“Regular Servicing Status” Clarified: PACEM Solutions International, LLC v. U.S. Small Business Administration

1. Introduction

The Fourth Circuit’s published decision in PACEM Solutions International, LLC v. U.S. Small Business Administration, No. 24-2082 (Aug. 4, 2025) squarely addresses the meaning of the phrase “regular servicing status” in § 1112 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The ruling affirms the Small Business Administration’s (“SBA”) refusal to apply six months of automatic debt relief to PACEM’s troubled $5 million Section 7(a) loan, holds that the agency’s decision was neither arbitrary nor capricious, and dismisses constitutional due-process arguments as non-justiciable “‘emotional satisfaction’” claims.

Because tens of thousands of borrowers (and dozens of lenders) negotiated loan modifications in the chaotic early-COVID climate, the court’s definitive guidance on what does not qualify as “regular servicing status” will reverberate across SBA guaranteed-loan litigation, administrative practice, and lender risk management.

2. Summary of the Judgment

• Holding. A 7(a) loan that is repeatedly in default and subject to serial extensions is not in “regular servicing status,” even if the lender and borrower enter new forbearance or modification agreements on the eve of the CARES Act. Consequently, the SBA may deny CARES Act § 1112 payments on that loan.
• Statutory Interpretation. The court accepted the SBA’s contemporaneous Procedural Notice (5000-20020) equating “regular servicing status” with loans that are neither in liquidation nor should be in liquidation under SBA program requirements.
• APA Review. The agency acted within a “zone of reasonableness”; its decision was adequately explained in the administrative record and thus survives arbitrary-and-capricious review.
• Due Process. The borrower’s request for a declaratory ruling of past harm, absent ongoing stake, was non-justiciable under Ashcroft v. Mattis.
• Outcome. District court’s summary judgment for SBA affirmed; SBA’s denial of roughly $3.1 million in principal payments (plus interest and fees) stands.

3. Detailed Analysis

A. Precedents Cited and Their Influence

Below, each precedent cited by Judge Berner is summarized with its doctrinal takeaway and specific application to PACEM.

• Shaw v. Foreman, 59 F.4th 121 (4th Cir. 2023)
    —Sets the general de novo standard for reviewing summary-judgment rulings. The panel used Shaw to reinforce that it would examine the record anew while still applying Rule 56 principles.
• Defenders of Wildlife v. NCDOT, 762 F.3d 374 (4th Cir. 2014)
    —Important for “cross-motions” methodology: each motion must be considered separately; facts are viewed in the light most favorable to the non-movant. Allowed PACEM to get every reasonable factual inference, yet still lose.
• Ohio Valley Envtl. Coalition v. U.S. Army Corps, 828 F.3d 316 (4th Cir. 2016);
  NC Wildlife Fed’n v. NCDOT, 677 F.3d 596 (4th Cir. 2012);
  Ohio Valley Envtl. Coalition v. Aracoma Coal, 556 F.3d 177 (4th Cir. 2009)
    —Triad of Fourth-Circuit APA cases emphasizing (i) “searching but narrow” review; (ii) need for a rational connection between facts and agency choice; and (iii) judicial deference when agency considers relevant data. These authorities framed how the court assessed SBA’s explanation concerning loan status.
• Ren v. USCIS, 60 F.4th 89 (4th Cir. 2023)
    —Restates that courts ensure agencies act within a “zone of reasonableness.” The phrase is quoted verbatim in PACEM to justify deference.
• Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (1983)
    —Canonical arbitrary-and-capricious test. Court invoked State Farm’s “rational connection” language when approving SBA’s memorandum denying payments.
• Jordan v. Sosa, 654 F.3d 1012 (10th Cir. 2011) & Ashcroft v. Mattis, 431 U.S. 171 (1977)
    —Mootness and justiciability of purely retrospective declaratory relief; relied upon to dispose of PACEM’s Fifth-Amendment claim.

