Paycheck Protection Program (PPP) agent-fee litigation is one of several emerging risks that the Jones Walker PPP Bank Litigation and Regulatory Task Force has been following since the implementation of the program. Very early on in the PPP loan process, our team saw that this area of litigation would be one that banks would face. Now, we are seeing the first major court decision on this issue, and it deals a victory to lenders.

In Sport & Wheat, a federal district court in Florida held that the CARES Act and its implementing regulations do not require lenders to pay a portion of the loan processing fees they receive from the Small Business Administration (SBA) to agents that helped borrowers obtain PPP loans. No. 20-05425 (N.D. Fla. filed April 26, 2020). The court issued its opinion on August 17, in response to a motion to dismiss filed by the defendant lenders that same day.

In Sport & Wheat, a small accounting firm that assisted borrowers in obtaining PPP loans filed suit against lenders claiming that, as an agent, it was entitled to a portion of the loan processing fees paid by the SBA to lenders. The agent did not allege that it or the borrowers had agreements with lenders regarding payment of agent fees. The agent asserted the following claims:

• A declaration that under the CARES Act and its implementing regulations, lenders are required to pay the borrowers’ agent fees irrespective of whether there is an agreement between the agent or borrower and the lender

• A state law claim for “conversion,” which was premised on the alleged federal law requirement that lenders must pay agent fees

• State law equitable claims for “unjust enrichment” and “contract implied in law” to recover the monetary benefits that the lenders allegedly received when the agent helped borrowers obtain PPP loans, which were based on the agent’s allegations that the lenders were aware of and benefitted from the agent’s work on the borrowers’ PPP loan applications

The court held that “the CARES Act does not require lenders to pay the agent’s fees absent an agreement to do so,” and based its holding on an analysis of the language of the CARES Act and the SBA’s interim final rule (IFR) published on April 15, 2020.

• The court noted that the CARES Act mandates that the SBA “shall reimburse a lender authorized to make a covered loan” and establishes the fees that the lender will be paid for making the loan. The CARES Act further provides that “[a]n agent that assists an eligible recipient to prepare an application for a covered loan may not collect a fee in excess of the limits established by the [SBA] Administrator.”

• The court also noted that the IFR provides: “Agent fees will be paid by the lender out of the fees the lender receives from SBA. Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed: i. One (1) percent for loans of not more than $350,000; ii. 0.50 percent for loans of more than $350,000 and less than $2 million; and iii. 0.25 percent for loans of at least $2 million.”

• The court reasoned that relevant statutory and regulatory language does not address who should pay agent fees; it merely provides a ceiling for the fee amount, if such a fee is to be paid.

• The court also contrasted the “shall reimburse” language of the CARES Act (referring to SBA’s payment to lenders) from the “may not collect” language of the IFR.

• The court concluded that the IFR “simply explains that, if an agent is to be paid a fee, the fee must be paid by the lender from the fee it receives from the SBA.”

The court also held that an agreement is a “prerequisite to the lender’s payment of agent fees” pursuant to the existing Section 7(a) regulations of the Small Business Act, to which the PPP was added.

• Specifically, Section 7(a) requires that an agent execute a “compensation agreement” and provide it to the SBA on a specific form (SBA Form 159) that identifies the portion of the agent fee to be paid by the borrower and the lender. Section 7(a) also prohibits agent fees that are contingent upon the loan being approved.

• The IFR states that it only supersedes “conflicting” Section 7(a) program requirements. The only IFR provisions “conflicting” with Section 7(a) are the delineated cap on agent fees and the contingent nature of the PPP agent fees.

• Because Section 7(a)’s “compensation agreement” (SBA Form 159) requirement does not conflict with the IFR, it applies to agents that assist borrowers in obtaining loans under the PPP.

• In Sport & Wheat, neither the agent nor the borrowers executed Form 159 or had any agreement with the lenders regarding agent fees. The lenders thus had no legal obligation under the CARES Act or the IFR to pay any agent fees.

The court dismissed the state law claims based on similar reasoning.

• The agent’s “conversion” claim (i.e., the claim for “wrongful deprivation of a person of property to the possession of which he is entitled”) was dismissed because the agent had no legal right to the fees at issue.

• The agent’s equitable “unjust enrichment” and “contract implied in law” claims were dismissed because any benefit to the lender from the agent’s work was “merely an incidental benefit” and thus did not meet the requirement that the benefit be “directly” conferred on the lender.

Importantly, the court noted that it will allow the agent to seek leave to file another amended complaint and “will keep an open mind.”

The Sport & Wheat decision is an important legal opinion that supports an interpretation of the CARES Act and its regulations in a manner that lenders have been advancing. For example, the Sport & Wheat court cited the Profiles, Inc. v. Bank of Am. Corp., No. 20-0894 (D. Md. Apr. 13, 2020) opinion for the proposition that “it is doubtful that such a private right of action [under the CARES Act] exists,” but declined to directly weigh in on the issue. The court further noted that the IFR, as a regulation, may not create a private right of action that Congress did not create in the CARES Act.

Stay tuned, as this and the other court opinions we are actively monitoring will almost assuredly be addressed by US courts of appeal in due course.