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Published by Jake Leahy

Business Lender Appeals SBA’s Denial of PPP Forgiveness Over Implementation of “Exclusion Rule” (Franklin Capital v. SBA)

August 31, 2022

Earlier this week, Franklin Capital Holdings LLC (“Franklin Capital”) filed suit against the United States Small Business Administrator (“the SBA”) in the United States District Court of Northern Illinois, after the SBA denied forgiveness of Franklin Capital’s Paycheck Protection Program (“PPP”) forgivable loan.

PPP was administered in 2020 as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Rather than allocating grants to businesses, the program was administered as a “forgivable loan,” meaning that businesses would have their loan forgiven in its entirety should they meet certain qualification criteria. 

The beginning of the complaint addresses the procedural requirements to bring suit in Federal court pertaining to an adverse administrative decision. Namely, that Plaintiff is entitled to judicial review of a Final Administrative decision. After the SBA reached its final decision, it was then appealed to Office of Hearings and Appeals (“OHA”), as required by law. After those two agencies issued final decisions, then an appeal to Federal district court is permissible, pursuant to the Code of Federal Regulations. As such, Franklin Capital appealed to the Northern District of Illinois. 

To qualify for forgiveness, an entity must use at least 60% of funds obtained from PPP for payroll expenses, the entity must be considered an “eligible recipient,” and a formal application must be submitted. 

As the CARES Act passed in March of 2020, interpretation of the statute and subsequent regulatory guidance sometimes came swiftly and abruptly, sometimes bypassing the typical thirty day notice requirement to implement regulations under the Administrative Procedures Act. The SBA instituted an Interim Final Rule on April 15, 2020, less than one month after passage of the PPP program. The purported purpose of the regulation’s expedited status was to assure that small businesses would be able to apply for the loan in a way which they have the full understanding of its requirements. 

That April 15, 2020 Rule excluded financial businesses primarily engaged in lending or investments from applying for relief under the CARES Act. However, Franklin Capital applied for the loan initially prior to the April 15 date, as such, Franklin Capital argues that it was operating pursuant to the guidance at the time, namely, the statutory language passed by Congress, which Franklin Capital asserts, did not preclude those types of financial services. 

Franklin Capital also notes that the SBA did not allege that the company was ineligible due to its size, amount, or the use of funds; the sole basis is based on the type of business. Although the initial loan application was accepted, notwithstanding these requirements, the SBA argued in Administrative hearings that the refusal to object to the privately executed loan, did not amount to an approval of SBA funding. 

In order to overcome the previous Administrative decisions, Franklin Capital must demonstrate that the SBA’s final agency decision went against the Congressional statute and that the decision was arbitrary and capricious. Franklin Capital notes that Congress had intended that “all business concerns,” which Plaintiff argues, means that Congress did not intend for the SBA to use its previous rules and regulations pertaining to availability of SBA loans. The SBA “Exclusion Rule,” which predates the pandemic, already excluded certain types of organizations, including, financial institutions, real estate developers, finance companies, and life insurance businesses. While Plaintiff does not object to the validity of the prior regulations, it argues that applying this criteria, in light of the “all business concerns” standard, runs directly counter to the Congressional intent. 

To support its assertion as to the expansiveness of the Congressional intent, Franklin Capital also cites the second round of PPP funding which was later passed by Congress in 2020. That second round, excluded certain types of businesses, including, specifically restricted “financial businesses primarily engaged in the business of lending.” Plaintiff asserts that the second round, in essence, adopted the “Exclusion Rule,” based on the language of the statute, but this language was not included in the first round. 

Franklin Capital further asserts the SBA decision was Arbitrary, Capricious, and an Abuse of Discretion. Notably, the complaint cites other decisions made by the SBA. One of the reasons given as a basis to determine the type of business was that the company had used the code “522220” on its tax return, indicating its specific sector in the financial services industry. The complaint alleges that publicly available PPP data shows 163 entities were listed under the exact same code, who were granted student loan forgiveness. In fact, 64 of said entities were approved for the loan after the effective date of the April 15 Regulation. 

The complaint prays that the court reverse the administrative decisions; declare that the rule’s application runs contrary to statute; declare that the April 15 Regulation could not be applied; declare that the April 15 Regulation’s “Exclusion Rule,” was arbitrary and capricious; declare that Exclusion Rule’s application was not statutorily authorized; declare that denial of loan was arbitrary and capricious; aware costs and reasonable attorneys’ fees; and other relief the court deems just and proper. 


Appealing a final administrative decision to federal court is always an uphill battle. The reality is that finding a decision was arbitrary and capricious is not an easy task, however Franklin Capital does include some helpful bits of information that provide some insight into the inconsistent decisions coming from the SBA. The one factor that I find most helpful to Franklin Capital’s decision is regarding the code “522220.” Given that this number helps explain, at least in portion, the decision of how to classify the entity, it seems like a clear red flag that so many other similarly situated organizations were able to obtain funding. This case may have far reaching impact to other sectors as well, especially those which were deemed ineligible for PPP funding in the early days of its implementation. 

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