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CARES Act and Financial Institutions – Litigation Update

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Paycheck Protection Program (“PPP”) have allowed some businesses to remain operational during the COVID-19 pandemic. For these businesses, obtaining access to funds under these programs has proved vital.

The U.S. Small Business Administration (“SBA”) closed new applications for PPP funds on April 16, 2020, except for a brief re-opening period on April 29 for financial institutions with asset sizes less than $1 billion. Although the SBA is not accepting new PPP applications, for financial institutions, litigation risk remains.

This alert provides an update on current CARES Act financial services litigation and issues on the horizon for Ohio financial institutions.

Does the CARES Act Contain a Private Right of Action for PPP Applicants?

Though it is still early, at least one court has determined that the CARES Act itself does not contain an explicit or implied private right of action. In Profiles, Inc. v. Bank of America Corp., No. CV SAG-20-0894, 2020 WL 1849710, at *8 (D. Md. Apr. 13, 2020), the plaintiffs brought suit against Bank of America for allegedly refusing to process their applications for PPP funds, and, thus, improperly restricting their access to the PPP funds.

Under the CARES Act, lenders “shall consider” whether the borrower (1) “was in operation on February 15, 2020,” and (2) either “had employees for whom the borrower paid salaries and payroll taxes,” or “paid independent contractors.” P.L. No. 11-136, § 1102(a)(2). In Profiles, Inc., Bank of America required additionally that the plaintiffs seek PPP applications though other institutions with which they had previous credit relationships, its so-called “credit elsewhere” requirement.

The U.S. District Court for the Maryland District determined that the CARES Act does not contain a private right of action, but, even if it did, Bank of America’s actions did not run afoul of the Act. The court stated that Bank of America’s “credit elsewhere” eligibility disqualifier was not contrary to the CARES Act language, and, thus, the plaintiffs' claims for injunctive relief were meritless.

Other pending cases will have to address whether the CARES Act contains a private right of action. See Scherer v. Wells Fargo Bank, N.A., 2020 WL 1864840 (S.D.Tex. filed April 11, 2020) (including claims under the CARES Act as a private cause of action). As Profiles, Inc. is currently on appeal and Scherer is pending, it will be interesting to see how the private right of action issue plays out.

If the CARES Act does not contain a private right of action, Ohio financial institutions still may face litigation risk for CARES Act issues through conventional litigation vehicles, such as:

  • Contractual theories
  • Ohio’s deceptive trade practices law (R.C. 4165.01, et seq.)
  • Unfair or Deceptive Acts or Practices (“UDAP”) claims
  • Fair lending laws claims
  • Fraudulent concealment
  • False advertising

Debt Collection Issues

If the financial institution engages in debt collection or mortgage services, realize that COVID-19 related Fair Debt Collection Practices Act and state collection law violations are likely inevitable, and be prepared for inability to pay requests and additional (sometimes, federal- and state-mandated) flexibility around repayment.

Some states have already tried to ban all debt collection proceedings during the pandemic. See ACA Int'l v. Healey, No. CV 20-10767-RGS, 2020 WL 2198366, at *10 (D. Mass. May 6, 2020) (enjoining the Massachusetts Attorney General from enforcing a law prohibiting all debt collection proceedings during the pandemic). Whether any state can successfully ban debt collection proceedings during the COVID-19 pandemic remains to be seen.

Finally, in Taylor v. JPMorgan Chase Bank, N.A., No. 17-3019, 2020 WL 2079164, at *7 (7th Cir. Apr. 30, 2020), the court affirmed dismissal of the plaintiff mortgagor’s breach of contract, promissory estoppel, and fraud claims, among others. The mortgagor’s claims were based on a proposed loan modification plan for payments during the 2008-2009 housing crisis that Chase Bank sent to him, but that Chase later did not execute. Chase Bank argued that its execution of the application materials was a condition precedent to the modification contract.

The Taylor dissent noted that this decision could have relevance in light of the COVID-19 pandemic. The dissent further stated that there could have been enough for the mortgagor to sustain his claims in light of Chase Bank’s representations, the loan modification application materials, and whether Chase Bank’s execution of the documents was a true condition precedent to the parties’ modification contract.

These cases provide some insight into how courts may tackle COVID-19 pandemic with respect to financial institutions, but the coming weeks will tell us much more about COVID-19 and CARES Act litigation.

Richard L. Hilbrich is a member of Brennan, Manna & Diamond’s Litigation team and is available to assist you with minimizing litigation risk. Richard can be reached at 330.253.4766, or rlhilbrich@bmdllc.com.

HHS Announces an Additional $20 Billion In Provider Relief Grants

The U.S. Department of Health and Human Services (“HHS”) announced an additional $20 billion in new funding for providers on October 1, 2020. Eligible providers include those that have already received Provider Relief Fund payments as well as previously ineligible providers, such as those who began practicing in 2020, and an expanded group of behavioral health providers confronting the emergence of increased mental health and substance use issues exacerbated by the pandemic. The new Phase 3 General Distribution is designed to balance an equitable payment of 2% of annual revenue from patient care for all applicants plus an add-on payment to account for revenue losses and expenses attributable to COVID-19.

DOL Proposes New Rule Regarding Independent Contractor Status - But How Will the Election Affect Its Future?

On September 22, 2020, the U.S. Department of Labor announced a new proposed rule regarding employee and independent contractor status under the Fair Labor Standards Act. The full text of the proposed rule is available here. The rule's drafters intend to reduce uncertainty and enhance the precision and predictability of the long-standing "economic reality" test, which currently relies on a multifactor balancing test.

Major Change to Franklin County, Ohio Eviction Process: Landlord Testimony Required

Although there is currently a nationwide temporary halt on all residential evictions through December 31, 2020 in place, the eviction process in Franklin County – which processes the highest number of evictions in the State of Ohio at approximately 18,000 a year – recently changed significantly.

UPDATE: Governor Dewine Signs HB 606 Granting Short Window of Immunity from COVID-19 Personal Injury Lawsuits

The Ohio General Assembly, in Am. Sub. H.B. No. 606, is in the final stages of passing a law that will prohibit lawsuits seeking damages from COVID-19. This includes injury, death, or loss to person or property if the lawsuits are based, in whole or in part, on the exposure to, or the transmission or contraction of the coronavirus, unless the defendant in the lawsuit acted intentionally or recklessly. In circumstances where this immunity does not apply, H.B. 606 prohibits such claims being aggregated and brought as a class action.

Revised Department of Labor FFCRA Guidance, Effective September 16, 2020

In response to attacks on the legality of the Department of Labor’s (“DOL”) Final Rule regarding the Families First Coronavirus Act (“FFCRA” or the “Act”), which took effect in April 2020, the Department of Labor issued new guidance on Friday, September 11th to formally address ongoing questions and concerns related to the COVID-19 legislation.