No Partial PPP Forgiveness for Corporate-Group-Cap Violations Under SBA’s Corporate Group Rule

Introduction

In Celebrity of Springfield LLC v. SBA, the U.S. Court of Appeals for the Third Circuit addressed whether a Paycheck Protection Program (PPP) borrower that concedes it exceeded the SBA’s “Corporate Group Rule” aggregate cap can nevertheless obtain partial loan forgiveness up to the cap. The appellant, Celebrity of Springfield, LLC (a New Jersey car dealership), was part of a commonly owned group of entities controlled by Thomas Maoli. The appellees were the United States Small Business Administration and its Administrator.

The dispute arose in the “second draw” PPP context, where the SBA applied a $4 million aggregate cap across majority-commonly-owned entities. Celebrity’s $2 million second-draw loan pushed its corporate group above that cap by a little more than $1 million. After the SBA denied forgiveness entirely, Celebrity sued under the Administrative Procedure Act (APA), arguing that the CARES Act and/or SBA guidance required the SBA to grant forgiveness at least up to the cap, and that a total denial was arbitrary and capricious.

The Third Circuit affirmed summary judgment for the SBA, holding that neither the statute nor the implementing rules mandate partial forgiveness, and that the SBA did not abuse its discretion in denying forgiveness in full once the loan violated the Corporate Group Rule.

Summary of the Opinion

The court held:

  • The CARES Act is silent on partial forgiveness when the corporate group maximum is exceeded; that silence does not create a requirement of partial forgiveness.
  • The SBA’s Corporate Group Rule provides that if a borrower fails to withdraw or cancel a noncompliant loan, “the loan will not be eligible for forgiveness.” That language authorized a complete denial of forgiveness.
  • Other SBA materials (including an FAQ-style statement that forgiveness may be denied “in whole or in part, as appropriate,” and an SBA procedural notice) did not override the specific Corporate Group Rule or transform discretionary language into a mandate of partial forgiveness.
  • Even assuming some discretion existed, the SBA reasonably explained why full denial was “appropriate” given the size of the overage, the borrower’s request for forgiveness of the entire $2 million loan, and the borrower’s explanations (“not aware” / “lost track”) in light of repeated eligibility certifications.

Accordingly, the SBA’s decision was not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” and the Third Circuit affirmed.

Analysis

Precedents Cited

Kelly v. Borough of Carlisle, 622 F.3d 248 (3d Cir. 2010)

The court cited Kelly v. Borough of Carlisle for the standard of appellate review of summary judgment: de novo review applying Federal Rule of Civil Procedure 56(a). While not central to the PPP merits, it frames the procedural posture: the Third Circuit independently assessed whether the record supported judgment as a matter of law in favor of the SBA.

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007)

Long Island Care at Home, Ltd. v. Coke supplied the interpretive principle that “the specific governs the general.” The court used that canon to prioritize the Corporate Group Rule’s specific consequence—noncompliant loans “will not be eligible for forgiveness”—over more general language in other SBA materials suggesting that denials may occur “in whole or in part, as appropriate.” This move is the opinion’s key interpretive pivot: even if general guidance contemplates partial denials in some scenarios, a specific rule can foreclose partial forgiveness for the category of violations it addresses.

United States v. Nixon, 418 U.S. 683 (1974)

The court invoked United States v. Nixon for the proposition that when the Executive Branch promulgates binding rules, it is bound by them while they remain in force. Applied here, once the SBA adopted the Corporate Group Rule, it was obligated to apply it as written; doing so cannot itself be arbitrary or an abuse of discretion. The citation reinforces that an agency’s adherence to its own valid, operative rule is not a flaw but a virtue.

Leslie v. Att'y Gen., 611 F.3d 171 (3d Cir. 2010)

Leslie v. Att'y Gen. reinforced the “long-settled principle” that an agency’s regulations that affect the rights and interests of others are controlling upon the agency. The Third Circuit used this alongside Nixon to validate the SBA’s reliance on its own Corporate Group Rule as the primary basis for denial.

FCC v. Prometheus Radio Project, 592 U.S. 414 (2021)

The court cited FCC v. Prometheus Radio Project for the APA reasonableness benchmark: agency action is upheld if it falls “within a zone of reasonableness.” This precedent informed the court’s alternative holding: even if the SBA had discretion to partially forgive, the SBA’s explanation for denying forgiveness entirely was reasonable given the magnitude of the overage and the borrower’s asserted lack of awareness despite multiple certifications and applications across the corporate group.

Legal Reasoning

  1. Statutory framework and delegated discretion.

    The court emphasized Congress’s delegation to the SBA under the Small Business Act (including 15 U.S.C. §§ 631, 633(d), 634(b)(6), (7), and § 636) and the CARES Act’s direction that, except as otherwise provided, PPP loans would operate under “the same terms, conditions, and processes” as § 7(a) loans (15 U.S.C. § 636(a)(36)(B)), with the SBA directed to issue implementing guidance and regulations for forgiveness (codified at 15 U.S.C. § 636m(k)). This framing matters because it supports the court’s view that, where the statute is silent on a specific edge case (partial forgiveness after a corporate-group cap violation), the SBA retains room to implement administrable rules—like an aggregate cap with a categorical forgiveness consequence.

