National Funding, Inc. v. United States Small Business Administration et al

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
NATIONAL FUNDING, INC.,
Plaintiff,
v.
UNITED STATES SMALL BUSINESS
ADMINISTRATION; et al.,
Defendants.
Case No.: 24-cv-01440-DMS-MMP
ORDER DENYING PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT; AND GRANTING
DEFENDANTS’ MOTION FOR
SUMMARY JUDGMENT
[ECF Nos. 41, 44]
In response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid,
Relief and Economic Security (“CARES”) Act. The CARES Act, in relevant part, created
the Paycheck Protection Program (“PPP”), which allowed the Small Business
Administration (“SBA” or “Administrator”) to administer and forgive loans to select
businesses impacted by the pandemic. Coronavirus Aid, Relief and Economic Security
(“CARES”) Act, Pub. L. No. 116-136, 134 Stat. 281, 286 (2020). Plaintiff National
Funding, Inc. applied for and received a PPP loan in April 2020. The SBA later refused to
forgive Plaintiff’s PPP loan, determining that Plaintiff was ineligible to receive the loan in
the first place. Plaintiff appealed to the agency’s Office of Hearing and Appeals (“OHA”).
After OHA affirmed SBA’s decision, Plaintiff sought relief before this Court. Plaintiff
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contends that the SBA violated the Administrative Procedure Act (“APA”) by refusing to
forgive the loan. Pending now is Plaintiff’s motion for summary judgment (“Plaintiff’s
MSJ”). (Pl.’s MSJ, ECF No. 41-1.) Defendants1 filed a joint response in opposition to
Plaintiff’s MSJ and cross-motion for summary judgment (“Defendants’ MSJ”). (Defs.’
MSJ, ECF No. 44-1.) Plaintiff filed a combined reply in support of its MSJ and response
in opposition to Defendants’ MSJ. (Pl.’s Resp., ECF No. 47.) Defendants filed a reply in
support of their MSJ. (Defs.’ Reply, ECF No. 48.) The matter is suitable for resolution
without oral argument pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 49.) For the
following reasons, the Court denies Plaintiff’s MSJ and grants Defendants’ MSJ.
I. BACKGROUND
A. Legal Background
In 1953, the Small Business Act created and conferred on the SBA the power to
provide financial assistance to small businesses. H.R. 5141, 83d Cong. (1953); Tidewater
Fin. Co. v. U.S. Small Bus. Admin., No. 23-CV-609, 2024 WL 4329140, at *2 (E.D. Va.
Aug. 9, 2024), report and recommendation adopted, No. 23-CV-609, 2025 WL 763940
(E.D. Va. Mar. 11, 2025); 15 U.S.C. § 636(a). “The SBA’s primary mechanism for aiding
small businesses is by financing private ‘Section 7(a) loans.’” Salutoceuticals, LLC v. U.S.
Small Bus. Admin., 750 F. Supp. 3d 764, 766 (W.D. Tex. 2024). “The Act also provides
the SBA with the authority to make rules and regulations it deems necessary to carry out
its statutory authority.” Tidewater Fin. Co., 2024 WL 4329140, at *2; 15 U.S.C. §§ 633(d),
634(b)(6)–(7). Accordingly, the SBA enacted 13 C.F.R. § 120.110 in 1996, which outlined
several categories of businesses ineligible for Section 7(a) loans (“Section 120.110” or
“Exclusion Rule”). 13 C.F.R. § 120.110. Most relevant here, the SBA excluded
“[f]inancial businesses primarily engaged in the business of lending, such as banks, finance
1 “Defendants” are the SBA; Kelly Loeffler, in her official capacity as Administrator of the SBA; Scott
Bessent, in his official capacity as United States Secretary of the Treasury; and the United States of
America.
