Bank had no duty to disclose limits to PPP loan applicants

Elizabeth M. Byrnes, Inc. v. Fountainhead Commercial Capital, LLC, 2021 WL 3501518, No. CV 20-04149 DDP (RAOx) (C.D. Cal. Aug. 6, 2021)

The CARES Act, among other things, established the Paycheck Protection Program, a $349 billion loan program through which small businesses could obtain forgivable loans backed by the Small Business Administration, but administered by private lenders. As soon as it was enacted,

Fountainhead advertised that it would “soon be tackling the loan inquiries lined up in our queue, providing business owners with capital they need within days.” The next day, Plaintiff submitted a PPP loan application to Fountainhead for a loan of less than $25,000. Fountainhead responded with an e-mail stating that Plaintiff was “in the queue,” and that “[h]elp is on the way,” and asking her to gather certain documentation. The next day, Fountainhead told Plaintiff to expect “an invitation to a secure portal for document upload within the next 48 business hours.” Plaintiff did not receive any such invitation.

Fountainhead continued to promote PPP loans, encouraging applications and stating that it “hope[d] to make these loans within days.” Fountainhead executives made statements touting its advantage over other, bank-based lenders, such as Fountainhead’s ability to approve loans “within a few hours.” Fountainhead further represented that it “require[d] no[ ] prior relationship, no special (money-making) criteria, and [was] processing first come, first serve ... no prioritization.”

Despite followup (and reassurance from Fountainhead) nothing happened. Plaintiff alleged that, on the basis of its representations, it gathered the requested documents, waited for the opportunity to upload them, refrained from submitting a loan application to other lenders, and made other related decisions regarding its small business.

Plaintiff alleged that Fountainhead was not even licensed to engage in lending activities in California until April 21 and had not secured any funding prior to that time, and therefore could not possibly have extended loans “within days.” It also alleged that Fountainhead did prioritize favored customers and higher-value loans that would yield higher fees to Fountainhead than would relatively small loans, such as the one it sought. It sought to represent a class bringing state law claims for fraudulent concealment, unfair business practices, and false advertising.

The court granted the motion to dismiss.

There was no fraudulent concealment because Fountainhead lacked any duty to disclose to the plaintiff.

A duty to disclose may arise in four circumstances: “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” Although plaintiff alleged (2)-(4), all three “presuppose the existence of some other relationship between the plaintiff and defendant in which a duty to disclose can arise.”

The UCL and FAL claims were equitable, and under Sonner v. Premier Nutrition Corp., 971 F.3d 834 (9th Cir. 2020), the plaintiff needed to allege that it lacked an adequate remedy at law, which it did not allege.