35 STATE STREET HOTEL PARTNERS, LLC (d/b/а Hotel Californian), Plaintiff, v. KELLY LOEFFLER, Administrator of the United States Small Business Administration, et al., Defendants.
Civil Action No. 24-747 (JDB)
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
March 20, 2025
JOHN D. BATES, United States District Judge
At the start of the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief and Economic Security (
The Hotel Californian asserts that SBA violated the Administrative Procedure Act (“APA”) by denying its forgiveness request because either applying the single corporate group rule to the Hotel is contrary to the governing statutes or SBA‘s application of the rule was arbitrary and capricious. After these arguments failed in front of SBA, the Hotel Californian sought judicial review in this Court. Albeit for different reasons than the Hotel posits, the Court agrees that SBA‘s denial violated the APA. It thus grants the Hotel Californian‘s motion for summary judgment, denies SBA‘s cross-motion, vacates SBA‘s denial, and remands to the agency.2
BACKGROUND
This case involves a web of statutes and regulations. So before moving to the factual and procedural history, the Court explains SBA‘s authority to give loans under the Small Business Act, how the CARES Act altered that authority for PPP loans, and the relevant regulations SBA has promulgated.
I. Legal Background
a. Section 7(a) of the Small Business Act
“The Small Business Act of 1953 created the Small Business Administration to ‘aid, counsel, assist, and protect insofar as is possible the interests of small-business concerns in order to preserve free competitive enterprise . . . and to maintain and strengthen the overall economy of the Nation.’” SBA v. McClellan, 364 U.S. 446, 447 (1960) (quoting
To carry out its power under § 7(a)—or any power Congress grants it—SBA can “make such rules and regulations as [it] deems necessary.”
Part 121 also contains the so-called “affiliation rules.” “[I]n certain circumstances,” SBA takes into account “other entities (‘Affiliates’) owned by the applicant or an owner of the applicant” to “determin[e] the size of the applicant.”
The Small Business Act does not provide much detail on the permissible amount of a § 7(a) loan. The only specific guardrail is that a borrower cannot receive in aggregate more than a specified dollar amount in SBA loans.
b. The CARES Act and the PPP
In March 2020, Congress enacted the CARES Act in part “to help businesses weather the pandemic.” Air Excursions LLC v. Yellen, 66 F.4th 272, 275 (D.C. Cir. 2023). Section 1102 of the Act established the PPP to “provid[e] small businesses with the funds necessary to meet their payroll and operating expenses and therefore keep workers employed.” Springfield Hosp., Inc. v. Guzman, 28 F.4th 403, 409 (2d Cir. 2022); see also Intеrim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program (“Apr. 15, 2020 IFR”),
The PPP made more businesses eligible for loans by relaxing certain § 7(a) eligibility criteria and waiving others. These included criteria related to size. “[A]ny business concern” became “eligible to receive а covered loan if” it had not more than 500 employees or the applicable industry employee size standard, whichever was larger.
Like § 7(a), the PPP specified a maximum amount in loans a business could receive under the program. Rather than set a universal cap, the statute made an entity‘s maximum loan amount a function of the entity‘s average month payroll costs, multiplied by 2.5.
On the back end, the PPP allowed a recipient to apply to have its loan forgiven. The CARES Act made a “covered loan” eligible for forgiveness up to the sum of certain costs—such as payroll costs—the recipient incurred during the covered period,
While the CARES Act provided this general structure for the PPP, Congress saw that the program‘s details would need to be ironed out—and fast. So it mandated that SBA “issue regulations to carry out” the PPP “[n]ot later than 15 days” after the Act‘s enactment “without regard to the notice requirements” under the APA.
