*1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA 35 STATE STREET HOTEL PARTNERS,
LLC (d/b/a Hotel Californian),
Plaintiff,
v. Civil Action No. 24-747 (JDB) KELLY LOEFFLER, Administrator of the
United States Small Business
Administration, et al.,
Defendants.
MEMORANDUM OPINION
At the start of the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, Pub. L. No. 116-136, 134 Stat. 281 (2020). Among other things, the CARES Act created the Paycheck Protection Program (“PPP”), which empowered the Small Business Administration (“SBA”) to give loans to a broader swath of businesses and to forgive those loans. The plaintiff here, the Hotel Californian (or “the Hotel”), took advantage of the PPP and received a $2 million loan in both “draws” that Congress authorized. Its first loan was forgiven. But its second loan was not. For second draw PPP loans, SBA implemented a regulation that capped the amount in loans that a “single corporate group” could receive at $4 million. Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans (“Second SCG Rule”), 86 Fed. Reg. 3712, 3720 (Jan. 14, 2021). The Hotel Californian shares a common majority owner with three other hotels and, together, the *2 four hotels received $8 million in loans. For that reason, SBA denied the Hotel’s request for loan forgiveness on its second, $2 million loan.
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.
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,
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.” Id. § 634(b)(6). SBA has thus fleshed out the eligibility requirements for business loans. See id. § 632(a)(2)(A) (permitting SBA to “specify
detailed definitions or standards by which a business concern may be determined to be a small business concern”). A business is only eligible for a § 7(a) loan if, among other requirements, it is “small under the size requirement of part 121 of this chapter.” 13 C.F.R. § 120.100(d) (2025). Part 121 goes on to explain that size requirements are based either on number of employees or annual receipts and vary by industry. Id. § 121.201 (listing size requirements); § 121.101(a). 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.” Id. § 121.301; id. § 120.100(d) (explaining that a business must be “small . . . including affiliates”). Businesses in the same industry are affiliated if, as relevant here, one individual owns more than 50 percent of each business. See id. § 121.301(f)(1)(iii); see also id. § 121.103(a)(2) (“SBA considers . . . ownership . . . in determining whether affiliation exists.”). For § 7(a) loans, the affiliation rules mean an entity is eligible if it does “not exceed the size standard” for its industry either alone or when “combined with its affiliates.” Id. § 121.301(a)(1)–(2). If a business fails either requirement, it can still be eligible if, “[i]ncluding its affiliates,” it has a “tangible net worth” of $20 million or less and an “average net income” of $6.5 million or less over the past two fiscal years. § 121.301(b)(1)–(2).
Generally, “[t]he SBA prefers to guarantee private loans rather than to disburse funds
directly.” United States v. Kimbell Foods, Inc.,
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. 15 U.S.C. § 636(a)(3).
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,
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 a covered loan if” it had not more than 500 employees or the applicable industry employee size standard, whichever was larger. § 636(a)(36)(D)(i)(I)–(II). And, for small businesses in certain industries, the number of employees did not have to include affiliates. Congress expressly provided that “the provisions applicable to affiliations under [13 C.F.R. § 121.103], or any successor regulation, [wer]e waived with respect to eligibility for” businesses in the accommodation and food services industry with 500 employees or fewer (the “Affiliation Waiver”). 15 U.S.C. § 636(a)(36)(D)(iv)(I).
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. Id. § 636(a)(36)(E). But in no event could the amount exceed $10 million. Id. § 636(a)(36)(E)(ii).
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, id. § 636m(b), so long as the recipient used at least 60 percent of the loan for payroll costs, id. § 636m(d)(8). The Act also *6 capped forgiveness at the amount of the loan principal, id. § 636m(d)(1), and decreased it by, among other things, the recipient’s number of employees, see id. § 636m(d)(2)–(3).
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. Id. § 9012. SBA complied. The resulting regulations largely “streamlin[ed] the requirements of the regular 7(a) loan program.” See Apr. 15, 2020 IFR, 85 Fed. Reg. at 20811–12, 20815. They also recognized SBA did not have an unlimited amount to lend in PPP loans. For example, the regulations established that PPP funds were to be distributed on a “first-come, first-served” basis until the allocated funds ran out. Id. at 20812–13.
Another way the SBA sought “[t]o preserve the limited resources available to the PPP program” 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”), 85 Fed. Reg. 26324, 26324–25 (May 4, 2020). The Rule “limit[ed] the amount of PPP loans that any single corporate group [could] receive” by forbidding “businesses that are part of a single corporate group” from “receiv[ing] more than $20,000,000 of PPP loans in the aggregate.” Id. at 26325. Per the Rule, a single corporate group was defined as all businesses that are majority owned by a common parent. Id. The Affiliation Waiver “appl[ied] independently” of the Rule and all businesses—including those to which the Affiliation Waiver applied—were subject to the Rule. See id.
