First Amended Complaint — Horseshoe Bay Resort Holdings, LLC v. SBA (Western District of Texas)

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First Amended Complaint (Document 21, filed 05/13/24) by Horseshoe Bay Resort Holdings, LLC against the United States Small Business Administration and Administrator Isabella Casillas Guzman, Civil Action No. 1:24-CV-00040, in the U.S. District Court for the Western District of Texas, Austin Division. It describes itself as an appeal of the SBA's denial of loan forgiveness under the Paycheck Protection Program, for a loan of $2,370,748. The complaint alleges that the SBA misidentified the plaintiff's NAICS code as 71, and that the Office of Hearing and Appeal affirmed the Loan Review Decision on May 9, 2023. It asks the court to declare the SBA decisions contrary to law, set them aside or vacate them, and remand the matter to OHA. It is signed /s/ Leane K. Capps.

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“First Amended Complaint — Horseshoe Bay Resort Holdings, LLC v. SBA (Western District of Texas).” Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/21-first-amended-complaint-6c97f3904d/, SHA-256 81ef04e7b602642118eecdd3c9c9c671b25df933ca8cbf59cb818c8a0af3277b.

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Case 1:24-cv-00040-DAE Document 21 Filed 05/13/24 Page 1 of 21

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION

HORSESHOE BAY RESORT §
HOLDINGS, LLC §
§
Plaintiffs, §
§
v. § Civil Action No. 1:24-CV-00040
§
THE UNITED STATES SMALL §
BUSINESS ADMINISTRATION and §
ISABELLA CASILLAS GUZMAN, §
in her official capacity as Administrator §
of the Small Business Administration, §
§
Defendants. §

FIRST AMENDED COMPLAINT

Plaintiff Horseshoe Bay Resort Holdings, LLC files this First Amended Complaint against

the United States Small Business Administration (the “SBA”) and Plaintiff Isabel Casillas Guzman

in her official capacity as Administrator of the SBA. In support of the First Amended Complaint,

Plaintiff states as follows:

INTRODUCTION

1. This is an appeal of the SBA’s erroneous, arbitrary, and capricious denial of loan

forgiveness to Plaintiff under the Paycheck Protection Program (the “PPP”).

2. In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act

(the “CARES Act”) in order to mitigate the economic devastation and mass unemployment caused

by the COVID-19 Pandemic. As part of the CARES Act, Congress created the PPP, which

authorized the SBA to guarantee hundreds of billions of dollars in loans to small businesses, and

further provided for forgiveness of a PPP loan if the borrower uses the funds to pay certain

expenses, such as payroll, mortgage interest, rent, and utilities.
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3. Plaintiff, a holding company which operates the 4-star Horseshoe Bay Resort (the

“Resort”), sought SBA approval for a $2,370,748 PPP loan (the “PPP Loan”) as a “small” business

under an employee-based size standard. Despite approving Plaintiff’s PPP Loan, when Plaintiff

sought to have that loan forgiven, the SBA instead issued a decision retroactively revoking

Plaintiff’s eligibility and denying forgiveness (the “Loan Review Decision”).

4. In making the Loan Review Decision, the SBA misidentified the North America

Industry Classification System (NAICS) code number applicable to Plaintiff. The SBA

erroneously determined that Plaintiff’s NAICS code was 71, wrongly classifying Plaintiff as a

large business that is ineligible for a waiver of the SBA’s traditional rules requiring loan

repayment.

5. Plaintiff timely appealed the Loan Review Decision to the SBA’s Office of Hearing

and Appeal (“OHA”). Ignoring the SBA’s promulgated regulations which place the responsibility

of determining a NAICS code on the SBA, the OHA instead erroneously relied on the NAICS code

reported on Plaintiff’s tax forms, which incorporate the full scope of activities of Plaintiff and

several wholly-owned disregarded entities. Without any further analysis or consideration of the

financial analyses provided by Plaintiff, the OHA concluded that Plaintiff’s NAICS code was 71.

6. As a result, the OHA affirmed the Loan Review Decision on May 9, 2023 (the

“Corrected Final Decision” and, together with the Loan Review Decision, the “SBA Decisions”),

and denied Plaintiff the loan forgiveness to which it is entitled.

7. Plaintiff now appeals the Corrected Final Decision pursuant to 13 C.F.R. §

134.1201(g), which permits appeal of a final decision to the federal district court.

