Liability Pitfalls and Traps Arising from the Paycheck Protection Program

Topics: Coronavirus (COVID-19)

By Timothy Jacobs, Complex/Specialty Claims Adjuster

Summary: PPP Loans were created as part of the CARES Act to help small businesses stay afloat during the COVID-19 pandemic. However, some banks offering the loans have found themselves at the center of class action lawsuits. In this article, we'll discuss why.

Earlier this year, the CARES Act established the Paycheck Protection Program (PPP). This loan program, administered by the SBA, was designed to help small businesses survive the forced economic downturn caused by pandemic related shutdowns and shelter in place orders, as it provided cash for payroll and other permitted expenses. In total, the program authorized $659 billion in loans to help businesses continue operations in the face of much adversity. However, this popular program has come with some unwelcome legal pitfalls for the banks and institutions charged with originating and administering the loans.

Paycheck Protection Program Loans and Class Action Lawsuits

Plaintiffs’ attorneys have looked to capitalize on the program and get a piece of the money being distributed. Specifically, we have seen two different types of class action lawsuits filed against financial institutions related to the PPP:
  1. Claims that banks have improperly prioritized loan applicants to favor their own interests, rather than the applicants’ interests.
  2. Claims that various parties are entitled to agent fees, which are mandated to be paid by the banks under the PPP.
Luckily, both of these types of suits have met little success in the U.S. Courts thus far.



In early April, the first of the loan priority cases was filed in the District of Maryland. In Profiles, Inc. V. Bank of America Corp., No.: SAG-20-0894, 2020 WL184910 (D. Md. April 13, 2020), the court looked at whether a lender could prioritize certain applicants over other applicants. Profiles sued Bank of America seeking an injunction and damages related to the bank’s processing of loan applicants. At the time Profiles attempted to apply, Bank of America only accepted applications from current borrowers. Additionally, we have seen similar cases where the plaintiff alleged that the financial institution prioritized applicants for larger loans before applicants for smaller loans, as the fees are larger. These plaintiffs have argued the financial institutions violated the SBA regulations related to the PPP by prioritizing which applicants got their application processed first. They assert the PPP must be handled strictly on a first-come, first-served basis.

The most important holding in Profiles is the PPP does not create a private right of action against a lender. Furthermore, the court found that the regulations mandating first come, first served processing of the loan applications only applied after the loans that were submitted to the SBA portal for approval. Thus, the lenders were allowed to prioritize the loans that they processed first. It appears that much of this litigation was initiated after the original $349 billion allocation to the PPP was exhausted almost overnight. This prevented potential borrowers who did not get their application approved quickly from getting loans. The extension of the program and the additional $310 billion that was allocated to it appears to have limited the damages claims of these plaintiffs, as they were eventually able to get their loans once the added funds were made available. At this time, the plaintiff’s appeal is still pending, so this may not be the last word on the subject. However, it would appear that the impetus and potential financial gain for the plaintiff’s counsel has disappeared with the influx of additional money.

The second type of lawsuit is also typically filed as a class action lawsuit; however, the plaintiffs in these suits are business consultants, usually CPAs, who assisted clients in preparing the loan application materials. These plaintiffs assert the PPP regulations mandate banks to pay an “agent fee” out of loan fees paid to the banks for originating and servicing the loans to any agent that helped prepare the application. In most cases, these agents were never disclosed to the banks, and the banks did not have any agreement to pay them for their work. In August, the judicial committee on multi-district litigation denied a request that the cases be collected into a single MDL proceeding. In that decision, the court acknowledged there were more than 60 of these class actions filed in 28 different judicial districts across the U.S. The court found that while there were numerous common facts among the lawsuits, they were not sufficient to overcome the differences, such as the parties in these suits were nearly universally different in each suit.



After the matters were referred back to their original jurisdictions, the first matter to have a ruling was Sport & Wheat CPA, PA v. Servisfirst Bank, Inc., No.: 3:20CV5425-TKW-HTC, 2020 WL 4882416 (N. Fla. August 17, 2020), where the court dismissed the complaint. The court determined that the Act does not mandate who must pay the agent fees, just that the fees cannot exceed a set amount. In dismissing the lawsuit, the court found that the PPP did not require any payment from the loan fees to a third party.

Insurance Coverage for Financial Institutions from AmTrust

It’s important to keep in mind that each claim has its own set of unique circumstances, and financial institutions face their own unique exposures. Whether you require Directors and Officers Liability, Employment Practices Liability coverage, Fiduciary Liability, Professional Liability, or you need more specialized coverage to protect your business, AmTrust is a one-stop insurance solution for financial institutions. AmTrust’s FI Advantage℠ products offer comprehensive insurance coverage that can be tailored to the specific needs of each type of institution.

For more information, to discuss coverage options or to make sure your insureds are properly covered before a claim occurs, please contact your underwriter today.
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