Having learned that the amounts they borrowed under the COVID-19-era Payroll Protection Program are not entirely forgivable, some borrowers seek to avoid repayment by blaming their lender in federal court.

In February, three companies filed a class-action suit in a federal court in California accusing Bank of America, N.A. of misleading them into borrowing unforgivable loans under the Paycheck Protection Program (PPP). Those companies seek monetary damages and certification of two classes of plaintiffs: a 1099 Payroll Class and an Overfunding Payroll class. The case is in its infancy and its outcome is far from certain, but PPP lenders will surely be curious about these borrowers’ attempt to distance themselves from their loan obligations.

As is well known, PPP loans were part of the Coronavirus Aid, Relief and Economic Security Act and were intended to provide cash-flow assistance to small businesses through federally guaranteed loans to employers who maintained their payroll through the COVID-19 pandemic. Per federal guidelines, however, compensation paid to non-employee, independent contractors, and so-called 1099 workers, could not be included in PPP loan amounts. In order to disburse the loans, the Small Business Administration worked with numerous financial institutions nationwide. The loans were particularly attractive because certain amounts owed on PPP loans were eligible for forgiveness. 

In their complaint, Happy Puppy LA, Inc., et al. v. Bank of America, 2:23-cv-1354 (C.D. Cal.), the plaintiff companies allege that Bank of America misled them (and other class members) into applying for loan amounts that covered payments to 1099 workers when such payments were expressly excluded from PPP loan-forgiveness eligibility. The plaintiffs maintain that Bank of America improperly induced companies into borrowing to pay 1099 workers by simultaneously requiring applicants to upload supporting loan documentation, including any IRS Form 1099s for independent contractor services, while at the same time failing to mention that 1099 workers should exclude independent contractors when calculating loan amounts eligible for forgiveness.    

Plaintiffs also claim that Bank of America improperly induced them and other companies into borrowing sums in excess of forgivable amounts by both refusing to process loan applications from businesses that requested amounts below thresholds established by Bank of America and warning that PPP funds were at risk of depletion unless companies applied immediately. Plaintiffs contend that, as a result, companies were forced to borrow the full amount purportedly available through the bank’s calculations, which were allegedly often in excess of federal PPP loan guidelines. 

Plaintiffs are seeking an unspecified amount of damages for loan amounts that the federal government has since determined are ineligible for forgiveness. They also assert breaches of contract and good faith and fair dealing, as well as claims of negligent and fraudulent misrepresentation. 

As mentioned, the case is in its early stages and we anticipate threshold legal battles to determine the viability of the two plaintiffs’ classes. Thus, it is too soon to tell whether the plaintiffs’ classes — or the substantive allegations themselves — will gain legal traction. A potential near-term result is that other PPP borrowers might use this case as a road map to bring cases of their own.