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PARTIES

8. Plaintiff is a Texas limited liability company duly organized and authorized to

conduct business in the State of Texas. Plaintiff is located at 101 Horseshoe Bay Boulevard,

Horseshoe Bay, Texas 78657. Plainitiff is a holding company which operates the Resort located

in Horseshoe Bay, Texas.

9. Defendant ant SBA is an independent federal agency created and authorized under

15 U.S.C. § 633 et seq. The SBA administers the PPP under the CARES Act, Pub. L. No. 116- 136,

134 Stat. 281 (2020)

10. Defendant Isabella Casillas Guzman is the Administrator of the SBA and is named

as a defendant only in her official capacity. Because she is the officer with final authority for

administering the PPP within the SBA, Administrator Guzman is a proper defendant for causes of

action under the Administrative Procedures Act (“APA”). See 5 U.S.C. § 702.

JURISDICTION AND VENUE

11. This Court has subject-matter jurisdiction of this action under 28 U.S.C. § 1331

because this action arises under the laws of the United States. This Court also has subject-matter

jurisdiction under 5 U.S.C. § 706.

12. Venue in this Court is proper pursuant to 28 U.S.C. § 1391(e) as a substantial part

of the events and omissions giving rise to the claim occurred in this District, the property that is

the subject of this action is situated in this District, and Plaintiff resides in this District.

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FACTUAL BACKGROUND

A. The Paycheck Protection Program

13. As noted above, Congress passed the CARES Act to mitigate the economic

devastation and mass unemployment caused by COVID-19. Pub. L. No. 116-136, 134 Stat. 281

(2020).

14. To help accomplish this goal, Congress created the PPP, which authorized the SBA

to guarantee hundreds of billions of dollars in loans to small businesses. Specifically, the CARES

Act amends Section 7(a) of the Small Business Act, a preexisting statutory scheme that authorizes

the SBA to issue loans, and guarantee loans made by private lenders, to qualifying businesses.

15. Section 1106 of the CARES Act provides that a borrower’s indebtedness under a

PPP loan will be forgiven to the extent that the borrower uses the funds to pay expenses related to

payroll, mortgage interest, rent, and utilities during the eight-week period following the loan’s

origination.

16. According to the CARES Act, any SBA regulations pertaining to PPP “borrower

eligibility” were to be consistent, “to the maximum extent practicable,” with 7(a) loan rules. See

CARES Act, Pub. L. 116-136, § 1109(d)(2)(B).

17. In the language of the OHA, “[t]he CARES Act placed the PPP under SBA’s

existing 7(a) loan program and instructed that PPP loans be made ‘under the same terms,

conditions, and processes’ as other 7(a) loans.” Order Granting Petition for Reconsideration for

Westview Financial Services VA LLC, SBA No. PPP-1033067100 (Jan. 6, 2023) (quoting 15

U.S.C. § 636(a)(36)(B)).

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18. Pursuant to its delegated authority, the SBA issued an interim final rule in April

2020 to implement the PPP. Interim Final Rule, Business Loan Program Temporary Changes;

Paycheck Protection Program, 85 Fed. Reg. 20811 (Apr. 15, 2020) (the “IFR”).

B. The Existing 7(a) Loan Program

19. Under the existing 7(a) loan program, SBA size standards define whether a business

entity is small and, thus, eligible for Government programs and preferences reserved for “small

business” concerns. Size standards have been established for types of economic activity, or

industry, generally under NAICS. 13 C.F.R. § 121.101(a).

20. “In determining the primary industry in which a concern or a concern combined

with its affiliates is engaged, SBA considers the distribution of receipts, employees[,] and costs of

doing business among the different industries in which business operations occurred for the most

recently completed fiscal year. SBA may also consider other factors, such as the distribution for

patents, contract awards, and assets.” 13 C.F.R. § 121.107 (emphasis added).

21. OHA case law also establishes that “when petitioning a[n] [SBA] determination not

related to a procurement that requires a designation of the challenged concern’s primary industry,

an area office must make that designation by considering the work that accounts for the greatest

percentage of the receipts for the challenged concern and all its affiliates, then designate one six-

digit NAICS code and corresponding size standard as the concern’s primary industry.” McLendon

Acres, Inc., SBA No. SIZ-5222 (Mar. 25, 2011) (emphasis added); see also Group O, Inc., SBA

No. SIZ-4441 (June 28, 2001); Sargent Pipe Company, Inc., SBA No. SIZ-4441, at 5 (2001);

Compton Irrigation Inc., SBA No. SIZ-2408, at 6 (1986).

