By Jon Hill

Law360 (September 25, 2020, 6:46 PM EDT) -- A California pet groomer behind a proposed class action alleging that Wells Fargo stiffed applicants for the Paycheck Protection Program has urged a San Diego federal judge to reject the bank's bid to compel arbitration in the case, arguing that the customer agreements cited by the bank don't apply.

In a brief filed Thursday, plaintiff Karen's Custom Grooming LLC told U.S. District Judge Larry Alan Burns that Wells Fargo's agreements supposedly requiring arbitration are invalid for several reasons, including  alleged evidentiary shortcomings and conflicts with California precedents on arbitration enforceability.

But the Carlsbad, California-based small business said its claims about the coronavirus relief loans offered through the U.S. Small Business Administration-run program also just don't fall within the scope of Wells Fargo products and services ostensibly covered by the bank's agreements.

"WF's products and services, by common logic, do not include forgivable PPP loans due to a global pandemic," KCG wrote. "Indeed, while WF would like to treat the PPP loans as just any other commercial loan that it would make, courts have aptly seen through this argument, describing PPP loans not as 'loans' but as a 'grant of financial aid necessitated by a public health crisis' and noting that they have no underwriting mandates."

KCG is one of a number of small businesses that has accused Wells Fargo and other lenders of misconduct in their roles as gatekeepers for the $660 billion relief loan program, one of several initiatives rolled out by the federal government this spring to blunt economic damage from the coronavirus pandemic.

Created by the Coronavirus Aid, Relief and Economic Security Act, the program allowed small businesses to take out forgivable loans from banks and other lenders to help cover payroll costs and certain other expenses, but KCG and others have alleged that banks improperly obstructed access to the first-come, first-serve program by prioritizing loan applications from bigger, more lucrative borrowers.

Last month, Wells Fargo moved for arbitration in KCG's case, pointing in part to language in a 2018 business account application from the small business that the bank said included a binding arbitration agreement covering disputes related to any Wells Fargo "deposit account, product or service."

And because KCG needed a Wells Fargo business account to be eligible to apply with the bank for a PPP loan, its claims about its PPP loan application are covered by that agreement, according to the bank.

Wells Fargo also asked for dismissal of the case in the absence of arbitration. Among other things, the bank argued that the CARES Act didn't require it to process PPP loan applications in any particular order, and that KCG hadn't shown any concrete harm that can be pinned on having its application allegedly processed later than others.

"Even if plaintiff could plead that it was delayed in obtaining PPP funding for less than one month, plaintiff pleads nothing about how that delay caused it the requisite injury in fact," the bank wrote. "Plaintiff was also free at any time to apply for a PPP loan with any one of the nearly 5,000 other lenders offering PPP loans at the time."

KCG pushed back on the bank's dismissal arguments in Thursday's brief, defending its multiple state-law claims as adequately pled and contending the bank was setting the bar too high for making a passable showing of injury in a case brought under California's Unfair Competition Law.

"Only an 'identifiable trifle' of injury need be alleged, and such injury may, for example, take the form of a loss of customers, goodwill or business relationships," the small business wrote. "Wrongful denial of business opportunities also suffices to allege economic injury."

"Plaintiff alleges that it, along with members of the class(es), were denied the ability to timely apply for PPP loans that were vital to their continued business operations (hence, opportunities), and as such allege a loss of money or property," KCG continued. "Thus, injury in fact is alleged."

KCG also noted its case doesn't assert claims against Wells Fargo for violating the CARES Act itself, unlike other small businesses that have brought PPP-related cases against major banks. Although the complaint does allege Wells Fargo went against SBA regulations that characterized the program as first-come, first-served, KCG said that this alleged failure is "just one basis (of many)" for its claims of unfair and fraudulent business practices by the bank.  

"WF gives short shrift to analyzing the repeated statements identified in the complaint that it would process the PPP applications in a 'queue' and 'work[ ]through' the queue 'in that order' to process PPP loans in the order in which they were received," KCG wrote. "Plaintiff submits the other false statements in the complaint are similarly actionable."

A representative for Wells Fargo declined to comment on Friday, citing the pending nature of the litigation. Counsel for KCG also declined to comment.

Karen's Custom Grooming is represented by Alreen Haeggquist, Kathleen A. Herkenhoff and Ian Pike of Haeggquist & Eck LLP.

Wells Fargo is represented by Brendan P. Cullen and Sverker K. Hogberg of Sullivan & Cromwell LLP.

The case is Karen's Custom Grooming LLC v. Wells Fargo Bank NA et al., case number 3:20-cv-00956, in the U.S. District Court for the Southern District of California.

--Editing by Michael Watanabe.

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