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companies, and factors” from obtaining Section 7(a) loans. Id. § 120.110(b); (Pl.’s MSJ
3–4.) The SBA later promulgated a Standard Operating Procedure for Lender and
Development Company Loan Programs (“2019 SOP”), which also excludes “businesses
primarily engaged in lending, investment, or . . . an otherwise eligible business engaged in
financing, factoring, or investment not related or essential to the business.” Small Bus.
Admin., SOP 50 10 5(K) (2019); (Pl.’s MSJ 4.)
In March 2020, the CARES Act amended Section 7(a) to create the PPP. CARES
Act, Pub. L. No. 116-136, 134 Stat. 281, 286 (2020). “[T]he CARES Act established the
PPP as a temporary expansion of SBA’s pre-existing business-loan authority under Section
7(a) by adding a new paragraph—Paragraph 36—to Section 7(a).” Salutoceuticals, LLC,
750 F. Supp. 3d at 767 (citing 15 U.S.C. § 636(a)(36)). “The PPP was not created as a
standalone program; instead, it was added into Section 7(a), albeit with several of that
subsection’s general eligibility requirements relaxed.” Id. The CARES Act provides that
“[e]xcept as otherwise provided in this paragraph, the [SBA] may guarantee [PPP] loans
under the same terms, conditions, and processes as a loan made under” Section 7(a). 15
U.S.C. § 636(a)(36)(D)(i). “The statute then set forth in detail the precise ways in which
PPP loans would differ from other Section 7(a) loans.” Salutoceuticals, LLC, 750 F. Supp.
3d at 767 (citing 15 U.S.C. § 636(a)(36)(D)–(W)).
On April 2, 2020, the SBA posted an interim final rule, to be effective April 15,
2020, stating that “[b]usinesses that are not eligible for PPP loans are identified in [the
Exclusion Rule] and described further in SBA’s [2019 SOP], except that nonprofit
organizations authorized under the Act are eligible” (“First IFR”). Business Loan Program
Temporary Changes; Paycheck Protection Program (“First IFR”), 85 Fed. Reg. 20,811,
20,812 (April 15, 2020); (Administrative R. (“AR”), ECF No. 37, at 144.) On April 28,
2020, the SBA issued a second interim final rule, allowing certain businesses—namely,
hospitals owned by governmental entities and businesses that receive legal gaming
revenue—to be eligible for a PPP loan, despite falling under the Exclusion Rule. See
Business Loan Program Temporary Changes; Paycheck Protection Program—
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Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed.
Reg. 23,450, 23,451 (Apr. 28, 2020). The SBA “believes this approach is more consistent
with the policy aim of making PPP loans available to a broad segment of U.S. businesses.”
Id.
Congress then enacted the Consolidated Appropriations Act (“CAA”) later that
year—also under Section 7(a)—which “authorized the SBA to guarantee so-called ‘second
draw’ PPP loans to certain businesses that obtained PPP loans under the CARES Act (‘first-
draw’ PPP loans).” Salutoceuticals, LLC, 750 F. Supp. 3d at 776; 15 U.S.C. § 636(a)(37).
The CAA explicitly states that eligible entities do not include those described in the
Exclusion Rule or “any successor regulation or other related guidance or rule that may be
issued by the Administrator.” 15 U.S.C. § 636(a)(37)(A)(iv)(III)(aa).
B. Factual Background
Plaintiff, which assists small and medium-sized businesses to acquire working
capital loans, was “detrimentally impacted” by the COVID-19 pandemic. (AR 144.)
Accordingly, Plaintiff applied for a PPP loan on April 8, 2020. (Id. at 145.) Plaintiff’s
application was approved on April 14, 2020, and Plaintiff received $6,088,165.00. (Id. at
141.) The loan was funded on April 21, 2020. (Id. at 145.) Plaintiff applied for loan
forgiveness on December 7, 2020. (Id.) But, on November 30, 2021, the SBA determined
Plaintiff was ineligible for loan forgiveness because it is a “financial business primarily
engaged in lending, investments or an ineligible business engaged in financing or
factoring.”2 (Id. at 141.) Plaintiff appealed to the OHA, and thereafter the OHA affirmed
SBA’s decision on April 12, 2023.3 (Id. at 170–85.)
