Complaint — Horseshoe Bay Resort Holdings, LLC v. Small Business Administration (No. 1:24-cv-00040, W.D. Tex.)
Summary
A civil complaint filed January 10, 2024 as Document 1 in Horseshoe Bay Resort Holdings, LLC v. The United States Small Business Administration and Isabella Casillas Guzman, in her official capacity as Administrator, No. 1:24-CV-00040, in the U.S. District Court for the Western District of Texas, Austin Division. The plaintiff appeals the SBA's denial of forgiveness of its $2,370,748 PPP loan, approved April 27, 2020, which rested on a determination that its NAICS code was 71 rather than 72 and so made it ineligible for the affiliation waiver. It states that the SBA Office of Hearings and Appeals affirmed on May 9, 2023 by relying on the code reported on its tax forms. The complaint asks the court to find the plaintiff a NAICS 72 entity eligible for the loan and to order forgiveness. C. Thomas Kruse of Arnold & Porter Kaye Scholer LLP signed it.
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“Complaint — Horseshoe Bay Resort Holdings, LLC v. Small Business Administration (No. 1:24-cv-00040, W.D. Tex.).”
Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/complaint-no-1-24-cv-00040-dkt-1-w-d-tex-7f1fb4bfb2/
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 1 of 22
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
HORSESHOE BAY RESORT HOLDINGS, LLC, §
§
Plaintiff, §
§
v. § NO. 1:24-CV-00040
§
THE UNITED STATES SMALL BUSINESS §
ADMINISTRATION; ISABELLA CASILLAS §
GUZMAN, in her official capacity as Administrator §
of the Small Business Administration, §
§
Defendants. §
§
§
COMPLAINT
Plaintiff Horseshoe Bay Resort Holdings, LLC (“Plaintiff”) files this Complaint against
the United States Small Business Administration (“SBA”) and Isabel Casillas Guzman in her
official capacity as Administrator of the SBA, and alleges:
I. 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 (“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 (“COVID-19”). As part of the CARES Act, Congress created the
Paycheck Protection Program (“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. The SBA’s denial was based on an erroneous determination that Plaintiff’s NAICS
code – a code used by the SBA to determine whether a business entity is “small” and, thus, eligible
for Government programs such as the PPP – was 71 and not 72. As a result of this improper
classification, Plaintiff was deemed ineligible for a waiver of the SBA’s traditional rules
determining eligibility under an employee-based size standard applicable to businesses with a “72”
NAICS code and its PPP Loan eligibility was retroactively revoked.
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 – forms which incorporate the full scope of activities of Plaintiff
and several wholly-owned disregarded entities – and, without any further analysis or consideration
of the financial analyses provided by Plaintiff, 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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II. 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 Blvd., Horseshoe
Bay, Texas 78657. Plaintiff is a holding company which operates the Resort located in Horseshoe
Bay, Texas.
9. Defendant SBA is an independent federal agency created and authorized pursuant
to 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.
III. 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.
IV. FACTUAL BACKGROUND
A. The Paycheck Protection Program
13. As noted above, Congress passed the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”) in order to mitigate the economic devastation and mass
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unemployment caused by the Covid-19 Pandemic (“COVID-19”). Pub. L. No. 116-136, 134 Stat.
281 (2020).
14. To help accomplish this goal, Congress created the Paycheck Protection Program
(“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)).
18. Pursuant to its delegated authority, the SBA issued an interim final rule in April of
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”).
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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 the North America Industry Classification System (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).
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
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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 a careful analysis by SBA; on the contrary, SBA regularly overrules borrower’s
own NAICS code determinations, so much so that an appeal process has been 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
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.
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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.
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.
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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.
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.
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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.
43. On September 8, 2022, counsel for Plaintiff responded to the 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.”
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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.
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.
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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
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.
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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.
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
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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.”
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
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SBA’s misapplication of the regulatory factors in 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.
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.
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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.
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
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costs of doing business and employee counts and determined that these activities are better
reflective of a NAICS code 721100.”
70. Plaintiff timely submitted a Petition for Reconsideration from Corrected Final
Decision on May 18, 2023, which OHA denied on June 16, 2023.
V. CAUSES OF ACTION
COUNT I
Agency Action Not in Accordance With Law
(5 U.S.C. § 706(2)(A))
71. Plaintiffs realleges and incorporates by reference paragraphs 1 through 70 as if fully
stated 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;
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;
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 17 of 22
g. Incorrectly included Plaintiff’s affiliates when determining that Plaintiff
exceeded the 500 employee size standard; and
h. Incorrectly determined Plaintiff was ineligible for its PPP Loan.
75. As a result, the Court should hold that the SBA Decisions were unlawful, should
set aside the SBA Decisions, and should direct the SBA to grant forgiveness to Plaintiff regarding
its PPP Loan.
76. In the alternative, the Court should hold that the OHA’s reliance on Plaintiff’s tax
returns in the Corrected Final Decision was unlawful, should set aside the Corrected Final
Decision, and remand the matter to the OHA to review SBA’s primary industry analysis in
accordance with SBA’s promulgated regulations.
