The Third Circuit Court of Appeals issued a precedential ruling Monday finding that the Small Business Administration violated the Administrative Procedure Act when it declined to fully forgive a Paycheck Protection Program loan, creating new legal precedent on a key interpretive question that has divided federal courts.
In *Essintial Enterprise Solutions LLC v. SBA* (3d Cir. 2026), a three-judge panel ruled on whether payments to independent contractors constitute "payroll costs" under the PPP's statutory definition. The decision, authored by Circuit Judge Bove and joined by Chief Judge Chagares and Circuit Judge Freeman, resolves a dispute that originated in the U.S. District Court for the Middle District of Pennsylvania.
The case stems from the SBA's denial of full loan forgiveness to Essintial Enterprise Solutions LLC under the Paycheck Protection Program, which was established during the COVID-19 pandemic to provide forgivable loans to small businesses. The central legal question involves the statutory interpretation of "payroll costs" and whether such costs include payments made to independent contractors.
District Judge Julia K. Munley initially ruled in favor of Essintial Enterprise Solutions, finding that payments to independent contractors were covered under the Program's definition of payroll costs. The SBA, along with the Administrator of the Small Business Administration, the Secretary of the Treasury, and the United States government, appealed the decision to the Third Circuit.
The appeals court noted that this interpretive question "is not a routine ground ball," highlighting the complexity of the statutory construction issue. The opinion references conflicting district court decisions on the matter, noting that while the Middle District of Pennsylvania and the Western District of Louisiana found that independent contractor payments qualify as payroll costs, at least one district judge in the Eastern District reached a different conclusion.
The case was argued before the Third Circuit on December 3, 2025, with government attorneys Adam C. Jed from the Department of Justice Civil Division, Patrick J. Bannon, and Michael J. Butler from the U.S. Attorney's Office for the Middle District of Pennsylvania representing the appellants. Essintial Enterprise Solutions was represented by attorneys Bret S. Wacker and J. Chris White from Clark Hill's Denver office, along with Danny P. Cerrone Jr. from the firm's Pittsburgh office and Cynthia Filipovich from the Detroit office.
The Third Circuit's decision carries precedential weight, meaning it will be binding on all federal district courts within the Third Circuit's jurisdiction, which includes Pennsylvania, New Jersey, Delaware, and the Virgin Islands. This precedential status makes the ruling particularly significant for future PPP-related litigation and administrative determinations.
The ruling comes at a time when many PPP loan forgiveness applications remain under review or appeal. The program, which distributed over $800 billion in loans during the pandemic, has generated numerous legal disputes over forgiveness criteria and the SBA's interpretation of statutory requirements.
The Administrative Procedure Act violation finding suggests that the SBA failed to follow proper procedural requirements in making its forgiveness determination. The APA requires federal agencies to follow specific procedures when making administrative decisions and provides grounds for judicial review when agencies fail to comply with statutory mandates or act arbitrarily.
For businesses that received PPP loans and made payments to independent contractors, the Third Circuit's ruling provides important clarification on what expenses qualify for loan forgiveness. The decision may prompt the SBA to revise its guidance and procedures for evaluating similar forgiveness applications.
The case also highlights ongoing tensions between federal agencies and borrowers over PPP loan terms and forgiveness criteria. While the program was designed to provide relief during economic uncertainty, disputes over interpretation of statutory language have led to significant litigation.
Legal experts note that the Third Circuit's precedential ruling may influence how other circuit courts address similar questions, though district courts outside the Third Circuit are not bound by this decision. The ruling adds to a growing body of case law interpreting PPP statutory language and SBA administrative procedures.
The decision represents a victory for Essintial Enterprise Solutions, which can now pursue full loan forgiveness for payments made to independent contractors. For the SBA, the ruling requires compliance with the Third Circuit's interpretation of payroll costs within its jurisdiction.
As PPP-related litigation continues across federal courts, this precedential decision provides important guidance on statutory interpretation and administrative procedure requirements. The ruling demonstrates the courts' willingness to scrutinize agency interpretations of pandemic relief program requirements and ensure compliance with federal administrative law.
The case underscores the importance of clear statutory language in federal relief programs and the role of federal courts in resolving interpretive disputes between agencies and program participants. For future emergency relief programs, the decision highlights the need for precise definitions and consistent administrative implementation.