Another way the SBA sought “[t]o preserve the limited resources available to the PPP рrogram” was through what became known as the “Single Corporate Group Rule,” or the “SCG Rule.” Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders (“First SCG Rule”),
On August 8, 2020, the PPP expired, see Act of July 4, 2020,
The criteria and limits for second draw loans under the EAA were largely the same as for first draw loans under the CARES Act, although some diffеred. “The maximum amount of a covered loan made to an eligible entity” was capped at $2 million instead of $10 million,
II. Factual and Procedural History
The Hotel Californian4 is a hotel in Santa Barbara, California that is majority owned by Michael Rosenfeld. See Redacted J.A. Part 1 [ECF No. 30-1] (“J.A. vol. I”) at 58. During the COVID-19 pandemic, the Hotel struggled alongside many others in the accommodations industry. See id. at 57 (explaining that thе Hotel‘s gross receipts declined by 78% between the second quarter of 2019 and the second quarter of 2020). So it applied for a first draw PPP loan in spring of 2020. Id. The lender approved the $1,957,400 loan and the loan was disbursed on April 14, 2020. Id. The Hotel Californian used the loan to cover payroll costs, “which enabled it to keep the majority of its workers employed” despite the downturn in business due to the pandemic. Pl.‘s Mot. Summ. J. [ECF No. 17] (“Pl.‘s Mot.”) at 13; see also J.A. vol. I at 23–24. The loan was later forgiven in full. J.A. vol. I at 57.
The pandemic continued into 2021, and thus so did the Hotel Californian‘s hardships. To keep itself afloat, the Hotel applied for a second draw PPP loan on January 20, 2021, seeking the maximum second draw loan amount of $2 million. Pl.‘s Mot. at 13; Redacted J.A. Part 2 [ECF No. 30-2] (“J.A. vol. II”) at 49. The loan was approved and disbursed in February 2021. J.A vol. II at 49. Like it did for its first draw loan, the Hotel Californian used the full $2 million on payroll costs. J.A. vol. I at 57. Therefore, like it did for its first draw loan, Hotel Californian aрplied to have its second draw PPP loan forgiven. J.A. vol. I at 58.
The Hotel Californian complied with SBA‘s request and sent SBA documents explaining its common ownership. See id. at 58. In addition to being the majority owner of the Hotel Californian, Rosenfeld was at all relevant times the majority owner of three other hotels: Pine & Powell Partners, LLC (“P&P”), WRC Newport LLC (“Newport”), and WRC Huntington LLC (“Huntington”). See id. at 57;
On August 25, 2022, SBA issued a final loan review decision denying Hotel Californian‘s forgiveness application because SBA determined the Hotel‘s second draw loan violated the SCG Rule. See J.A. vol. I at 1–2. The Hotel timely appealed the decision to SBA‘s Office of Hearings and Appeals (“OHA”), id. at 3, but before OHA could rule on the appeal, SBA withdrew its final loan review decision so it could conduct further review of the Hotel‘s application, see id. at 50; Combined Memo. Supp. Defs.’ Mot. for Summ. J. & Opp‘n to Pl.‘s Mot. Summ. J. [ECF No. 19] (“Def.‘s Mot.”) at 40.
After further review, SBA again denied the Hotel‘s application on March 28, 2023 (the “Final Loan Review Decision,” or “FLRD”). See J.A. vol. I at 67–68. Its reasoning remained largely the same: the Hotel was part of a “‘family’ of four affiliated entities defined by common
The Hotel Californian timely appealed this decision too. Id. at 56–66. As it had in its previous appeal, the Hotel argued that SBA‘s decision was contrary to law or in the alternative arbitrary and capricious. Id. In the Hotel‘s view, applying the SCG Rule to a business in the accommodations industry contradicted the Affiliation Waiver by “reintroduc[ing] an affiliation-based bar to eligibility.” Id. at 62–65. And regardless of the rule‘s legitimacy, the Hotel posited that because SBA had granted Newport‘s forgiveness application—but denied the Hotel‘s—the denial was arbitrary. Id. at 65–66.