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22. SBA’s promulgated regulations place the responsibility of determining a NAICS

code for a 7(a) loan program applicant within its own authority—considering the “totality of the

circumstances”—in accordance with 13 C.F.R. §§ 121.107 and 121.106(a).

23. While SBA is permitted to use federal tax returns, such as those submitted to the

IRS, as informative in its NAICS determination, federal tax returns alone are not dispositive. Put

even more clearly, SBA must consider the “totality of the circumstances, including criteria used

by the IRS for Federal income tax purposes.” See, e.g., 13 C.F.R. § 121.106(a).

24. There is no clear precedent that a borrower’s own designation of its NAICS code

should outweigh careful analysis by SBA; on the contrary, SBA regularly overrules a borrower’s

own NAICS code determinations, and there is an appeal process codified in 13 C.F.R. §§ 121.402;

121.1102.

C. PPP Loan Eligibility Requirements

25. The SBA repeatedly cited to existing 7(a) loan requirements in defining eligibility

criteria for PPP loan applicants. For example, SBA made clear in the IFR that “[b]usinesses that

are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in [SOP] 50

10, Subpart B, Chapter 2.” IFR at 20812. 13 CFR 120.11 refers to businesses that are ineligible

for 7(a) loans, and SOP 50 10, Subpart B refers to “SECTION 7(A) BUSINESS LOAN

PROGRAMS.”

26. Through the CARES Act and PPP, Congress intended to “[i]ncrease[] eligibility for

certain small businesses and organizations.” 15 U.S.C. § 636(a)(36)(D). In furtherance of this

intention, Congress declared that “any business concern that employs not more than 500

employees per physical location of the business concern and that is assigned a [NAICS] code

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beginning with 72 at the time of disbursal shall be eligible to receive a covered loan.” 15 U.S.C.

§ 636(a)(36)(D)(iii)(I) (emphasis added).

27. Moreover, Congress expressly waived application of SBA’s affiliation rules “with

respect to eligibility for a covered loan.” 15 U.S.C. § 636(a)(36)(D)(iv) (the “Affiliation Waiver”).

Under the NAICS 72 Affiliation Waiver, the only employees counted for the size standard analysis

are those that the borrower employs at the single location.

28. In other words, SBA’s rules traditionally consider a business concern eligible to

participate in SBA 7(a) loan programs when the total number of (i) its employees, and (ii) all its

affiliates’ employees do not exceed the employee-based size standard. However, Congress’s

express waiver of this rule means that it intended that PPP loan eligibility be determined without

regard to the employees of a concern’s affiliates as part of the employee-based size determination.

29. The CARES Act did not waive the consideration of affiliates for purposes of

determining a borrower’s primary industry under 13 C.F.R. § 120.107. It only waived

consideration of affiliates for determining eligibility for PPP loan forgiveness based on an

employee size standard. 15 U.S.C. § 636(a)(36)(D)(iv). This means that while affiliation is

relevant for NAICS classification, once a concern is classified as a NAICS 72 entity, the eligibility

determination is made without regard to the concern’s affiliates’ employee count.

D. Horseshoe Bay Resort – Background and PPP Loan

30. As noted above, Plaintiff is a holding company used to operate the Resort in

Horseshoe Bay, Texas.

31. Plaintiff wholly owns several other entities that independently operate various

aspects of the resort, such as the golf course, spa, restaurants, bars, and club memberships.

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32. Among Plaintiff’s wholly-owned entities is Horseshoe Bay Resort Destinations,

LLC (“Destinations”), which has a NAICS code of 721110 (Hotels, Resort Hotels, and Motels).

This LLC therefore qualified for a NAICS 72 waiver of the affiliation rules under the SBA PPP

and received full forgiveness of its $2,748,400 PPP loan in early 2021.

33. Plaintiff’s role in operation of the Resort focuses on the Club at Horseshoe Bay

(“the Club”), a private membership club that makes up only part of the overall Resort, which is

not member-exclusive. The Club alone operates four different dining facilities as well as

refreshment carts.