*7 The regulations also addressed applying for loan forgiveness. While private lenders received and approved or denied loan forgiveness applications, SBA could “undertake a review at any time in [its] discretion.” Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program—SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (“June 1, 2020 IFR”), 85 Fed. Reg. 33010, 33012 (June 1, 2020). This included when any documentation indicated the borrower was ineligible for a PPP loan. Id.
On August 8, 2020, the PPP expired, see Act of July 4, 2020, Pub. L. No. 116-147, 134 Stat. 660 (2020), but the need for the aid it provided did not. So Congress in December 2020 passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act,” or “EAA”). Consolidated Appropriations Act, 2021, Div. N, Title III, Pub. L. No. 116-260, 134 Stat. 1182, 1993–2052 (2020). That act reestablished the PPP, extended it to March 31, 2021, and authorized SBA to loan another $147.5 billion to businesses. See id. § 323(a)(1). It also authorized so-called “second draw” PPP loans for businesses that had already received PPP loans in the “first draw.” Id. § 311(a); see 15 U.S.C. § 636(a)(37).
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 differed. “The maximum amount of a covered loan made to an eligible entity” was capped at $2 million instead of $10 million, 15 U.S.C. § 636(a)(37)(C), and that amount became—for food and accommodation industry businesses only—a function of the entity’s average monthly payroll costs, multiplied by 3.5 rather than the previous 2.5, id. § 636(a)(37)(C)(iv)(bb). And while the EAA kept the CARES Act’s Affiliation Waiver, it extended the waiver only to businesses in the accommodation and food industry with 300—not 500—employees or fewer. Id. § 636(a)(37)(E).
*8
The regulations SBA made to carry out the CARES Act also remained generally the same
for second draw loans. However, SBA altered the SCG Rule, reducing a single corporate group’s
maximum aggregate second draw loan amount from $10 million to $4 million. See Second SCG
Rule,
II. Factual and Procedural History
The Hotel Californian 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 the 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 applied to have its second draw PPP loan forgiven. J.A. vol. I at 58.
That’s when the similarities to the Hotel’s first draw loan ended. Two months after the Hotel Californian submitted its second draw forgiveness application, it received a letter from SBA “requesting additional documents or information for its review of” the Hotel’s second draw loan and forgiveness application. J.A. vol. I at 44. SBA requested documents relating to the Hotel’s affiliates because SBA’s initial review showed that the Hotel, “together with its affiliates, may not meet SBA small business size standards and/or the” SCG Rule. Id. at 45.
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; First SCG Rule,
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 *10 ownership” that had “received $8,000,000 in second draw loans, more than the corporate max of” $4 million and therefore did “not meet eligibility requirements for forgiveness.” Id. at 67. 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 then 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 *11 million loans forgiven while both the Hotel and Huntington—whose loans were disbursed after the other hotels’—did not (or so the ALJ thought). Id. at 56–57; J.A. vol. I at 58.
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 5 U.S.C. § 704 (subjecting “final agency action” to judicial review); 13 C.F.R. § 134.1211(c)(3) (explaining that “a reconsidered initial OHA decision becomes the final decision of SBA 30 calendar days after its service unless SBA . . . decides to review or reverse” it). Several months later, the Hotel filed its motion for summary judgment, see Pl.’s Mot., and SBA responded with its cross-motion, see Def.’s Mot.
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.” Fed. R. Civ. P. 56(a). Here, the parties don’t contest any material facts. So the sole question is which party is entitled to 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.” 5 U.S.C. § 706(2)(A). The court itself
must “decide all relevant questions of law, interpret constitutional and statutory provisions, and
*12
determine the meaning or applicability of the terms of an agency action.” § 706; see also Loper
Bright Enters. v. Raimondo,
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 *13 “render[ed] certain businesses unqualified . . . for Second Draw loans” if the businesses shared common ownership—just like SBA’s affiliation rules for § 7(a) loans. Id. at 23, 25. In the Hotel’s view, the SCG Rule as applied to businesses in the food and accommodations industry directly contradicts the Affiliation Waiver, which explicitly instructed SBA not to apply the affiliation rules to determine such businesses’ eligibility for PPP loans. Id. at 28. And even if the application of the SCG Rule to a hotel didn’t directly conflict with the Affiliation Waiver, the Hotel continues, it still surpassed SBA’s statutory authority because the Rule set a cap on a hotel’s loan amount below the cap Congress set itself. See id. at 32.