On August 18, 2023, an administrative law judge (“ALJ”) affirmed SBA‘s denial of the Hotel‘s loan forgiveness application (the “Initial OHA Decision”). J.A. vol. II at 48–57. The ALJ first agreed that the Hotel violated the SCG Rule because the Hotel and its affiliates received an aggregate of $8 million in second draw loans. See id. at 53–54. The ALJ thеn declined to decide whether the SCG Rule was unlawful because it determined the OHA‘s jurisdiction does not extend to challenges to the validity of a regulation, and SBA‘s application of the regulation wasn‘t a “clear error.” Id. at 56. In so doing, however, the ALJ noted that the Rule “does not functionally render hotel and restaurant PPP borrowers ineligible in contradiction of the Affiliation Waiver.” Id. at 55 (emphasis added). He pointed to P&P and Newport for support: the two hotels would have had more than 300 employees, and thus would have been ineligible for a second draw loan, has SBA taken their affiliates’ employees into account when determining eligibility. Id. at 55–56. Yet both were eligible for second draw loans, received said loans, and had them forgiven. Id. The ALJ also determined SBA‘s denial wasn‘t arbitrary and capricious because P&P and Newport had their $2
Days after the Initial OHA Decision, the Hotel petitioned OHA for reconsideration, id. at 58–70, but OHA denied the Hotel‘s request, id. at 71–76. The denial reiterated that the FLRD‘s determination that the Hotel violated the SCG Rule was not clear error. Id. at 76. Following OHA‘s denial of reconsideration, the SBA Administrator declined to review the Initial OHA Decision too. Id. at 94.
As a result, the Hotel Californian filed the instant suit on March 14, 2024. Compl. [ECF No. 1 at 23]; see also
LEGAL STANDARD
Summary judgment is appropriate if the movant demonstrates “there is no genuine issue as to any material fact and the movant is entitled to a judgment as a matter of law.”
Under the APA, a court must “hold unlawful and set aside agency action” that is “arbitrary, capricious, . . . or otherwise not in accordance with law.”
ANALYSIS
The Hotel Californian argues that it is entitled to summary judgment for the same reasons it raised to SBA: the denial of the Hotel‘s second draw loan forgiveness application was erroneous because (1) as applied to the Hotel, the SCG Rule exceeds SBA‘s power under the governing statutes and (2) even if not, the denial was arbitrary and capricious.
I. Whether applying the SCG Rule to the Hotel exceeded SBA‘s statutory authority.
The Hotel‘s argument that SBA exceeded its statutory authority starts with the Hotel‘s claim that SBA‘s application of the SCG Rule to a business in the accommodation and food industry flatly contradicts the Affiliation Waiver. Pl.‘s Mot. at 21–28. The SCG Rule, the Hotel reasons, was “an affiliation-based limitation” on a business‘s “eligibility” for a PPP loan: it
SBA retorts that the Hotel‘s argument is based on mistaken premises. First, “[t]he Corporate Group Rule does not conflict with the Affiliation Waiver because the Rule d[id] not restrict eligibility.” Def.‘s Mot. at 17. Instead, SBA explains, the Rule acted as a limit on the loan amount that eligiblе businesses could receive. Id. In other words, the Hotel and its affiliates were always eligible for PPP loans; the SCG Rule only made it so they could not receive a loan that exceeded a particular amount. Id. at 17–18. Since SBA‘s application of the Rule only limited the amount the Hotel could receive, SBA contends the Rule didn‘t conflict with the statutes. See id. Second, in SBA‘s view, its application of the SCG Rule didn‘t conflict with the statutes’ caps on loan amounts. The statutes only set a ceiling—not a floor—on loan amounts, and nothing in the statute prohibited SBA from constructing another, lower limit for certain businesses. See id. at 19, 24–26.
SBA‘s arguments win out.