34. Indeed, food and beverage employees/associates comprise 41 percent, the largest

single category, of Plaintiff’s total employees. The second largest category of employees is

Agronomy and Landscaping, which makes up 25 percent of Plaintiff’s total employees.

35. Plaintiff lists several of its wholly-owned entities on its IRS Form 1065 for tax

purposes. Specifically, Plaintiff along with Destinations; Horseshoe Bay Resort Interests, LLC;

and Horseshoe Bay Resort Realty, LLC file a single tax return Form 1065 under Plaintiff’s name.

36. Plaintiff, an organization that included within its tax return the information of

multiple disregarded entities, did not analyze the full scope of activities of the affiliated group

when it identified the NAICS code for the organization. Since the Federal Form 1065 was filed

under Plaintiff’s LLC identity, Plaintiff chose a code describing what was unique in its individual

operations, which was its membership and owner of the Golf Operations. Plaintiff, which consists

of multiple entities with a common ownership of Jaffe Assets LLC at 75.1 % and a minority partner

at 24.9%, had never used the NAICS code for any business purpose and it was considered as

information only.

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37. As a result, in its 2019 tax filings, Plaintiff identified itself as a NAICS code 713910

(Golf Courses and Country Clubs) business, which is one of the two major business activities that

fall within Plaintiff’s business through multiple affiliated disregarded entities, which include

restaurant and food sales—a business activity falling under the NAICS 72 category

E. Plaintiff’s PPP Loan and SBA Review

38. Plaintiff applied for a PPP Loan in the amount of $2,370,748 under an employee-

based size standard. The reference number for Plaintiff’s PPP Loan is 3866357206.

39. The SBA approved Plaintiff’s request for a PPP loan on April 27, 2020.

40. On January 20, 2021, Plaintiff submitted to the SBA a PPP loan forgiveness

application.

41. On April 19, 2022, Plaintiff completed SBA Form 3511, the Paycheck Protection

Program Affiliation Worksheet. SBA Form 3511 lists Plaintiff’s affiliated entities with a brief

description of their respective function with regard to the Resort.

42. On May 27, 2022, Plaintiff’s lender, BancorpSouth Bank (“Bancorp”), informed

Plaintiff that:

The request was assessed by a managerial review team and it was
determined that [Plaintiff] is not eligible for an affiliation waiver given the
NAICS code of 713910 for Golf Resorts and Country Clubs accurately
defines the [Plaintiff’s] primary business. The focus of the affiliation
Review moving forward will be based on the data provided on completed
3511.

Bancorp later provided Plaintiff with SBA’s subsequent request for documents, dated June 23,

2022, which stated that:

Due to the lack of documentation, a review of alternative size standards
and eligibility information is not possible. The borrower did not provide
the standard SBA 3511 and did not complete Section III Part C or
comparable documentation and without the Tangible Net Worth and
Average Net Income the Alternative Size Standard cannot be evaluated.

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43. On September 8, 2022, counsel for Plaintiff responded to SBA explaining why

Plaintiff should properly be classified as a NAICS 72 entity and therefore eligible for affiliation

waiver. Specifically, Plaintiff asserted that “the review conducted by the SBA managerial review

team does not accurately capture the applicable NAICS code attributable to [Plaintiff]” and cited

record evidence suggesting Plaintiff is more appropriately categorized by a NAICS 72 code.

F. SBA Loan Review Decision

44. In the SBA’s Loan Review Decision dated January 24, 2023, the SBA denied

Plaintiff’s request for forgiveness of its PPP Loan.

45. The decision was based on the SBA’s incorrect determination that “[t]he subject

loan was . . . ineligible for an affiliation waiver as it does not have a NAICS code beginning with

72.”

46. Having determined that Plaintiff was not eligible for the Affiliation Waiver, the

SBA concluded that “[Plaintiff] and its affiliates have a combined employee count of 593, which

exceeds SBA’s Employee-Based size standard of 500 employees.” As a result, the SBA

determined that Plaintiff was “ineligible for the PPP loan” because “the [Plaintiff] business, or

together with its affiliates, exceeds the maximum allowable number of employees and the SBA

small business size standards.”

47. SBA’s determination that Plaintiff was ineligible for the Affiliate Waiver, its PPP

loan, and, ultimately, forgiveness of the PPP Loan was arbitrary, capricious, and not in accordance

with law as it contravened the CARES Act, the plain language of the IFR implementing the PPP,

and the plain language of SBA’s own regulations. SBA’s decision was also inconsistent with the

clear intent of Congress to make funds widely available to struggling American businesses in the

wake of the COVID-19 pandemic.

