Big Banks Face Class Action Lawsuits Alleging Unfair Handling of Paycheck Protection Program Applications

After being shut out of receiving loans from the coronavirus relief bill’s Paycheck Protection Program, small business owners have filed class action lawsuits against some of the country’s biggest banks, alleging unfair business practices and fraud.

Defendants include Bank of America, JP Morgan Chase, U.S. Bank and Wells Fargo. Los Angeles-based Stalwart Law Group filed all four lawsuits yesterday in the U.S. District Court Central District of California.

The lawsuits contend that each bank decided against “processing Paycheck Protection Program (“PPP”) applications on a first-come, first-served basis as required by the rules governing that program” and instead “prioritized loan applications seeking higher loan amounts because processing those applications first generated larger loan origination fees for the bank.”

The plaintiffs in each suit include a builder, optometry office, restaurant group, automotive repair shop, frozen yogurt parlor, marketing agency, cyber defense provider and two law offices.

The class definition includes any California-based small businesses that met the PPP’s eligibility requirements, applied for a loan through Bank of America, JP Morgan Chase, U.S. Bank or Wells Fargo and did not receive funds.

Though the company declined to comment on the lawsuit, Wells Fargo told Brewbound in a statement it is “working as quickly as possible to assist small business customers.”

“We have mobilized thousands of employees and launched new technology to better assist customers seeking assistance via the Paycheck Protection Program,” the company continued.

To qualify for a PPP loan, companies must have fewer than 500 employees or fewer employees than the U.S. Small Business Administration’s industry size standards. Loans are capped at 2.5 times the applicant’s average monthly salary expenses and 75% of the loan must be spent on payroll. The remaining 25% can be used for rent, utilities and interest on mortgage or other debt. All funds but those spent on non-mortgage debt interest will be forgiven if the company has maintained its employee count by June 30.

Banks began accepting PPP applications on April 3. By April 16, the SBA announced that all of the $349 billion allocation had been promised. Since then, the program has drawn criticism for giving money to larger businesses, such as upscale restaurant chain Ruth’s Chris Steak House, which received $20 million in PPP loans by applying through two different subsidiaries.

The co-owners of Shake Shack announced yesterday they had returned the $10 million PPP loan tha the fast casual chain had received after securing “the additional capital we needed to ensure our long term stability through an equity transaction in the public markets.”

In their announcement, Shake Shack CEO Randy Garutti and Danny Meyer, the CEO of parent company Union Square Hospitality Group, called for Congress to refill the fund, for applicants to be paired with local banks and for a change from the June 30 deadline to a six-month requirement instead.

“Shake Shack, like all restaurant businesses in America, is doing the best we can to navigate these challenging times. We don’t know what the future holds. Our people would benefit from a $10 million PPP loan, but we’re fortunate to now have access to capital that others do not. Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours.”

California businesses received $33.4 billion in 112,967 loans, but financial services firm Evercore ISI found that just 24% of the state’s small businesses eligible for assistance received it. Sens. Dianne Feinstein (D-CA) and Kamala Harris (D-CA) have asked Treasury Secretary Steven Mnuchin and SBA administrator Jovita Carranza to investigate the discrepancy in loan awards between states.

“As California was the first state to issue a stay-at-home order on March 19, our small businesses have been shut down longer than in any other state,” Feinstein and Harris wrote. “It is difficult to understand why California’s small businesses would qualify for so much less aid than others.”

Negotiations have begun in Congress for another aid package, and the White House has pushed for it to include another $250 billion for PPP loans.

The SBA published loan totals by industry, and the manufacturing industry, which has a segment for breweries, received $40.9 billion in 108,863 loans, about 12% of the total. However, many craft breweries may fall under the accommodations and food service category, which received $30.5 billion in 161,876 loans.

Framingham, Massachusetts-based Jack’s Abby Craft Lagers told Brewbound its PPP application was approved and it received funding on April 17.

“Over the weekend, we were able to bring back a significant portion of our team who had previously been reduced hours back to full time,” a spokeswoman wrote in an email.

Other craft breweries known to have received PPP loans include Minneapolis’ Surly Brewing, Saint Louis, Missouri’s 2nd Shift Brewing and Watford City, North Dakota-based Stonehome Brew Pub. The Bruery and its sister brand Offshoot Beer Co., based in Orange County, California, were excluded from this round of PPP funding.