By Craig Clough

Law360 (May 8, 2020, 9:49 PM EDT) -- Wells Fargo urged a Texas federal judge Friday to dismiss a proposed class action seeking changes in the bank's Paycheck Protection Program lending practices, saying the two plaintiff business owners have not successfully pled any violation of the coronavirus relief legislation that authorized the program.

The two business owners argue in their lawsuit that Wells Fargo is improperly restricting access to the program by requiring that applicants have a pre-existing checking account with the bank, but Wells Fargo said there are grounds for dismissal for at least three reasons, including that nothing in the Coronavirus Aid, Relief and Economic Security Act prohibits the bank from setting eligibility requirements.

"Plaintiffs' reading of the CARES Act, if it were accepted, threatens to disrupt the process of getting PPP funds to the small businesses that need them," Wells Fargo said. "Reinterpreting the act after thousands of lenders have already been processing loans for weeks will require them to divert their time and resources to overhauling their processes midstream."

Originally launched in early April, the Paycheck Protection Program allows small businesses to take out loans of up to $10 million each and receive forgiveness on those loans if they use the money to keep paying their workers amid the widespread shutdowns and disruptions caused by the pandemic.

Plaintiffs Edward Scherer of Texas and Donald Kowall of California alleged in a proposed class action filed April 11 against Wells Fargo that the bank's gating policy violates the CARES Act by giving preexisting clients preferential access to the relief loans, which are being distributed on a first-come, first-serve basis and have been in such high demand that the program exhausted its initial $349 billion lending capacity in just two weeks.

The bank requires that applicants for the program have had a checking account with Wells Fargo before Feb. 15, and said in its motion to dismiss that the policy helps expedite loans by prioritizing customers who already have gone through its anti-fraud and anti-money laundering screenings.

Although the loans require that businesses be below a certain size to be eligible, Wells Fargo and Bank of America are among a number of banks participating in the program that have established additional criteria allowing only existing customers to submit applications.

U.S. District Judge David Hittner on April 29 rejected a request from Scherer and Kowall to temporarily restrain Wells Fargo Bank NA from requiring that businesses have a pre-existing checking account at the bank in order to be eligible for one of its loans under the program.

The judge said the business owners failed to show how they would suffer "irreparable injury" if not given access to a loan specifically from Wells Fargo and noted that nearly 5,000 other lenders are reportedly participating in the program.

In its motion to dismiss on Friday, Wells Fargo said the business owners' lawsuit failed to state any claim because there is no private right of action under the CARES Act, they have not pled any violation of the CARES Act and they failed to plead that Wells Fargo caused them any harm.

Wells Fargo said there is "no dispute" that the CARES Act does not provide an express private right of action, so the business owners need to outline an implied private right of action. The bank further argued "there is no evidence in the text of the CARES Act that Congress intended for enforcement by private litigants."

The bank cited an April ruling by U.S. District Judge Stephanie Gallagher in Maryland in a similar suit brought against Bank of America. In that case, the judge also declined to issue an emergency order and said private parties don't have a right to enforce the coronavirus relief law in court.

Wells Fargo said the criteria lenders are told to "consider" in the CARES Act is if a borrower was in operation and paid employees on Feb. 15. The act does not prohibit lenders from considering other criteria.

Wells Fargo said an earlier draft of the act said lenders were to "only" consider that criteria, but that the word was removed before the act was approved.

"Congress's omission of the word 'only' from the final act is further evidence that it did not intend to restrict lenders from imposing additional lending criteria," Wells Fargo said.

Wells Fargo also pointed to Judge Hittner's denial of the temporary restraining order to support its argument the business owners have not been harmed by Wells Fargo, including the judge's comment that the plaintiffs can apply for loans through thousands of other lenders.

Counsel for the parties did not immediately respond to a request for comment.

Scherer and Kowall are represented by Salar Ali Ahmed of Ali S. Ahmed PC.

Wells Fargo is represented by Charles B. Hampton of McGuireWoods LLP and Christopher M. Viapiano, Nicolas Bourtin and Sverker K. Högberg of Sullivan & Cromwell LLP.

The case is Scherer et al. v. Wells Fargo Bank NA, case number 4:20-cv-01295, in the U.S. District Court for the Southern District of Texas.

--Additional reporting by Jon Hill. Editing by Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.