Gordon Coll. v. Small Bus. Admin.

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GORDON COLLEGE, Plaintiff, v. UNITED STATES SMALL BUSINESS ADMINISTRATION et al., Defendants.

Civil Action No. 23-614 (BAH)

United States District Court, District of Columbia

July 18, 2024

MEMORANDUM OPINION

BERYL A. HOWELL UNITED STATES DISTRICT JUDGE

In March 2020, in response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Pub. L. No. 116-136, 134 Stat. 281 (2020), which established, in Section 1102, the Paycheck Protection Program (“PPP”), see CARES Act § 1102 (codified at 15 U.S.C. § 636(a)(36)). To help “alleviate the pandemic's substantial economic effects on small businesses,” the PPP authorized the Small Business Administration (“SBA”) “to guarantee favorable and potentially forgivable loans to businesses negatively impacted by the pandemic.” Springfield Hosp., Inc. v. Guzman, 28 F.4th 403 408-09 (2d. Cir. 2022); see also In re Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1247 (11th Cir. 2020) (explaining that the CARES Act was “in large part aimed at helping businesses make payroll and pay operating expenses in order to keep people employed through the [COVIDinduced] economic downturn”).

Plaintiff Gordon College, “a religious nonprofit higher educational institution,” received a PPP loan for $7,046,037 but was denied loan forgiveness when SBA concluded that plaintiff “exceeded the maximum allowable number of employees and therefore does not qualify under the SBA small business size standard qualifications for a [PPP] loan.” Am. Compl. ¶¶ 1, 152, 172, ECF No. 15.

Plaintiff administratively appealed the denial to SBA's Office of Hearings and Appeals (“OHA”), which denied plaintiff's appeal and plaintiff's subsequent petition for reconsideration and upheld SBA's decision to deny plaintiff's loan forgiveness application. Id. ¶¶ 173, 198-99, 213.

Plaintiff then commenced this eleven-count action against SBA, Isabella Casillas Guzman, in her official capacity as Administrator of SBA, and the United States, alleging that SBA's denial of its loan-forgiveness application violates the Administrative Procedure Act (“APA”), 5 U.S.C. § 551 et seq.; the Religious Freedom Restoration Act (“RFRA”), 42 U.S.C. § 2000bb et seq.; the First Amendment's Free Exercise and Establishment Clauses, U.S. Const. amend. I; and the Fifth Amendment's Equal Protection and Due Process Clauses U.S. Const. amend. V. Defendants, in turn, have moved pursuant to Federal Rule of Civil Procedure 12(b)(6), for partial dismissal of the Amended Complaint, namely, of the claims based on RFRA, the First Amendment's Free Exercise and Establishment Clauses, and the Fifth Amendment's Equal Process Clause. See Defs.' Partial Mot. to Dismiss, ECF No. 16; Defs.' Mem. Supp. Partial Mot. to Dismiss (“Defs.' Mem.”), ECF No. 16-1; see also Pl.'s Opp'n Defs.' Partial Mot to Dismiss (“Pl.'s Opp'n”), ECF No. 18; Defs.' Reply Supp. Partial Mot. to Dismiss (“Defs.' Reply”), ECF No. 20.

For the reasons below, defendants' partial motion to dismiss is GRANTED.

I. BACKGROUND

The relevant statutory and regulatory framework, as well as the facts from which this litigation arises, are presented below.

A. Factual Background

1. The Paycheck Protection Program

SBA was created by the Small Business Act, 15 U.S.C. § 631 et seq., to “aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns,” id. § 631(a); see also id. § 633(a) (establishing SBA). Its “primary mechanism” for doing so is “by financing private ‘Section 7(a) loans,'” which are “typically issued by private lenders” and “guarantee[d]” by SBA. Springfield Hosp., 28 F.4th at 408-09; see also 15 U.S.C. § 636(a) (Section 7(a) of the Small Business Act); Small Bus. Admin. v. McClellan, 364 U.S. 446, 447 (1960) (explaining that SBA has “extraordinarily broad powers to accomplish [its] important objectives, including that of lending money to small businesses whenever they could not get necessary loans on reasonable terms from private lenders”); United States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3 (1979) (explaining that SBA “prefers to guarantee private loans rather than to disburse funds directly”). To qualify for a Section 7(a) loan, an applicant must be a “small business concern,” 15 U.S.C. § 636(a), which SBA has defined to be an entity “operating business,” “organized for profit,” “located in the United States,” under certain “size requirements” that vary by industry, and “demonstrate[s] a need for the desired credit,” 13 C.F.R. § 120.100; see also 15 U.S.C. § 632(a)(2)(A) (allowing SBA to define “small business concern”).