2 While Plaintiff contends that it is “not primarily in the business of lending,” and therefore not a financial
business typically ineligible for loans under Section 7(a), (Pl.’s MSJ 2 n.1), Plaintiff raises only legal
challenges to SBA’s decision, which, Plaintiff argues, “would have been improper even if [Plaintiff was]
in the excluded category of businesses.” (Id.)
3 Because the Court does not reach the merits of Count 4, see infra III.C, the Court finds it unnecessary to
include in this Order Plaintiff’s allegations that “the SBA has forgiven numerous loans to what the SBA
perceives as entities engaged in the same type of business as National Funding.” (See Pl.’s MSJ 8.)
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C. Procedural History
Plaintiff initiated this action on August 13, 2024, arguing that the SBA’s Exclusion
Rule is being retroactively enforced against Plaintiff (“Count 1”); violates the CARES Act
(“Count 2”); and is arbitrary and capricious on its face (“Count 3”) and as applied to
Plaintiff (“Count 4”). (Compl., ECF No. 1.) Plaintiff moves for summary judgment on the
second through fourth counts. (Pl.’s Resp. 2 n.1.) Defendants move for summary judgment
on all counts.
II. LEGAL STANDARD
“A motion for summary judgment is an appropriate vehicle to review an
administrative action even though the court does not use the standard of review in Federal
Rule of Civil Procedure 56.” SLPR, LLC v. San Diego Unified Port Dist., No. 06 CV 1327,
2009 WL 10672895, at *2 (S.D. Cal. Aug. 4, 2009) (citations omitted). When reviewing
an agency decision, a court must set aside an agency action if it is “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
“[C]ourts review agency interpretations of statutes de novo, exercising their own
‘independent judgment in deciding whether [the] agency has acted within its statutory
authority.’” Novedades y Servicios, Inc. v. Fin. Crimes Enf’t Network, 785 F. Supp. 3d
785, 802 (S.D. Cal. 2025) (citation omitted). “Doing so requires using ‘all relevant
interpretive tools’ to determine the ‘best’ reading of a statute; a merely ‘permissible’
reading is not enough.” Id. An agency’s “legal error requires that its decisions be set
aside.” Meduri Farms, Inc. v. U.S. Small Bus. Admin., 799 F. Supp. 3d 1144, 1146 (D. Or.
2025) (citing Grand Canyon Univ. v. Cardona, 121 F.4th 717, 726 (9th Cir 2024)). “But
if an agency ‘construed the law correctly,’ then a court reviews the agency’s ‘application
of the law to the facts of the case under the APA’s deferential standards.’” Id. (citing
Cardona, 121 F.4th at 723). “Under this deferential arbitrary-and-capricious standard, the
agency action need only be ‘reasonable and reasonably explained.’” Id. (citing Fed.
Commc’ns Comm’n v. Prometheus Radio Project, 592 U.S. 414, 423 (2021)).
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“Judicial review of an agency decision typically focuses on the administrative record
in existence at the time of the decision and does not encompass any part of the record that
is made initially in the reviewing court.” SLPR, LLC, 2009 WL 10672895, at *2 (citation
omitted). “The Ninth Circuit allows extra-record material ‘if necessary to determine
whether the agency has considered all relevant factors and has explained its decision’ or
‘when supplementing the record is necessary to explain technical terms or complex subject
matter.’” Id.
