Jason A. Levine, Peter E. Masaitis, Gillian H. Clow, and Giles Judd, Alston & Bird LLP
This week, we focus on four significant decisions in pandemic-related cases. Courts dismissed putative class actions claiming PPP agent fees and seeking to invalidate Minnesota’s eviction moratorium, and also dismissed a lawsuit by several restaurants seeking business interruption insurance coverage. Another court denied an employer’s motion to dismiss a complaint for violation of the WARN Act through a layoff necessitated by the pandemic.
CASES
1. Suit Against JPMorgan Chase and First Republic Bank Over PPP Agent Fees Dismissed
Overview: A California federal judge dismissed a putative class action brought by M&M Consulting Group, LLC against JPMorgan Chase Bank and First Republic Bank for their purported failure to pay fees to agents who assisted small businesses in acquiring federal loans under the Paycheck Protection Program (“PPP”).
Background: M&M claimed that it was entitled to receive mandatory agent fees under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act for helping borrowers with their PPP loan applications. Further, M&M asserted that a compensation agreement between the agent and lender was not required for payment. In its motion to dismiss, JPMorgan Chase countered that “self-proclaimed agent[s] with no compensation agreement with Defendant lenders” are not entitled to agent fees.
Decision: In granting the motion to dismiss, the court held that “absent an agreement between agent and lender pursuant to the traditional Section 7(a) guidelines, lenders are not required to pay agent fees under the text of the CARES Act or its implementing regulations.” Further, the court noted that nothing in the statutory language of the CARES Act “suggests that Congress intended to create an implied private right of action.” Since the court found that M&M was not entitled to agent fees absent a compensation agreement, its companion claims for unjust enrichment and conversion also failed.
What it means/Our take: This decision continues the trend of federal courts dismissing agent claims for fees, further solidifying the legal conclusion that a compensation agreement with the lender is a prerequisite to the recovery of agent fees in connection with PPP loan applications. We would expect uniformity on this point as cases percolate further.
2. Complaint Challenging Minnesota’s COVID-19 Eviction Moratorium Dismissed
Background:Two landlords filed suit seeking to invalidate the Governor of Minnesota’s moratorium on evictions of tenants for failure to pay rent due to the pandemic, claiming it was unconstitutional because it violated their contractual right to evict “troublesome” tenants.
Decision: On December 31, 2020, the District of Minnesota granted the Governor’s motion to dismiss the complaint, and denied the landlord’s request for a preliminary injunction. The court’s order provided that nothing in the Minnesota executive orders interfered with the landlord’s ultimate right to collect rent pursuant to its lease agreements, and that the moratorium on eviction thus did not infringe their constitutional rights. The court explained:
But the fundamental nature of a lease of a residential unit is that the landlord provides the tenant a place to live; the tenant, in turn, pays the landlord rent. The landlord’s end of the contractual bargain is receiving rent payments. Nothing in the [executive orders] interferes with that right, and each of the eviction moratoria clearly states that it does not affect a tenant’s obligation to pay rent. And although, under the [executive orders], a landlord cannot enforce its contractual right to rent through an eviction proceeding, it can still sue tenants for rent owed.
The court found further that the executive orders advance an important state interest – preventing the spread of COVID-19 – and the court determined they “appropriately and reasonably advance that interest.” The executive orders do not completely prohibit evictions, which the court believes would not reasonably advance the state’s interest in protecting public health – for example, evictions may still be allowed if a tenant poses a risk to other residents or engages in dangerous criminal activity.
What it means/Our take: This decision is in line with others from across the country that have upheld statewide eviction moratoriums against legal challenges. As a consequence, a large volume of eviction proceedings will likely be filed nationwide once the moratoriums expire, assuming tenants are unable to pay rent. Real estate entities and landlords should prepare for a backlog of these cases, and for the potential that they will take longer to adjudicate as a result.
