SBA Loan Default: SBA to Increase Enforcement Efforts?
We help people who need to avoid SBA loan default by teaching them about SBA offer in compromise and about various SBA loan problems.
The transcript of the video follows below for further review.
CASE BRIEF: An SBA guarantor can be discharged from personal liability under California state U.C.C. law to the extent that the lender or the SBA (as assignee) unjustifiably impairs any collateral pledged as security for the SBA loan even though the SBA Unconditional Guarantee Agreement contains an express waiver of such a defense.
CASE NAME: Alcock v. SBA
CITATION: 50 F.3d 1456 (9th Cir. Cal. 1995)
FACTS:
Top Pac Growers and Shippers ("Top Pac"), a tomato packing and shipping company, borrowed $600,000 from Crocker Bank secured by a note guaranteed by the SBA for seventy-five percent of the amount due (SBA Note). On the same day, Crocker extended Top Pac an additional $ 500,000 line of credit ("Crocker Line"). The SBA was secured by a first deed of trust to the real property at one of Top Pac plant locations. Crocker was secured by a deed of trust on the real property, subordinated to the SBA first-priority deed. Crocker and the SBA were also secured by a perfected security interest in Top Pac's equipment; in its intangible assets; and by the personal guaranties of several parties, including Charles Alcock, a Top Pac stockholder.
Prior to closing on the loans, Crocker Bank informed the SBA that it was not willing to advance the $500,000 line of credit if it only had the second lien on the real property. The SBA agreed to subordinate its interest in the real to that of Crocker Bank on September 29, 1982, retaining the first-priority interest in the equipment. The SBA entered into this new agreement because it felt adequately collateralized by the interest in the equipment and the net worth of the guarantors. The guarantors were not informed of the change in priority of the real estate liens.
In the spring of 1984, Top Pac defaulted on the loan. The SBA honored its guaranty to Crocker Bank, and the SBA Note was assigned to it. The SBA declined any interest in the real property. Crocker foreclosed on the real property in March 1985 and purchased it for only $130,000 at a trustee's sale in partial satisfaction of the amount owed on the Crocker Bank Line of Credit.
BRIEF OVERVIEW:
Charles Alcock (Guarantor on the SBA loan) argued that the bankruptcy panel committed error in allowing, in a chapter 11 proceeding, the SBA claim on a loan deficiency. The guarantor urged his discharge from the guaranty obligation because the SBA unjustifiably impaired the collateral, both land and equipment, disposed of it in a commercially unreasonable manner, and failed to give him notice of the disposition.
Citing to California Commercial Code Section 3606, the court agreed. It said that when the SBA's lien on land became subordinated, the land and equipment could not be sold as a going concern and the market value as a whole fell. While the subordination was justified with respect to Top Pac as an obligor, it prejudiced any guarantor, including Charles Alcock. The court further ruled that the SBA guaranty agreement did not act to waive the guarantor's impairment-of-collateral defense under Section 3606, and that Alcock's discharge from personal liability under the SBA Unconditional Guarantee, pursuant to Section 3606(1)(b), was completely due to the difficulty in measuring monetary loss.
OUTCOME:
The order allowing a claim by the SBA for a deficiency on a loan that Charles Alcock signed as a guarantor was reversed, because the SBA agreement to a later lien subordination only on land, not equipment, severely prejudiced the SBA guarantor when the entire property could not be sold as a going concern and the market value as a whole fell.
If you are facing an SBA loan default, contact us today for a FREE initial consultation with an experienced SBA workout attorney at 888-756-9969.
We analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default or SBA personal guarantee.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients personally guaranteed SBA 504 loan balance of $750,000. Clients also pledged the business’s equipment/inventory and their home as additional collateral. Clients had agreed to a voluntary sale of their home to pay down the balance. We intervened and rejected the proposed home sale. Instead, we negotiated an acceptable term repayment agreement and release of lien on the home.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
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