Class Action: Fountainhead Commercial Capital Failed to Process PPP Loan Applications on First-Come, First-Served Basis [UPDATE]
by Erin Shaak
Last Updated on December 7, 2021
Elizabeth M. Byrnes, Inc. v. Fountainhead Commercial Capital, LLC
Filed: May 6, 2020 ◆§ 2:20-cv-04149
A business claims Fountainhead Commercial Capital unlawfully prioritized large Paycheck Protection Program loans instead of processing applications on a first-come, first-served basis.
Case Updates
December 7, 2021 – Case Dismissed
The proposed class action detailed on this page was dismissed with prejudice by United States District Judge Dean D. Pregerson on November 24, 2021.
In a 13-page order granting Fountainhead Commercial Capital’s motion to dismiss, Judge Pregerson found that the plaintiff failed to support her claim that she and Fountainhead were “transacting business” in order to enter into a contractual borrower-lender relationship.
“This Court cannot, therefore, assume the truth of Plaintiff’s allegation that she submitted a loan application, let alone her conclusory allegation that the parties entered into a borrower-lender relationship or engaged in any other transaction,” the dismissal order states.
Moreover, the judge said that the plaintiff’s fraudulent concealment claim also failed given a financial institution, as a general rule, “‘owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.’” Although there exist some instances in which a lender may incur a duty to a borrower, the benchmarks for such a scenario were absent in this case, the judge relayed, stating that Fountainhead owed no duty to the plaintiff.
“Furthermore, given the preliminary nature of the communications between the parties, it was not foreseeable that Plaintiff would put all of her eggs in the Fountainhead basket on the basis of her loan ‘request’…,” Judge Pregerson wrote. “It is far from certain that Plaintiff suffered any injury, as she does not allege that she was unable to obtain a loan from another source or how much of a delay she suffered as a result of Fountainhead’s conduct. Nor does Fountainhead’s alleged conduct seem overly blameworthy.”
Judge Pregerson stated that although Fountainhead “did allegedly misrepresent” that it would allow the plaintiff to upload a loan application, the institution also acknowledged that it was “somewhat overwhelmed” and experiencing delays in implementing a novel loan program and “specifically raised the possibility that Plaintiff might want to pursue a loan with another lender.”
The court also agreed with Fountainhead’s contention that the plaintiff’s fraudulent deceit claim, which was tacked on to the second amended complaint, fell well short of the necessary legal standard.
Fountainhead Commercial Capital, LLC has been named in a proposed class action lawsuit in which a California business claims the non-bank lender unlawfully prioritized large Paycheck Protection Program (PPP) loans instead of processing applications on a first-come, first-served basis.
The case explains the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help mitigate the effects of the economic fallout caused by the COVID-19 outbreak. As part of the Act, the PPP was enacted to provide federally backed, forgivable loans to small businesses suffering through mandated closures and reduced operations. Per the case, PPP loans are backed by the Small Business Administration (SBA) but administered by private lenders who were to process small businesses’ applications on a first-come, first-served basis.
The plaintiff, a small California business, alleges that Fountainhead advertised itself as “the largest non-bank SBA lender in the United States” and assured PPP applicants that their applications would be placed in a queue and processed in the order in which they were submitted. According to the case, however, Fountainhead “had a secret priority system” whereby it prioritized larger loans that would generate higher origination fees for the lender.
The plaintiff believes Fountainhead unlawfully processed loans within the range of $100,000 to $300,000 before smaller loans that were submitted first.
After the plaintiff submitted a PPP loan application to the defendant on March 28, the case says, Fountainhead sent an email that stated, among other things, “We’ve received your loan app and you are in the queue!” The next day, the plaintiff allegedly received another email from the defendant advising that Fountainhead would send a link to a portal for document upload within 48 business hours.
According to the suit, after the plaintiff followed up with Fountainhead on April 9, the lender assured the plaintiff that “you will soon be receiving an email which provides a link to register for and access our borrower portal,” assuring the business that links would be sent “over the next 24-48 hours.”
The plaintiff says it received another email on April 13 with the subject “PPP links being sent” in which the defendant asked for applicants’ continued patience “as we process your requests as quickly and responsibly as we can.”
The case argues that Fountainhead received thousands of PPP loan applications yet concealed from the public that it had chosen to prioritize large loans that would generate higher fees. According to the suit, the plaintiff and other PPP applicants reasonably relied on the defendant’s representations and were unaware that the lender would prioritize larger borrowers “to the detriment” of proposed class members.
“Had Plaintiff and class known Defendant FCC was prioritizing large loans, they could have applied for a loan with a different lender,” the complaint states.
The lawsuit against Fountainhead echoes claims filed against several other PPP lenders, including Wells Fargo, Chase, and PNC, who allegedly prioritized larger clients instead of adhering to the SBA’s first-come, first-served directive with relation to the processing of PPP loans.
The plaintiff looks to represent all businesses in California who applied for PPP funding through the defendant in an amount less than $100,000, who met the SBA’s criteria for PPP loan eligibility, and whose applications were not processed by the defendant.
ClassAction.org’s coverage of COVID-19 litigation can be found here and over on our Newswire.
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