Court filing

OHA Initial Appeal Decision — Continental Real Estate v. SBA

Filed March 21, 2023 in Continental Real Estate v. SBA; one of 2 filings from this case.

Record facts

Court	U.S. Small Business Administration, Office of Hearings and Appeals (OHA)
Filed	2023-03-21

U.S. Small Business Administration, Office of Hearings and Appeals (OHA) · No. 2:23-cv-01921-SDM-KAJ · Doc. 1-3 · 2023-03-21 · Docket on CourtListener

Full text

United States Small Business Administration
Oﬀice of Hearings and Appeals

Issued: March 21, 2023
Decision No. PPP-5457717009

APPEARANCES
Katherine Dodson, Esq., Attorney for Borrower
Samina Nabijee, Esq., Oﬀice of General Counsel, SBA

DECISION
I. Introduction and Jurisdiction
On December 10, 2022, the U.S. Small Business Administration (SBA)
Oﬀice of Capital Access issued a ﬁnal Paycheck Protection Program (PPP)
loan review decision ﬁnding CONTINENTAL REAL ESTATE (Appellant) is
ineligible for the PPP loan received. On January 6, 2023, Appellant ﬁled the
instant appeal from that ﬁnal SBA loan review decision.
Appellant argues that the Final SBA Loan Review Decision is clearly
erroneous, and requests that OHA reverse it, and ﬁnd Appellant is eligible
for PPP loan forgiveness.
For the reasons discussed infra, I DENY the Appeal and AFFIRM the
ﬁnal SBA loan review decision.
OHA conducts Paycheck Protection Program (PPP) appeals under the
authority of 13 C.F.R. part 134 Subpart L.
II. Background

On April 17, 2020, Appellant applied for a PPP loan of $2,922,700.00 with The
Huntington National Bank (“Lender”) Administrative Record “AR” at 2995-3001. On April
23, 2020, Lender approved the loan in full and disbursed the funds. AR at 3002. On
September 16, 2021, Appellant applied for PPP loan forgiveness in the amount of
$2,872,765.70. Supplemental of Administrative Record “SAR” at Exhibit A, Page 1.

On November 1, 2021, SBA notified Appellant through its lender that it was conducting
a review of the loan. AR at 2976-2977. On January 21, 2022, SBA notified Appellant through
its lender that it was potentially recommending a full denial based on affiliation rules. AR at
2978-2982. A follow-up request for additional information was sent on February 22, 2022. AR
at 2983-2987. Another follow-up request was sent April 4, 2022. AR at 2988-2994.

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Docket No. PPP-5457717009
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Documentation was provided to SBA by Appellant, but was deemed insufficient to
overcome the affiliation rules it determined applied to the loan. So, on September 12, 2022,
SBA issued a Final Loan Review Decision (“FLRD”) denying PPP loan eligibility based on
affiliation. However, SBA withdrew the FLRD on November 5, 2022, and filed a Motion on
November 15, 2022, to dismiss the appeal. I issued an Order of Dismissal on November 15,
2022, based on lack of jurisdiction.

A petition for reconsideration (PFR) of that dismissal was filed by Appellant on
November 22, 2022, alleging that it was not given an opportunity to respond to the motion to
dismiss, and further questioned SBA’s authority to withdraw the FLRD. I dismissed the PFR
on December 12, 2022, as the withdrawal of the FLRD removed jurisdiction from OHA.

After withdrawal of the FLRD, SBA issued a new FLRD on December 10, 2022, which is
the subject of the instant appeal. Dkt. No. 21, AR at 27-28. The AR at 20 reflects that affiliation
was no longer considered by SBA as a basis for its determination that Appellant is ineligible for
a PPP loan and forgiveness thereof.

On January 6, 2023, Appellant timely filed the instant appeal. Dkt No. 1. On January
25, 2023, I issued a Notice and Order requiring SBA to produce the AR by February 14, 2023.
Dkt. No. 10. The AR, as well as the SAR, were timely filed on February 14, 2023. Dkt. No. 11
and 12. Appellant was permitted to object to the AR until February 24, 2023. No response was
filed. SBA could, but was not required, to respond to the appeal until March 13, 2023. SBA
timely filed its response on March 13, 2023. Dkt. No. 13. The record was closed on March 13,
2023.
A. Final SBA Loan Review Decision

On December 10, 2022, SBA issued the current ﬁnal loan review
decision, ﬁnding that Appellant was ineligible for the PPP loan received.

The reason(s) for SBA’s decision is as follows:

After review of the documentation provided, the SBA
concludes that Borrower is organized as an ineligible
Passive Entity.

Open-source searches conﬁrm CONTINENTAL REAL
ESTATE is a developer, “We are a multidisciplinary,
nationwide developer and builder of commercial real
estate projects” and further states, “$3 billion+
developed, 30 million sq.ft. developed”.

A review of the 2019 ﬁnancial statements provided
report development fees, professional fees and Gain
from sale of aﬀiliated interests.

Passive businesses owned by developers and landlords
that do not actively use or occupy the assets acquired

1 Docket No. refers to the order in which documents were uploaded to the OHA Case Portal (“the Portal”).
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Docket No. PPP-5457717009
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or improved with the loan proceeds (except as Eligible
Passive Companies under 13 CFR § 120.111) are not
eligible.

