Edf Resource Capital, Inc. v. United States Small Business Administration

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
EDF RESOURCE CAPITAL, INC.
Plaintiff,
v. Civil Action No. 12-2043 (JDB)
UNITED STATES SMALL BUSINESS
ADMINISTRATION, et al.
Defendants.
MEMORANDUM OPINION
Plaintiff EDF REsource Capital, Inc. ("EDF") seeks a temporary restraining order
("TRO") and a preliminary injunction against the U.S. Small Business Administration and Karen
Mills, Administrator of SBA (collectively "defendants" or "SBA") enjoining defendants from
enforcing their December 17, 2012 final agency decision revoking EDF's authority to participate
in SBA's 504 loan program and permanently transferring EDF's loan portfolio to an agent for
SBA. A hearing on the TRO was held on this date, and, upon consideration of the submissions
by the parties and the parties' arguments, and for the reasons explained below, the temporary
restraining order will be denied.
BACKGROUND
The facts and circumstances under which this case arose are briefly stated here. On
February 18, 2011, SBA served EDF with a notice of proposed revocation and the proposed
transfer of its loan portfolio. After nearly two years of investigation, correspondence, and
submissions between EDF and SBA, SBA issued a final agency decision on December 17, 2012
revoking EDF's authority to participate in SBA's 504 loan program; transferring EDF's loan
portfolio and all pending 504 loan applications to an agent for SBA; and ordering SBA's Central
Servicing Agent to withhold from EDF all fees received and/or due and payable to SBA. Final
Agency Decision at 1-2. The decision was effective immediately. Id. at 2. In support of its
decision, SBA concluded that EDF had failed (1) to establish and adequately maintain the
required loan loss reserve fund; (2) to pay invoiced obligations to SBA in a timely manner; and
(3) to comply with SBA's loan program requirement that it maintain financial solvency to operate
under the applicable regulations. Id. at 5. SBA concluded that these grounds, "either
individually or in the aggregate," were sufficient to support the final decision. Id. EDF
challenges these conclusions, and seeks a TRO and injunctive relief to prevent the decision from
being effectuated. EDF also seeks discovery, claiming that SBA's motive for investigating and
issuing the final decision was based on bias or personal animus against EDF's CEO, Frank
Dinsmore. EDF's Mem. in Supp. of Mot. for Expedited Disc. [ECF 4-1] at 1.
ANALYSIS
The standard for issuance of the "extraordinary and drastic remedy" of a temporary
restraining order or preliminary injunction is by now well-established. Munaf v. Geren, 553 U.S.
674, 689 (2007). To prevail on a motion for a temporary restraining order or preliminary
injunction, the moving party must demonstrate: (1) a substantial likelihood of success on the
merits; (2) that the moving party would suffer irreparable injury if the relief were not granted; (3)
that the balance of equities tips in the movant's favor; and (4) that an injunction is in the public
interest. See Chaplaincy of Full Gospel Churches v. England, 454 F.3d 290, 297 (D.C. Cir.
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2006) (citing Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1066 (D.C. Cir. 1998)); see also
Winter v. NRDC, Inc., 555 U.S. 7, 20 (2008). "The likelihood of success requirement is the most
important of these factors." See Apotex, Inc. v. Sebelius, 700 F. Supp. 2d 138, 140 (D.D.C.
2010). This is because "[w]ithout any probability of prevailing on the merits, the Plaintiffs'
purported injuries, no matter how compelling, do not justify preliminary injunctive relief." Id.(quoting Am. Bankers Ass'n v. Nat'l Credit Union Admin., 38 F. Supp. 2d 114, 140 (D.D.C.
1999)); see also Trudeau v. Fed. Trade Comm'n, 456 F.3d 178, 182 n.2 (D.C. Cir. 2006) (citing
previous instances where denials of preliminary injunctions have been affirmed where district
courts have concluded that a plaintiff had no likelihood of success on the merits). Indeed, the
Supreme Court has observed that "a party seeking a preliminary injunction must demonstrate,
among other things, "a likelihood of success on the merits." Munaf, 553 U.S. at 689 (quoting
Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal, 546 U.S. 418, 428 (2006))
(emphasis supplied).
EDF has failed to satisfy its burden of demonstrating that it is entitled to a TRO.
The Court assumes – and SBA does not seriously contest – that EDF would suffer irreparable
harm absent entry of a TRO. But EDF has not demonstrated a substantial likelihood of success
on the merits. EDF raises a claim under the Administrative Procedure Act, attacking SBA's
decision as arbitrary and capricious. The bases it cites for that conclusion are: (1) a purported
lack of due process because of SBA's failure to conduct a pre-termination evidentiary hearing; (2)
a challenge to SBA’s conclusion that EDF failed to satisfy its loan loss reserve requirements and
that EDF owes money to SBA; and (3) improper bias on the part of SBA, based on claims that
SBA personnel had personal animus against EDF’s CEO Frank Dinsmore.