COUNT II
Arbitrary & Capricious Agency Action
(5 U.S.C. § 706(2)(A))
77. Plaintiffs realleges and incorporates by reference paragraphs 1 through 76 as if fully
stated 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).
80. The OHA’s Corrected Final Decision affirming the SBA’s denial of forgiveness of
Plaintiff’s PPP Loan was arbitrary and capricious, 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;
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 18 of 22
c. Failed to consider the factors it is required to consider for purposes of the
primary industry analysis; and
d. Failed to consider evidence that Plaintiff should properly be classified as
NAICS 72, including that (i) financial information showed food and beverage
accounts were Plaintiff’s single largest source of revenue, comprised the single
largest percentage of Plaintiff’s employees, and comprised the largest
percentage of Plaintiff’s costs; and (ii) that Plaintiff’s tax advisor, BDO, wrote
to the IRS requesting that Plaintiff’s NAICS code be updated to a NAICS 72
code.
81. As a result, the Court should hold that the SBA Decisions were arbitrary and
capricious, should set aside the SBA Decisions, and should direct the SBA to grant forgiveness to
Plaintiff regarding its PPP Loan.
82. In the alternative, the Court should hold that the OHA’s reliance on Plaintiff’s tax
returns in the Corrected Final Decision was arbitrary and capricious, should set aside the Corrected
Final Decision, and remand the matter to the OHA to review SBA’s primary industry analysis in
accordance with SBA’s promulgated regulations.
COUNT III
Declaratory Judgment
(28 U.S.C. § 2201)
83. Plaintiff realleges and incorporates by reference paragraphs 1 through 82 as if fully
stated herein.
84. For the reasons discussed herein, Plaintiff should properly be classified as a NAICS
72 entity eligible for the Affiliation Waiver and therefore forgiveness of its PPP Loan.
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 19 of 22
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
f. The SBA must grant forgiveness of the PPP Loan to Plaintiff.
VI. REQUESTS FOR RELIEF
WHEREFORE, Plaintiffs respectfully request that the Court enter a judgment in its favor and
against Defendants, granting the following relief:
a. Setting aside the SBA Decisions and directing the SBA to issue a new decision on
Plaintiff’s forgiveness application forgiving its PPP Loan or, in the alternative,
setting aside the Corrected Final Decision and remanding the matter to the OHA to
review SBA’s primary industry analysis in accordance with SBA’s promulgated
regulations;
b. A declaration that: (1) Plaintiff has met all requirements for loan forgiveness under
the CARES Act; (2) Plaintiff should be classified as a NAICS 72 entity; (3) Plaintiff
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 20 of 22
is eligible for the Affiliation Waiver under the Cares Act; (4) Plaintiff was eligible
to receive its PPP Loan under the CARES Act; (5) the SBA’s attempt to deny loan
forgiveness to Plaintiff is an impermissible application of law, contrary to the
CARES Act; and (6) the SBA must grant loan forgiveness to Plaintiff;
c. Awarding costs and reasonable attorney fees to the extent permitted by law; and
d. Granting any other relief as this Court may deem proper.
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 21 of 22
Dated: January 10, 2024 Respectfully submitted,
ARNOLD & PORTER KAYE SCHOLER LLP
By: /s/C. Thomas Kruse
C. Thomas Kruse (Bar No. 11742535)
700 Louisiana Street, Suite 4000
Houston, TX 77002-2755
Telephone: +1 713.576.2400
Fax: +1 713.576.2499
Email: Tom.Kruse@arnoldporter.com
James W. Kim (pro hac vice pending)
601 Massachusetts Ave, NW
Washington, DC 20001-3743
Telephone: +1 202.942.5000
Fax: +1 202.942.5999
Email: James.Kim@arnoldporter.com
Tyler J. Fink (pro hac vice pending)
250 W 55th Street
New York, NY 10019-9710
Telephone: +1 212.836.8000
Fax: +1 212.836.8689
Email: Tyler.Fink@arnoldporter.com
Cate Baskin (pro hac vice pending)
70 West Madison Suite 4200
Chicago, IL 60602-4231
Telephone +1 312.538.2300
Fax: +1 312.583.2360
Email: Cate.Baskin@arnoldporter.com
ATTORNEYS FOR PLAINTIFF
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Case 1:24-cv-00040-DAE Document 1 Filed 01/10/24 Page 22 of 22
CERTIFICATE OF SERVICE
I hereby certify that this document will be served on Defendants in accordance with Fed.
R. Civ. P. 4.
/s/C. Thomas Kruse
C. Thomas Kruse (Bar No. 11742535)
ARNOLD & PORTER KAYE SCHOLER
LLP
700 Louisiana Street, Suite 4000
Houston, TX 77002-2755
Telephone: +1 713.576.2400
Fax: +1 713.576.2499
Email: Tom.Kruse@arnoldporter.com
ATTORNEY FOR PLAINTIFF
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