Defendants’ Motion to Dismiss — Horseshoe Bay Resort Holdings, LLC v. The United States Small Business Administration (Dkt. 20, W.D. Tex.)

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The defendants' motion to dismiss in Horseshoe Bay Resort Holdings, LLC v. The United States Small Business Administration, et al., Case 1:24-cv-00040-DAE, in the U.S. District Court for the Western District of Texas, Austin Division, filed April 29, 2024 as Document 20. The SBA, its Administrator and the United States move under Fed. R. Civ. P. 12(b)(1) to dismiss the plaintiff's Administrative Procedure Act and Declaratory Judgment Act case over its Paycheck Protection Program loan. They state that the SBA determined the plaintiff's NAICS code begins with 71 and, with other reasons, denied forgiveness, while the plaintiff says its code should begin with 72, and they argue the court lacks jurisdiction to order forgiveness.

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Case 1:24-cv-00040-DAE             Document 20            Filed 04/29/24         Page 1 of 10


                                   UNITED STATES DISTRICT COURT
                                    WESTERN DISTRICT OF TEXAS
                                         AUSTIN DIVISION

    HORSESHOE BAY RESORT HOLDINGS,
    LLC

      Plaintiff

      v.                                                                 No. A:24-CV-00040-DII

    THE UNITED STATES SMALL BUSINESS
    ADMINISTRATION, ET AL.,

      Defendants.


                                DEFENDANTS’ MOTION TO DISMISS

           Defendants THE UNITED STATES SMALL BUSINESS ADMINISTRATION (“SBA”),

ISABEL CASILLAS GUZMAN (“the Administrator”) and the UNITED STATES OF AMERICA

(“the United States”) move to dismiss Plaintiff’s Complaint pursuant to Fed. R. Civ. P. 12(b)(1)

as follows:

                                               BACKGROUND

           This is an Administrative Procedure Act (“APA”) and Declaratory Judgment Act (“DJA”)

case arising out of an SBA Paycheck Protection Program (“PPP”) 1 loan to Plaintiff. Basically,

Plaintiff disagrees with SBA’s decision on Plaintiff’s North American Industry Classification

System (“NAICS”) code in Plaintiff’s application to have its PPP loan forgiven. [Dkt. #1 ¶ 4].



1
  The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) PPP was a temporary SBA program
designed to immediately assist certain small businesses during the COVID-19 shutdowns by providing forgivable
federally guaranteed loans to help maintain their payrolls. E.g., Seville Indus., Inc. v. U.S. Small Bus. Admin., 2024
WL 697592 at *1-3, No. 6:22-CV-06229 (E.D. Louisiana, February 20, 2024), see also SBA First IFR, 85 Fed. Reg.
20811 (effective April 15, 2020). The PPP was implemented under Section 7(a) of the Small Business Act and
administered by SBA and its regulations promulgated under the act. Id., 15 U.S.C.§ § 636(a)(36), 636((b)(7), In re
Hidalgo Cnty. Emergency Serv. Found., 962 F.3d 838, 840 (5th Cir. 2020); see also Brothers Petroleum, L.L.C., v
United States, 569 F. Supp 405, 414 (E.D. Louisiana, 2021). The PPP was a loan program, not a grant, and unless
eligible for forgiveness, the maker is expected to satisfy the debt. Bruckner Truck Sales, Inc. v Guzman, 2023 WL
860761 at * 1, 6, No. 2:23-CV-097-Z (N.D. Tex., Amarillo, December 12, 2023) (citing Springfield Hosp., Inc..
Guzman, 28 F.4th 403, 423 (2d. Cir. 2022)), Brothers Petroleum, L.L.C., 569 F. Supp. at 414 (internal citations
omitted).

       Case 1:24-cv-00040-DAE             Document 20         Filed 04/29/24       Page 2 of 10


SBA correctly determined Plaintiff is a business whose NAICS code begins with “71” and

(together with other reasons) denied forgiveness of Plaintiff’s loan. [Id. ¶¶ 4-5, 42, 44-46].

