Pharaohs GC, Inc. v. United States Small Bus. Admin.

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PHARAOHS GC, INC., Plaintiff, v. UNITED STATES SMALL BUSINESS ADMINISTRATION, JOVITA CARRANZA, in her Official Capacity as Administrator of the Small Business Administration, UNITED STATES OF AMERICA, and STEVE MNUCHIN, in his Official Capacity as United States Secretary of Treasury, Defendants.

No. 20-CV-665 (LJV) (HKS)

United States District Court, W.D. New York

July 31, 2023

REPORT, RECOMMENDATION AND ORDER

H KENNETH SCHROEDER, JR. UNITED STATES MAGISTRATE JUDGE

The Honorable Lawrence J. Vilardo referred this case to the undersigned for all pretrial matters and to hear and report upon dispositive motions pursuant to 28 U.S.C. §§ 636(b)(1)(A), (B) and (C). Dkt. 25.

Plaintiff Pharaohs GC, Inc., filed a complaint against Defendants seeking injunctive, declaratory, and monetary relief (Dkt 1). Plaintiff alleges that the Small Business Administration's (“SBA”) application of 13 C.F.R. § 120.110(p) (the “prurience restriction”) to the Paycheck Protection Program (“PPP”) is an unconstitutional condition on its freedom of speech under the First Amendment and violates its equal protection rights under the Fifth Amendment. Dkt. 1, at ¶¶ 54-63, 64-79. Plaintiff also challenges the prurience restriction under the Administrative Procedure Act (“APA”). Id. at ¶¶ 80-85.

Defendants now move for summary judgment (Dkt. 36). For the following reasons, the Court recommends that Defendants' motion be granted in full.

BACKGROUND

I. THE CARES ACT

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which created the PPP, authorizing the SBA to guarantee loans to small businesses affected by the pandemic. Pub. L. No. 116-136, § 1102, 134 Stat. 281,286-94 (2020) (codified at 15 U.S.C. § 636(a)). PPP loans are forgiven to the extent the borrower uses the funds for payroll costs (including group health insurance and other benefits), mortgage interest, rent, or utilities. 15 U.S.C. §§ 636(a)(36)(B), (F), 9005(b).

Congress placed the Program under section 7(a) of the Small Business Act, 15 U.S.C. § 636(a). The 7(a) loan program is the SBA's primary program for providing financial assistance to small businesses. Congress authorized the SBA Administrator to guarantee PPP loans “under the same terms, conditions, and processes” as 7(a) loans. Id. § 636(a)(36)(B). Pursuant to the CARES Act, 15 U.S.C. § 9012, the SBA Administrator exercised emergency rulemaking authority to promulgate several interim final rules to “carry out” the Program. As those rules explain, small businesses seeking PPP loans must apply through an approved lender. 85 Fed.Reg. at 20,812. PPP loans are distributed on a “first come, first served” basis until the full amount of the congressionally authorized loan commitment has been met. Id. at 20,813.

The rules governing eligibility for PPP loans incorporated longstanding restrictions on eligibility for 7(a) loans. A section of the first interim final rule entitled “How do I determine if I am ineligible?” provides that the types of businesses categorically ineligible for 7(a) loans also are ineligible for PPP loans. Id. at 20,812 (incorporating 13 C.F.R. § 120.110, restrictions on eligibility for certain “types of businesses”). The rule's sole exception to the adoption of 7(a)'s eligibility restrictions is for nonprofit organizations, which Congress expressly made eligible for PPP loans. See id.; 15 U.S.C. § 636(a)(36)(D)(i) (making nonprofit organizations eligible for PPP loans). Thus, the “types of businesses” that are not eligible for PPP loans include foreign businesses, “[p]yramid sale distribution plans,” “[s]peculative businesses (such as oil wildcatting),” businesses with an associate indicted for a felony or crime of moral turpitude, “[b]usinesses primarily engaged in political or lobbying activities,” and, as relevant here, businesses that “[p]resent live performances of a prurient sexual nature”-i.e., the “prurience restriction.” 13 C.F.R. § 120.110.

Pharaohs GC, Inc. v. United States Small Bus. Admin., 990 F.3d 217, 224 (2d Cir. 2021) (footnote omitted).

II. FACTUAL AND PROCEDURAL HISTORY

Pharaohs is an adult-entertainment business that “present[s] nude or semi-nude erotic dance entertainment.” Dkt. 1, at ¶ 32. Peter Gerace is Pharaohs' sole owner. Dkt. 36-4, at 1; see Dkt. 3-4, at 1. On May 21, 2020, Pharaohs applied for a PPP loan through Live Oak Bank, with the help of Scott Meacham. Dkt. 43-4, at ¶ 3. The bank informed Meacham that “it would be necessary for the bank to reject Pharaohs' loan application because it was involved in a business of a ‘prurient sexual nature.'” Id. at ¶ 4. Meacham “asked the underwriter to not reject the application, to put it on ‘hold' while Pharaohs reviewed its options and possible remedies” and “was advised that Live Oak Bank would comply with [his] request, but was notified that this should be done expeditiously as the funding for the PPP was almost exhausted.” Id. at ¶ 5.