Recall that the CARES Act and the EAA provided that business concerns that would not be “small” under § 7(a) would be eligible for PPP loans so long as the business had—for second draw loans—not more than the higher of 300 employees or the applicable size standard for its
Viewing these together, one doesn‘t need a suite of canons of statutory construction to conclude that the plain text of the Affiliation Waiver forbids SBA from using the affiliations of a business in the accommodations and food industry to determine whether the business met the size standards to be eligible for a PPP loan. To illustrate, if a hotel had 250 emрloyees and its two affiliates had 1000, the hotel would still be eligible for a second draw PPP loan under
Now compare the Affiliation Waiver to the SCG Rule. The Rule stated that “businesses that are part of a single corporate group shall in no event receive more than $20,000,000” in first
That does not directly contradict the Affiliation Waiver. Rather than limiting a business‘s “eligibility for a covered loan,” see
The takeaway is that—as SBA argues and the Initial OHA Decision concluded—the SCG Rule was not an affiliation-based limit on PPP loan eligibility but a limit on the loan amount an
Next, the Hotel directs the Court‘s attention to SBA‘s statements that the Hotel “‘d[id] not meet eligibility requirements for forgiveness’ of the loan because of the Single Corporate Group Rule.” Pl.‘s Mot. at 27 (emphasis added by plaintiffs) (quoting J.A. vol. I at 67 (FLRD)); cf. J.A. vol. II. at 56 (initial OHA Decision explaining that the Hotel “and its affiliates could all be potentially eligible for full forgiveness”). The Hotel reasons that this language shows the SCG Rule was a limit on loan eligibility. Pl.‘s Mot. at 27. This argument misses a critical distinction made by the governing statute and the regulations implementing it. The criteria for lоan eligibility
In its last attempt to convince the Court that SBA‘s application of the SCG Rule directly violated the Affiliation Waiver, the Hotel argues that it doesn‘t matter how the SCG Rule is “label[ed].” Pl.‘s Mot. at 26. Because, “[i]n ordinary speech, if a business fails to satisfy a condition . . . and therefore receives $0 . . . no one would say that the business was ‘eligible’ for the loan,” the Hotel avers that the “substance” of the SCG Rule is to limit loan eligibility. Id. at 26–27. It‘s true that, colloquially, one may say that the Hotel was ineligible for a second draw loan if it was entitled to receive a loan of $0. But the colloquial meaning of one word in the Affiliation Waiver dоes not give the Court license to ignore the rest of the Waiver, the other relevant statutory provisions, the text of the SCG Rule, and SBA‘s decisions denying the Hotel‘s application. See Noble v. Nat‘l Assoc. of Letter Carriers, ALF-CIO, 103 F.4th 45, 50 (D.C. Cir. 2024) (explaining that statutory interpretation requires “examining the plain text” and the statute‘s “structure and context” (citations omitted)). For the reasons already explained, each of those shows that the SCG Rule, as applied to the Hotel, did not operate as an affiliate-based limitation on loan eligibility in violation of the Affiliation Waiver.8
The question is thus whether Congress‘s PPP-loan maximums precluded SBA from setting a lower maximum for corporate groups. To begin, statutes that set a maximum dollar amount are
Once given discretion, agencies can then “cabin their own discretionary funding determinations by . . . regulation[],” see Policy & Rsch., 313 F. Supp. 3d at 76, so lоng as the regulations don‘t contradict the statutory circumscriptions. That is what SBA did here. Faced with limited funds and a country full of struggling businesses, SBA decided to allocate the funds by setting a maximum loan amount for corporate groups that was below the statutory maximum.
Cementing the fact that the SCG Rule‘s limit on loan amount isn‘t contrary to the statutory maximums is that the Rule and the statutory maximums operated independently and simultaneously. The statutorily imposed maximums set caps on the amounts “eligible entit[ies]” could receive in PPP loans. See
Finally, the Hotel argues that SBA‘s application of the SCG Rule to deny the Hotel‘s loan forgiveness was contrary to SBA‘s statutory authority because it conflicted with the “statutory purposes and design” of the CARES Act and EAA. Pl.‘s Mot. at 33 (quoting Gonzales v. Oregon, 546 U.S. 243, 267 (2006)). The Court agrees with the Hotel that the PPP was created “to help businesses weather the pandemic,” and that Congress surely desired “to maximize relief for . . . businesses” in the hospitality industry. See id. at 33–34 (citations omitted). But “no law pursues its purposes at all costs.” Pulsifer v. United States, 601 U.S. 124, 152 (2024) (cleaned up). Congress may have wanted to provide unlimited assistance to struggling businesses, but financially it could not. The unambiguous statutory language shows that it thus allocated a limited fund for PPP loans, set statutory limits on which businesses could receive the loans, how much those
II. Whether SBA‘s denial of the Hotel‘s loan-forgiveness application was arbitrary and capricious.
Although SBA‘s application of the SCG Rule to the Hotel was within SBA‘s statutory authority, its denial of the Hotel‘s loan-forgiveness application on the basis of the SCG Rule was still not permissible under the APA. The Court concludes the denial was arbitrary and capricious.