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I. Due Process
The "fundamental requirement of due process is the opportunity to be heard 'at a
meaningful time and in a meaningful manner.'" Mathews v. Eldridge, 424 U.S. 319, 333 (1976)
(internal citation omitted); see also Propert v. District of Columbia, 948 F.2d 1327, 1331 (D.C.
Cir. 1991) (stating the three basic elements to a procedural due process claim as (1) a
deprivation, (2) of life, liberty, or property, (3) without due process of law). However, due
process is not a concept that is "unrelated to time, place and circumstances" but instead is
"flexible and calls for such procedural protections as the particular situation demands."
Mathews, 424 U.S. at 334. In considering a due process challenge, "[t]he first inquiry . . . is
whether the plaintiff has been deprived of a protected interest in 'liberty' or 'property.'" Amer.
Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59 (1999) (citations omitted). Assuming that the
movant has a property interest, courts then apply the familiar balancing test under Mathews v.
Eldridge, considering (1) the significance of the private party's protected interest, (2) the
government's interest, and (3) the risk of erroneous deprivation and "the probable value, if any, of
additional or substitute procedural safeguards." 424 U.S. at 335.
Based on the Court's preliminary assessment, it appears that EDF has a significant
property interest at stake here. Indeed, EDF has represented, and SBA concedes, that EDF's
entire business is premised on its status as a certified development company ("CDC"), which
makes 504 loans available to small businesses.
However, EDF has not made a persuasive case that a pre-termination evidentiary hearing
is necessary here to avoid the risk of erroneous deprivation, or explained what probative value a
pre-termination evidentiary hearing would offer, in light of the thorough response by SBA in its
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82-page administrative decision addressing EDF's failure to maintain adequate loan loss reserves,
to pay forward obligations owed to SBA, and to maintain financial solvency. These appear to be
issues that can adequately be resolved through paper submissions, which EDF certainly availed
itself of through the nearly 200 pages it submitted to SBA throughout the course of a twenty-two
month investigation. Based on the record, it appears that EDF received plenty of opportunities to
challenge the proposed revocation and transfer, going as far back as February 2011. It submitted
voluminous responses to SBA and met with SBA officials since that time. Based on that robust
exchange between EDF and SBA over a period of twenty-two months, it appears that EDF
received both ample notice of the proposed revocation and transfer of its loan portfolio and a
meaningful opportunity to be heard. See, e.g., Pinnacle Armor, Inc. v. United States, 648 F.3d
708, 717 (9th Cir. 2011). On the final Mathews factor, SBA has not made a particularly strong
showing that it would be burdened by a pre-termination hearing requirement. But because of the
sufficiency of process afforded EDF through its paper submissions and meetings in this case, the
Court does not conclude at this time that due process required a pre-termination hearing.
Finally, as to the issue of bias, at this juncture EDF has not put forward enough evidence
to warrant a pre-termination hearing on that point. See, e.g., Bender v. Dudas, No. 04-1301, 2006
WL 89831, at *15 (D.D.C. Jan. 13, 2006) ("Where a violation of due process resulting from bias
is alleged, the complaining party bears the burden of showing 'a risk of actual bias or
prejudgment' and must 'overcome the presumption of honesty and integrity in those serving as
adjudicators.'" (quoting Withrow v. Larkin, 421 U.S. 35, 47 (1975))).
II. Loan Loss Reserve Requirements, Loss Share Requirements, and Financial
Solvency
On the three main substantive bases for SBA's final decision, EDF also fails to show a
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substantial likelihood of success in demonstrating that SBA's decision to revoke EDF's authority
to participate in the 504 loan program and transfer EDF's loan portfolio was arbitrary and
capricious. EDF challenges SBA's conclusion that EDF failed to satisfy the loan loss reserve
requirements; that it failed to pay SBA money owed under its loss share obligations; and that,
relatedly, EDF was financially unable to maintain its participation in SBA's loan program. Based
on the representations at the hearing and its submissions, EDF has suggested that it does not
believe it was subject to any loan loss reserve requirement because the alternative loan loss
reserve program, which allowed certain PCLP CDCs to utilize a risk-based methodology as
opposed to the "standard" methodology (which directed PCLP CDCs to maintain a loan loss
reserve fund requirement of 1% of each loan), expired in 2006. Although there is some
uncertainty whether the pilot program allowing for participation in an alternative loan loss
reserve program (allowing CDCs to set aside less than the standard 1% of a loan amount) expired
in 2011 (as SBA contends) or 2006 (as EDF claims), the statutory regime does not appear to
support EDF's contention that it was subject to no loss reserve requirement at all. See generally
15 U.S.C. § 697e; 13 C.F.R. § 120.847(a) ("PCLP CDCs must establish and maintain a [Loan
Loss Reserve Fund]"). The final agency decision points to EDF's own actions, which seem to
suggest that EDF at least understood, post-2006, that there was a loan loss reserve requirement,
and discusses EDF's obligation to maintain an adequate loan loss reserve. See Final Agency
Decision at 12-23. At this stage, the Court cannot conclude that EDF is likely to succeed on this
challenge.
