By Rachel O'Brien

Law360 (October 13, 2020, 9:49 PM EDT ) Some of the nation's biggest banks have a "fundamental misapprehension" of the federal Paycheck Protection Program when they argue they're not required to pay fees to loan agents during the COVID-19 pandemic, the agents told a California federal judge Monday while fighting to keep their suit in court.

Agents who helped businesses apply for Paycheck Protection Program — or PPP — loans are owed fees for their services, as delineated in the Small Business Administration regulations, the plaintiffs argued in a filing Monday.

They were responding to a September motion to dismiss filed by JPMorgan Chase Bank, Wells Fargo Bank, Bank of America, U.S. Bank National Association, Live Oak Banking Company and Harvest Small Business Finance.

Citibank N.A. and Citigroup Inc. filed a separate motion to dismiss in May, which the agents opposed in June.

"Using a mislaid foundation about how the PPP works, defendants argue that agents are not entitled to compensation for their role in helping borrowers," the agents said Monday.

The agents at American Video Duplicating, Inc., Tush Law Ltd., and Kenneth M. Hahn filed suit in April, saying the Coronavirus Aid, Relief, and Economic Security Act — CARES Act — which provides $659 billion in loans to small businesses for their payroll and to cover other expenses during the COVID-19 pandemic, guarantees them fees for their work on behalf of loan applicants.

But the banks argued that Congress set limits to how much the SBA could pay an agent without requiring that agents be paid automatically.

"The CARES Act nowhere mandates that a lender pay fees to an agent for assisting a borrower in applying for a [Paycheck Protection Program] loan," the banks said.

The banks pointed to a decision from a Florida federal judge, who dismissed a complaint against four banks in August, finding the plaintiff, Florida-based accounting firm Sport & Wheat CPA PA, didn't show that the CARES Act requires lenders to pay the agent fees absent an agreement to do so.

The agents in this case claimed that the banks' motion to dismiss "is based on a fundamental misapprehension of the Paycheck Protection Program."

The banks don't make the distinction between lender agents and borrow agents, the agents argued.

"The lenders have no right to approve or disapprove of the borrowers' agents," the filing said. "All the lender is required to do is to pay the borrowers' agents the reasonable agent fees they have earned for assisting the borrowers in preparing their PPP loan applications."

They argue SBA regulations say that lenders and agents shall be compensated from the fees the SBA gave to lenders to process the loans.

"Defendants' tortured reading of the PPP ignores clear language that mandates that agent fees be paid out of the lender fees and sets the statutory amount of such payment as reasonable," they argued.

The SBA capped how much an agent can collect for helping prepare the application: up to 1% for loans of up to $350,000, 0.50% for loans of more than $350,000 and less than $2 million, and 0.25% for loans of at least $2 million.

"The SBA regulations are clear: the agents cannot be paid by the borrower, but instead must receive their required statutory fee from the lender itself, to be paid from the lender fees," the agents said.

Michael E. Adler of GrayLaw Group Inc., one of the plaintiffs' lawyers, told Law360 Tuesday that the Florida judge's decision should have no bearing on this case because state law there differs from California law and different arguments were made in each case.

That decision wrongly focused only on the language of the CARES Act and ignored the interpretive regulations, which the act gave the SBA the power to make, he said.

"That's a clear error," Adler said, as it should have been taken into account what regulators were thinking when they implemented the law.

"We wish the banks would be paying the agents instead of wasting the money on lawyers fighting the battle," he said. "The SBA regulations are very clear that the agent fees will be paid by the lender out of the fees the lender receives from the SBA. The agents can't be paid by the borrower, and the agents … did 90 percent of the heavy lifting in order for the borrowers to be able to submit the PPP loans to the banks."

Counsel for Live Oak Banking Company declined to comment Tuesday.

Counsel for the other parties didn't immediately respond to requests for comment Tuesday.

American Video Duplicating, Inc., Tush Law Ltd., and Kenneth M. Hahn are represented by Mark J. Geragos, Ben J. Meiselas and Matthew M. Hoesly of Geragos & Geragos, Michael E. Adler of GrayLaw Group Inc., and Harmeet K. Dhillon and Nitoj P. Singh of Dhillon Law Group Inc.

Citibank N.A. and Citigroup Inc. are represented by Bronwyn F. Pollock, Lucia Nale, Thomas V. Panoff, Christopher S. Comstock and Andrew J. Spadafora of Mayer Brown LLP.

Wells Fargo Bank, N.A. is represented by Brendan P. Cullen and Sverker K. Hogberg ofSullivan & Cromwell LLP, and David C. Powell, Carolee A. Hoover and Jamie D. Wells of McGuire Woods LLP.

JPMorgan Chase Bank, N.A. is represented by Robert J. Herrington and Karin Bohmholdt of Greenberg Traurig LLP.

Bank of America, N.A. is represented by Enu A. Mainigi, Kenneth C. Smurzynski, Craig D. Singer and Jesse T. Smallwood ofWilliams & Connolly LLP, and Janice P. Brown and Arlene R. Yang of Brown Law Group.

U.S. Bank National Association is represented by J. Warren Rissier, Megan A. Suehiro, Brianna R. Howard and Michael S. Kraut ofMorgan Lewis & Bockius LLP.

Live Oak Banking Company is represented by Kevin M. Lally and Henry L. Kitchin, Jr. of McGuire Woods LLP.

Harvest Small Business Finance LLC is represented by Nina Huerta, Casey B. Howard and Andrew Braunstein of Locke Lord LLP.

The case is American Video Duplicating Inc. et al, v. Citibank N.A., et al, case number2:20-cv-03815, in the U.S. District Court for the Central District of California.

--Editing by Amy Rowe.

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