The Vinegar Factory, Inc. v. The United States Small Business Administration

Background

Congress created the Paycheck Protection Program during the COVID-19 pandemic through the Coronavirus Aid, Relief, and Economic Security Act. The program authorized the Small Business Administration (SBA) to guarantee loans that could potentially be forgiven for businesses harmed by the pandemic.

The Vinegar Factory, Inc. and Eli’s Leasing Inc., described as two of thirteen New York businesses owned by Eli Zabar, received Paycheck Protection Program loans. They later applied for forgiveness. The SBA denied their applications, and the SBA’s Office of Hearings and Appeals upheld the denials.

The businesses sued the SBA and its Administrator under the Administrative Procedure Act. They sought a declaration that the SBA’s decisions were unlawful, cancellation and reversal of those decisions, and an injunction requiring the SBA to forgive their loans fully. The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), asserting lack of subject-matter jurisdiction and failure to state a claim.

Subject-Matter Jurisdiction and Sovereign Immunity

The defendants’ main jurisdictional argument was that the government had not waived its protection from lawsuits seeking injunctive and declaratory relief. The court noted that the Second Circuit had held that the SBA’s sovereign-immunity defense did not have to be decided before reaching the merits when the plaintiffs also sought relief—such as review or cancellation of final agency decisions—for which sovereign immunity was not an obstacle.

Because the plaintiffs sought cancellation and reversal of the SBA’s final loan-review decisions in addition to injunctive and declaratory relief, the court declined to decide the defendants’ subject-matter-jurisdiction arguments and proceeded to the merits.

PPP Eligibility and Loan Forgiveness

The SBA’s eligibility rules generally aggregate the employees of affiliated businesses, including businesses under common ownership. The CARES Act expanded eligibility to businesses with no more than 500 employees and waived the affiliation rules for a business with no more than 500 employees that, when its loan was disbursed, had a North American Industry Classification System code beginning with 72, covering the Accommodation and Food Services sector.

The plaintiffs conceded that their total employee counts exceeded 500 when combined with their affiliates. They also conceded that their own industry classification codes did not begin with 72. The court held that the statutory exception applied to the business seeking the loan, not to a business merely because one of its affiliates had a code beginning with 72.

The court compared the plaintiffs to an example in the SBA’s frequently asked questions. In that example, a restaurant with a code beginning with 72 and a construction company under the same ownership were affiliates. The affiliation waiver applied to the restaurant but not the construction company, so the construction company had to count the employees of its affiliates. The court concluded that the plaintiffs were similarly required to aggregate their employees with those of their affiliates.

Because eligibility for the loan was required for forgiveness, the court concluded that the plaintiffs were ineligible for forgiveness. As to Eli’s Leasing, the court held that the SBA appeals office had applied the same interpretation when it upheld the denial.

The Vinegar Factory’s Additional Argument

The Vinegar Factory argued that the SBA should not have counted affiliates whose industry codes were later changed to begin with 72 while the administrative appeals were pending. The SBA appeals office instead concluded that the rules for appeals from size determinations did not apply to Paycheck Protection Program applications.

The court stated that this reasoning was a more indirect route to the same result, but it was not arbitrary, capricious, an abuse of discretion, or otherwise unlawful under the Administrative Procedure Act. The court also noted that the statute measured the industry code as of the loan-disbursement date, and the plaintiffs acknowledged that none of their affiliates had codes beginning with 72 at that time. Even if the appeals office’s stated reasoning had been incorrect, the court concluded that any error would not have mattered because the Vinegar Factory was independently ineligible for forgiveness.

Disposition

The court observed that, in opposing dismissal for failure to state a claim, the plaintiffs did not cite the statute, regulations, or SBA interpretations supporting their position. They argued that they had stated a claim because the parties disagreed about how the rules should be interpreted. The court explained that a dispute alone does not establish a legally sufficient claim; the claim must also be plausible under the law.

The court held that the plaintiffs’ position was inconsistent with the statute and the SBA’s reasonable interpretation of it. It granted the defendants’ motion to dismiss for failure to state a claim, dismissed the complaint in its entirety, directed the Clerk of Court to enter judgment for the defendants, and ordered the case closed.