Additionally, although EDF now challenges its loss share requirements, again, the statute
referenced by the parties governing PCLP CDCs provides for either a 10% or a 15% loss sharing
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arrangement. See 15 U.S.C. § 697e(b)(2)(C) (allowing for designation of a CDC as eligible to
participate in the PCLP "if the company agrees to assume and to reimburse the [SBA] for 10
percent of any loss sustained by the [SBA] . . . 15 percent in the case of any such loss attributable
. . . [under the alternative loan loss reserve program]"). Under either percentage, EDF has a
substantial loss share obligation that it has not met and does not currently have the funds to meet.
Moreover, as SBA noted at the hearing, and stated in its final agency decision, EDF nevertheless
paid the initial invoices charging the 15% obligation on several loan losses. See Final Agency
Decision at 26-28. That supports the conclusion that EDF had that obligation and knew it.
Whether the loan loss reserve requirement was calculated under the "alternative" loan loss
reserve program, the "standard" program, or a hybrid of the two, EDF nevertheless conceded at
the hearing that, under either the "standard" or "alternative" loan loss reserve regime, it would not
have sufficient funds to satisfy the loan loss reserve requirement. Nor, as explained above, and
found by the SBA, does it appear that EDF can meet its loss share requirement due to SBA.
Having insufficient funds to satisfy the loss reserve requirement and the loss share payments due
to SBA, it would appear that EDF would be, as the SBA found, financially insolvent.
Accordingly, EDF has not demonstrated that it would likely succeed on the merits of showing
that SBA acted arbitrarily or capriciously in relying on any of the three justifications that SBA
contends separately, or in the aggregate, are sufficient to sustain its final agency decision.
III. Remaining Factors
As to the remaining factors regarding the public interest, and the balance of equities, EDF
similarly fails to establish that these factors support its TRO request. Here, although EDF points
to the services it provides small businesses, the loan portfolio will be transferred to an SBA
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agent, and will continue to be serviced and administered accordingly. See, e.g., Elk Assocs.
Funding Corp. v. U.S. Small Bus. Admin., 858 F. Supp. 2d 1, 32 & n.29 (denying TRO because
irreparable harm suffered by private entity was outweighed by the public interest since SBA's
holding of outstanding debentures "represent public monies that have been extended to . . . a
private entity, with the ultimate aim not of encouraging [its] growth but rather the growth of
small business generally") (internal quotations omitted).
IV. Discovery
Finally, the Court will deny EDF's motion for discovery. Absent "evidence that the
agency has given a false reason . . . discovery is inappropriate in cases under the APA." See Nat'l
Treas. Emps. Union v. Seidman, 786 F. Supp. 1041, 1046 (D.D.C. 1992). Although EDF alludes
to bias by SBA against Dinsmore as a motive for SBA's final agency decision, the record
currently before the Court is not persuasive on this point. Even if the Court permitted discovery,
it is doubtful that such an endeavor would garner additional facts that would help to decide
whether the agency action – and its stated rationale – was arbitrary and capricious, given the
deferential review accorded under the APA. See Camp v. Pitts, 411 U.S. 138, 142 (1973) ("[T]he
focal point for judicial review should be the administrative record already in existence, not some
new record made initially in the reviewing court."); Seidman, 786 F. Supp. at 1046 n.11 ("The
Court may not substitute its judgment for that of the decision-making agency.") (citing Motor
Vehicle Mfrs. Assoc. of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
Hence, the Court will deny discovery, and will set in place a briefing schedule on the preliminary
injunction motion.
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CONCLUSION
For the foregoing reasons, the Court will deny EDF's request for a TRO, deny EDF's
motion for discovery, and set a briefing schedule for the preliminary injunction motion. The
Court is mindful of the impact the denial of a TRO may have on EDF's continued viability.
Nevertheless, in considering the relevant factors, and, in particular, EDF's likelihood of success
on the merits of its challenge to the final agency decision, the Court determines that a TRO is
unwarranted. A separate order accompanies this memorandum opinion.
/s/
JOHN D. BATES
United States District Judge
Date: December 21, 2012
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