Plaintiff now claims it is a business whose NAICS code should begin with “72”, and based on that

its loan should have been forgiven. [Id. ¶¶ 53-57]. Regardless of how Plaintiff couches its claims

for relief, Plaintiff essentially asks the Court to tell SBA to forgive their loan. [Id. ¶¶ 75, 81, 87(f)].

The Court cannot do this because it lacks jurisdiction.

                          THE IMPORTANCE OF THE NAICS CODE

        NAICS codes establish the “primary industry” of the borrower and are used in SBA’s “size

standards” to define whether a business is “small” and thus eligible for a loan. See 13 C.F.R. §§

121.101; 121.201. NAICS codes are self-assigned, meaning nobody “assigns” a code; the business

itself selects the code that best depicts its primary business activity and then uses it when asked

for their code. See What is a NAICS Code and Why do I Need One?, NAICS Association (last

visited March 26, 2024).

        PPP eligibility depends on the “size” of the applicant combined with its ‘affiliates.” See 13

C.F.R. §§ 121.103(a); 121.301(a). The CARES Act waived the “affiliate rules” for PPP loans to

certain “small” businesses with not more than 500 employees that were assigned a NAICS code

“72” at the time a covered loan was disbursed. 15 U.S.C. § 636(a)(36)(D)(iv)(I), see also SBA

Second IFR 85 Fed. Reg. 20818.

        This means that a business with a NAICS code beginning with “72” would not be combined

with its “affiliates” to determine its “size.” See id. This is why Plaintiff now wants to be a NAICS

code “72” business, instead of a NAICS Code “71” business that does not get an affiliate waiver.

                                         RELEVANT FACTS

        Plaintiff and its various affiliates own and operate “the 4-star Horseshoe Bay Resort.” [Id.

¶¶ 3, 30-34]. On April 28, 2020, Plaintiff, through its lender, applied for a $2,370,474.50 PPP loan

and to be eligible was required to certify the number of its employees and any other businesses

        Case 1:24-cv-00040-DAE                  Document 20           Filed 04/29/24          Page 3 of 10


that it owned or shared common management (i.e. “affiliates”). [Ex. 1]. Plaintiff disclosed 380

employees and provided a list of its other businesses. [Id.] The list omitted Plaintiff’s wholly

owned affiliate “Horseshoe Bay Resort Destinations, L.L.C.” (“HB Destinations”). [Id.]. Based on

the information Plaintiff provided, the lender immediately approved Plaintiff’s application and the

loan was disbursed the same day on April 28, 2020. [Ex. 2]. 2

         On September 24, 2021, Plaintiff, through its lender, applied to SBA for forgiveness of the

loan and certified to SBA that its NAICS code was “71.” [Ex. 3]. 3 On April 11, 2022, SBA notified

Plaintiff, through its lender, that it had identified eight (8) possible affiliates of Plaintiff and

requested information on them, including HB Destinations. [Ex. 5]. On April 22, 2022, Plaintiff

submitted its Form 3511 Affiliation Worksheet that disclosed HB Destinations for the first time.

[Ex. 6]. Plaintiff sought forgiveness based on an “employee size” standard and again certified

(twice) to SBA that its NAICS code was “71.” [Id.. Part B, Sections I-III]. Plaintiff further certified

that its affiliate HB Destinations had 294 employees. [Id. Section IV].

         On January 24, 2023 SBA issued its Final Loan Review Decision (“FLRD”) holding that

Plaintiff was ineligible to receive a PPP loan and thus denied forgiveness [Dkt. #1, ¶¶ 44-45], [Ex.

7]. 4 Among other reasons, Plaintiff, together with its wholly owned affiliate HB Destinations, had

too many employees (over 500) and was not eligible for a code “72” affiliation waiver. [Id.]. On

February 10, 2023, only seventeen (17) days after the FLRD and almost three (3) years after the



