Unreported / Non-Citable
Background
SSCP Management Inc. provides administrative support to affiliated restaurant companies, while ATHR Management Company, Inc. employs managers who oversee affiliated Applebee’s franchisees. Although the companies and their affiliates employed approximately 5,300 people, SSCP and ATHR sought Paycheck Protection Program loans based on their own employee counts of 24 and 15, respectively. They believed the CARES Act’s waiver of SBA affiliation rules allowed them to disregard their affiliates’ employees.
A third-party lender approved the loans, and the companies used the proceeds for payroll before applying for forgiveness. The SBA denied forgiveness after determining that the affiliation waiver did not apply because SSCP and ATHR had neither a qualifying NAICS code nor an SBA franchise identifier code. The SBA’s Office of Hearings and Appeals affirmed. In federal court, the companies principally argued that they could qualify for forgiveness even if they had not been eligible to receive the loans.
The Court’s Holding
The court granted summary judgment to the SBA and denied the companies’ motion. It held that the Fifth Circuit’s decision in Bruckner Truck Sales, Inc. v. Guzman controlled: a business that was not eligible for a PPP loan was also ineligible for forgiveness of that loan. Bruckner also foreclosed the companies’ arguments that they were “eligible recipients” under the CARES Act’s forgiveness provision and that denying forgiveness operated impermissibly retroactively.
The court declined to consider the companies’ later argument that the affiliation waiver covered them because they were “essentially restaurant companies.” That theory was not presented to the Office of Hearings and Appeals and was not pleaded in the complaint. The court added that the argument would fail even if preserved because the statutory waiver applies only to five specified categories, and the companies did not claim to fall within any of them. The SBA’s decision therefore complied with the statute and was not arbitrary or capricious.
Key Takeaways
- PPP loan forgiveness depends on the borrower having been eligible to receive the loan in the first place.
- A borrower generally cannot obtain judicial review of a theory it failed to present during the administrative process.
- A new claim or theory first advanced at summary judgment is not properly before the court when it was absent from the complaint.
- Being functionally connected to restaurants does not satisfy the CARES Act’s affiliation waiver without meeting one of the statute’s specified categories.
Why It Matters
The ruling applies binding Fifth Circuit precedent to reject a separation between PPP loan eligibility and forgiveness eligibility. Borrowers cannot preserve forgiveness merely by showing that loan proceeds were used for an authorized purpose if they were statutorily ineligible for the loan.
The decision also underscores the importance of presenting all eligibility theories to the agency and pleading them in the complaint. Courts reviewing agency action generally will not consider materially different theories introduced later in the litigation.