III. DISCUSSION
A. Whether the Exclusion Rule Violates the CARES Act (Count 2)
The CARES Act provides, in part, that “in addition to small business concerns, any
business concern . . . shall be eligible to receive a covered loan.” (Pl.’s MSJ 11 (emphasis
omitted) (citing 15 U.S.C. § 636(a)(36)(D)(i)).) Plaintiff argues the CARES Act “defined
within the Act what it intended to be the entire universe of businesses that would be eligible
for PPP loans,” and thus “all businesses” meeting those such enumerated specifications are
entitled to PPP loans (and forgiveness). (Id. at 11–12 (emphases omitted).) Plaintiff
contends that the CARES Act left “no room for the SBA to put a chokehold on those
requirements by applying further limitations like the Exclusion Rule.” (Id. at 11.)
Defendants argue Plaintiff’s interpretation fails because it construes the provision in
“isolation, treats the PPP as a standalone program, and fails to consider the statutory
scheme as a whole.” (Defs.’ MSJ 14.) Defendants contend that because the PPP “was
added into the existing § 7(a) program,” the PPP is subject to “existing conditions and
regulations, as well as existing SBA authority,” including the Exclusion Rule. (Id. at 5
(citations omitted).) The Court agrees with Defendants.
“[W]hile the word ‘any’ generally carries an expansive meaning, ‘any’ can and does
mean different things depending upon the setting, and it is an error to place dispositive
weight on ‘any’ without considering the rest of the statute.” Defy Ventures, Inc. v. U.S.
Small. Bus. Admin., 469 F. Supp. 3d 459, 472–73 (D. Md. 2020) (citation modified). “It is
a fundamental canon of statutory construction that the words of a statute must be read in
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their context and with a view to their place in the overall statutory scheme.” Davis v. Mich.
Dep’t of Treasury, 489 U.S. 803, 809 (1989). “A provision that may seem ambiguous in
isolation is often clarified by the remainder of the statutory scheme—because the same
terminology is used elsewhere in a context that makes its meaning clear or because only
one of the permissible meanings produces a substantive effect that is compatible with the
rest of the law.” United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484
U.S. 365, 371 (1988) (citations omitted).
Here, the CARES Act “authorize[s] the SBA to guarantee PPP loans ‘under the same
terms, conditions, and processes’ as Section 7(a) loans.’” Meduri Farms, Inc., 799 F. Supp.
3d at 1148; 15 U.S.C. § 636(a)(36)(B). “Because Congress expressly legislated against the
backdrop of an existing statutory and regulatory scheme, it may be presumed that Congress
was aware of the pre-existing rules and regulations of the Section 7(a) program— including
Section 120.110—when it placed the PPP under Section 7(a).” DACO Invs., LLC v. U.S.
Small Bus. Admin., No. 6:22-CV-01444, 2024 WL 750594, at *9 (W.D. La. Feb. 22, 2024).
“[Y]et, Congress did not express its intent in the CARES Act to include borrowers typically
excluded by Section 120.110, except for non-profit businesses.” Id. This “strongly
suggests that Congress deliberately chose not to change the Administrator’s statutory
discretion to exclude businesses, other than those it expressly identified in the CARES
Act.” Id.
Plaintiff argues that “[i]f merely placing PPP loans in Section 7(a) subjected the
program to all Section 7(a) regulations, including the Exclusion Rule, then the provision
permitting SBA to guarantee loans under the same ‘terms, conditions, and processes’ as
other Section 7(a) loans would have no effect.” (Pl.’s Resp. 10–11.) However, because
the CARES Act provides that the SBA “may guarantee loans under the same terms,
conditions, and processes as a loan made under [Section 7(a)],” 15 U.S.C. § 636(a)(36)(B)
(emphasis added), the SBA has the discretion—not the requirement—to “implement the
PPP under the pre-existing Section 7(a) program.’” DACO Invs., LLC, 2024 WL 750594,
at *9 n.96 (emphasis added); see also In re Gateway Radiology Consultants, P.A., 983 F.3d
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1239, 1257 (11th Cir. 2020) (finding the use “of the permissive word ‘may’ vests the SBA
with discretionary authority”). Therefore, it is not redundant to include such a provision
within the CARES Act.