2
  Since the intent was to disburse PPP funds as quickly as possible, eligibility for PPP loans relaxed several 7(a)
origination/underwriting requirements and thus was heavily dependent on self-certification by the borrower. See SBA
First IFR, 85 Fed. Reg. 20811, ¶ 1.
3
  Plaintiff also self- assigned its NAICS code as “71” in its 2019 and 2020 tax returns. [Ex. 4] (pg. 1, redacted); [Dkt.
#1 ¶ 37]. This is significant because Plaintiff did not disclose its NAICS code in its loan application and thus was
required to use their tax return NAICS code in their loan forgiveness application. See PPP Loan Forgiveness
Application Form 3508EZ and Instructions, Rev. July 30, 2021 (https://www.sba.gov/document/sba-form-3508ez-
ppp-ez-loan-forgiveness-application-instructions) (last visited April 5 2024).
4
  Only an “eligible recipient” may receive forgiveness of a PPP loan 15 U.S.C. § 636m(b). If a borrower is found
ineligible, forgiveness can be denied even if the borrower obtained the loan. Bruckner Truck Sales, Inc., 2023 WL
860761 at * 1, 4-5, see also SBA Loan Forgiveness IFR, 85 Fed. Reg. 33010 (effective June 1, 2020).

        Case 1:24-cv-00040-DAE                 Document 20           Filed 04/29/24          Page 4 of 10


loan was disbursed, Plaintiff wrote to the IRS seeking to change its NAICS code to “72” [Ex. 8],

[Dkt. #1 ¶81(d)].

         Plaintiff unsuccessfully appealed to the SBA Office of Hearings and Appeals (“OHA”) and

the FLRD was fully affirmed on May 9, 2023. [Id. ¶ 59], [Ex. 9]. Plaintiff’s Petition for

Reconsideration was denied on June 16, 2023. [Id. ¶ 70], [Ex. 10]. 5 The instant lawsuit followed.

                                           MOTION TO DISMISS

Fed. Rule Civ. P. 12(b)(1) Requires Dismissal When The Court Lacks Jurisdiction

         “Under Rule 12(b)(1), a claim is ‘properly dismissed for lack of subject matter jurisdiction

when the court lacks statutory or constitutional power to adjudicate’ the claim.” In re FEMA

Trailer Formaldehyde Prods. Liab. Litig., 668 F.3d 281, 286 (5th Cir. 2012) (quoting Home

Builders Ass’n of Miss., Inc. v. City of Madison, Miss., 143 F.3d 1006, 1010 (5th Cir. 1998)). While

the Court considers the allegations in the complaint as true in a facial attack, in a factual attack the

court may consider matters outside the pleadings, such as affidavits and other documents. E.g.,

Menchaca v. Chrysler Credit Corp., 613 F.2d 507, 511 (5th Cir.) cert. denied, 449 U.S. 953 217

(1980). District Courts have broad discretion on how to consider subject matter jurisdiction

challenges and “considerable latitude in devising the procedures it will follow to ferret out the




5
  To the extent necessary, pursuant to Fed. R. Evid. 201(b)(2), Defendants request the Court to take judicial notice of
the following exhibits, all of which are part of the administrative record below:

         Ex. 1    Plaintiff’s Borrower Application Form 2483 (redacted)
         Ex. 2    SBA Lender’s Transcript of Account
         Ex. 3    Plaintiff’s Loan Forgiveness Application Form 3508EZ (hi-lighted and redacted)
         Ex. 4    Plaintiff’s 2019 and 2020 IRS Form 1065, pg. 1 (hi-lighted and redacted)
         Ex. 5    SBA letter to Plaintiff’s lender
         Ex. 6    Plaintiff’s Affiliation Worksheet Form 3511 (hi-lighted and redacted)
         Ex. 7    SBA FLRD
         Ex. 8    Plaintiff’s letter to IRS (redacted)
         Ex. 9    OHA Corrected Decision
         Ex. 10   OHA Decision on Petition for Reconsideration

       Case 1:24-cv-00040-DAE           Document 20        Filed 04/29/24      Page 5 of 10


facts pertinent to jurisdiction.” Harty v. West Point Rlty, Inc. 28 F.4th 435, 441, 442 (2d Cir. 2022)

(quoting APWU v. Potter, 343 F.3d 619, 627 (2d Cir. 2003) (emphasis original). When deciding a

12(b)(1) motion and subject matter jurisdiction, “the district court is ‘free to weigh the evidence

and resolve the factual disputes in order to satisfy itself that it has power to hear the case.’” Krim

v pcOrder.com, Inc., 402 F.3d 489, 494 (5th Cir. 2005).