3. Restaurant Group’s Coverage Class Action Against State Auto Insurance Dismissed
Overview: A West Virginia federal judge dismissed a putative class action brought by Bluegrass, LLC, operator of three local restaurants, against insurer State Automobile Mutual Insurance Company (“State Auto”), for its purported failure to cover physical losses or damages resulting from the COVID-19 pandemic.
Background: Bluegrass argued that it suffered a “direct physical loss of or damage to Covered Property” and an “actual loss of Business Income” under the terms of its policy with State Auto, when it was forced to temporarily shut down and later modify its operations due to the coronavirus outbreak. State Auto moved to dismiss, contending that such health restrictions were not a “direct physical loss or damage,” and that exclusions for loss due to governmental orders and viral outbreaks barred coverage under the terms of the policy.
Decision: Despite a recent opinion from the Eastern District of Virginia in Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., which found ambiguity in the term “direct physical loss,” the court held that no such ambiguity existed under West Virginia law and granted dismissal. While expressing sympathy for small businesses affected by the pandemic, the court found that, under the plain language of the agreement, there was no “direct loss to the property.” Further, the fact that many businesses, including Bluegrass, continued to operate under such circumstances undercut any alternative argument that “the presence of COVID-19 . . . created an altered physical condition that would trigger coverage under the policy.”
What it means/our take:Although a split exists among courts as to whether a “direct physical loss or damage” requires tangible damage to the covered property, this decision adds to a growing majority holding that such a requirement exists. If courts continue to differ on this issue, we would expect insurers operating in jurisdictions not requiring tangible damage to consider accounting for this in premiums charged to policyholders.
4. Court Denies Motion to Dismiss Class Action Against Enterprise Holdings for Failing to Provide Workers With Advance Warning of Layoff Due to the Pandemic
Background: A putative class of employees at the Orlando and Tampa airports sued Enterprise Holdings, claimed it had violated the Worker Adjustment and Retraining Notification (“WARN”) Act by “dismissing them with little to no notice” due to the pandemic.
Decision: On January 4, 2021, the district court for the Middle District of Florida entered an order denying Enterprise Holdings, Inc.’s motion to dismiss Plaintiffs’ complaint for lack of standing, lack of personal jurisdiction, and failure to state a claim. The court permitted Plaintiffs to take jurisdictional discovery to determine whether Enterprise had an employment relationship with the workers who filed the suit under the WARN Act. The court found unavailing Enterprise’s argument that the “natural disaster” defense should apply, because the complaint does not allege that COVID-19 is a natural disaster that caused the layoffs, but instead that the layoffs were an indirect result of the pandemic. Thus, the court also denied the motion to dismiss for failure to state a claim.
What it means/Our take: While the personal jurisdiction aspect of this order does not have broad application, the court’s analysis of the “natural disaster” defense is noteworthy. It stated:
This isn’t a situation where, for example, a factory was destroyed overnight by a massive flood – that would be a “direct result” of a natural disaster. This is an indirect result – more akin to a factory that closes after nearby flooding depressed the local economy. Defendants’ facilities or staff didn’t disappear overnight, suddenly wiped out. Instead, COVID-19 caused changes in travel patterns and an economic downturn, which affected Defendants – so the natural disaster defense doesn’t apply.
Under the court’s reasoning, the exception to the WARN Act’s notice requirement for a layoff that is the direct resultof a natural disaster may not be successful for pandemic-related layoffs. Instead, the court noted that the likely inquiry will be whether the “unforeseeable business circumstances” defense applies. But that defense is not a complete exemption from the notice requirement; it only softens the requirement, mandating that the employer “give as much notice is practicable.” 29 U.S.C. §§ 2102(b)(2)(A), (b)(3). Employers should be wary of this distinction in the event they are forced to lay off workers due to the pandemic’s effect on their businesses.
Jason Levine is a commercial and antitrust litigation partner in the Washington, D.C. office of Alston & Bird LLP. Peter Masaitis is a product liability and toxic tort litigation partner in the firm’s Los Angeles office. Gillian Clow and Giles Judd are litigation associates at the firm.