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 eligible 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 *14 industry. 15 U.S.C. § 636(a)(37)(A)(iv), (a)(36)(D)(i), (a)(37)(E). The Affiliation Waiver then stated in relevant part that “the provisions applicable to affiliations under” 13 C.F.R. § 121.103 “or any successor regulation, are waived with respect to eligibility for a covered loan for . . . any business concern” that operates in the accommodations and food industry. See 15 U.S.C. § 636(a)(36)(D)(iv) (emphasis added); § 636(a)(37)(E). The referenced affiliation rules of 15 C.F.R. § 121.103, in turn, explain that a business concern’s affiliates are considered when determining whether the business concern is “small” within the meaning of the Small Business Administration Act, and thus eligible for § 7(a) loans. See 15 C.F.R. § 121.103(a)(6) (“In determining the concern’s size, SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its . . . affiliates.”); id. § 121.301(a).
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 employees and its two affiliates had 1000, the hotel would still be eligible for a second draw PPP loan under 15 U.S.C. § 636(a)(37)(A)(iv). But if the same were true of a business in another industry—say a clothing store—the business would have more than 300 employees (or the applicable industry standard, if higher) and thus be ineligible for a second draw loan. See § 636(a)(37)(A)(iv). The Hotel Californian agrees with this straightforward reading. See Pl.’s Mot. at 23 (“SBA therefore has no power to apply an affiliation-based limitation . . . in a way that renders hotels ineligible for PPP loan[s].”).
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
*15
draw loans—or $4 million for second draw loans—“in the aggregate.” First SCG Rule, 85 Fed.
Reg. at 26325; Second SCG Rule,
That does not directly contradict the Affiliation Waiver. Rather than limiting a business’s
“eligibility for a covered loan,” see 15 U.S.C. § 636(a)(36)(D)(iv), the SCG Rule limits the amount
a business can “receive,” First SCG Rule, 85 Fed. Reg. at 26325. This is all the more clear
considering the statutory authority the Rule points to. The Rule cites 15 U.S.C. § 636(a)(36)(E),
the CARES Act’s maximum loan amount. Id. The eligibility requirements—including the
Affiliation Waiver—lie in § 636(a)(36)(D). And while the definition of a “single corporate group”
overlaps with the affiliation rules’ definition of “affiliates,” the rules use the definitions
differently. Under the affiliation rules, a business’s affiliates dictate which employees and/or
income must be counted to determine the business’s size. See 13 C.F.R. § 121.103(a). In contrast,
under the SCG Rule, that a business belongs to a single corporate group dictates which other
businesses’ loan amounts must be counted to determine the maximum loan amount the business
may receive. See First SCG Rule,
Affiliation Waiver because the latter “relate[d] to an applicant’s eligibility for PPP loans”).
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
*16
eligible recipient could receive, and thus the Rule does not violate the Affiliation Waiver. See
Def.’s Mot. at 17; J.A. vol. II. at 55–56. The Hotel resists this conclusion by pointing to the
administrative record, which the Hotel argues shows that SBA understood the SCG Rule to be an
affiliation-based eligibility limit during the agency’s review of the Hotel’s second draw loan
forgiveness application. See Pl.’s Mot. at 27. The Hotel’s first example is a June 2023 internal
SBA review of the Hotel’s application in which SBA determined that the Hotel did not “meet all
Size Standards requirements” for loan eligibility “consider[ing] . . . affiliates.” See J.A. vol. II at
25. This statement indicates that the reviewer construed the SCG Rule as a size requirement that
limited loan eligibility. However, the rest of the record—including SBA’s later, public-facing
decisions denying the Hotel’s application—confirms that SBA in fact did not rely on this rationale.
See infra Part II (explaining SBA’s rationale); Epsilon Elecs., Inc. v. Dep’t of Treasury, 857 F.3d
913, 924 (D.C. Cir. 2017) (“[T]he grounds upon which an administrative order must be judged are
those upon which the record” as a whole “discloses that its action was based.” (quoting SEC v.
