10 SoCal Businesses Are Suing Big Banks Over Federal Coronavirus Loans

(Streeter Lecka/Getty Images)

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Ten Los Angeles-area businesses are suing the country's biggest banks over their handling of the first round of funding from the Paycheck Protection Program (PPP), the federal government's loan program for small businesses affected by the coronavirus. They claim banks prioritized bigger customers over smaller ones in violation of the program's intent.

Now, as the second round of funding for the program goes live, the plaintiffs hope their lawsuit ensures the program is more equitable this time.

"Even if nothing comes from this, perhaps just knowing the lawsuit existed before the second round came out has helped small businesses that might not have gotten a loan," said Lou Rabon, the CEO of Cyber Defense Group, a plaintiff in the lawsuit against JP Morgan Chase.

"And if that's the case, I would consider it successful," he said.


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A ROCKY ROLLOUT

On April 3, banks began accepting applications for the PPP.

Congress had voted to create the $349 billion loan fund just a week earlier, and put banks in charge of issuing the government-backed loans.

Immediately, there were problems.

The U.S. Treasury did not send banks the final guidelines on how to issue loans until the night before the program was set to go live, and many banks were not prepared to accept applications right away. Others shut down their loan portals quickly after being overwhelmed by the demand.

Unable to apply for loans, or unsure of the status of their application, many small business owners began to panic.

"I applied for the PPP on Day 1, and it's been awful," said Sabrina Damast, who owns an immigration law firm in L.A. "The communication I received from Bank of America has at best been unclear, and in my view has been affirmatively misrepresenting."

A week after submitting her application, she said she spoke with someone from Bank of America, and then heard nothing for 10 days. By then, it was April 15, and the funding for the Paycheck Protection Program had run out.

'WE FELT THERE WAS SOMETHING UNFAIR'

Meanwhile, attorney Ji-In Lee Houck of the L.A.-based Stalwart Law Group was hearing from frustrated small business owners around California who were unable to apply for loans.

Houck and her colleagues analyzed data released on April 16 from the Small Business Administration, and concluded that banks approved more large loans earlier in the program and more smaller loans towards the end. The banks appeared to be prioritizing larger loans, despite the fact that the U.S. Treasury had said the loans were first-come, first-served.

"We felt there was something unfair, at the very least, going on," she said. "So we investigated, and we realized there were some viable claims here against the banks."

That week, Damast, the immigration lawyer, saw a post in a Facebook group that Houck's firm was looking for plaintiffs in a class action lawsuit against large banks over their handling of the PPP.

Dismayed by her experience with Bank of America, and angered by stories of large or publicly-traded companies that had received loans — like the LA Lakers and Irvine-based Kura Sushi — she volunteered.

"For me, it was more about hopefully dissuading the banks from doing this again," she said. "What I'm hoping my role will promote is a more honest, more first-in, first out processing of applications."

THE BANKS PUSH BACK

On April 19, Houck's law firm filed four class-action lawsuits against Bank of America, JP Morgan Chase, Wells Fargo and US Bank. The suits accuse the banks of claiming to process loans in the order in which they were received, but instead prioritizing larger loans first because they generated higher fees for the banks.

The lawsuits allege that this behavior amounts to unfair, fraudulent and unlawful business practices.

Peter Kelley, a spokesman for JP Morgan Chase, declined to comment on the lawsuit, but said the "vast majority of the PPP loans Chase secured went to our smaller business clients."

Bank of America spokesman Bill Halldin said the company disagrees with the claims made in the lawsuit. "Smaller enterprises [companies with fewer than 10 employees] dominated our initial submissions and that will continue," he said.

Wells Fargo declined to comment on the lawsuit, and US Bank did not respond to a request for comment.

LET'S TRY THIS AGAIN

Since the lawsuits were filed, multiple media reports have showed how large, publicly-traded companies received loans intended for small businesses under the Paycheck Protection Program. Many of them have given their loans back.

The negative attention appears to have had an impact: The Small Business Administration told publicly-traded companies they are most likely not eligible for the next round of funding. And yesterday, the day before the program reopened for loan applications, SBA reminded banks the loans are first-come, first-served.

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