Class Action Alleges ‘Vast Majority’ of Minority-, Woman-Owned Businesses Shut Out of Paycheck Protection Program

A “vast majority” of minority- and woman-owned small businesses were never given the opportunity to apply for Paycheck Protection Program (PPP) loans before the federal money ran out, a proposed class action lawsuit alleges.

Filed by non-profit social welfare organization NOLC, Inc. and its operator, the 16-page complaint out of Oklahoma aims to remedy what it claims to be the U.S. Small Business Administration’s (SBA) “egregious[] and lawless[]” failure to protect underserved and rural-community small businesses from the financial distress brought on by the COVID-19 crisis.

Overall, the plaintiffs allege the defendants’ decision-making and conduct leading up to and during the rollout of the PPP unlawfully and disproportionately discriminated against minority- and woman-owned businesses amid a period of unprecedented financial uncertainty.

“During a time of national and global crisis, Defendants were given the unique and tremendous charge of providing relief to small business owners through administration of these small business loans pursuant to the PPP,” the lawsuit reads. “Yet, Defendants chose to pick winners and losers - the winners being non-minority and non-woman owned small businesses.”

The lawsuit requests $150 billion for disbursement among millions of underserved- and rural-market barbers, hairstylists, mom and pop restaurants, actors, comedians, musicians, small churches, small non-profits and youth organizations nationwide so the parties can continue to operate until COVID-19 is no longer a threat.

Lawsuit: Lack of guidance left many small businesses “in the lurch”

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $2.2 trillion to support citizens and businesses as the novel coronavirus pandemic wreaked havoc on the country’s economy. Created by the CARES Act was the PPP, a $349 billion program through which 30 million small businesses (those with fewer than 500 employees), non-profits, veterans’ groups and tribal organizations could apply for and obtain government-backed, forgivable loans. Additionally, the PPP was intended to be made available to “non-employer businesses,” i.e. sole proprietorships, those who are self-employed, and independent contractors, the suit says.

As the lawsuit tells it, however, an issue with the CARES Act was that it did not specify when and how PPP funds would be distributed nor offered enough guidance or criteria as to who would receive funds. According to the suit, these crucial matters relied on the discretion of the defendants—the federal government; the U.S. Small Business Administration and its administrator, Jovita Carranza; and U.S. Secretary of the Treasury Steve Mnuchin.

Although the non-binding “Sense of the Senate” within the CARES Act decreed that the SBA administrator issue guidance directly to lenders—i.e. banks—and agents to “ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets,” what took place in practice disproportionately harmed minority- and woman-owned non-employer businesses, the lawsuit alleges.

Essentially, the groups for whom the PPP was intended to provide aid have been left out in the cold as a result of the defendants’ decision to leave it up to lenders and agents to call the shots, the plaintiffs claim.

“Failure to comply with the Sense of the Senate has led to underfunding or non-funding for the most vulnerable small businesses,” the complaint says. “Without guidance, lenders have been allowed to circumvent the law and discriminate against certain groups.”

“Winners and losers”

In addition to the defendants allowing lenders and agents to spearhead the disbursement of PPP funds, the lawsuit takes issue with the federal government’s call on when to open the application process and to whom it would be available.

According to the case, the first PPP application period opened on Friday, April 3 for businesses with up to 500 W-2 employees. A week later, on Friday, April 10, an application period opened for non-employer businesses. Unfortunately, because guidance for non-employers’ loan applications was not released until late on Tuesday, April 14, these businesses were essentially not allowed to apply for PPP funds until Wednesday, April 15, a day before the SBA announced on its website that it was unable to accept new PPP applications based on funding availability.

Per the lawsuit, the defendants offered no explanation or justification for the separate application periods. 

The first wave of applicants, businesses with payroll employees, was given a 14- day window of opportunity to apply for the PPP loans before the funds were exhausted. In contrast, the second group. Non-employer Businesses, only had a one-day window to apply before the funds were exhausted.

Approximately 79 percent of all white-owned businesses and 96 percent of Black-owned businesses are considered non-employer, the suit says. Moreover, 89.5 percent of the 9.9 million firms in the United States owned by women are of the non-employer designation, the complaint adds.

Overall, the defendants prioritized businesses who maintained W-2 employees on payroll over protecting the interests of “a large part of this country’s economic engine – sole proprietorships, self-employed individuals, or independent contractors,” according to the lawsuit.

“In fact, Defendants knowingly, intentionally, and illegally discriminated against minority-owned and woman-owned Non-employer Businesses,” the plaintiffs claim, alleging violations of the Fifth Amendment to the U.S. Constitution.

As the COVID-19 crisis stretches into the summer, banks and insurance companies are among the most common targets of proposed class actions filed by small businesses who allege they’ve received the short end of the stick when it comes to receiving a piece of federal stimulus money. Whereas some cases allege lenders ignored the government’s first-come, first-served directive in handling PPP loan applications, other lawsuits claim lenders stiffed accountants, attorneys, CPAs and other agents who helped small businesses prepare and file their applications.

Who’s covered by this lawsuit?

The lawsuit looks to represent a class comprised of all minority- and woman-owned businesses in the United States.

ClassAction.org’s coverage of COVID-19 litigation can be found here and over on our Newswire.  

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