SBA Creates Safe Harbor From Certification Review for Recipients of PPP Loans Less Than $2 Million

SBA Loan

The Coronavirus Aid, Relief, and Economic Security (or “CARES”) Act includes a Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).  The PPP was intended to provide unsecured loans on favorable terms to small businesses to pay their employees and other enumerated expenses during the COVID-19 crisis.  The PPP provides that the loans are forgivable if used as specified in the Act.  One of the requirements of the program is that applicant borrowers, when applying for a loan, must certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations” of the applicant.

The PPP has recently come under scrutiny after reports that some large public companies, including national restaurant chains, obtained loans in excess of $10 million.  In response, the SBA issued guidance in April indicating that it is unlikely that a public company with substantial market value and access to capital markets would be able to make the required certification in good faith, and that it should be prepared to demonstrate to the SBA, upon request, the basis for its certification.

Some believed that the April guidance could have the effect of discouraging smaller employers who were otherwise eligible from applying for loans.  Earlier this month, in light of the program’s original intent and in order to provide assurance to smaller employers, the SBA issued additional guidance which creates a safe-harbor from certification review for borrowers that received less than $2 million.  This safe harbor provides that any such borrower “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

According to the SBA, this safe harbor is appropriate “because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”  The SBA further determined that given the large volume of PPP loans, “this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”

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By Brad R. Becker
Associate at Frandzel Robins Bloom & Csato, L.C.

A Bank Does Not Owe A Duty Of Care To Non-Customers

Duty of Care

Recent Federal Case Reaffirms California Law Holding that Absent Extraordinary and Specific Facts, a Bank Does Not Owe a Duty of Care to Non-Customers

California law has long held that a bank does not owe a duty of care to non-customers in the absence of allegations of extraordinary and specific facts. So, for example, in Software Design & Application v. Hoefer & Arnett (1996) 49 Cal.App.4th 472, a group of investors sued two banks for negligence, alleging that the banks failed to supervise and monitor withdrawals and transfers from accounts which the defendant financial consultant and his sister were using to misappropriate the plaintiffs’ investments. The Court of Appeal upheld the dismissal of the negligence claims based on the rule that “absent extraordinary and specific facts, a bank does not owe a duty of care to a noncustomer.” (Id. at 479.) The Court found that the investors were neither customers nor past customers of the banks, and had not alleged any special facts, such as an investor being the alter ego of the account holder or an intended beneficiary of the account, which could have given rise to a duty of care. (Id. at 480-481.)

In the recent case of Evans v. ZB, N.A. (E.D. Cal. Dec. 20, 2017) 2017 U.S. Dist. LEXIS 209632 (“Evans”), the United States District Court for the Eastern District of California reaffirmed this rule. The Evans case was a class action against a bank on behalf of over fifty people who had invested in a corporation which was allegedly operating a Ponzi scheme and misappropriating funds. The corporation maintained its accounts at the bank. After the corporation filed bankruptcy, the investors, none of whom were bank customers, sued the bank for, among other things, negligence and aiding and abetting fraud. They argued that the bank owed them a duty to protect them from the corporation’s fraud.

In granting the bank’s motion to dismiss the case, the District Court reaffirmed California’s rule of no liability to non-customers in the absence of specific facts: “The primary flaw with regard to [the plaintiff investors’] argument, which plaintiffs rely on for all of their claims, is that plaintiffs were neither … customers nor had any relationship with [the bank], and a bank does not owe a duty of care to noncustomers unless extraordinary and specific facts are present. … Because plaintiffs have alleged no such facts, [the bank] was under no legal duty to warn plaintiffs about [the corporation’s] financial condition …” (Evans at *2-3.)

It should be noted that the Court in Evans also recognized an important exception to the rule: that tort liability may be imposed upon a bank in favor of a non-customer in a situation where sufficient facts are alleged showing that the bank had actual knowledge that the account-holder was using its account for the purpose of misappropriating funds. (Evans at *3-4.) The Evans Court did not apply the exception, however, because no such facts were alleged: “The only relevant question therefore becomes whether [the bank] had actual knowledge that [the corporation] was operating a Ponzi scheme and misappropriating funds. … Here, plaintiffs have not pled sufficient facts to give rise to a plausible inference that defendant knew [the corporation] was misappropriating funds. … To support their claim that [the bank] was aware of [the] Ponzi scheme, plaintiffs point to an October 2009 letter in which [the bank] informed [the corporation] that it intended to ‘disengage from the Lending relationship’ because ‘there has been little to no revolving of the outstanding balances.’ … However, even if this demonstrates that [the bank] was aware that [the corporation] could not meet its financial obligations, it does not sufficiently allege that the bank knew that [the corporation] was engaging in fraud and misappropriating money. Accordingly, plaintiffs’ Complaint fails to plead more than ‘alleged knowledge,’ and instead ‘essentially alleges the [bank] knew something fishy was going on with the accounts opened by’ [the corporation] … which is insufficient to plead a cause of action for any of the eight claims plaintiffs assert …” (Id., citations omitted.)