Nat'l Ass'n of Home Builders v. United States Small Bus. Admin.

• Decision Date: 28 September 2021
• Docket Number: 20-11780
• Parties: NATIONAL ASSOCIATION OF HOME BUILDERS, HOMEBUILDERS ASSOCIATION OF MICHIGAN, and HOMEBUILDERS ASSOCIATION OF SOUTHEASTERN MICHIGAN, Plaintiffs, v. UNITED STATES SMALL BUSINESS ADMINISTRATION, ISABELLA CASILLAS GUZMAN, JANET L. YELLEN, and UNITED STATES OF AMERICA, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

NATIONAL ASSOCIATION OF HOME BUILDERS, HOMEBUILDERS ASSOCIATION OF MICHIGAN, and HOMEBUILDERS ASSOCIATION OF SOUTHEASTERN MICHIGAN, Plaintiffs,
v.
UNITED STATES SMALL BUSINESS ADMINISTRATION, ISABELLA CASILLAS GUZMAN, JANET L. YELLEN, and UNITED STATES OF AMERICA, Defendants.

No. 20-11780

United States District Court, E.D. Michigan, Southern Division

September 28, 2021

OPINION AND ORDER DENYING DEFENDANTS' MOTION TO DISMISS AND GRANTING PLAINTIFFS' MOTION FOR JUDGMENT ON THE PLEADINGS

DAVID M. LAWSON, UNITED STATES DISTRICT JUDGE.

The plaintiffs are several state and national associations of home builders and real estate developers that seek to enjoin the United States Small Business Administration (SBA) from enforcing certain rules that it issued regarding eligibility for loans under the emergency lending authority of the Paycheck Protection Program (“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. 116-136, 134 Stat 281 (Mar. 27, 2020). They argue that the SBA's regulations contravene the plain language of the legislation, which otherwise would render the plaintiffs' members eligible for PPP loans and loan forgiveness. The defendants have filed a motion to dismiss, arguing that the plaintiffs have not identified a direct injury or otherwise sufficiently alleged associational standing, there has been no final agency action that can be challenged under the Administrative Procedures Act concerning prospective applications for loan forgiveness, and the eligibility rules it enacted are not prohibited by the CARES Act. The plaintiffs have countered with a motion for judgment on the pleadings, in which

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they argue that they have established standing to sue on behalf of their members, and the SBA's eligibility rules are invalid as a matter of law. Because defendants' procedural defenses lack merit, and the plaintiffs' argument concerning the SBA's rule making under the first draw PPP program tracks the reasoning of a recent Sixth Circuit decision, which is controlling, the defendants' motion will be denied, and the plaintiffs' motion will be granted.

I.

Congress passed the CARES Act in response to the dire economic consequences wrought by the COVID-19 pandemic. One of the financial boosts in the legislation was the PPP, intended to help businesses cover expenses and make payroll for their workers to keep them employed during the pandemic. See CARES Act, § 1102, 134 Stat. at 286 (codified at 15 U.S.C. § 636(a)(36)). The PPP is targeted at small businesses; loans granted under that program to eligible business may be forgiven if the loaned funds are used for specified expenses. 15 U.S.C. § 636(a)(36)(D)(i); 15 U.S.C. § 9005(b).

The administration of the PPP was entrusted by Congress to the SBA. One of the SBA's main purposes has been to “aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise.” 15 U.S.C. § 631(a). The SBA has “extraordinarily broad powers to accomplish these important objectives, including that of lending money to small businesses whenever they could not get necessary loans on reasonable terms from private lenders.” SBA v. McClellan, 364 U.S. 446, 447 (1960). Congress has conferred considerable rulemaking powers upon the SBA, authorizing it to “make such rules and regulations as [it] deems necessary to carry out the authority vested in” it, 15 U.S.C. § 634(b)(6); to “take any and all actions . . . when [it] determines such actions are necessary or desirable in making . . . or otherwise dealing with or realizing on loans, ” id. § 634(b)(7); and to

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“establish general policies . . . which shall govern the granting and denial of applications for financial assistance by the [SBA], ” id. § 633(d). “The SBA aids small businesses primarily through financing private loans, ” but “[t]ypically, it ‘prefers to guarantee private loans rather than to disburse funds directly, '” and “most often it operates under 15 U.S.C. § 636(a) through what are called ‘section 7(a) loans.'” In re Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1248 (11th Cir. 2020) (quoting United States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3 (1979)).