B. Appeal
On January 6, 2023, Appellant ﬁled the instant appeal, arguing as
follows, in pertinent part, that the ﬁnal SBA loan review decision is clearly
erroneous:
The SBA, on April 2, 2020, issued emergency
regulations for the Paycheck Protection Program
(PPP), and made the provisions of 13 CFR §120.110
applicable to determine eligibility for the ﬁrst round
PPP loans. See 85 Fed. Reg. 20811-01. The applicable
regulation provides that “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).
The SBA’s Standard Operating Procedure (SOP 50 10
6) provides further clariﬁcation on the businesses
ineligible for SBA business loans. As is relevant to this
appeal, the SOP 50 10 6 deﬁnes a passive business as
follows:
a. Passive businesses owned by developers and
landlords that do not actively use or occupy the assets
acquired or improved with the loan proceeds are not
eligible, except Eligible Passive Companies under 13
CFR § 120.111. (See Ch. 2, Para. A., Eligible Passive
Companies, of this Section for more information.)
b. Businesses primarily engaged in subdividing real
property into lots and developing it for resale on its
own account are not eligible.
c. Businesses that are primarily engaged in owning or
purchasing real estate and leasing it for any purpose
are not eligible. For example, shopping centers, salon
suites, and similar business models that generate
income by renting space to accommodate independent
businesses that provide services directly to the public
are not eligible.
d. Businesses that lease land for the installation of a
cell phone tower, solar panels, billboards, or wind
turbines also are not eligible. However, the business
operating the cell phone tower, solar panel, billboard,
or wind turbine is eligible.
e. Businesses that have entered into a management
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Docket No. PPP-5457717009
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agreement with a third party that gives the
management company sole discretion to manage the
operations of the business, including control over the
employees, the ﬁnances and the bank accounts of the
business, with no involvement by the owner(s) of the
Applicant, are not eligible. (See Chapter 1, Para. D.5,
Aﬀiliation Based on Management in this Section for
additional guidance on management agreements.)
f. Apartment buildings and mobile home parks are not
eligible.
g. Residential facilities that are not licensed as nursing
homes or assisted living facilities and do not provide
healthcare and/or medical services are not eligible.
h. The limited circumstances under which certain
businesses engaged in renting or leasing may be
eligible are as follows:

i. Hotels, motels, recreational vehicle parks,

marinas, campgrounds, or similar types of

businesses are eligible if more than 50% of the

business’s revenue for the prior year is derived

from transients who stay for 30 days or less at a

time and the business complies with all zoning

and other legal requirements. If the Applicant is a

Start-Up Business, the Applicant’s projections

must show that more than 50% of the business’s

revenue will be derived from transients who stay

for 30 days or less at a time.

ii. Businesses that are licensed as nursing homes

or assisted living facilities and provide

healthcare and/or medical services are eligible.

Healthcare and/or medical services include but

are not limited to services such as wellness

checks, monitoring and/or helping take

medications, monitoring blood sugar levels,

having medical staﬀ onsite (even on a part-time

basis). The SBA Lender must consider the terms

of the license under which the business operates

or will operate when determining eligibility.

iii. Businesses that are engaged in leasing

equipment, household goods or other items are

eligible. (See subparagraph A.2. above regarding

the eligibility of businesses engaged in lending.)

iv. Businesses such as barber shops, hair salons,

nail salons, and similar types of personal services

businesses are eligible, regardless of whether

they have employees or contract with individuals

to provide the services that the business is
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providing directly to the public. (See

subparagraphs a) and c) above regarding

ineligibility of developers and landlords.)
i.
An ineligible passive business cannot obtain an
SBA Loan for any purpose, including the
purchase or construction of a building for its own
use.
SBA SOP 50 10 6, Part 2, Section A, Chapter 3

Continental Real Estate Companies is organized and operates within the
State of Ohio. The State of Ohio is within the Federal 6th Circuit. Any appeals
related to this SBA Final Loan Review Determination would be appealed to the
6th Circuit Court of Appeals.

The case law precedent in the 6th Circuit is very clear. The limitations
and exclusions set forth in 13 CFR §120.110 are NOT applicable or valid for
purposes of the ﬁrst round PPP loan program. Speciﬁcally, the 6th Circuit held, in
DV Diamond Club of Flint, LLC v. SBA, 960 F.3d 743, 746 (2020), that Congressional
intent in the CARES Act was clear that the ﬁrst round PPP loans were available for
“any business concern” that meets the size criteria. The 6th Circuit further held that
Congress’s enactment of the CARES Act “made clear that the SBA’s longstanding
ineligibility rules are inapplicable given the current circumstances.” Id. …

Although the controlling case precedent makes clear that the passive business
eligibility rule cannot be applied to ﬁrst round PPP loans, Continental also argues that
even if such provisions were found to be applicable, it does not meet the deﬁnition of a
passive business. Speciﬁcally, during the applicable covered period, Continental Real
Estate Companies was not a passive investor/developer. Continental Real Estate
Companies was an active business that employed many people and provided
professional services to its clientele.

There is no reported case law (other than the Eastern District of Michigan case
that rejected the use of the passive business eligibility rule for PPP loans) that
interprets the provisions of 13 CFR §120.110(c). Accordingly, what the SBA deﬁnes as
a passive business must be found in review of administrative agency materials like the
SOP 50 10 6 and the general usage and deﬁnitions of “passive.”

The Merriam-Webster’s Dictionary deﬁnes “passive” in relation to a business
activity to be a business in which the investor does not actively participate in the
generation of income. Webster’s further deﬁnes passive to mean “not active or
operating” and “lacking energy or will.”

