COVID-19 Litigation Update
The first wave of COVID-19 litigation has already started working its way through the courts. The federal dockets are jammed with habeas corpus petitions from inmates seeking early release from custody based on coronavirus health risks. Civil litigants have also fired their first proverbial shots in state and federal courts. This article focuses on three new cases involving different legal aspects of the COVID-19 crisis: the administration of the CARES Act, business interruption insurance coverage and a contract dispute arising out of a force majeure clause.
The CARES Act and the PPP: Legendary Transport, LLC v. JP Morgan Chase & Co.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) allows small businesses (defined as companies that have 500 or fewer employees) to apply for various forms of economic relief, including funds under the Paycheck Protection Program (“PPP”). As the global pandemic brought the U.S. economy to a screeching halt, the small business community viewed the CARES Act as a much-needed lifeline. But soon after the PPP roll-out, reports emerged that the banks charged with processing PPP loan applications were giving preference to their wealthiest clients, thus defeating the CARES Act’s stated objective of saving the most vulnerable companies.
On April 20, 2020, two small businesses, Legendary Transport, LLC and Ro Fitness, LLC initiated a putative class action against JPMorgan Chase Bank, NA. for illegal lending practices. Legendary Transport, LLC v. JPMorgan Chase & Co., C.D. Cal. Case No. 2:20-CV-03636-ODW (GJSx). Specifically, plaintiffs allege that Chase gave preferential treatment to its “high-value” private banking clients, which resulted in fast-track approvals for these wealthy clients. While providing personalized, “concierge” service to its private bank clients, Chase advised its retail customers that applications would only be accepted online. And by the time Chase began accepting online applications from non-private banking clients, the PPP money was mostly gone. According to the complaint, nearly 100 percent of its private banking clients received PPP funds, while only about 4 percent of its retail clients received PPP funds.
On April 22, Legendary sought a temporary restraining order “discontinuing [the banks’] alleged practice of limiting PPP loan applications to only existing customers.” Legendary Transport, LLC v. JPMorgan Chase & Co, 2020 WL 1975366, at *1 (C.D. Cal. April 24, 2020). Legendary filed its TRO application without notice to any of the banks. On this procedural ground alone, the Court denied the application, finding that Legendary did not establish that it would suffer irreparable injury if relief were not granted before the banks could be heard. Id. at *3. (Although Chase filed an opposition, it apparently had not been served with either the complaint or the TRO papers.)
The Court also denied the TRO application on the additional ground that Legendary did not demonstrate that it would suffer an irreparable injury in the absence of injunctive relief. The Court found that Legendary failed “to explain how its alleged injury is not compensable in money damages.” Id. at *3.
Notably, the Court did not reach the merits of Legendary’s claims or evaluate any of the evidence submitted in support thereof. If Legendary’s case continues beyond the pleading stage, discovery into the banks’ PPP lending practices could be of great interest to the general public (to the extent any such information would be available to the public). With the presidential election only a few months away, the banks’ implementation of the CARES Act and the federal government’s delegation of the PPP lending function to private banks, this case and others like it also could very well take on a political dimension.
Business Interruption Insurance Coverage: Travelers Casualty Insurance Co. of America v. Geragos & Geragos, APC and related actions
Many businesses carry business interruption insurance. For companies that have been paying premiums for this coverage, it would seem to be the perfect time to make a claim for business interruption. Well-known attorney Mark Geragos thought so, anyway. His law firm, Geragos & Geragos, initiated a lawsuit against Travelers Casualty Insurance Company of America (“Travelers”) after Travelers denied his business interruption claim. Geragos & Geragos v. Travelers Indemnity Co. of Conn., LASC Case No. 20STCV14022. (Geragos, his firm and related companies have also filed similar lawsuits against Travelers and Hartford Fire Insurance Company.) Travelers, in turn, filed a declaratory relief action against Geragos’ law firm in federal court. Travelers Casualty Insurance Co. of America v. Geragos & Geragos, APC, C.D. Cal. Case No. 2:20-CV-03619-PSG (CFEx).
The Travelers-Geragos lawsuits are ordinary insurance coverage disputes. But these cases frame the key issues that will determine whether and to what extent insurance carriers must pay out billions of dollars in business interruption claims arising out of the COVID-19 pandemic. First, does the physical presence of the virus constitute the requisite “direct physical loss or damage” to property? Travelers contends in its complaint that “the presence of SARS-Co-V-2 [COVID-19] on a surface would not cause physical damage to that surface.” For their part, the Geragos plaintiffs assert that the presence of the virus constitutes a direct physical loss, citing studies that show that the virus can stay on surfaces for 28 days and pointing out that the virus can cause serious illness and death.