Chenery Corp.,
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 loan eligibility
*17
are separate from the criteria for loan-forgiveness eligibility. Compare 15 U.S.C. § 636(a)(37)(D)
and Second SCG Rule, 86 Fed. Reg. at 3713–14 (discussing second draw loan eligibility
requirements) with 15 U.S.C. § 636m and Second SCG Rule,
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 does 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,
Nevertheless, the Hotel argues, applying the SCG Rule to the Hotel exceeded SBA’s statutory authority because it was “otherwise contrary to the text, structure, and purpose of the statute.” Pl.’s Mot. at 28 (cleaned up). Much of the Hotel’s argument depends on the SCG Rule having been a loan eligibility limitation, which the Court has already determined it was not. One portion of the argument, however, rests on the (accurate) premise that the Rule was a limit on loan amounts. According to the Hotel, the CARES Act and the EAA specified a mandatory maximum loan amount, so SBA lacked the authority to create its own, lower maximum for corporate groups. Id. at 32. This is all the truer, per the Hotel, because the statutes provide the maximum by way of a specific formula “designed . . . to ensure that businesses would receive loans that covered at least a couple months of their payroll costs.” Id. at 33; 15 U.S.C. § 636(a)(36)(E) (making maximum loan amount a function of the business’s payroll costs, multiplied by 2.5); see also id. § 636(a)(37)(C)(iv) (same but multiplying accommodation and food industry businesses’ payroll costs by 3.5).
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 whether the SCG Rule was in fact a limit on loan eligibility was not squarely presented there. And, regardless of another district court’s conclusion, the statutory and regulatory language convince this Court that the Rule is not a limit on loan eligibility.
eligible to receive’ a PPP loan if it satisfies the conditions that the statute authorizes,” and so SBA could not
For example, the Hotel argues that “Congress mandated that ‘any’ individual ‘business concern . . . shall be
promulgate the SCG Rule to restrict eligibility further. Pl.’s Mot. at 30 (emphasis in original) (quoting 15 U.S.C.
§ 636(a)(36)(D)(i)). The Court need not determine whether SBA was authorized to promulgate regulations that further
restricted PPP loan eligibility. The Court notes, however, that the rationale it gives later in this opinion for determining
SBA was authorized to promulgate regulations further restricting maximum loan amounts would support answering
the loan-eligibility question in the affirmative. See Pharaohs GC, Inc. v. SBA.,
Once given discretion, agencies can then “cabin their own discretionary funding
determinations by . . . regulation[],” see Policy & Rsch., 313 F. Supp. 3d at 76, so long 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.
*20
See First SCG Rule,
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 15 U.S.C. § 636(a)(37)(C)(iv). An “eligible entity” was a business
concern—i.e., a single business—that met the eligibility requirements. See id. at
§ 636(a)(37)(A)(iv)(I). The SCG Rule, in distinction, set a cap on the aggregate amount a single
corporate group could receive. First SCG Rule,
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,
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,
Throughout its review of the Hotel’s second draw loan forgiveness application, SBA stuck to the same rationale for its denial. See Epsilon Elecs., 857 F.3d at 924 (“[O]nce an agency’s action is final and properly before [a court], [the court] review[s] the entire administrative record.”). The reason SBA gave in its Initial OHA Decision is representative: the Hotel was “part of a corporate group that received more than $4 million in Second Draw PPP loans in the aggregate,” J.A. vol. II at 53–54, and P&P’s and Newport’s $2 million loans were forgiven before the Hotel’s such that the corporate group had already reached the $4 million max, see id. at 56. That was the extent of SBA’s reasoning. See also id. at 74–75 (OHA’s denial of reconsideration); J.A. vol. I at 67–68 (FLRD).
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),
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,
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
First SCG Rule,
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.
First SCG Rule,
True, it could be that SBA really denied the Hotel’s loan forgiveness application because
Rosenfeld failed to notify the lender that he applied for forgiveness of second draw loans in excess
of the SCG Rule’s $4 million cap.
[13]
But SBA did not say as much. And it’s not this Court’s role
to “attempt itself to make up for such deficiencies.” Motor Vehicle Mfrs. Ass’n v. State Farm
Mut. Auto. Ins. Co.,
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
*25
draw loans were forgiven. The SCG Rule said that if “an applicant for a PPP loan” failed to “notify
the lender” of his applications for or receipt of loans in excess of the corporate group cap, the loan
he applied for would “not be eligible for forgiveness.” First SCG Rule,
In short, SBA failed to explain “a rational connection between the facts found and the
choice made.” See Dickson v. Sec’y of Def.,
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
conclusions found to be . . . arbitrary [and] capricious.’” 5 U.S.C. § 706(2). In its motion, the
Hotel requests not only vacatur, but also a declaratory judgment and an injunction.