Continental’s primary source of income came from fees for services it rendered
to customer/ clients. As you will notice from the 2019 tax return, the gross receipts
reported are from active business operations including receipts for professional
management, legal, accounting services, asset management and other management
and development services. As noted in Section III, Subsection B above, the majority of
the revenues earned by Continental in 2019 came directly from the day-to-day services
rendered by Continental’s employees.

Continental was not a primary owner of real estate. The core business functions
of Continental were not investments or real estate. Rather, the core business revenues
were earned through active, day-to-day work and provision of professional services.

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As set forth in Section IV above, the SBA’s Standard Operating Procedure (SOP
50 10 6) provides further clariﬁcation on what constitutes a “passive business.”
Speciﬁcally, SOP 50 10 6, Part 2, Section A, Chapter 3(A)(3) provides a listing of seven
business types that are considered “passive businesses.” Continental does not meet
any of the seven business types identiﬁed in this section. This is more fully identiﬁed
below:

1. Continental Is Not A Developer or Landlord: Continental did not own

any real estate. Continental did not develop any land for itself. Continental was

not a landlord. It did not receive rents or royalties. Rather, the majority of the

income earned by Continental came from active business operations. The PPP

loan proceeds received by Continental were used to pay payroll and other

eligible expenses for Continental’s active business operations. Accordingly,

Continental does not meet the deﬁnition of a passive business set forth in SOP

50 10 6, Part 2, Section A, Chapter 3(A)(3)(a).

2. Continental Does Not Subdivide Real Property Into Lots & Develop

for Resale on Its Own Account: As noted above, Continental did not own

any real estate. Continental did not subdivide real property into lots and

develop for its own account. Accordingly, Continental does not meet the

deﬁnition of passive business set forth in SOP 50 10 6, Part 2, Section A,

Chapter 3(A)(3) (b)..

3. Continental Does Not Purchase Real Estate or Lease Real Estate:

As noted many times above, Continental did not own real estate. Continental

did not lease real estate. Accordingly, Continental does not meet the deﬁnition

of passive business set forth in SOP 50 10 6, Part 2, Section A, Chapter

3(A)(3)(c)..

4. Continental Does Not Lease Land for Installation of Cell Phone

Towers, Solar Panels, Billboards, or Wind Turbines: Continental did

not own any real estate. Continental did not lease land for installation of

anything including cell phones, solar panels, billboards or wind turbines.

Accordingly, Continental does not meet the deﬁnition of passive business set

forth in SOP 50 10 6, Part 2, Section A, Chapter 3(A)(3)(d)..

5. Continental Did Not Enter into Management Agreements with

Third Parties to Run Its Operations: Continental did not enter into any

management agreements with Third Parties to run its operations. Rather, all of

Continental’s business services were performed, managed, organized, and

controlled by Continental’s employees. Accordingly, Continental does not meet

the deﬁnition of passive business set forth in SOP 50 10 6, Part 2, Section A,

Chapter 3(A)(3)(e)..

6. Continental Does Not Own Apartment Buildings or Mobile Home

Parks: Continental did not own any real estate, including apartment buildings

or mobile home parks. Accordingly, Continental does not meet the deﬁnition of

passive business set forth in SOP 50 10 6, Part 2, Section A, Chapter 3(A)(3)(f).

7. Continental Does Not Own or Operate Residential Facilities:

Continental did not own any real estate, including residential facilities during

the covered period. Accordingly, Continental does not meet the deﬁnition of

passive business set forth in SOP 50 10 6, Part 2, Section A, Chapter 3(A)(3)(g)

Continental does not meet any of the deﬁnitional provisions identiﬁed by the
SBA in SOP 50 10 6 to deﬁne a passive business. Continental's revenues were earned
through day-to-day work of its employees. These are highly paid, highly skilled
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professionals who provided meaningful, hard, and thorough work to Continental's
customers. There is nothing "passive" about Continental' s core business services.