Second, do the various stay-at-home orders issued by state and local governments trigger so-called “civil authority” coverage, which protects against losses suffered when the government mandates business closures for health and safety reasons? Travelers says no. The government issued stay-at-home orders to prevent the spread of the virus, not because the virus has caused physical loss, which is a condition precedent for coverage. The Geragos plaintiffs counter that many of the “stay-at-home” orders, including Governor Newsom’s state-wide order, explicitly found that there was a “dire risk” of physical loss resulting from COVID-19, which is sufficient to trigger coverage.
Third, even if there is business interruption coverage, does the virus exclusion preclude claims based on COVID-19? Travelers argues that the plain language of the policy clearly bars any claims based on the coronavirus pandemic. The Geragos policy in question, like many other commercial policies, excludes from coverage “loss or damage caused by or resulting from any virus.” It is not yet clear how the Geragos plaintiffs will address the virus exclusion, but they may attempt to argue that the exclusion does not bar the claims, which arose out of the stay-at-home orders and resulting loss of revenue, as opposed to the virus itself.
The Geragos lawsuits are among the legion of coverage disputes that will play out over the next several years. Small businesses will watch these bellwether cases closely to determine whether they should pursue their own business interruption claims.
Force majeure: Pacific Collective, LLC v. ExxonMobil Oil Corporation
The coronavirus pandemic has disrupted, and will continue to disrupt, all aspects of commercial relationships. Contract disputes will surely arise, and those disputes that cannot be resolved, will be litigated. The doctrines of force majeure and impracticability will play a major role in the outcomes of many of these cases.
Pacific Collective, LLC v. ExxonMobil Oil Corporation, LASC Case No. 20STCV 13294, is among the first cases filed in California to test the court’s application of force majeure law to the COVID-19 crisis. In Pacific Collective, the plaintiff entered into a sales agreement to purchase property from Exxon in Culver City (where a gas station had been located) for $4.2 million. The sales agreement, executed on February 3, 2020, was supposed to close on March 31, 2020. The agreement contains a force majeure clause, which provides:
The deadline for performance of any obligation of a party hereunder shall be automatically extended one day if such performance is delayed on account of force majeure, which as used herein means…material or labor restrictions by any governmental authority…and which, by the exercise of due diligence, the claiming party is unable, wholly or in part, to prevent, or overcome.
On March 30, the day before the scheduled closing, Pacific advised Exxon that it was invoking the force majeure clause on the basis that the state, county and city authorities had issued stay-at-home orders, which prevented Pacific from closing the sale. Specifically, Pacific claimed that it could not appear in person to execute the closing documents before a notary public. Moreover, the stay-at-home orders prevented Pacific from starting construction on the property, which frustrated the purpose of the sales agreement.
On April 3, Exxon rejected Pacific’s force majeure notice and purported extension of the closing date, and thereafter terminated the sales agreement. Pacific wasted no time, filing its complaint later that day. Pacific asserts claims for breach of contract, specific performance and declaratory relief, and seeks damages and attorneys’ fees, among other relief. Exxon removed the case to the Central District of California on April 28.
Pacific’s force majeure theory raises several critical issues. Generally speaking, a force majeure will excuse performance only to the extent that the event actually prevents the party from fulfilling its obligations; partial or delayed performance may still be required. Could Pacific have executed the closing documents by DocuSign or other remote means? Could the notary requirements have been waived? If so, was Pacific required to close the transaction in this fashion? If documents could be signed, but the sale could not be recorded, was Pacific nonetheless obligated to tender the $4.2 million to the escrow agent? These are just some of the questions that Pacific and Exxon will litigate.
As for Pacific’s claim that the coronavirus pandemic excuses performance of the sales agreement because construction will be delayed, Exxon will likely argue that the commercial impracticability doctrine does not apply. The sales agreement contemplates that Pacific will purchase the property from Exxon — whether Pacific develops the property or leaves it fallow has no bearing on Pacific’s promise to pay $4.2 million to Exxon on March 31.
Exxon may also argue that as a matter of law it was entitled to rescind the sales agreement when Pacific failed to perform because of a force majeure. Pacific will likely counter that the sales agreement explicitly provides that a force majeure extends the time for performance, and Pacific merely sought additional time to close the sale, as it was entitled to do under the contract.
Whatever the outcome, this case, like Legendary Transport and the Travelers v. Geragos cases, may provide the first clues to how courts will decide novel legal questions arising out of the COVID-19 crisis. Must banks treat all lenders equally when administering the PPP loans under the CARES Act? Are business losses caused by the coronavirus shutdown covered under business interruption policies? Do the stay-at-home orders excuse a real estate developer from closing on the sale date? It will likely take months, or years, to get clear answers to these questions. We all hope that by then the COVID-19 crisis will be behind us.