“[T]he PPP was not created as a standalone program; instead, it was added into § 7(a), albeit with several of that subsection's general eligibility requirements relaxed.” Id. at 1249 (citing CARES Act, § 1102, 134 Stat. at 286 (amending § 7(a)); 15 U.S.C. § 636(a)(36)(B) (“[T]he Administrator may guarantee covered loans under the same terms, conditions, and processes as a loan made under this subsection [§ 7(a)].”)). “For example, in the context of the PPP, the CARES Act relaxes (or expands) the typical § 7(a) definition of businesses that are eligible for a loan.” Ibid. (citing 15 U.S.C. § 636(a)(36)(D)).

The construction of the eligibility criteria for PPP loans that was included in the CARES Act and codified at 15 U.S.C. § 636(a)(36)(D)(i) is the crux of this case. That subsection, titled “Increased eligibility for certain small businesses and organizations, ” states as relevant here:

During the covered period, in addition to small business concerns, any business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern described in section 657a(b)(2)(C) of this title shall be eligible to receive a covered loan if the business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern employs not more than the greater of -

(I) 500 employees; or

(II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern operates

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15 U.S.C. § 636(a)(36)(D)(i) (emphasis added). The CARES Act also included several other provisions expanding eligibility for particular categories of recipients which, in ordinary times, are not eligible for SBA loans, including sole proprietorships, 15 U.S.C. § 636(a)(36)(D)(ii); businesses in certain industry classifications with multiple locations, where no more than 500 persons were employed at any one location, 15 U.S.C. § 636(a)(36)(D)(iii); and (with certain exclusions) nonprofit “[b]usiness leagues, chambers of commerce, real-estate boards, boards of trade, [and] professional football leagues, ” 15 U.S.C. § 636(a)(36)(D)(vii); 26 U.S.C. § 501(c)(6). However, other types of business entities, such as publicly traded corporations, explicitly were excluded from participation in the PPP program. 15 U.S.C. § 636(a)(36)(D)(viii).

The PPP initially was funded by Congress with approximately $350 billion, which quickly was exhausted and later supplemented by another $310 billion. The program initially had a sunset date in August 2020, but subsequent enactments extended the duration of the “first draw” PPP lending program through December 2020. See In re Gateway Radiology, 983 F.3d at 1247 n.1 (“The program lasts during a ‘covered period,' which is defined as ‘beginning on February 15, 2020 and ending on December 31, 2020.'”).

Recognizing the exigencies of the pandemic, “Congress gave the SBA rulemaking power directly related to the PPP, specifying that it ‘shall issue regulations to carry out this title.'” In re Gateway Radiology, 983 F.3d at 1249 (citing CARES Act, § 1114, 134 Stat. at 312 (codified at 15 U.S.C. § 9012)). “And Congress ordered that it be done posthaste, requiring that the implementing regulations be issued ‘[n]ot later than 15 days after the date of enactment of this Act.'” Ibid. “Recognizing [that] the rulemaking deadline would otherwise be impossible, Congress freed the SBA from having to comply with the notice requirement that is a familiar part of the rulemaking

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process.” Ibid. (citing 15 U.S.C. § 9012) (directing that regulations be issued “without regard to the notice requirements under [5 U.S.C. § 553(b)]”).

The SBA acted swiftly on the statutory mandate and issued several “interim final rules” governing the implementation of the PPP. The first interim final rule, which the plaintiffs in this case challenge, was issued on April 2, 2020 and states, as relevant to this case: “Businesses that are not eligible for PPP loans are identified in 13 CFR § 120.110 and described further in SBA's Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible.” Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811-01. SBA regulation 120.110 - which was issued and amended in due course during several decades preceding the passages of the CARES Act and implementation of the PPP - lists 18 categories of businesses that typically are not eligible to receive loans from the SBA, including, as pertinent here, “[p]assive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds, ” 13 C.F.R. § 120.110(c), and “[s]peculative businesses, ” 13 C.F.R. § 120.110(s). However, the SBA later issued a fourth interim final rule, which stated that “[a] business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues, and 13 CFR 120.110(g) is inapplicable to PPP loans.” Business Loan Program Temporary Changes; Paycheck Protection Program - Requirements - Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450-01. The fourth interim final rule explained that “[o]n further consideration, the Administrator, in consultation with the Secretary, ” had determined that allowing legal gambling businesses to receive PPP loans was “more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses.”...