C.
SBA’s Response to the Appeal
On March 13, 2023, SBA filed its response to the Appeal, arguing as follows, in
pertinent part:
A. Under the CARES Act, PPP Loans Were Subject
To The SBA 7(a) Loan Program Requirement in 13
C.F.R. § 120.110(c) Which Specifically Defines And
Identifies Borrowers Excluded From Eligibility
Congress has given SBA broad authority to make rules
and regulations, to take actions that “are necessary or desirable
in making . . . loans,” 15 U.S.C. § 634(b)(6)-(7), and to establish
general policies to “govern the granting and denial of
applications for financial assistance by the Administration,” id.
§ 633(d). That background authority naturally extends to the
PPP lending program. See Camelot Banquet Rooms, Inc., et al.
v. SBA, No. 21-2589, 2022 WL 221616 (7th Cir. 2022) (noting
that first round PPP legislation “gave the SBA considerable
discretion to decide eligibility for the Program.”) In addition,
the CARES Act expressly provides that the PPP is a part of
SBA’s 7(a) Loan Program and subject to the policies and
regulations applicable to the 7(a) Loan Program. Congress
made the decision not to enact the PPP as a freestanding
program, but rather to utilize the pre-existing infrastructure of
SBA’s Section 7(a) lending program. See 85 Fed. Reg. at 20811
(recognizing the CARES Act “temporarily adds a new product,
titled the ‘Paycheck Protection Program,’ to [SBA’s] 7(a) Loan
Program”). The CARES Act expressly modified some of Section
7(a)’s requirements for purposes of PPP loans. See, e.g., 15
U.S.C. 636(a)(36)(I), (R) (exempting PPP from Section 7(a)
requirements regarding an applicant’s ability to obtain credit
elsewhere and prepayment penalties). However, Congress
specified that “[e]xcept as otherwise provided”, the
Administrator may guarantee PPP loans “under the same
terms, conditions, and processes” as a loan made under Section
7(a). CARES Act § 1102, 134 Stat. at 287 (codified 15 U.S.C. §
636(a)(36)(B)).
One Section 7(a) loan program regulation (and therefore,
a term and condition of that program) is 13 C.F.R. § 120.110(c),
which provides that businesses ineligible to receive 7(a) loans
include “(c) Passive businesses owned by developers and
landlords that do not actively use or occupy the assets acquired
or improved with the loan proceeds [].” This rule was already in
effect at the time the PPP was promulgated and made a part of
the PPP by virtue of the PPP being an arm of the 7(a) Loan
Program. Neither Congress nor SBA made an exception to this
rule for lenders seeking PPP loans.
Pursuant to the CARES Act, SBA promulgated several
regulations concerning PPP eligibility, including the First
Interim Final Rule of the PPP (“First IFR”). See Paycheck
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Docket No. PPP-5457717009
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Protection Program, 85 Fed. Reg. at 20811 (posted on the SBA
and Treasury websites on April 2, 2020 and effective April 15,
2020); CARES Act § 1102, 134 Stat. at 287 (codified 15 U.S.C. §
636(a)(36)(B)). The First IFR, which was effective when
Appellant applied for and received its PPP Loan, advised all
PPP lenders and applicants of the basic PPP eligibility criteria,
including the incorporation of 13 C.F.R. § 120.110. In that
regard, the First IFR informed PPP lenders and applicants,
“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.” 85 Fed. Reg. at 20812. [Footnote omitted] In turn,
SOP 50 10 5(K), Subpart B, Chapter 2, Section 3(A)(3)(a), cites
13 C.F.R. § 120.110(c) for the proposition that loans to passive
entities are prohibited.
Three Circuit Courts, the 2nd, 11th, and D.C. Circuit
courts, have issued opinions validating SBA’s application of
120.110 or bankruptcy eligibility to PPP. See Pharaohs GC, Inc.
v. United States Small Business Administration, No. 20-2170,
990 F.3d 217 (2nd Cir. March 4, 2021) (upholding the
application of 13 C.F.R. §120.110 to prevent adult
entertainment establishments from obtaining a PPP loan); USF
Fed. Credit Union v. Gateway Radiology Consultants, P.A.,
983 F.3d 1239 (11th Cir. 2020) (holding that PPP is a part of the
existing Section 7(a) Loan Program and thus subject to the
existing conditions and regulations pertaining to that
program); American Association of Political Consultants v.
U.S. SBA, No. 20-cv-970 (ECF 21) (D.D.C. April 21, 2020),
affirmed by Am. Ass'n of Political Consultants &
Ridder/Braden v. United States SBA, 810 Fed. Appx. 8, 2020
U.S. App. LEXIS 16697 (D.C. Cir., May 26, 2020) (affirming
SBA could apply the provisions of 13 CFR 120.110(r) to prevent
a non-profit association primarily engaged in political or
lobbying activities from obtaining a PPP loan).
In Gateway Radiology Consultants, the 11th Circuit
upheld SBA’s exclusion of bankrupt borrowers from PPP
eligibility. Id. at 1264. The Court found that 1) SBA did not
exceed its authority in adopting its bankruptcy exclusion rule
for PPP eligibility; 2) the rule was not contrary to the CARES
Act and was based on a reasonable interpretation of the Act,
and 3) SBA did not act arbitrarily and capriciously in adopting
the bankruptcy exclusion rule. Id. at 1264.
In reaching this conclusion, the Court conducted a 2-part
Chevron analysis [footnote omitted] and determined that SBA
did not exceed its statutory authority. Addressing Chevron part
1, the Court determined that Congress had not directly spoken
on the issue of bankrupt debtors’ eligibility for the PPP and that
Congress’ silence on the issue indicated its delegation of
authority to SBA. The Court rejected the argument that SBA
could only consider the eligibility factors expressly listed in the
CARES Act:
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First, as we have noted, the CARES Act relaxes and

simplifies the usual § 7(a) size requirements, which are

regulated in detail by the SBA. See 15 U.S.C. §

636(a)(36)(D)(i); 13 C.F.R. § 121.201. And in doing so

the Act provides that “any business concern . . . shall be

eligible” for a PPP loan if it “employs not more than the

greater of . . . 500 employees; or . . . if applicable, the size

standard in number of employees established by” the

SBA for that business concern’s industry. 15 U.S.C. §

636(a)(36)(D)(i)(I)-(II). Of course, “any” typically has an

expansive meaning, see Jones v. Waffle House, Inc., 866

F.3d 1257, 1267 (11th Cir. 2017), and “shall” is an

imperative, see Kingdomware, 136 S. Ct. at 1977.