Consequently, Pharaohs has been “unable to proceed with the PPP loan.” Dkt. 43-3, at ¶ 8. And without the PPP loan, Pharaohs has been “unable to make any wage payments, payments to vendors, or payments on the business's mortgage” and “anticipate[s] that [its] business will soon fail.” Id. Pharaohs alleges that the prurience restriction is inconsistent with the CARES Act and violates its constitutional rights and seeks injunctive, declaratory, and monetary relief. Dkt. 1.

On February 25, 2021, Gerace was indicted on charges of (i) conspiracy to defraud the United States in violation of 18 U.S.C. § 371, (ii) paying a bribe to a public official in violation of 18 U.S.C. § 201(b)(1)(A) and 201(b)(1)(C), and (iii) conspiracy to commit sex trafficking in violation of 18 U.S.C. § 1594(c). Dkt. 36-4, at ¶ 3; see Dkt. 362. And on June 8, 2023, Gerace was indicted on four counts of wire fraud in violation of 18 U.S.C. § 1343. Dkt. 46, at ¶¶ 5-6; see Dkt. 46-1. Each of these offenses is a felony. Dkt. 36-4, at 4; Dkt. 46, at ¶ 8.

Plaintiff moved for a preliminary injunction (Dkt. 3) and Defendants moved to dismiss the complaint (Dkt. 13). The court denied both motions. See Dkt. 18; Pharaohs GC, Inc. v. United States Small Bus. Admin., No. 20-CV-665, 2020 WL 3489404 (W.D.N.Y. June 26, 2020). Plaintiff appealed the denial of its motion for preliminary injunction, and the Second Circuit affirmed. See Pharaohs GC, 990 F.3d 217 (2d Cir. 2021). Defendants now move for summary judgment (Dkt. 36). Plaintiff opposed (Dkt. 43) and Defendants replied (Dkt. 44).

DISCUSSION

I. MOOTNESS

Defendants argue that Gerace's felony indictments have mooted Plaintiff's claims. Dkt. 36-3, at 20-22. To satisfy the Constitution's case-or-controversy requirement, “a party must, at each stage of the litigation, have an actual injury which is likely to be redressed by a favorable judicial decision.” Janakievski v. Exec. Dir., Rochester Psychiatric Ctr., 955 F.3d 314, 319 (2d Cir. 2020). While “standing doctrine focuses ‘on whether the party invoking jurisdiction had the requisite stake in the outcome when the suit was filed,' ‘mootness doctrine ensures that [a] litigant's interest in the outcome continues to exist throughout the life of the lawsuit.” Connecticut Citizens Def. League, Inc. v. Lamont, 6 F.4th 439, 444 (2d Cir. 2021) (citations omitted). A case becomes moot “when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” Id. (internal quotation marks omitted) (quoting Knox v. Serv. Emps. Int'l Union, Loc. 1000, 567 U.S. 298, 307 (2012)). If, “as a result of changed circumstances, a case that presented an actual redressable injury at the time it was filed ceases to involve such an injury, it ceases to fall within a federal court's Article III subject matter jurisdiction and must be dismissed for mootness.” Janakievski, 955 F.3d at 319. Accordingly, “a case that is ‘live' at the outset may become moot ‘when it becomes impossible for the courts, through the exercise of their remedial powers, to do anything to redress the injury.'” Cook v. Colgate Univ., 992 F.2d 17, 19 (2d Cir. 1993) (citation omitted). Defendants “bear[] the burden of proving that a change of circumstances during the course of litigation has rendered a case moot.” Shotkin v. United States, No. 3:19-CV-01506 (JCH), 2021 WL 5770039, at *3 (D. Conn. Dec. 6, 2021) (citing Mhany Management, Inc. v. City of Nassau, 819 F.3d 581, 603 (2d Cir. 2016)).

Plaintiff argues that the issue of mootness is not properly before the Court because Defendants failed to assert such a defense in their answer. Dkt. 43, at 8. When a case becomes moot, the court “lacks subject matter jurisdiction over the action.” New York City Employees' Retirement Sys. v. Dole Food Co., 969 F.2d 1430, 1433 (2d Cir. 1992). Defects in subject matter jurisdiction “cannot be waived and may be raised at any time during the proceedings.” Fox v. Bd. of Trustees of State Univ. of New York, 42 F.3d 135, 140 (2d Cir. 1994). Accordingly, “mootness is not a defense that could be waived by the Defendants, but rather is a condition that deprives the court of subject matter jurisdiction.” Id.

A litigant “may not use the declaratory judgment statute to secure judicial relief of moot questions.” Christopher P. by Norma P. v. Marcus, 915 F.2d 794 802 (2d Cir. 1990); accord Caswell v. Green, No. 1:10-CV-0166 MAT, 2013 WL 4015013, at *4 (W.D.N.Y. Aug. 6, 2013) (“Federal district courts have no jurisdiction to render declaratory judgments when the underlying questions are moot or otherwise nonjusticiable.”); Shariff v. Coombe, 655 F.Supp.2d 274, 297 (S.D.N.Y. 2009) (“The Declaratory Judgment Act cannot resurrect substantive claims that are defeated by . . . mootness[.]”). When attempting “to define the problem of mootness in...