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48. The SBA first erred by considering Plaintiff without its affiliates for purposes of

the primary industry analysis. See 13 C.F.R. § 121.107 (primary industry analysis is based on a

concern together with its affiliates). The Loan Review Decision states that “the largest source of

revenue for [the Plaintiff] was from Membership rather than Food & Beverage” and cited to other

documents Plaintiff provided in its assessment that “the majority of revenue was derived from

Membership rather than Food & Beverage.” These statements make no mention of Plaintiff’s

affiliates, nor do they consider the factors that determine those affiliates’ primary industry, which

is broader than merely revenue sources.

49. By considering Plaintiff in isolation, SBA determined that its primary operation

involves membership rather than food and beverage—but that determination is inconsistent with

the overall picture which, by regulation, necessarily must include Plaintiff’s affiliates.

50. SBA’s Loan Review Decision was also deficient as it (mis)applied only one of the

factors its own regulations state are relevant to the primary industry analysis and ignored the

remaining two. 13 C.F.R. § 121.107.

51. SBA cited as conclusive evidence that “the largest source of revenue” for Plaintiff

was membership rather than food and beverage. Revenue is notably not one of the factors

announced as critical to the primary industry determination. While revenue may be relevant to the

calculation of receipts, other relevant inputs to this calculation include “total income” and “cost of

goods sold.” See 13 C.F.R. § 121.104(a).

52. The documents SBA cited as evidence of the membership revenue point to other

data points SBA apparently glossed over, such as revenue for other aspects of the Club’s operation,

like food and beverage, golf operations, spa, marina, and airport, as well as the cost of sales in

these respective aspects of The Club. Moreover, SBA failed to recognize that “membership” at

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The Club is, in actuality, inclusive of food and beverage and other amenities that The Club

provides.

53. Had SBA conducted a proper analysis of Plaintiff’s primary industry, it would have

first determined which concerns are affiliated with Plaintiff, then considered the entire group’s

receipts, employees, and costs of doing business, and the industry encompassing the largest portion

of these three factors combined would suggest Plaintiff’s primary industry. When properly

considered—in accordance with the plain regulatory language—jointly with its affiliates,

particularly with regard to their collective operation of the Resort, a NAICS 72-category code

should be applied to Plaintiff’s broader business activity.

54. Even considering Plaintiff in isolation from its affiliates—which is not proper under

13 C.F.R. § 121.107—Plaintiff’s receipts, employees, and costs of doing business demonstrate its

primary industry falls within the NAICS 72 (Accommodation and Food Services) category:

a. Food and beverage accounts for Plaintiff’s single largest source of revenue, at

25.8% of Plaintiff’s total revenue for 2019, the most recently completed

calendar year at the time of its loan disbursement. In contrast, Plaintiff’s

revenues in the same time period for SBA’s assigned NAICS classification

(Golf, Tennis, and Recreation), constitute only 20.2% of Plaintiff’s total

revenue.

b. Food and beverage personnel comprise the single largest percentage of

Plaintiff’s employees (excluding its affiliates). 41% of Plaintiff’s total

employees are dedicated solely to Plaintiff’s food and beverage operations. By

comparison, nearly half of the same number, or 21%, of Plaintiff’s employees

work in Golf Operations and Grounds Maintenance.

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c. Food and beverage expenses are 39.7% of Plaintiff’s total operating expenses,

while golf expenses are only 35.3% of total operating expenses. More

importantly, when combined with Plaintiff’s affiliates—which SBA should

have done—food and beverage expenses are 43.9% of the Resort’s overall

operating expenses, with golf expenses only 19.4%.

55. Because SBA improperly classified Plaintiff as a NAICS 71 code, Plaintiff was

deemed ineligible for the Affiliation Waiver to which it was entitled under the CARES Act. See

15 U.S.C. § 636(a)(36)(D)(iv) (waiving application of SBA’s traditional affiliation rules with

respect to eligibility under an employee-based size standard for any business concern with no more

than 500 employees at each physical location that is assigned a NAICS code beginning with 72).