  2. No statutory mandate of partial forgiveness.

    Celebrity conceded the CARES Act is silent about partial forgiveness in this particular context. The court rejected the attempt to convert broad statutory purpose (“keeping small businesses afloat”) into a concrete legal requirement. Importantly, the court also rejected the “absurdity” framing: denying forgiveness to an entity that failed to comply with the rules for obtaining the loan is not absurd; it is a predictable compliance incentive in a high-volume emergency program.

  3. The Corporate Group Rule’s text forecloses forgiveness once violated.

    The Corporate Group Rule (85 Fed. Reg. 26324, 26325 (May 4, 2020)) expressly warns that a borrower must withdraw or cancel noncompliant applications and that failure to do so means the loan “will not be eligible for forgiveness.” The Third Circuit read this as authorizing the SBA to deny forgiveness entirely once the loan exceeded the cap and was not timely withdrawn/cancelled.

  4. General “in whole or in part, as appropriate” language does not compel partial forgiveness.

    Celebrity relied heavily on language in 85 Fed. Reg. 33010, 33012 (June 1, 2020) (FAQ-style guidance) stating that if the SBA determines a borrower is ineligible for the loan amount or forgiveness amount claimed, it will direct denial “in whole or in part, as appropriate.” The court rejected the claim that “will” plus “in part” creates a mandatory entitlement to partial forgiveness. Two reasons were central:

    • The Corporate Group Rule is the more specific directive for this violation category, and under Long Island Care at Home, Ltd. v. Coke, the specific governs the general.
    • The phrase “as appropriate” preserves SBA discretion; it does not confer borrower-controlled rights to a partial remedy.
  5. The SBA procedural notice did not require partial forgiveness here.

    The court addressed SBA Procedural Notice Control No. 5000-20078 language that could be read to contemplate partial denial where only a portion is ineligible. But read as a whole—including the notice’s statement (in a footnote) that if SBA determines a borrower was ineligible “based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application … the loan will not be eligible for loan forgiveness”—the notice did not impose a partial-forgiveness mandate for Corporate Group Rule violations.

  6. APA review: no abuse of discretion / not arbitrary and capricious.

    The SBA’s primary rationale—applying its own rule barring forgiveness for noncompliant corporate-group loans— could not be an abuse of discretion because agencies are expected to follow their rules (United States v. Nixon; Leslie v. Att'y Gen.).

    The SBA’s alternative rationale also passed review: the overage exceeded $1 million, Celebrity sought forgiveness of the entire $2 million, and its explanations (“not aware” / “lost track”) were reasonably viewed as demonstrating at least serious negligence given repeated certifications across multiple loans. Under FCC v. Prometheus Radio Project, the decision fell within a “zone of reasonableness.”

Impact

This decision is likely to shape PPP/agency-forgiveness litigation in at least four ways:

  • No equitable “cap-only” forgiveness theory in the Third Circuit. Borrowers who exceed an SBA-promulgated aggregate cap cannot assume courts will order forgiveness up to what would have been allowed; categorical ineligibility language can support total denial.
  • Regulatory specificity matters. When SBA (or other agencies) pairs a compliance obligation with an explicit consequence (“will not be eligible”), courts may treat that as decisive even if other program materials discuss partial remedies elsewhere.
  • “As appropriate” preserves agency discretion. The opinion treats “in whole or in part, as appropriate” as a discretionary administration tool—not a borrower entitlement—limiting attempts to convert general guidance into mandatory outcomes.
  • Compliance systems and recordkeeping are legally salient. The SBA’s reasoning credited by the court highlights that borrower explanations reflecting weak controls can justify harsher outcomes under APA review, especially where repeated certifications were made during the application process.

More broadly, the case reinforces a pandemic-program administration theme: in mass emergency lending with finite appropriations, agencies may adopt bright-line rules to allocate resources and deter over-application, and courts may uphold strict consequences where rules clearly warn of them.

Complex Concepts Simplified

PPP “forgiveness”
PPP loans could be forgiven (not repaid) if the borrower met statutory and regulatory conditions—typically spending on payroll and other allowed costs and meeting eligibility requirements.
Corporate Group Rule
A rule limiting the total (aggregate) amount that entities with shared majority ownership could borrow across the group. In second-draw PPP, that aggregate limit was $4 million. The rule warned that failing to cancel a noncompliant loan would make it ineligible for forgiveness.
“Partial forgiveness”
Forgiving only part of a loan (e.g., forgiving the portion up to an allowed cap). The Third Circuit held that, for Corporate Group Rule violations, partial forgiveness was not required and could be denied entirely.
Administrative Procedure Act (APA) “arbitrary and capricious” review
A court does not decide what it would do best; it asks whether the agency’s decision was reasonable, explained, and consistent with law. If the agency acts within a “zone of reasonableness” and follows its rules, courts usually uphold the action.
“Specific governs the general”
When two legal texts arguably overlap, a more specific directive (here, the Corporate Group Rule consequence for cap violations) controls over more general language (here, general statements about denials “in whole or in part”).

Conclusion

Celebrity of Springfield LLC v. SBA establishes, as a precedential Third Circuit rule for PPP disputes, that exceeding the SBA’s Corporate Group Rule aggregate cap can render the entire noncompliant loan ineligible for forgiveness, and that neither the CARES Act’s purpose nor general SBA guidance compels partial forgiveness up to the cap. The decision also underscores that courts will defer to agencies applying clear, specific program rules and will uphold strict outcomes under the APA where the agency’s reasoning falls within a “zone of reasonableness” and is tied to compliance, certification, and program-integrity concerns.