Plaintiff argues that the words “terms,” “conditions,” and “processes” do not
incorporate the Exclusion Rule into the CARES Act for various reasons, none of which are
convincing. First, Plaintiff contends that “the statutory text plainly means that SBA will
guarantee to lenders loans already extended – and, therefore, for which eligibility had
already been established – under the same standard [Section] 7(a) loan guarantee ‘terms,
conditions, and processes.’” (Pl.’s MSJ 14.) However, this interpretation cannot be correct
because the CARES Act “was passed at the outset of the Pandemic to solve a future
problem, not to govern loans already issued.” (Defs.’ MSJ 19 n.16.)
Next, Plaintiff argues that “terms” and “conditions” refer to parameters of the loans,
such as “loan amounts, maturity terms, interest rates, and fees”—not eligibility
requirements. (Pl.’s MSJ 14.) The Court disagrees. The plain meaning of “condition”
includes “a restricting or modifying factor” (i.e., a “qualification”) or “something essential
to the appearance or occurrence of something else” (i.e., a “prerequisite”). Condition,
Merriam-Webster, https://www.merriam-webster.com/dictionary/condition. And to be
“eligible” means to be “qualified to participate or be chosen.” Eligible, Merriam-Webster,
https://www.merriam-webster.com/dictionary/eligible. Thus, the plain meaning of
“condition” can mean or include “eligibility.” Other parts of the statutory scheme make
clear that Congress understood “conditions” to include “eligibility.” Specifically, 15
U.S.C. § 636(m)(4)(F)(iii)(I) provides that “[g]rants under this subparagraph . . . shall not
require the contribution of matching amounts as a condition of eligibility.” 15 U.S.C. §
636(m)(4)(F)(iii)(I) (emphasis added). The SBA’s website, titled “Terms, conditions, and
eligibility,” also states that “[a]s a lender, these conditions determine which businesses you
can lend to and the types of loans you can give.” Terms, conditions, and eligibility, U.S.
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Small Bus. Admin., https://www.sba.gov/partners/lenders/7a-loan-program/terms-
conditions-eligibility (emphasis added).
Plaintiff then argues that “[e]ven if SBA’s traditional exclusions under Section 7(a)
were a ‘term[], condition[], or process[]’ of a loan guarantee, these exclusions would still
run contrary to the CARES Act because this paragraph is explicitly made subject to other
provisions . . . which includes the Act’s expansive, detailed, and unambiguous definition
of PPP eligibility.” (Pl.’s MSJ 13.) However, the language “any business concern . . .
shall be eligible” is “not to the contrary when read in its statutory context—specifically, its
foundation in the Small Business Act’s 7(a) loan program.” Pharaohs GC, Inc. v. U.S.
Small Bus. Admin., 990 F.3d 217, 226 (2d Cir. 2021). Thus, the Court finds “the CARES
Act expressly gives the Administrator the general authority to adopt the ‘same terms,
conditions, and processes’ for PPP loans as for 7(a) loans,” including the Exclusion Rule.
Id. at 228.
Further, the CARES Act “sets forth precise ways . . . in which Congress intended
PPP loans to differ from other Section 7(a) loans.” (Defs.’ MSJ 5 (citing 15 U.S.C. §
636(a)(36)(D)–(W)).) For example, “the PPP authorized SBA to guarantee loans to
nonprofit organizations, veteran organizations, Tribal concerns, independent contractors,
and self-employed persons, in addition to small-business concerns; it relaxed size
limitations; and it selectively waived certain SBA affiliation rules.” Id. (citations omitted).
Additionally, 15 U.S.C. § 636(a)(36)(I) waives the requirement that an applicant be unable
to obtain credit elsewhere. In re Gateway Radiology Consultants, P.A., 983 F.3d at 1258.