Only APA Section 702 Waives Sovereign Immunity

       Plaintiff seeks judicial review of SBA’s decision(s) pursuant to 28 U.S.C. § 1331 and APA

Section. 706 [Dkt. #1 ¶ 11]. However, the APA itself does not provide an implied grant of subject

matter jurisdiction, but rather only provides a cause of action for a properly asserted federal

question. See California v. Sanders, 430 U.S. 99, 107 (1997). Although Plaintiff cites Section 706

of the APA as a basis for jurisdiction, Section 706 does not define whether there has been waiver

of sovereign immunity under section 702. See Alabama-Coushatta Tribe of Tex. v. United States,

757 F.3d 484, 491 (5th Cir. 2014) (in context of final agency action required for APA review). On

its face, Section 706 grants no rights and simply defines the Court’s scope of review over agency

actions and the relief that could be granted. See 5. U.S.C. § 706. As such, the true federal question

in this case arises under the statutes “whose violation is the gravamen of the complaint.” Stockman

v. Federal Election Comm’n, 138 F.3d. 144, 151-52 (5th Cir. 1998) (quoting Lujan v. National

Wildlife Fed’n, 497 U.S. 871, 886 (1990)). In this case, the statutes are the Small Business Act and

CARES Act, and to maintain the action the only applicable waiver of sovereign immunity is

Section 702 of the APA. Alabama-Coushatta Tribe of Tex., 757 F.3d. at 488 (citing Koehler v.

United States, 153 F.3d 263, 265 (5th Cir. 1998)).

APA Section 702 Does Not Waive Sovereign Immunity For Injunctive Relief Against SBA

       “The basic rule of sovereign immunity is that the United States cannot be sued at all without

the consent of Congress.” Block v. N.D. ex. rel. Bd. of Univ. & Sch. Lands, 461 U.S. 273, 287

(1983). Because sovereign immunity is jurisdictional, the consent or waiver must be unequivocally

         Case 1:24-cv-00040-DAE             Document 20          Filed 04/29/24         Page 6 of 10


expressed. E.g., Freeman v. United States, 556 F. 3d 326, 335 (5th Cir. 2006). In general, the scope

of any waiver of sovereign immunity is strictly construed “in favor of the sovereign.” Gomez-

Perez v. Potter, 533 U.S. 474, 491 (2008). Plaintiff has the burden to show an unequivocal waiver

of sovereign immunity. St. Tammany Parish ex rel. Davis v. FEMA, 556 F. 3d 307, 315 (5th Cir.

2009).

         Section 702 of the APA waives sovereign immunity for certain non-monetary claims

against federal government agencies, but not “if any other statute that grants consent to suit

expressly or impliedly forbids the relief which is sought.” 5 U.S.C. § 702. Actions against the

Administrator of SBA for an injunction, among others, are statutorily prohibited by the Small

Business Act. 15 U.S.C. § 636(b)(1). Based on this, the Fifth Circuit has consistently held the APA

does not waive sovereign immunity for claims seeking injunctive relief against SBA and all such

claims are “absolutely prohibited,” specifically in the context of PPP loan decisions. In re Hidalgo

Cnty. Emergency Serv. Found., 962 F. 3d at 840 (emphasis original) (denial of PPP loan under

CARES Act), see also Shumaker v. Guzman, WL 1183712 at *1, No. 22-40049, 2022 (5th Cir.

April 21, 2022) (denial of EIDL 6 advance under CARES Act), Shumaker v. Guzman, 2023 WL

143276 at *2, No. 22-40409 (5th Cir. February 1, 2023) (injunction to fund EIDL under CARES

Act), Jackson v. Small Bus. Admin., 2022 WL 18456351 at *4-5, No. 3:22-CV-986-S-BH (N.D.

Tex., Dallas, December 16, 2022) (denial of EIDL).