But it would be illogical to conclude that this subsection

of the CARES Act sets size as the one and only

requirement for PPP eligibility. It would be illogical

because other sections of the CARES Act waive or relax

for PPP loans other § 7(a) eligibility requirements. See 15

U.S.C. § 636(a)(36)(I) (waiving the requirement that the

applicant be unable to obtain credit elsewhere). If the

sole eligibility requirement were size, then those other

provisions would be pointless. We try hard not to

interpret statutory provisions in a way that will result in

them having no purpose or effect. Corley v. United

States, 556 U.S. 303, 314, 129 S. Ct. 1558, 173 L. Ed. 2d

443 (2009). And there is a more reasonable and obvious

reading of the revision of § 7(a) size requirements for

PPP loan purposes. That revision simplifies the detailed

and cumbersome size requirements set forth in 13 C.F.R.

§ 121.201 by focusing only on the number of employees,

and it relaxes the size requirement for businesses in

many industries. It does not prohibit the SBA from

establishing other, non-size related eligibility criteria.

Second, Gateway relies on a subsection of the CARES

Act that delegates authority to lenders to make PPP

loans and requires them to take into account two

“considerations” when “evaluating the eligibility of a

borrower.” See 15 U.S.C. § 636(a)(36)(F)(ii)(II). One is

whether the borrower “was in operation on February 15,

2020,” and the other is whether it “had employees for

whom the borrower paid salaries and payroll taxes” or

“paid independent contractors, as reported on a Form

1099-MISC.” Id. But that provision does not say those

two considerations are the only ones. And for reasons

we've discussed, it would make little sense if they were

the only considerations or criteria for determining

eligibility. The Act establishes some eligibility

requirements, the size requirement, for example. See id.

§ 636(a)(36)(D)(i). And it waives some generally
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Docket No. PPP-5457717009
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applicable § 7(a) requirements, such as the inability to

obtain credit elsewhere. See id. § 636(a)(36)(I). It would

render parts of the Act inoperative and superfluous if the

two “considerations” were interpreted as the only ones.

See Corley, 556 U.S. at 314. . . .

The takeaway is: None of the individual statutory

provisions that Gateway relies on provides an

unambiguous answer to the question of whether

bankruptcy debtors are eligible for PPP loans. Nor does

the sum of those provisions. Cf. Friends of the

Everglades, 570 F.3d at 1225 (“The broader context of

the statute as a whole does not resolve the ambiguity.”)

(quotation marks omitted). Instead, the text of the

CARES Act shows Congress placing the PPP within §

7(a), leaving intact the sound value requirement, and

delegating rulemaking authority to the SBA. That is all

the more important because in the Act Congress

expressly made some changes to § 7(a)’s requirements,

showing it knew how to alter them for PPP loans and

how to delegate to the SBA the question about whether

to alter others.
Id. at 1258-59 and 1261.

The Court then turned to Chevron part 2 and
determined that SBA’s bankruptcy exclusion rule was
reasonable and therefore entitled to deference. Id. at 1261.
When determining reasonableness, the Court is not permitted
to substitute its own judgment for SBA’s and must only
consider “whether the SBA’s interpretation is rational.” Id. at
1261-62.

Congress gave the SBA only 15 days to issue rules, which

is practically warp speed for regulatory action, a

command that undoubtedly sprang from the felt need for

quick action in light of the burgeoning economic crisis

stemming from the pandemic. Even though the purpose

of the PPP was to quickly help small businesses in

distress or before they became distressed, as we have

stressed and stressed again, Congress did put the

program in § 7(a), which has a sound value requirement

that applies to "all" § 7(a) loans. See 15 U.S.C. §

636(a)(6). In that way, it identified "manifestly

competing interests" that it "intended to accommodate."

Chevron, 467 U.S. at 865. But it did not accommodate

them with specificity when it came to whether

bankruptcy debtors are eligible for PPP loans. It left that

to the SBA.

The SBA's interpretation of the CARES Act and § 7(a)

was a reasonable accommodation of those interests.

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Lastly, the Court found that SBA did not act arbitrarily
or capriciously in adopting its bankruptcy exclusion rule.

DV Diamond Club of Flint, LLC v. Small Bus. Admin.,
960 F.3d 743 (6th Cir. 2020), is not dispositive. The DV
Diamond Club case involved an appeal by SBA from a district
court’s grant of a preliminary injunction in favor of a sexually
oriented business that was seeking a PPP loan. Id. at 745. On
appeal, the 6th Circuit merely determined that the sexually
oriented business was likely to succeed on the merits of its case
(i.e., was likely to succeed in proving PPP eligibility) taking into
consideration irreparable harm and public interest, but did not
decide the case on its merits. To date, no appellate court has
held SBA’s 13 C.F.R. § 120.110 regulation or interpretation of
the regulation as it applies to passive businesses under the
CARES Act invalid.

Appellant relies heavily on National Ass’n of Home
Builders v. SBA, 2021 U.S. Dist. LEXIS 186548 (E.D. Mich.
Sept. 28, 2021), which found that the long-standing 7(a) loan
program guidelines regarding eligibility for SBA loans could not
be applied to PPP loans. However, Home Builders is a district
court case with no precedential value. See Midlock v. Apple
Vacations West, 406 F.3d 453, 457-58 (7th Cir. 2005). An OHA
decision invalidating SBA’s regulations based on district court
decisions would have an inconsistent and unpredictable effect
on SBA’s implementation of PPP loan forgiveness across the
United States as applied by OHA. See id. (noting that if district
court opinions had precedential value it would create an
unmanageable legal system); see also Colby v. J.C. Penny, Co.,
811 F.2d 1119, 1124 (7th Cir. 1987) (it is a bedrock principle that
“the responsibility for maintaining the law's uniformity is a
responsibility of appellate rather than trial judges.” “Federal
district judges in Detroit do not make law that is binding on
federal district judges in Chicago.”).