Thus, Defendants’ interpretation of the CARES Act is not contrary to Congress’s overall
intention “to expand that eligibility beyond the types of entities usually eligible for Section
7(a) loans.” (See Pl.’s MSJ 11.) Indeed, the CARES Act relaxed many of the general
eligibility requirements. Further, Congress was clear and explicit when it intended for the
PPP to differ from traditional Section 7(a) loans.
Lastly, Plaintiff argues that because Congress explicitly adopted the Exclusion Rule
when enacting the CAA, Defendants’ interpretation of the CARES Act would render this
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explicit reference “superfluous.” (Pl.’s Resp. 11.) The Court disagrees for several reasons.
First, the CAA provides that the First IFR “properly clarified the eligibility of churches and
religious organizations for loans made” under the CARES Act. See Consolidated
Appropriates Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182, 2007 (2020). The CAA also
provides that “[t]he prohibition on eligibility established by [Section 120.110(k)] shall not
apply to a loan” under the CARES Act (i.e., the first-drawn loans). Id. “[A]n agency’s
interpretation of a statute may be confirmed or ratified by subsequent congressional failure
to change that interpretation.” DACO Invs., LLC, 2024 WL 750594, at *10 (citation
omitted). If Congress disapproved of the First IFR, it should and would have said as much
in the CAA. Yet, Congress explicitly approved at least one aspect of the First IFR. Further,
it would be unreasonable for Congress to clarify that only one subpart of the Exclusion
Rule—Section 120.110(k)—does not apply to loans under the CARES Act if it did not
want the entirety of the regulation to be applied to the CARES Act. Finally, “[t]he terms
of § 636(a)(36)(B) are permissive,” while the CAA “§ 311(a) is prohibitory.” (Defs.’ MSJ
18 n.18.) “Interpreting § 636(a)(36)(B) to grant SBA discretion to exclude Section 120.110
businesses from first-draw eligibility does not make it redundant to require that the SBA
exclude them from second-draw eligibility.” (Id.)
Considering the above, the Court finds that the Exclusion Rule is not violative of the
CARES Act. Accordingly, the Court DENIES Plaintiff’s MSJ and GRANTS Defendants’
MSJ as to Count 2.
B. Whether the Exclusion Rule was Retroactively Applied (Count 1)
Plaintiff applied for a PPP loan on April 8, 2020, and the loan was approved on April
14, 2020. (Pl.’s MSJ 7; id., Ex. A, ¶ 10.) The First IFR became effective April 15, 2020.
(Id. at 5 (citing First IFR, 85 Fed. Reg. 20,811, 20,812 (April 15, 2020)).) Thus, Plaintiff
alleges that the Exclusion Rule, through the First IFR, is being unlawfully retroactively
applied to Plaintiff. (Compl. ¶ 76.) Plaintiff does not move for summary judgment of
Count 1, (Pl.’s Resp. 2 n.1), but Defendants do. (Defs.’ MSJ 2, 12.) Defendants contend
that Count 1 fails because the First IFR “stated only what preexisting law required and had
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no retroactive effect when applied to Plaintiff’s PPP loan.”4 (Id. at 12.) Plaintiff does not
oppose Defendants’ motion for summary judgment as to Count 1.5
“Regulations cannot be applied retroactively unless Congress has so authorized the
administrative agency and the language of the regulations requires this result.” Scamihorn
v. Gen. Truck Drivers, 282 F.3d 1078, 1083 (9th Cir. 2002) (citing Bowen v. Georgetown
Univ. Hosp., 488 U.S. 204, 208 (1988)). A regulation operates retroactively when it would
“impair rights a party possessed when [it] acted, increase [its] liability for past conduct, or
impose new duties with respect to transactions already completed.” Landgraf v. USI Film
Prods., 511 U.S. 244, 280 (1994); Bahr v. Regan, 6 F.4th 1059, 1072 (9th Cir. 2021). “A
statute does not operate ‘retrospectively’ merely because it is applied in a case arising from
conduct antedating the statute’s enactment.” Landgraf, 511 U.S. at 269. Instead, the key
is “whether the new provision attached new legal consequences to events completed before
its enactment.” Id. at 270. The Court finds that the First IFR is not retroactive.