In response to the economic fallout during the COVID-19 pandemic, Congress enacted the CARES Act, which, inter alia, established the PPP, “a temporary program targeted at providing small businesses with the funds necessary to meet their payroll and operating expenses and therefore keep workers employed.” Springfield Hosp., 28 F.4th at 409; see also Business Loan Program Temporary Changes; Paycheck Protection Program (“Apr. 2020 IFR”), 85 Fed.Reg. 20,811, 20,811 (Apr. 15, 2020) (explaining that the PPP is “intended to provide economic relief to small businesses nationwide adversely impacted [by COVID-19]”). “Rather than establishing the PPP as a standalone program, the CARES Act place[d] the PPP under Section 7(a) of the Small Business Act,” Springfield Hosp., 28 F.4th at 410, and temporarily expanded SBA's pre-existing business-loan authority by authorizing SBA, “[e]xcept as otherwise provided” in Section 1102, to guarantee PPP loans “under the same terms, conditions, and processes” as an ordinary Section 7(a) loan, 15 U.S.C. § 636(a)(36)(B). The CARES Act, however, “relaxed many of the Section 7(a) eligibility criteria for PPP applicants and waived some of the standard Section 7(a) requirements altogether.” Springfield Hosp., 28 F.4th at 410 (citing 15 U.S.C. § 636(a)(36)(D), (H)-(J), (R)); see also In re Gateway Radiology Consultants, P.A., 983 F.3d at 1249 (explaining that “the PPP was not created as a standalone program” and “was added into § 7(a), albeit with several of that subsection's general eligibility requirements relaxed”). The CARES Act, for example, “[i]ncreased [the] eligibility” for PPP loans, such that PPP loans could be guaranteed not only to “small business concerns” but also to “any . . . nonprofit organization” that “employs not more than . . . 500 employees” (the “500-employee cap”). 15 U.S.C. § 636(a)(36)(D). The CARES Act further defined “employee,” “[f]or purposes of determining whether . . . a nonprofit organization . . . employs not more than 500 employees,” to “include[] individuals employed on a full-time, part-time, or other basis.” Id. § 636(a)(36)(D)(v). The PPP was launched on April 3, 2020, with Congress authorizing SBA to guarantee up to $349 billion of PPP loans to small businesses. See Apr. 2020 IFR, 85 Fed.Reg. at 20,812.

Section 1106 of the CARES Act set out the process of loan forgiveness, see CARES Act § 1106 (codified at 15 U.S.C. § 636m), and provides that “[a]n eligible recipient shall be eligible for forgiveness of indebtedness” on the portions of the PPP loan used for certain enumerated purposes, such as payroll costs and payments for rent, utilities, and mortgage interest, 15 U.S.C. § 636m(b); see also id. § 636(a)(36)(A)(iv) (defining “eligible recipient”); see also Springfield Hosp., 28 F.4th at 409 (“The PPP provides potentially forgivable loans to eligible small businesses, allowing the recipient to seek loan forgiveness if at least 60% of the loaned funds are used for specified expenses, such as payroll.”); In re Gateway Radiology Consultants, P.A., 983 F.3d at 1247 (explaining that PPP “is designed to give loans to eligible businesses and, if the loaned funds are used for specified expenses, to allow those loans to be forgiven”). “The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest,” so long as “the borrower uses all of the loan proceeds for forgivable purposes” and certain “employee and compensation levels are maintained.” Apr. 2020 IFR, 85 Fed.Reg. at 20,813; see also 15 U.S.C. § 636m(d)(1) (“The amount of loan forgiveness . . . shall not exceed the principal amount of the financing made available under the applicable covered loan.”).

To obtain forgiveness, a borrower must submit a PPP loan forgiveness application and supporting documentation to its lender. See 15 U.S.C. § 636m(e)-(f). Within 60 days of receiving the application, the lender must “issue a decision on the . . . application.” Id. § 636m(g). If the lender determines that the borrower is entitled to loan forgiveness, it submits a request for payment to SBA, and SBA, within 90 days, must “remit to the lender an amount equal to the amount of forgiveness, plus any interest accrued through the date of payment.” Id. § 636m(c)(3).

“In light of the structure of the PPP . . ., in which loans and loan forgiveness are provided based on the borrower's certifications and documentation provided by the borrower,” SBA established a series of “procedures and criteria through which SBA will review” a borrower's eligibility for a PPP loan calculation of the loan amount, use of loan proceeds, and entitlement to loan forgiveness “to ensure that PPP loans are directed to the entities Congress intended, and that PPP loan proceeds are used for the purposes Congress required.” Business Loan Program Temporary Changes; Paycheck Protection Program (“June 2020 IFR”), 85 Fed.Reg. 33,010, 33,012 (June 1, 2020). “SBA may undertake a review at any time in SBA's discretion.” Id. “If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application,” and “if...