SBA appealed to the 6th Circuit following the district
court’s decision in Home Builders, but ultimately moved to
dismiss its appeal after granting forgiveness to plaintiffs.
Appellant posits that SBA forgave plaintiffs’ loans “despite
[plaintiffs’] being passive business entities.” (Appeal at 8) But
the basis for forgiveness is not apparent from the joint motion
to dismiss. (Exhibit F – SBA Joint Motion to Dismiss) There is
no indication, as Appellant contends, that SBA forgave
plaintiffs’ loans because it recognized or accepted the district
court’s conclusion that SBA could not use existing 7(a) program
rules and regulations when determining eligibility for PPP
loans, itself a subset of the 7(a) program.

Finally, to the extent Appellant argues that SBA’s
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Docket No. PPP-5457717009
12

forgiveness for the plaintiffs in Home Builders entitles
Appellant to forgiveness, this is an argument for estoppel.
Estoppel bars a party from doing something different from
what has been done before or what has been legally established
as true. See Definition of Estoppel at
https://www.law.cornell.edut/wex/estoppel. The Supreme
Court has determined that as a general rule, the federal
government may not be estopped from enforcing public laws,
even though private parties may suffer hardship as a result in a
particular case. Office of Personnel Management v. Richmond,
496 U.S. 414 (1990); see also Department of Justice Manual at
https://www.justice.gov/jm/civil-resource-manual-209-
estoppel). In other words, in enforcing the applicable PPP
law(s), SBA cannot be prevented (i.e., estopped) from making a
different decision on Appellant’s loan forgiveness application
than it may have made on another party’s application. The
applicable laws, regulations, and policy make clear that each
PPP loan forgiveness application must be individually reviewed
by SBA and a separate, independent decision made on the
application to determine if it supports loan forgiveness and
complies with the applicable laws, regulations, and policy. See
15 U.S.C. § 636(a0(36); 15 U.S.C. § 636m; First IFR.

Based on the above, OHA should uphold SBA’s decision to
apply the 7(a) loan program passive entity ineligibility policy to
the PPP. SBA’s decision denying Appellant’s forgiveness
request is consistent with Congressional intent, the plain
language of the CARES Act and the regulations and rules
promulgated thereunder. Appellant is ineligible for PPP loan
forgiveness and OHA should affirm SBA’s decision.

B. SBA Was Correct in Its Determination That
Appellant, As a Passive Business, Was Ineligible For A
PPP Loan.

A passive entity is owned by a developer or landlord that
does not “actively use or occupy the assets acquired or
improved with the loan proceeds.” SOP 50 10 5(K), Subpart B,
Chapter 2, Section 3(A)(3)(a); 13 C.F.R. 120.110(c). On the front
page of its own website, Appellant brands itself as a “full service
[] developer.” https://www.continental-realestate.com/. Under
its “Office Development Portfolio” page, Appellant states
“Continental’s history and affiliation with office furniture made
a natural lead-in to a development focus on office parks [] and
mid-rise buildings []. *** While remaining diverse with our
office development activities; Continental has also purchased,
renovated, re-tenanted and sold high-rise office space after
stabilizing the performance of the assets.”
https://www.continentalrealestate.com/projects/office/.

Appellant’s Chief Financial Officer, in direct
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Docket No. PPP-5457717009
13

correspondence to SBA, admitted that Appellant “is a real
estate developer with 65 employees at the time of it’s [sic] PPP
loan application.” (AR [at] 576) The CFO went on to say “as is
typical in real estate – independent 3rd party management
companies are engaged to oversee the day to day operations of
each facility.” (Id.) Finally, the 2019 profit and loss statement
reveals that Appellant received over $5 million in development
and professional fees. (AR 3003)

Now, on appeal, Appellant contradicts its own website,
its CFO, and its profit and loss statement, and states
“[Appellant] Is Not A Developer” (Appeal, at 10) because it does
not own real estate. But a passive entity need not own real
estate. Appellant develops land for the benefit of third parties,
which means that it does not “actively use or occupy the assets
acquired.” It earns revenue from the development of real estate,
making it a developer. Therefore, it is irrelevant that Appellant
does not fit into the other examples of passive businesses, such
as those that subdivide real estate or lease property. By its own
admission, Appellant is a developer, which is a passive entity
under the regulations, and ineligible for a PPP loan.

C. Appellant Is Ineligible For PPP Loan Forgiveness
Because It Is Ineligible Under the PPP

Applying SBA’s interpretation of the CARES Act and the
First IFR, Appellant is ineligible for PPP loan forgiveness. As
stated above, SBA concluded that Appellant was a passive
entity. (AR 27-28) As such, it was an ineligible borrower under
the PPP.

SBA regulations make clear that ineligible borrowers
would not receive loan forgiveness under the CARES Act. See,
e.g., CARES Act § 1106(b), 134 Stat. at 298 (codified at 15 U.S.C.
§ 636(b)) (“An eligible recipient shall be eligible for
forgiveness…”); Paycheck Protection Program – Requirements
– Loan Forgiveness, 85 Fed. Reg. 33004-05 (May 28, 2020)
(“If SBA determines in the course of its review that the
borrower was ineligible for the PPP loan … the loan will not be
eligible for forgiveness.”); Paycheck Protection Program – Loan
Forgiveness Requirements and Loan Review Procedures as
Amended by Economic Aid Act, 86 Fed. Reg. 8283, 8296 (Feb.
3, 2021) (consolidates and restates multiple PPP Interim Final
Rules regarding forgiveness requirements, including
requirement that ineligible borrowers will not receive loan
forgiveness). Thus, Appellant is, and has been, ineligible for
PPP loan forgiveness and its Appeal seeking to overturn SBA’s
full denial of its PPP loan forgiveness request should be denied.
III. Discussion
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Docket No. PPP-5457717009
14

A. Standard of Review
Appellant has the burden of proving all elements of the appeal.
Speciﬁcally, Appellant must prove that the ﬁnal SBA loan review decision is
based upon a clear error of fact or law. 13 C.F.R. § 134.1210.