56. As a result, SBA “conclude[d] the [Plaintiff] business, or together with its affiliates,

exceeds the maximum allowable number of employees and the SBA small business size

standards,” based on its determination that “[Plaintiff] and its affiliates have a combined employee

count of 593,” exceeding the 500 maximum under the CARES Act.

57. With the proper NAICS 72 designation, Plaintiff would have been eligible for a

NAICS 72 affiliation waiver and determined eligible for its PPP Loan because it employed fewer

than 300 individuals during the relevant time period, well under the 500 employee maximum size

standard under the CARES Act.

G. The “Corrected” Final Decision and Reconsideration

58. Plaintiff timely appealed the Loan Review Decision to the OHA on February 23,

2023, arguing that “[t]hrough a legally and factually flawed analysis, the SBA incorrectly

determined that [Plaintiff] was not a NAICS 72 company and thus was an ineligible recipient of

PPP loan funds and, in turn, ineligible for forgiveness of the PPP Loan.”

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59. OHA issued a final decision on May 8, 2023 affirming the SBA’s Loan Review

Decision, as well as a Corrected Final Decision on May 9, 2023, “clarify[ing] a typographical error

in the Conclusion, as well as other typographical errors,” while the substance of the decision

remained unchanged.

60. The OHA’s Corrected Final Decision affirming the Loan Review Decision was

arbitrary, capricious, and not in accordance with law, as it contravened the plain language of the

CARES Act, the IFR implementing the PPP Loan program, and SBA’s own regulations by failing

to apply loan application requirements for 7(a) loans. Specifically, the OHA erred by affirming

SBA’s misapplication of the Regulatory factors determining Plaintiff’s designation as a NAICS

code 71390 (Golf Courses and Country Clubs).

61. Unlike the SBA’s Loan Review Decision, which at least attempted to conduct some

level of analysis under the regulatory factors, the OHA’s Corrected Final Decision failed to

conduct any analysis at all.

62. Instead, based on the fact that “[Plaintiff] identified itself on its PPP Loan

Forgiveness Application, as well as its tax returns as having a NAICS Code that begins with 71,”

the OHA erroneously concluded that “[b]ecause [Plaintiff] self-classified as NAICS Code 71,

instead of NAICS Code 72, I do not find that the [Loan Review Decision] is based on clear error

as to the extent that SBA declined to apply the NAICS Code 72 waiver.” Corrected Final Decision

at 7. Selection of NAICS code for tax return purposes discussed supra at ¶ 36.

63. As discussed above, SBA’s promulgated regulations place the responsibility of

determining a NAICS code solely on the SBA’s own authority, and no part of the CARES Act

specifies reliance on a borrower’s self-classification or the IRS’s records for this purpose.

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64. Nevertheless, the OHA erroneously concluded without reference to guidance from

the CARES Act that “[t]he PPP uses the borrower’s self-assigned NAICS Code from the

borrower’s tax returns for PPP eligibility purposes,” and on this basis, concluded that SBA is

permitted to ignore its own promulgated regulations relating to 7(a) loan qualification, providing:

The CARES Act considers the NAICS Code that a borrower “is assigned” for
waiver purposes. And SBA rules consider [Plaintiff’s] PPP Loan Forgiveness
Application—which uses the NAICS Code that [Plaintiff] assigned itself—for
determining eligibility. Thus, under PPP rules—even though [Plaintiff] has
previously proven it should classify as a NAICS-72 business under the “primary
industry” analysis—there is no place for considering what [Plaintiff’s] “primary
industry” should have been.

Corrected Final Decision at 8.

65. The Corrected Final Decision goes on to state that “[i]n short, the PPP loan

forgiveness application form [Plaintiff] used incorporate the [Plaintiff’s] NAICS Code from the

[Plaintiff’s] tax return, and, in turn, SBA uses the PPP loan application form and PPP loan

forgiveness application form to determine PPP eligibility.” Corrected Final Decision at 9.

66. OHA’s circular logic seems to provide that the SBA, by using instructions on a

form, somehow overruled long-standing regulatory requirements related to the determination of

NAICS code assignment to 7(a) loan borrowers.

67. Despite the CARES Act statement requiring the SBA to apply 7(a) “terms,

conditions, and processes,” and the fact that there is no other explicit statement in the CARES Act

or official guidance from the SBA prescribing the use of IRS records as the sole source of evidence

regarding NIACS assignment, the Corrected Final Decision appears to conclude that using the

phrase “is assigned” somehow directly modifies existing SBA regulations relating to 7(a) loan

qualification, and thus, any entity that self-certified on its IRS tax forms that it was a NAICS 72

entity is qualified for the Affiliation Waiver.