         Here, in its APA claim Plaintiff asks the Court to “direct the SBA to grant forgiveness to

Plaintiff regarding its PPP loan.” [Dkt. #1, ¶¶ 75, 81]. Plaintiff makes essentially the same request

in its DJA claim where Plaintiff asks the Court to “declare” (tell) SBA that it “must grant

forgiveness of the PPP loan to Plaintiff.” [Dkt. #1, ¶¶ 87 (f), VI (b)(6)]. An injunction “tells

someone what to do or not to do,” as compared to a vacatur that only reinstates “the status quo


6
  Economic Injury Disaster Loan, another temporary SBA COVID program under the CARES Act, now closed due
to exhaustion of program funds. See sba.gov/funding-programs/loans/covid-19-relief-options/eidl#, (last visited
April 8, 2024).

       Case 1:24-cv-00040-DAE           Document 20        Filed 04/29/24      Page 7 of 10


absent the unlawful agency action and neither compels nor restrains further agency decision-

making.” Texas v. Biden, 646 F. Supp. 753, 768 (N.D. Tex., 2022) (citations omitted), see

also Black's Law Dictionary 855 (9th ed.2009) (defining injunction as a “court order commanding

or preventing an action”). So, regardless of how Plaintiff’s claims for relief are couched, injunctive

relief is in fact what Plaintiff is asking the Court to grant; namely, tell SBA to forgive their PPP

loan. The Court lacks jurisdiction to issue such an injunctive command to SBA and as such

Plaintiff’s claims must be dismissed.

The DJA Provides No Independent Basis For Jurisdiction

       Pursuant to the DJA, “[i]n a case of “actual controversy within its jurisdiction ...the Court

may declare the rights and other legal relations of an interested party seeking such declaration,

whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a) (emphasis added).

However, “[T]he Declaratory Judgments Act is not an independent source of federal jurisdiction;

the availability of such relief presupposes the existence of a judicially remediable right.” Shumaker

v. Guzman, 2022 WL 2902843 at * 9, No. 7:21-CV-00477 (S.D. Tex., McAllen, April 4, 2022)

affirmed 2023 WL 143276 (5th Cir. 2023) (quoting Schilling v. Rogers, 363 U.S. 666, 677 (1960)

(internal citations omitted)). The “Declaratory Judgment Act is a procedural device that creates no

substantive rights, and requires the existence of a justiciable controversy.” Shelby v The City of El

Paso, 2013 WL12086210 at *9, No. EP-12-CV-0200-DCG (W.D. Tex., El Paso, June 5, 2013)

(quoting Aetna Life Ins.Co. v. Haworth, 300 U.S. 227, 239-241 (1937)). A petition for declaratory

judgement concerning federal law is not sufficient to create federal jurisdiction and the action must

arise under some other federal law. Garr v. Quirk, 86 F.3d. 451, 453 (5th Cir. 1996).

APA Section 702 Does Not Waive Sovereign Immunity For Injunctive Relief Disguised as
Declaratory Relief

       Courts have held that generally, declaratory relief is available against SBA in the context

of PPP decisions. See Brothers Petroleum, LLC, 569 F. Supp. 3d at 409-10. However, declaratory

       Case 1:24-cv-00040-DAE           Document 20        Filed 04/29/24      Page 8 of 10


relief is not available against the SBA if it is only a “shallow subterfuge for an unavailable

injunction.” Id., Valley Const. Co. v. Marsh, 714 F.2d 26, 29 (5th Cir. 1983) (citing Expedient

Services, Inc. v. Weaver, 614 F. 2d 56 (5th Cir. 1980)).

       Here, as noted supra, in its DJA claim Plaintiff asks the Court to “declare” (tell) SBA that

it “must grant forgiveness of the PPP loan to Plaintiff.” This is all Plaintiff has ever sought and

nothing else. This is not declaratory relief, not vacatur and is prohibited injunctive relief against

SBA by any other name, for which there is no waiver of sovereign immunity under the APA and

no jurisdiction. As such, there is also no jurisdiction over Plaintiff’s DJA claim since it creates no

rights, this is not a case within the Court’s jurisdiction and Plaintiff is simply trying to make an

end run around the prohibition against injunctive relief against SBA. Plaintiff’s DJA claim is a

mere subterfuge that must be dismissed.

Should The Court Find Jurisdiction, It Should Be Limited To Plaintiff’s Claims For
Alternative Relief, Any Limited Declaratory Relief Associated With Those Claims And
Remand

       In what is probably a tacit admission that their lawsuit seeks prohibited injunctive relief

against SBA, Plaintiff has requested two alternative forms of relief from the Court in its APA

claim. [Dkt. #1, ¶¶ 76, 82]. Both essentially request the same thing; vacatur and remand. [Id.].