An Administrative Judge or Administrative Law Judge has no constitutionally
based judicial power, see Ramspecky. Federal Trial Examiners Conference, 345 U.S.
128, 132-33 (1953), but are employees of the executive branch department or agency
employing them. See e.g., 20 U.S.C. §1234(c) (statute establishing the Office of
Administrative Law Judges within the Department of Education provides that ALJs
“shall be officers or employees of the Department”). As such ALJs are bound by all
policy directives and rules promulgated by their agency, including the agency’s
interpretations of those policies and rules. See Nash v. Bowen, 869 F.2d 675, 680(2d
Cir.), cert, denied, 493 U.S. 813 (1989); Mullen v. Bowen, 800 F.2d 535, 540-41 n.5 (6th
Cir.1986); Brennan v. Department of Health and Human Services, 787 F.2d 1559 (Fed.
Cir.), cert. denied, 479 U.S. 985 (1986); Goodman v. Svahn, 614 F. Supp. 726, 728
(D.D.C. 1985);Association of Administrative Law Judges, Inc. v. Heckler, 594 F. Supp.
1132, 1141 (D.D.C.1984); c f D'Amico v. Schweiker, 698 F.2d 903, 906 (7th Cir. 1983).
Accord 34 CFR §81.5(b) (embodying in Department regulations the requirement that
ALJs adhere to policies and rules of the agency).

Thus, an Administrative Judge has no authority to decide the constitutionality of
an SBA law, regulation, or policy or to interpret such contrary to SBA’s established
regulation or policy [emphasis added]. The task at hand is to determine whether the
adopted regulations and policies have been appropriately applied to the facts of the
case. Neither initial nor final decisions rendered by the SBA’s Office of Hearings and
Appeals (OHA) under this subpart are precedential, and thus decisions in other PPP
cases are not persuasive in this matter. 13 CFR §134.1212.

B. Analysis
In March 2020, in response to the COVID-19 pandemic and the
resulting economic upheaval, Congress passed the Coronavirus Aid, Relief,
and Economic Security Act (CARES Act), Pub. L. 116-136, 134 Stat. 281
(2020). Section 1102 of this Act amends 15 U.S.C. § 636(a) to add another
special Section 7(a) loan to the SBA's Section 7(a) loan portfolio, the
Paycheck Protection Program (PPP) [emphasis added]. CARES Act, Pub. L.
No. 116-136, §1102, 134 Stat. 281, 286 (2020) (codiﬁed in 15 U.S.C. §636(a)
(36)) [emphasis added]. Congress expressly provided that "[e]xcept as
otherwise provided in [15U.S.C. §636(a)(36)], the [SBA] Administrator may
guarantee [PPP] loans under the same terms, conditions, and processes as a
loan made under [15 U.S.C. § 636(a)]." Id. at 287 (codiﬁed as 15 U.S.C.
636(a)(36)(B)). The Paycheck Protection Program was aimed at helping
businesses meet payroll costs and pay operating expenses to keep people
employed through the economic downturn. Congress ﬁrst authorized $349
billion in loans. CARES Act § 1102(b)(1). One month later, Congress
increased this ﬁgure to m o r e t h a n $600 billion. Paycheck Protection and
Health Care Enhancement Act, Pub.L. No. 116-139, § 101(a)(1), 134 Stat. 620
(2020).

Congress gave the SBA rulemaking power directly related to the PPP,
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Docket No. PPP-5457717009
15

specifying that SBA, not later than 15 days after the passage of the Cares
Act “shall issue regulations to carry out this title,” and SBA implemented
and issued several interim ﬁnal rules (IFRs) under the Program. CARES
Act,§ 1114, 134 Stat. at 312 (codiﬁed at 15 U.S.C. § 9012).

The PPP is directed at small businesses and its principal function is to
provide potentially forgivable loans to them. See 15 USC § 636(a)(36)(D)(I).
The PPP loans are made under the same terms, conditions, and processes as
other SBA loans, although the scope of allowable borrowers was expanded
for PPP loans to generally include sole proprietorships, independent
contractors, non-proﬁt organizations, and other speciﬁed businesses, if they
were operating “small” business of not more than 500 employees. 15 USC §
636(a)(36)(B) and 15 USC § 636(a) (36)(D).

An Interim Final Rule lays out how one calculates the amount which
can be borrowed. As noted above, the Cares Act did not spell out loan
restrictions but left it to the SBA to implement rules which would carry out
Congressional intent. The First Interim Rule modiﬁes several general
Section 7(a) loan eligibility criteria as to PPP loans. This means that Section
1114 of the CARES Act waived the requirement for the First IFR to be
published in the Federal Register.

