The new stimulus package may finally put an end to a class of litigation that has pestered banks for months.
A provision in the law signed this week by President Trump states explicitly that the only agent fees that Paycheck Protection Program lenders are required to pay are those “which the lender directly contracts with the agent." The provision, moreover, is backdated to March 27, potentially driving a final nail in the coffin of dozens of lawsuits that borrower agents have filed seeking a cut of banks’ PPP fees.
That revenue stream is significant. The stimulus legislation directs the Small Business Administration to pay lenders the lesser of $2,500 or 50% of proceeds on loans under $50,000, 5% on loans between $50,000 and $350,000, 3% on loans between $350,000 and $2 million, and 1% on loans greater than $2 million.
Borrower agents, many of them
"It's still being litigated," Gregory Cook, a partner at Balch & Bingham in Birmingham, Ala., said in an interview. "It has not been abandoned by plantiffs' counsel."
In one of the most recent decisions, Radix Law PLC v. Silicon Valley Bank, a federal judge in Arizona on Dec. 15 dismissed a Scottsdale, Ariz.-based law firm’s claim for a 1% fee for helping arrange a $291,000 PPP loan. A member of the firm had signed the application, identifying himself as a borrower representative.
Even so, Judge Dominic Lanza of the U.S. District Court for the District of Arizona noted Radix neglected to enter into an agreement with the $97 billion-asset Silicon Valley before the close of the PPP loan in question.
“This is not the first case addressing whether PPP lenders have a mandatory obligation to pay fees to agents,” Lanza wrote. “To date, every court to have addressed this question has concluded that no such obligation exists.”
Jonathan Frutkin, Radix’s principal, said his firm would forgo attempts to collect the fee it sought, but added that many agents might be forced to turn to their clients to seek compensation.
The roots of the disputes between banks and the professional firms that sought agent fees can be traced back to PPP’s early days, when both groups were struggling to process an avalanche of applications from desperate borrowers. In the program’s first phase, between April 3 and April 16, the SBA, which is administering the Paycheck Protection Program as part of its 7(a) program, approved nearly 1.7 million loans for $342 billion.
Radix submitted the loan at the heart of its lawsuit with Silicon Valley, of Santa Clara, Calif., on April 5.
“A lot of agents like us put a lot of time into this,” Frutkin said in an interview. “Banks wanted agents to do the work. “They were getting tons of applications. Having them arrive well organized and with the proper documents was valuable to them.”
Many banks paid agent fees without question, Frutkin said.
Banking advocates, however, argued many of the lawsuits were not on the level, involving agents who did little work and often claimed a role in a transaction without the lender's consent.
"We ... want to make sure there is a clear understanding of how the lender-agent-borrower relationship works and that it is being acted on in good faith," the American Bankers Association wrote July 31 in a letter to the SBA and the Treasury Department.
"It's good to bring clarity to this matter," John Asbury, president and CEO of the $20 billion-asset Atlantic Union Bankshares in Richmond, Va., said Tuesday. “In our mind, what [the stimulus package] really does is it simply avoid frivolous lawsuits. The last thing the industry needs is a crisis of frivolous lawsuits being filed.”
"It really wasn’t a factor for us. We saw very few instances of so-called agents raising their hands saying, 'You owe us,' " Asbury added.
Judge Lanza’s decision
That same month, a federal judicial panel rejected an application to consolidate 62 class actions involving PPP fees.
Now, the new stimulus package seems likely to settle the issue once and for all.
“The amendment plainly undermines plaintiffs’… legal theories that somehow placed on lenders the onus to pay undisclosed agents or, even where disclosed, those that assisted borrowers without seeking an agreement from the lender to pay,” Gottlieb and Natarelli wrote.
“We expect courts to apply the language with full retroactive effect because Congress said so expressly. Likewise, we expect the statute will survive the usual constitutional challenges,” Gottlieb and Natarelli added.
Cook reached a similar conclusion.
"My opinion is the [agents] will walk away" from their lawsuits, Cook said.
Their attorneys will likely opt for a similar course.
"Plaintiffs' counsel are persistent capable lawyers, but because they are persistent and capable I think they will analyze the situation correctly" and realize pursuing the litigation is probably fruitless, Cook said.
A spokesman for the American Institute of Certified Public Accountants declined to comment.
Besides clarifying the fee issue, the new stimulus law includes a $284.5 billion appropriation for renewed PPP lending and expands streamlined forgiveness for PPP loans up to $150,000.