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68. This conclusion is clearly erroneous as the OHA’s proposed analysis does not take

into account organizations that have changed business lines, for example, or those like Plaintiff

who, due to tax reasons, are reported in the form of consolidated tax returns where the NAICS

code reported is commonly not reflective of the individual entity’s actual business.

69. The OHA also failed to consider evidence that a NAICS 72 code was the proper

classification of Plaintiff’s business activities at the time of the PPP Loan application. Plaintiff’s

tax advisor, BDO, wrote to the IRS on February 10, 2023, requesting that Plaintiff’s NAICS code

be updated to 721100, indicating that Plaintiff “reviewed its revenue stream, employee costs, other

costs of doing business and employee counts and determined that these activities are better

reflective of a NAICS code 7121100.

70. Plaintiff timely submitted a Petition for Reconsideration from Corrected Final

Decision on May 18, 2023, which OHA denied on June 16, 2023.

COUNT I

Agency Action Not In Accordance With Law (5 U.S.C. § 706(2)(A))

71. Plaintiff incorporates the preceding allegations as if set forth fully herein.

72. The APA authorizes judicial review of federal agency actions. 5 U.S.C. § 702.

73. The reviewing court shall “hold unlawful and set aside agency action, findings, and

conclusions found to be . . . not in accordance with law.” 5 U.S.C. § 706(2)(A).

74. The OHA’s Corrected Final Decision affirming the SBA’s denial of forgiveness of

Plaintiff’s PPP Loan was not in accordance with law, including the CARES Act, the APA, the

IFR, and SBA’s regulations, including because the OHA:

a. Ignored its own promulgated regulations relating to 7(a) loan qualification;

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b. Erroneously concluded that the SBA could rely exclusively on Plaintiff’s self-

assigned NAICS Code from its tax returns for PPP eligibility purposes;

c. Ignored Congress’s clear direction that “the same terms, conditions, processes” are

applicable to PPP loans as existing SBA 7(a) loans;

d. Did not apply the factors relevant to the primary industry analysis; e.

Incorrectly classified Plaintiff as a NAICS 71 entity;

f. Incorrectly determined Plaintiff was not eligible for the Affiliation Waiver;

g. Incorrectly included Plaintiff’s affiliates when determining that Plaintiff exceeded

the 500 employee size standard; and

h. Incorrectly determined Plaintiff was ineligible for a PPP Loan.

75. As a result, Plaintiff is entitled to an order declaring that the SBA Decisions were

not in accordance with law and setting aside or vacating the SBA Decisions.

76. In the alternative, Plaintiff is entitled to an order declaring that the OHA’s reliance

on Plaintiff’s tax returns in the Corrected Final Decision was not in accordance with law, setting

aside or vacating the Corrected Final Decision, and remanding the matter to OHA to review SBA’s

primary industry analysis in accordance with SBA’s Promulgated Regulations.

COUNT II

Arbitrary and Capricious Agency Action (5 U.S.C. § 706(2)(A))

77. Plaintiff incorporates the preceding allegations as if set forth fully herein.

78. The APA authorizes judicial review of federal agency actions. 5 U.S.C. § 702.

79. The reviewing court shall “hold unlawful and set aside agency action, findings, and

conclusions found to be . . . arbitrary [or] capricious.” 5 U.S.C. § 706(2)(A).

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Case 1:24-cv-00040-DAE Document 21 Filed 05/13/24 Page 18 of 21

80. The OHA’s Corrected Final Decision affirming the SBA’s denial of forgiveness of

Plaintiff’s PPP Loan was not in accordance with law, including the CARES Act, the APA, the

IFR, and SBA’s regulations, including because the OHA:

a. Ignored its own promulgated regulations relating to 7(a) loan qualification;

b. Erroneously concluded that the SBA could rely exclusively on Plaintiff’s self-

assigned NAICS Code from its tax returns for PPP eligibility purposes;

c. Ignored Congress’s clear direction that “the same terms, conditions, processes” are

applicable to PPP loans as existing SBA 7(a) loans;

d. Did not apply the factors relevant to the primary industry analysis; e.

