And So it Begins: Lender Targeted In Putative Class Action Claiming Discriminatory Treatment of CARES Applicants—Complaint Asserts “Implied” Right of Action under CARES and SBA

Well the ink is barely dry on the CARES Act and the lending world is seeing its first putative class action litigation under it.

While much has (properly) been made of upcoming federal oversight of the use of funds made too hastily available under CARES (watch out for regulatory actions by the barrelful arising out of fraud and discriminatory impact next year) private litigation regarding the availability of funds was predictable and, apparently, already afoot. This is perhaps unsurprising as the Act—when coupled with the nation’s SBA program—puts literally hundreds of billions of dollars up for grabs.

With that kind of bait in the water the sharks are sure to come swimming.

Consider: a small business owner in Texas by the name of  Edward L. Scherer filed a federal lawsuit on Easter Sunday alleging that Frost Bank–which recently donated $2MM  to COVID 19 relief efforts-– violated the CARES Act and the SBA by refusing to accept applications for payment protection plan loans from companies unless they already had a business account open with the Bank.

As the complaint points out, a handful of US politicians have called upon banks to drop such practices, with one Senator allegedly deeming the practice “redlining by another name.” Nonetheless, nothing in the text of either CARES or the SBA appear to specifically prevent lenders from imposing such conditions on their lending practices.

Yet, Mr. Scherer opposes the practice in stark terms and filed a putative class action lawsuit in the Southern District of Texas asserting Frost Bank’s “discriminatory policies driven by corporate greed over the recognized and urgent needs of America’s small businesses.” The complaint–which is available here Frost Complaint— asserts the Bank “implemented a loan process that unlawfully prioritized its existing business clients at the expense of not only its own clients without business checking accounts, but also other small businesses from applying for funds from the governmental loan program.” The Complaint also charges that “[n]othing in the CARES Act authorizes or permits the Defendant to pick and choose who would gain access to, or benefit from, the federally backed lending program. And, the priority of access to these limited funds is material – the demand is overwhelming as America responds to the economic tsunami of COVID-19 upon small businesses.”

The Complaint seeks at least $5MM in damages and Plaintiff purports to represent a class as follows: (a) all individuals or entities who qualify for a loan under the PPP and (b) who were prevented from even applying for a PPP loan by Frost Bank solely because they do not have a pre-existing business checking and/or debt relationship with Frost Bank.

Notably, to the extent damages are possible here—couldn’t Plaintiff just get the funds from another bank?—the amount of damage suffered by class members would seemingly differ tremendously, which would seem to thwart certification. Even more basically, neither CARES nor the SBA contain an express private right of action, so it is not entirely clear whether Mr. Sherer can bring suit. Nonetheless, he alleges that “there is an implied cause of action arising under the CARES Act… and arising under the SBA’s 7(a) loan program.”

You can expect counsel for Frost Bank—who has not yet made an appearance—to have a thing or two to say about these issues.

We’ll keep an eye on this developing story.



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