The First IFR’s “applicability date makes clear it applies to all PPP loan applications
received through June 30, 2020.” (AR 184 (citing First IFR, 85 Fed. Reg. 20,811, 20,812
(April 15, 2020)).) Further, while the First IFR was effective on August 15, 2020, (id.), it
was released to the public on April 2, 2020. (Id.) SBA guidance was also available to
Plaintiff when it submitted its PPP loan application on April 8, 2020. (Id.) And, the First
IFR was in effect when Plaintiff accepted PPP loan funds on April 21, 2020. (Id.) Thus,
Plaintiff had notice that the First IFR “would apply to its PPP loan application and there is
no retroactive harm to lenders or finance companies under” the First IFR. (Id.)
4 Defendants also argue that “Plaintiff does not address Count 1 at all in its MSJ and has therefore
abandoned that claim.” (Defs.’ MSJ 12 (citations omitted).) However, “there is no requirement that a
moving party seek summary judgment on all claims or lose the right to pursue outstanding claims.” United
States v. Rhody Dairy, L.L.C., 812 F. Supp. 2d 1239, 1245 (W.D. Wash. 2011). Accordingly, the Court
does not find that Plaintiff abandoned Count 1.
5 “[A] motion for summary judgment may not be granted based on a failure to file an opposition to the
motion, regardless of any local rule that suggests the contrary.” Heinemann v. Satterberg, 731 F.3d 914,
916 (9th Cir. 2013). Thus, the Court considers the merits of Defendants’ arguments.
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Accordingly, the Court GRANTS Defendants’ MSJ as to Count 2.6 See Salutoceuticals,
LLC, 750 F. Supp. 3d at 777 (holding First IFR is not retroactive); Bruckner Truck Sales,
Inc. v. Guzman, No. 23-CV-097-Z, 2023 WL 8606761, at *7 (N.D. TX, Dec. 12, 2023)
(same).
C. Whether the Exclusion Rule is Arbitrary and Capricious (Counts 3 and 4)
Defendants argue “the Court should reject Plaintiff’s claims that the SBA acted
arbitrarily and capriciously – both facially and as applied – because Plaintiff did not
exhaust those claims before the agency.” (Defs.’ MSJ 20.) Plaintiff appears to concede
that it did not raise its arbitrary and capricious arguments before the OHA. Plaintiff argues,
rather, that issue exhaustion was not required. (Pl.’s Resp. 13–15.) The Court finds that
the SBA regulations require issue exhaustion, and therefore, Plaintiff waived its arbitrary
and capricious arguments by failing to present them to the OHA.
“[R]equirements of administrative issue exhaustion are largely creatures of statute.”
Sims v. Apfel, 530 U.S. 103, 107 (2000); see also United States v. L. A. Tucker Truck Lines,
Inc., 344 U.S. 33, 36–37 (1952) (collecting statutes). It is also “common for an agency’s
regulations to require issue exhaustion in administrative appeals.” Sims, 530 U.S. at 108.
“And when regulations do so, courts reviewing agency action regularly ensure against the
bypassing of that requirement by refusing to consider unexhausted issues.” Id.; see also
Fam. Choice Fin., OHA Docket No. PPP-8323747201, at 8 (“When an agency’s
regulations contain an issue-exhaustion requirement for internal agency review, ‘courts
reviewing agency action regularly ensure against the bypassing of that requirement by
refusing to consider unexhausted issues.’”).
First, Defendants argue the APA requires issue exhaustion. (Defs.’ MSJ 21.)