In the Hotel‘s view, SBA‘s denial was arbitrary and capricious because SBA rendered “self-contradictory decisions” in applying the SCG Rule and “fail[ed] even to consider Hotel Californian‘s serious reliance interests.” Pl.‘s Mot. at 35. But SBA‘s denial was arbitrary and capricious for a more basic reason: SBA did not explain why the Hotel‘s receipt of a loan in excess of the SCG Rule‘s cap rendered the Hotel ineligible for loan forgiveness. See Mirror Lake Vill., LLC v. Wolf, 971 F.3d 373, 376 (D.C. Cir. 2020) (“An agency‘s actions are arbitrary and capricious if they are not ‘reasonably explained.‘” (quoting Jackson v. Mabus, 808 F.3d 933, 936 (D.C. Cir. 2015))).
That reasoning may have been well and good if SBA‘s decision was limited to a determination that the Hotel violated the SCG Rule. The problem is that the SBA‘s ultimate decision was that the Hotel was ineligible for loan forgiveness. In so deciding, SBA started and stopped with the SCG Rule. It never explained why the Hotel‘s violation of that Rule made the Hotel ineligible for loan forgiveness. SBA simply “jumped [from] the conclusion” that the Hotel violated the SCG Rule to the conclusion to deny loan forgiveness. See Rutledge v. Del Toro, Civ. A. No. 23-1583 (CRC), 2024 WL 3225958, at *8 (D.D.C. June 28, 2024). But the APA requires that an agency give the Court “[t]hat connective tissue.” See id.
This Court‘s conclusion that SBA didn‘t fully explain its decision is not based solely on the written decisions’ brevity. Perhaps a citation to a rule could adequately explain a decision if the text of that rule addressed each step of the reasoning needed to reach an agency‘s conclusion. See Frizelle v. Slater, 111 F.3d 172, 176 (D.C. Cir. 1997) (“An agency‘s decision need not be a model of analytic precision . . . . A reviewing court will uphold a decision of less than ideal clarity if the agency‘s path may reasonably be discerned.” (cleaned up)). That was not the case here,
Despite the Rule‘s plain text, SBA argues to this Court that the SCG Rule did explain that “loans issued in excess of the limit . . . ‘will not be eligible for forgiveness’ because such loans would [be] ‘regarded as a use of PPP funds for unauthorized purposes.‘” Def.‘s Mot. at 20 (quoting
It is the responsibility of an applicant for a PPP loan to notify the lender if the applicant has applied for or received PPP loans in excess of the amount permitted by this interim final rule and withdraw or request cancellation of any pending PPP loan application or approved PPP loan not in compliance with the limitation set forth in this rule. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness. A lender may rely on an applicant‘s representation concerning the applicant‘s compliance with this limitation.
Plus, SBA would run into another problem even were the Court to squint and read its denial of the Hotel‘s loan as being based on Rosenfeld‘s failure to notify: P&P and Newport‘s second
In short, SBA failed to explain “a rational connection between the facts found and the choice made.” See Dickson v. Sec‘y of Def., 68 F.3d 1396, 1404 (D.C. Cir. 1995). So its decision was arbitrary and capricious.15
III. Remedy
The remaining question is the proper remedy for SBA‘s violation of the APA. The APA requires that a reviewing court “hold unlawful and set aside agency action, findings, and cоnclusions found to be . . . arbitrary [and] capricious.‘”
CONCLUSION
No matter the legality of an agency‘s regulations, the APA requires the agency to reasonably explain its decisions applying them. Here, SBA did not. The Court thus grants the Hotel Californian‘s motion for summary judgment, denies SBA‘s cross-motion, vacates SBA‘s decision denying the Hotel‘s second draw PPP loan forgiveness application, and remands this matter to the SBA. The Court will issue a separate order consistent with this opinion.
/s/
JOHN D. BATES
United States District Judge
Dated: March 20, 2025