Vacatur is a less drastic remedy than injunctive relief that only reinstates the status quo. Texas v.

Biden, 646 F. Supp. at 768 (citations omitted), see also supra. The test for vacatur considers 1) the

seriousness of deficiencies of action, that is, how likely the agency will be able to justify its

decision on remand and 2) the disruptive consequences of vacatur. Texas v. Biden, 20 F.4th 928,

1000 (5th Cir. 2021) reversed on other grounds and remanded, 597 U.S. 785 (2022). Remand

without vacatur is “generally appropriate when there is at least a serious possibility that the agency

will be able to substantiate its decision when given an opportunity to do so.” Id. (citing Tex. Ass’n

of Mfrs. v. U.S. Consumer Prod. Safety Comm’n, 989 F.3d 368, 389-90 (5th Cir. 2021)). Courts

have recognized that vacatur is an available remedy against SBA under the APA. See Daco

       Case 1:24-cv-00040-DAE             Document 20         Filed 04/29/24       Page 9 of 10


Investments, LLC v. U.S. Small Bus. Admin., 2024 WL 750594 at * 5-6, No. 6:22-CV-01444 (W.D.

Louisiana, February 22, 2024).

        Since the Court is not yet balancing the equities in connection with this jurisdictional

challenge, the Court should defer examination of Plaintiff’s various representations to the

government about its NAICS code. The Court should also defer examination of SBA’s ability to

justify its decision, even though it has successfully justified its decision twice already before the

OHA. Instead, should the Court decide that Plaintiff is not really seeking prohibited injunctive

relief, then its exercise of jurisdiction should be limited to Plaintiff’s claims for alternate relief and

only what is necessary to decide this limited controversy; simply 1) was SBA’s decision to rely on

Plaintiff’s tax returns as part of its PPP eligibility analysis arbitrary and capricious or against the

law and 2) any limited factual or legal declarations associated with that decision that 3) the Court

believes SBA should consider on remand in connection with Plaintiff’s request to be a NAICS

Code “72” business that SBA hasn’t considered already, if any. In other words, not to command a

different result, but merely to require that SBA’s action be “reasonable and reasonably explained”,

and that “the agency has acted within a zone of reasonableness and, in particular, has reasonably

considered the relevant issues.” Brothers Petroleum, LLC, 569 F. Supp. at 412-13. This is

especially true when considering that SBA’s interpretation of its own regulations must be accorded

the greatest possible deference, even if it may not appear as reasonable as some other

interpretation. Expedient Services, Inc. v. Weaver, 614 F.2d 56, 57, n.1 (5th Cir. 1980) (citations

omitted).

      Case 1:24-cv-00040-DAE           Document 20         Filed 04/29/24      Page 10 of 10


        WHEREFORE PREMISES CONSIDERED, Defendants respectfully pray that upon

final consideration the Court grant this motion, dismiss Plaintiff’s claims and grant Defendants

such other and further relief to which they may be justly entitled.

Dated: April 29, 2024                                 Respectfully submitted,

                                                      Jaime Esparza
                                                      United States Attorney

                                               By:    /s/ Darryl S. Vereen
                                                      Darryl S. Vereen
                                                      Assistant United States Attorney
                                                      Texas Bar No. 00785148
                                                      darryl.vereen@usdoj.gov
                                                      601 NW Loop 410, Suite 600
                                                      San Antonio, Texas 78216-5597
                                                      Tel. (210) 384-7170
                                                      Fax. (210) 384-7358

                                                      Attorneys for Defendants

                                     CERTIFICATE OF SERVICE

        I certify that on April 29, 2024, I electronically filed this document with the Clerk of Court

using the CM/ECF system. The CM/ECF system will send notification to the following CM/ECF

participant(s):


        Leane K. Capps
        lcapps@polsinelli.com

        James W. Kim
        james.kim@polsinelli.com



                                                      /s/ Darryl S. Vereen
                                                      Darryl S. Vereen
                                                      Assistant United States Attorney

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