[16]
Pl.’s Mot. at
*26
39–41. But that request was premised on the Court’s determination that SBA’s denial was contrary
to statute and thus “unsustainable” on any reasoning. See id. at 39. That is not what the Court
ultimately concludes. The Court concludes only that SBA’s denial was inadequately reasoned,
meaning SBA may be “able to rehabilitate its rationale” upon remand. Comcast Corp. v. FCC,
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
waived its sovereign immunity from suits for injunctive relief). While other circuits have weighed in on the issue, see id., the D.C. Circuit has not. Here, the Court doesn’t need to reach the issue because the Hotel’s claim for an injunction was based on its argument that the Hotel was in fact entitled to complete forgiveness of its second draw loan because the SCG Rule violated the governing statutes—an argument the Court has rejected. SBA does not argue that vacating its denial of the Hotel’s loan-forgiveness application would have
“disruptive consequences.” See Allina Health Servs.,
Notes
[1] SBA Administrator Kelly Loeffler has been automatically substituted for Isabella Casillas Guzman as defendant. See Fed. R. Civ. P. 25(d).
[2] The Hotel Californian requested the Court hold oral argument on its motion for summary judgment. See Pl.’s Mot. Summ. J. [ECF No. 17]. For the reasons that follow, the Court concludes that oral argument is not necessary to resolve either the Hotel’s motion or SBA’s cross-motion, and thus denies the Hotel’s request.
[3] The statute says the affiliation rules are waived for “business concern[s] . . . assigned a North American Industry Classification System code beginning with 72.” 15 U.S.C. § 636(a)(36)(D)(iv)(I). Businesses with codes starting with 72 all are within the Accommodation and Food Services industry. 13 C.F.R. § 121.201. These businesses include hotels, bed and breakfasts, caterers, full-service restaurants, and more. Id.
[4] 35 State Street Hotel Partners, LLC does business as the Hotel Californian. Compl. [ECF No. 1] at 1.
[5] Despite the ALJ’s statement to the contrary, Huntington’s second draw loan forgiveness application had not been denied at the time of the FLRD. See J.A. vol. II at 79–80. In fact, Huntington’s loan was forgiven five months after the FLRD and approximately two weeks after the Initial OHA Decision. Id.; Def.’s Mot. at 31; J.A. vol. I at 67–68.
[6] Compare First SCG Rule,
[7] The Court does not conclude that the SCG Rule was a limit on loan-forgiveness eligibility. See infra Part II. It emphasizes this distinction here only to show SBA’s statements about loan-forgiveness eligibility do not imply the SCG Rule is a limit on loan eligibility.
[8] Another district court concluded that the SCG Rule was not contrary to SBA’s statutory authority, but
appears to have assumed that the SCG Rule is a limit on loan eligibility. See Forest View Rehab. & Nursing Ctr.,
LLC, v. SBA, Civ. A. No. 24-1490 (GNA),
[10] The Court does not imply an answer to the question whether SBA could choose to spend zero dollars. Cf.
Clinton v. City of New York,
[11] The Hotel does not argue (nor could it) that either the CARES Act or the EAA placed any other restriction on the amount in loans SBA could guarantee for an eligible business.
[12] The Court also notes that, contrary to what the Hotel seems to believe, the purpose of the PPP was not
solely to grant and forgive loans. See Pl.’s Mot. at 33–34. The purpose was to “provid[e] small businesses with the
funds necessary to meet their payroll and operating expenses and therefore keep workers employed.” See Springfield
Hosp.,
[13] Nor may it “reasonably be discerned” from the administrative record that SBA really denied the Hotel’s
loan-forgiveness application because Rosenfeld failed to notify the lender. See Frizelle,
[14] The Initial OHA Decision also quoted an SBA regulation that said, “If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application.” J.A. vol. II at 53 (quoting Interim Final Rule, 86 Fed. Reg. 8283, 8295(V)(1)(e) (Feb. 5, 2021)). But this doesn’t save SBA’s decision. First, the Initial OHA Decision did not apply that regulation in its analysis; it only quoted the regulation once in the “Applicable Rules” section. Id. at 52–56. Second, the regulation would have been inapplicable anyway because the SCG Rule was not a limit on loan eligibility. See id. at 55–56.
[15] The Court acknowledges that another district court has determined that SBA did not violate the APA when it denied a business’s PPP loan-forgiveness application solely based on the SCG Rule. See Forest View Rehab., 2024 WL 5247837. That case, however, has minimal persuasive value because it does not discuss—or even acknowledge— SBA’s failure to explain why a violation of the SCG Rule alone supported a denial of loan forgiveness.
[16] It is unclear whether the Court would have jurisdiction over the Hotel’s claim for an injunction against
SBA. See Forest View Rehab.,