Incorrectly classified Plaintiff as a NAICS 71 entity;

f. Incorrectly determined Plaintiff was not eligible for the Affiliation Waiver;

g. Incorrectly included Plaintiff’s affiliates when determining that Plaintiff exceeded

the 500 employee size standard; and

h. Incorrectly determined Plaintiff was ineligible for a PPP Loan.

81. As a result, Plaintiff is entitled to an order declaring that the SBA Decisions were

arbitrary and capricious and setting aside or vacating the SBA Decisions.

82. In the alternative, Plaintiff is entitled to an order declaring that the OHA’s reliance

on Plaintiff’s tax returns in the Corrected Final Decision was arbitrary and capricious, setting aside

or vacating the Corrected Final Decision, and remanding the matter to OHA to review SBA’s

primary industry analysis in accordance with SBA’s Promulgated Regulations.

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Case 1:24-cv-00040-DAE Document 21 Filed 05/13/24 Page 19 of 21

COUNT II

Declaratory Judgment (28 U.S.C. § 2201)

83. Plaintiff incorporates the preceding allegations as if set forth fully herein.

84. For the reasons asserted herein, Plaintiff should properly be classified as a NAICS

72 entity eligible for the Affiliation Waiver and therefore forgiveness of its PPP Loan.

85. The SBA has refused to apply the correct NAICS 72 classification to Plaintiff and,

as a result, denied Plaintiff’s eligibility for the Affiliation Waiver and forgiveness of its PPP Loan.

86. A declaratory judgment from this Court that Plaintiff should be properly be

classified as a NAICS 72 entity and eligible for the Affiliation Waiver will resolve this actual

controversy.

87. Plaintiff requests that the Court enter a declaratory judgment pursuant to 28 U.S.C.

§ 2201, declaring that:

a. Plaintiff is eligible for loan forgiveness under the CARES Act; b.

Plaintiff should properly be classified as a NAICS 72 entity;

c. Plaintiff is eligible for the Affiliation Waiver under the Cares Act;

d. Plaintiff was eligible to receive its PPP Loan;

e. The SBA’s attempt to deny loan forgiveness to Plaintiff is an impermissible

application of the law, contrary to the CARES Act; and

REQUESTS FOR RELIEF

WHEREFORE, Plaintiff requests the following relief:

1. An order declaring that the SBA Decisions were contrary to law and setting aside

or vacating the SBA Decisions;

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Case 1:24-cv-00040-DAE Document 21 Filed 05/13/24 Page 20 of 21

2. An order declaring that the Corrected Final Decision was contrary to law, setting

aside or vacating the Corrected Final Decision, and remanding the matter to OHA to review SBA’s

primary industry analysis in accordance with SBA’s Promulgated Regulations;

3. An order declaring that the SBA Decisions were arbitrary and capricious and setting

aside or vacating the SBA Decisions;

4. An order declaring that the Corrected Final Decision was contrary to law, setting

aside or vacating the Corrected Final Decision, and remanding the matter to OHA to review SBA’s

primary industry analysis in accordance with SBA’s Promulgated Regulations;

5. An order declaring that:

a. Plaintiff is eligible for loan forgiveness under the CARES Act; b.

Plaintiff should properly be classified as a NAICS 72 entity;

c. Plaintiff is eligible for the Affiliation Waiver under the Cares Act;

d. Plaintiff was eligible to receive its PPP Loan; and

e. The SBA’s attempt to deny loan forgiveness to Plaintiff is an impermissible

application of the law, contrary to the CARES Act; and

6. Such other relief as the Court deems just and proper.

Respectfully submitted,

/s/ Leane K. Capps
Leane K. Capps
State Bar No. 00796301

POLSINELLI
2950 N. Harwood Street
Suite 2100
Dallas, Texas 75201
lcapps@polsinelli.com
Telephone: (214) 397-0030
Facsimile: (214) 853-9199

ATTORNEYS FOR PLAINTIFFS

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Case 1:24-cv-00040-DAE Document 21 Filed 05/13/24 Page 21 of 21

CERTIFICATE OF SERVICE

I hereby certify that on May 13, 2024, I electronically filed the above and foregoing
pleading with the Clerk of the Court by using the CM/ECF system which will send a notice of
electronic filing to all counsel of record.

/s/ Leane K. Capps
LEANE K. CAPPS

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