B. The Court’s Legal Reasoning

1. Statutory Text. CARES Act § 1112(c)(1) requires loans be in “regular servicing status” at enactment. Because the statute is silent on definition, the SBA’s April 16, 2020 Procedural Notice filled the gap.
2. SBA Interpretation Given Chevron-Like Respect. Although Judge Berner never recited “Chevron” expressly, the opinion relied on familiar deference tools—contemporaneous interpretation, statutory silence, and agency expertise—to validate the Notice.
3. Application to Facts. Record showed:
   • First missed principal payment March 2019 (just 7 months after origination).
   • Six sequential modifications (Aug 2018-May 2020) postponing maturity from Aug 2019 to Dec 2020.
   • May 2020 SBA Form 1502 marked loan “in default.”
   • SBA disbursed April/May 2020 interest payments before discovering default mis-reporting.
   The court held that this pattern plainly forecasted liquidation status; thus SBA properly reversed course and demanded reimbursement.
4. APA Adequacy of Explanation. The December 23, 2022 e-mail (“SBA Email”) plus internal memoranda showed “reasoned decisionmaking.” State-Farm’s rational-connection requirement satisfied.
5. Due Process Analysis (or Lack Thereof). Because PACEM sought only retrospective declaratory relief, the claim was non-justiciable. Even if a liberty/property interest existed, any notice defects were “harmless.”

C. Potential Impact

• Administrative Law & Deference. Reinforces that agency interpretive notices—even below the level of formal rulemaking—can receive substantial deference when filling statutory gaps in emergency legislation.
• SBA Lending Practice. Lenders must report delinquencies timely; mis-reporting can trigger claw-backs. Borrowers cannot rely on post-hoc modifications to rehabilitate defaulted loans and claim CARES Act benefits.
• Litigation Posture. Borrowers challenging SBA § 1112 determinations face an uphill battle unless they can show the loan was unquestionably current at enactment. Expect more early-stage dismissals or summary judgments.
• Government Stimulus Programs. Sets an instructive template for future emergency-aid statutes (e.g., disaster relief, pandemic-response) on how courts will evaluate agency eligibility screens.

4. Complex Concepts Simplified

The decision contains several technical terms. Below is a plain-language explainer.

• Section 7(a) Loan. The SBA’s flagship loan-guarantee program; the agency backs a portion of the loan in case of borrower default, but a private bank originates and services the loan.
• Preferred Lender. A bank with SBA-delegated authority to approve loans and modifications without prior SBA review—speeding up the process but requiring accurate post-approval reporting.
• Regular Servicing vs. Liquidation.
  • Regular servicing: Loan is being repaid per schedule; minor delinquencies (≤120 days) may be cured without classification change.
  • Liquidation: Lender has determined borrower will likely not repay; remedies shift to collateral seizure, charge-off, or SBA purchase of guarantee.
• CARES Act § 1112 Payments. Congress mandated SBA, not borrowers, make six months of payments on qualifying 7(a) loans to keep small businesses afloat during COVID-19.
• Arbitrary and Capricious (APA). Legal standard that invalidates agency action if it is irrational, unexplained, or ignores critical evidence. Courts do not substitute their judgment for the agency’s; they ask only whether the agency reasonably connected facts to decision.
• Declaratory Judgment Mootness. Courts decline purely retrospective pronouncements when no ongoing legal interest or future harm exists; litigant’s desire for “vindication” is insufficient.

5. Conclusion

PACEM Solutions International crystallizes an important post-pandemic teaching: eligibility for government-subsidized loan relief hinges on a borrower’s objective repayment status, not on sympathetic narratives or eleventh-hour loan amendments. The Fourth Circuit’s comprehensive embrace of SBA’s interpretation of “regular servicing status” arms the agency—and participating lenders—with clear precedent to deny or reclaim CARES Act § 1112 payments where default conditions existed. More broadly, the opinion underscores courts’ readiness to uphold swift, pragmatic agency determinations issued during national emergencies, provided the agency demonstrates a reasoned connection to the factual record. Borrowers and practitioners should read PACEM as a cautionary tale: administrative grace has limits, and statutory precision prevails.