Unreported / Non-Citable
Background
DebtBlue, LLC, a Texas debt-resolution company, received a $1,144,417 Second Draw Paycheck Protection Program loan and later applied for full forgiveness. Eligibility required DebtBlue to demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The SBA concluded that DebtBlue had shown only a 22.9% reduction because its calculation improperly compared gross profit—after deducting costs of goods sold—rather than gross receipts reduced only by returns and allowances.
DebtBlue appealed to the SBA Office of Hearings and Appeals, which affirmed the denial. In seeking reconsideration, DebtBlue submitted revised calculations and new financial documents purporting to separate returns and allowances and show a 27.3% reduction. OHA declined to consider that material because it was submitted after the administrative record had closed and also identified inconsistencies between the new information and DebtBlue’s earlier records. DebtBlue then sought judicial review under the Administrative Procedure Act.
The Court’s Holding
The court held that the SBA and OHA applied the correct legal standard. The governing rule defined gross receipts as revenue reduced by returns and allowances, and DebtBlue’s administrative-record submissions instead deducted broader costs of goods sold. Because DebtBlue did not timely identify what portion of its “Total Adjustments” represented permissible returns and allowances, the agencies rationally concluded that it had not proven the required 25% reduction.
The court also held that OHA reasonably refused to consider DebtBlue’s post-record financial materials. The applicable regulations did not authorize new evidence with a reconsideration petition after the record closed, and OHA reasonably noted both DebtBlue’s earlier opportunity to supplement the record and inconsistencies in the newly submitted data. The court further denied DebtBlue’s request for extra-record discovery and record supplementation because it had not made the required significant showing of agency bad faith or an incomplete record.
Accordingly, the court granted the defendants’ summary-judgment motion, denied DebtBlue’s summary-judgment and discovery motions, and dismissed the action with prejudice.
Key Takeaways
- Second Draw PPP eligibility turns on a reduction in gross receipts, not gross profit; costs of goods sold generally cannot be deducted when making the quarterly comparison.
- A borrower challenging an SBA loan-review decision bears the burden of establishing clear factual or legal error from the administrative record.
- OHA may reject new financial evidence first submitted with a reconsideration petition after the administrative record has closed.
- Extra-record discovery in an APA case requires a significant showing of bad faith or an incomplete administrative record.
Why It Matters
The decision underscores that PPP borrowers must document eligible gross-receipts reductions with correctly categorized financial data during the agency-review process. General accounting labels or calculations that combine permissible returns and allowances with other costs may be insufficient.
It also illustrates the limits of APA review: courts generally evaluate the agency’s decision using the record that was before the agency, and reconsideration ordinarily cannot be used to introduce evidence that could have been submitted earlier.