However, if such an interpretation were correct, the APA would require issue exhaustion
6 In light of this determination, the Court does not consider the Defendants’ argument that “whether SBA
applied the Loan Review IFR retroactively is not of consequence to Plaintiff’s claims,” because “the SBA
had relied directly on paragraph 636m(a)(10)’s definition of ‘eligible recipient,’ and its authority under
the Small Business Act, to investigate Plaintiff’s loan-forgiveness eligibility,” instead of the First IFR and
Exclusion Rule. (Defs.’ MSJ 13.)
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in every agency action case—a rule the Supreme Court has rejected. (Pl.’s Resp. 13.)
Defendants do not point to another statute, including within the CARES Act, the CAA, or
the Small Business Act, that requires issue exhaustion before the SBA or OHA. (Id.)
Next, Defendants argue that the SBA regulations require issue exhaustion. (Defs.’
MSJ 21.) Defendants point to 13 C.F.R. § 134.1201(d), which provides that “[a]n appeal
to OHA is an administrative remedy that must be exhausted before judicial review of a
final SBA loan review decision may be sought in a Federal district court.” (Id.) This
particular regulation “only requires that an appeal be taken to OHA”—it does not create an
issue exhaustion requirement. (Pl.’s Resp. 14); see also Sims, 530 U.S. at 107 (determining
whether the plaintiff needed to show issue exhaustion “in addition to exhaustion of
remedies”). Several other SBA regulations, however, require an appeal petition to the
OHA to include “[a] full and specific statement as to why the final SBA loan review
decision is alleged to be erroneous, together with all factual information and legal
arguments supporting the allegations.” 13 C.F.R. § 134.1204 (emphasis added); see also
id. § 134.203 (providing an appeal petition must contain a “clear and concise statement of
the factual basis of the case and applicable legal arguments”). Plaintiff was also required
to include in its appeal petition “with specific reference to the determination and the record
supporting such determination, the reasons why the determination is alleged to be arbitrary,
capricious or contrary to law.” Id. § 134.402. Thus, the Court finds that the SBA
regulations impose issue exhaustion requirements. Forest View Rehab. & Nursing Ctr.,
LLC v. U.S. Small Bus. Admin., No. 24 CV 1490, 2024 WL 5247837, at *10 (N.D. Ill. Dec.
30, 2024) (finding the plaintiff’s argument that the SBA exceeded its statutory authority to
implement a rule was “forfeited, if not waived altogether” because the argument was not
raised “in its opening brief to [the court] or to the OHA during the administrative review
process”). And Plaintiff did not, in its appeal to the OHA, argue that the SBA’s findings
were arbitrary and capricious, either facially or as applied. (See AR 143–48.)
“Issue exhaustion is a jurisdictional requirement.” Vasquez-Rodriguez v. Garland,
7 F.4th 888, 895 (9th Cir. 2021). “[I]f an exhaustion requirement is jurisdictional . . . . a
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court ‘has no authority to create equitable exceptions to jurisdictional requirements,’”
including futility. Id. Thus, regardless of whether issue exhaustion would be futile, (see
Pl.’s MSJ 14 (arguing that the OHA “itself has determined it lacks authority to invalidate
SBA’s interpretation of the law”)), Plaintiff was required under SBA regulations to state
“all . . . legal arguments,” including why the SBA’s determination was “arbitrary,
capricious or contrary to law.” 13 C.F.R. §§ 134.1204, 134.402. The Court, therefore,
DENIES Plaintiff’s MSJ, and GRANTS Defendants’ MSJ as to Counts 3 and 4.
IV. CONCLUSION AND ORDER
Based on the foregoing reasons, the Court DENIES Plaintiff’s MSJ as to Counts 2
through 4, and GRANTS Defendants’ MSJ as to all Counts. Defendants will submit a
proposed order entering final judgment to the Court’s e-filing inbox within seven (7) days
of entry of this Order. See Fed. R. Civ. P. 58.
IT IS SO ORDERED.
Dated: February 27, 2026
________________________________
Hon. Dana M. Sabraw
United States District Judge
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