation, and many banks took the position that no compensation is due in the absence of a written agreement. Agents, however, contended that the CARES Act and the Small Business Administration’s (SBA) 7(a) loan program entitled them to fees even in the absence of a written agreement. Agents specifically pointed to the SBA interim final rule, which establishes the maximum fee an agent may collect from a lender, and to the PPP information sheet for lenders (PPP ISL), which provides, in part, that “[a]gent fees will be paid out of lender fees.”
Courts have consistently ruled in favor of lenders on the issue. For example, in Am. Video Duplicating Inc., No. 20-03815 (C.D. Cal. Nov. 16, 2020), a federal district court in California held that “the CARES Act does not create an entitlement or private right of action to collect agent fees.” See also Sport & Wheat, CPA, PA, No. 20-05425 (N.D. Fla. Aug. 17, 2020) (the first major decision in agent-fee litigation, in which a federal district court in Florida held that the CARES Act and its implementing regulations do not require lenders to pay a portion of the loan processing fees they receive from the SBA to agents that helped borrowers obtain PPP loans); Sanchez, PC v. Bank of S. Tex., No. 20-00139 (S.D. Tex. Oct. 14, 2020); and Johnson, No. 20-4100 2020 (S.D.N.Y. Sept. 21, 2020).
The Economic Aid Act specifically amended Section 7(a)(36)(P) of the Small Business Act (15 U.S.C. 636(a)(36)(P)) to provide: “A lender shall only be responsible for paying fees to an agent for services for which the lender directly contracts with the agent.”
This development, which echoes the consensus among federal district courts, should foreclose or severely impede pending agent-fee claims against PPP lenders based on federal law.