Thus, the First IFR was eﬀective without publication in the Federal
Register and was issued for the immediate implementation of the PPP
through publication on SBA’s and Treasury’s websites on April 2, 2020.
Consequently, publication of the rule in the Federal Register was not
required, but SBA did so in furtherance of the intent of the requirement that
it issue regulations to carry out the PPP.

The IFR had both an eﬀective date and an applicability date. April 15,
2020 is the date the IFR was published in the Federal Register, and the
applicability date indicates that the IFR applies to applications submitted
under the PPP through June 30, 2020, or until funds are exhausted. 85 Fed.
Reg, Page 20812. The IFR went through several revisions, most notably to
account for the creation of the second draw PPP loans.

13 C.F.R. § 120.111 sets out a list of conditions that a passive business must meet
in order to be considered an Eligible Passive Company. The Appellant asserts that it is
not a passive business at all, citing payroll documentation and its tax returns.
However, an SBA Standard Operating Procedure (SOP) makes clear that the Appellant
is ineligible for a PPP loan:

III. Ineligible Types of Businesses
A. The Lender must determine whether the Applicant is
one of the types of businesses listed as ineligible in
SBA regulations. Certain business types appearing on
this list may be eligible under limited circumstances,
as discussed below . . .
3. Passive Businesses (13 CFR § 120.110(c)):
a. Passive businesses owned by developers and
landlords that do not actively use or occupy the
assets acquired or improved with the loan proceeds
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Docket No. PPP-5457717009
16

(Except Eligible Passive Companies under 13 CFR
§ 120.1112).
. . .

In its appeal, Appellant describes its business operations as follows:

Continental’s revenues were generated from the
provision of services related to identifying, securing,
helping with finance, bookkeeping and tax preparation,
and general administration of real estate development
projects in three primary focus areas: (1)hospitality, (2)
assisted living facilities, and (3) multi-family
apartment complexes (including student housing).

This code section does not require that the developer own the
real estate developed, as alleged by Appellant’s counsel. Nor does
13 CFR §120.111 apply, and it is not otherwise contended by
Appellant.

Furthermore, Appellant’s arguments concerning the issuance of the
district court case opinion in N.A. Home Builders v. US Small Business
Administration, 2021 U.S. Dist. LEXIS 186548, purportedly favorable to
Appellant’s position, also fail. SBA filed an appeal of that opinion to the 6th
Circuit Court of Appeals. A joint motion by Home Builders and SBA “to
dismiss for lack of jurisdiction and to vacate the District Court’s Opinion and
Order” was then filed by the parties. The 6th Circuit granted the motion, 2023
U.S. App. LEXIS 908, the parties to the appeal having agreed that the appeal
and the underlying case are now moot because all of the Plaintiff’s members
who received loans under the program have obtained loan forgiveness. The
Joint Motion granted by the 6th Circuit included the language “loan
forgiveness to which federal law entitled them.” Dkt. No. 9 at 4.

Appellant infers from the dismissal that the appeal was dismissed despite
the Appellant’s being passive entities, but there is no indication or verification
of that position in the record. Dkt. No. 1.

Further, Home Builders is a district court case with no precedential
value. See Midlock v. Apple Vacations West, 406 F.3d 453, 457-58 (7th Cir.
2005). An OHA decision based on district court decisions or interpretations of
SBA regulations would have an unpredictable effect on SBA’s PPP loan
forgiveness process. See Id. (noting that if district court opinions had
precedential value it would create an unmanageable legal system); see also
Colby v. J.C. Penny, Co., 811 F.2d 1119, 1124 (7th Cir. 1987) ( “the
responsibility for maintaining …. uniformity is a responsibility of appellate
rather than trial judges).

The applicable laws, regulations, and policy provide that every PPP loan
forgiveness application must be individually reviewed by SBA and a separate,
independent decision made on the application to determine if it supports loan

2 SBA regulations at 13 CFR §120.111 currently provide an exception to this prohibition on providing financial
assistance to passive entities if the passive entity is an Eligible Passive Company that leases real or personal
property to an Operating Company for use in the Operating Company’s business and complies with the
conditions set forth in the regulation.
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Docket No. PPP-5457717009
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forgiveness and complies with the applicable laws, regulations, and policy. See
15 U.S.C. § 636(a0(36); 15 U.S.C. § 636m; First IFR. Estoppel cited by SBA in
its brief (Dkt. No. 13) applies herein.

Appellant is an ineligible passive entity, and as such, is ineligible for a
PPP loan, and as well for forgiveness of a PPP loan. This finding is consistent
with the language cited above in the joint motion to the 6th Circuit that loan
forgiveness must be based on entitlement under federal law. Such entitlement
is not established by the record.

C. Conclusion

Appellant has not established that the ﬁnal SBA loan review decision
is based on a clear error. I DENY the Appeal and AFFIRM the ﬁnal SBA
loan review decision. This is an initial agency decision.

However, unless a request for reconsideration is ﬁled pursuant to 13
C.F.R. § 134.1211(c) on the OHA Case Portal at https://appeals.sba.gov, this
decision shall become the ﬁnal decision of SBA 30 calendar days after its
service. 13 C.F.R.§ 134.1211.

A party may file a request for reconsideration within 10 calendar days after
service of an initial decision.

A request for reconsideration must clearly show an error of fact or law
material to the initial decision. 13 C.F.R. § 134.1211(c)(1). It is the borrower’s responsibility
to review the rules and procedures.

CLIFFORD STUREK
Administrative Judge
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OHA Initial Appeal Decision — Continental Real Estate v. SBA

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