Best Practices: Litigation Expenses and PPP Loans: What is a Lender to do?

In this, our third article on SBA Procedural Notice No. 5000-812316 (the “Procedural Notice”), we turn our attention to potential litigation scenarios involving PPP loans and the choices a lender must make.  Before the Procedural Notice was released last month, most lenders had been guided by SOP 50 57 2 (the “SOP”), including its Chapter 21 which addresses when lenders will need to submit litigation plans.  In an about-face, the Procedural Notice offered lenders a very different path than the one in the SOP, a path more geared to PPP lending.

Specifically, page 3 of the Procedural Notice states that SBA “does not anticipate a need for lenders to incur expenses relating to litigating the loan” as these PPP loans are 100% guaranteed and unsecured.  SBA does advise that it will honor litigation plans that have been approved by the SBA prior to issuance of the Procedural Notice; however, effective July 15, 2021, SBA will generally not approve litigation plans unless there appears to be a reasonable expectation of recovery in excess of legal and administrative expenses.

This is valuable guidance.  It will enable lenders to avoid litigation expenses on almost all of their PPP loans.  SBA also advises that it will not reimburse lenders for administrative costs, including the costs associated with the filing of a proof of claim in a bankruptcy case. The Procedural Notice puts lenders on notice that the SBA expects lenders to prepare and file proofs of claim, as required, directly.  This places additional burdens on lenders to either monitor all bankruptcy notices for PPP borrowers, and prepare and file the required proofs of claim when needed; or, to absorb counsel fees if the bank decides to engage counsel to assist with the preparation and filing of claims.

For those lenders that have engaged counsel to assist with a PPP loan bankruptcy or other related legal matter prior to issuance of the Procedural Notice, the lender should prepare and submit a litigation plan to the SBA for approval of its attorney’s fees and administrative expenses as soon as possible.  In their litigation plan submissions, lenders should clearly explain why the fees were necessary in order to assist SBA when it evaluates the need for these expenses.

Based on the Procedural Notice, as a general rule, lenders should avoid engaging in litigation relating to their PPP loans.  However, there could be situations in which a lender has no choice but to become involved in PPP loan litigation, as when a bankruptcy trustee sues a lender to claw back PPP loan funds paid to the lender during the preference period.  In a case where a lender is unable to avoid PPP loan litigation, a lender should prepare a litigation plan and submit it to SBA as quickly as possible.  A lender may also want to request guidance from SBA on how the lender should handle unavoidable PPP loan litigation to ensure the lender is taking the appropriate actions, and thereby receives maximum reimbursement from the Government.

If you are a lender with questions on PPP loan litigation or PPP bankruptcy, feel free to contact me at 215-542-7070.