By Jeannie O'Sullivan

Law360 (February 1, 2021, 6:02 PM EST) -- Bank of America NA and its wealth management division Merrill Lynch & Co. Inc. on Monday escaped a lawsuit for now over their shutdown of an account holding federal coronavirus relief funds, with a federal judge ruling that the account controllers didn't back up their claims that the closures were fueled by racism.

U.S. District Judge Susan D. Wigenton handed a defeat to Rafael and Chelsea Martinez, a father and daughter duo who operate Republic Group LLC and other organizations that serve minority- and women-owned businesses. The Martinezes, who have 30 days to amend parts of their complaint, alleged that BofA was targeting those protected classes when it stopped honoring checks issued to Republic Group clients as part of the Paycheck Protection Program.

The Martinezes bore the burden of showing that they're members of a racial minority, that the defendants intended to discriminate based on race and that the discrimination involved the right to make and enforce contracts — but fell short in some respects, according to the decision.

"Here, although Mr. and Ms. Martinez plead that they are members of a racial minority, they fail to plead facts that show that defendants intended to discriminate against them because of their race," Judge Wigenton wrote, tossing the Martinezes' claim under Section 1981 of the federal Civil Rights Act. "Plaintiffs do not plead that they were treated differently than any other individuals or businesses who are not members of a protected class. Rather, they conclude, without support, that [BofA's] decision to decline Plaintiffs' PPP Loan transactions was motivated solely by discriminatory intent. This is insufficient."

Because she tossed the federal claim, Judge Wigenton said she declined to exercise jurisdiction over the Martinezes' state law claims of breach of contract under the New Jersey Law Against Discrimination and the New Jersey Civil Rights Act. Those claims were dismissed without prejudice, subject to a 30-day time limit to file amended versions.

In addition to Republic Group, the Martinezes also own MBE Capital Partners LLC and the nonprofit Reaching New Heights Corp., according to their August complaint. Their aim is to create cash flow vehicles to give small and diverse businesses a foothold in professional fields traditionally "dominated by white men."

In the spring, MBE and Republic Group obtained U.S. Small Business Administration approval to issue PPP loans to small businesses and deposited $100 million into Republic Group's BofA business account, the decision said.

Beginning in May, BofA began refusing to honor checks or electronic payments drawn from the Republic Group account and informed the plaintiffs that it was unable to support its efforts to participate in the PPP program, the decision said.

In their complaint, the Martinezes alleged that one of Republic Group's customers attempted to cash a check from that account but BofA "refused to honor the check and instead humiliated and degraded the customer and client of Republic Group and MBE, claiming the check was fraudulent."

BofA then froze the account and later shuttered it when the Martinezes moved the funds to another institution, according to the complaint. BofA also closed the Martinezes' personal accounts, as well as a Reaching New Heights business account.

Blasting the claims as conclusory allegations that contain no facts, BofA has said that the plaintiffs were engaged in banking and loan-making practices "without prior authorization and in direct contravention of the bank's policies." The bank also noted that it has broad discretion to refuse checks and freeze and close accounts.

The plaintiffs further failed to identify what contract had been breached, according to the bank.

A representative for BofA declined to comment. Counsel for the plaintiffs didn't immediately respond to a request for comment. 

The plaintiffs are represented by Shannon Garrahan of Law Offices of Shannon Garrahan PC.

Bank of America and Merrill Lynch are represented by Philip S. Rosen of Zeichner Ellman & Krause LLP, and Enu A. Mainigi and Kenneth C. Smurzynski of Craig D. Singer of Williams & Connolly LLP.

The case is Republic Group LLC et al., v. Bank of America NA et al., case number 2:20-cv-12081, in U.S. District Court for the District of New Jersey.

--Additional reporting by Rachel O'Brien. Editing by Steven Edelstone.

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