SBA Loan Default Cases: What generally happens when SBA debts are referred to the DoJ for litigation?
The transcript of the video follows below for further review.
Once an SBA loan has been delinquent between 120 days (4 months) and 180 days (6 months), the loan is generally referred to the U.S. Treasury Department’s Bureau of Fiscal Service.
Treasury will then employ a number of administrative collection tactics to try and collect the debt. One of the Government’s most powerful weapons is to refer the debt to the U.S. Department of Justice (DoJ) for litigation . . . and this gives the Government superior leverage against the SBA obligor.
It is important to understand the litigation process that might threaten an SBA obligor’s assets. Hence, below is an overview of how an SBA claim is proven and enforced when an SBA debt is referred to the DoJ for litigation.
From the outset of the civil action, the DoJ through the U.S. Attorney’s Office representing the SBA may use a variety of techniques to try to obtain security in an SBA obligor’s assets before the trial has even begun. If the alleged debt is unsecured (e.g., the SBA obligor did not allow the lender of record, CDC or the SBA to place a lien on his personal or real property), the SBA may try, with approval from the court, to “attach” or otherwise create a lien upon the real estate or personal property within the SBA obligor’s control. The DoJ may also seek a “trustee process” to try to obtain a lien over SBA obligor’s tangible and intangible assets, his “goods, effects, and credits,” that are held by a third party. The trustee process is primarily used to attach monies held in banks or other financial institutions. The DoJ may even seek a “freeze” injunction in an effort to prevent the SBA obligor from encumbering, transferring or disposing of his assets during the pendency of the case.
The DoJ can employ these pre-trial security tools both to create security in the SBA obligor’s property should judgment eventually enter for the SBA, and to put pressure on the alleged SBA debtor to settle. However, several types of property are exempt from attachment and trustee process. Moreover, before the SBA will be able to establish these types of liens, it will need to meet certain legal standards in order to gain court approval. In most cases, an SBA defendant will be notified that the SBA is seeking a trustee process or is attempting to attach his property and will have an opportunity to contest its efforts. Occasionally (although rarely), the SBA may be permitted to attach a defendant’s property or be granted trustee process without advance notice to the defendant if the SBA can demonstrate that the defendant is likely to transfer, convey, or conceal the property if notified in advance of the attachment.
Once a complaint is filed and any attachment efforts are resolved, the suit will then proceed into a “pretrial” or “discovery” phase. During the discovery phase, each party to the litigation attempts to learn as much as he can about the other party’s case. This process involves document requests, interrogatories (written questions), requests for admissions (written questions requiring positive affirmation or denial), and the taking of “depositions,” which involves direct questioning, under oath, of persons having knowledge about the facts forming the basis of the lawsuit (whether or not they are parties to the lawsuit). A transcript is generally made at most depositions. Any party to the litigation is generally free to have counsel present to ask questions of the person being deposed. Depositions are generally taken of each party and his key witnesses. In a suit against an SBA debtor, the DoJ’s Assistant U.S. Attorney would normally take depositions. Counsel representing the SBA debtor will reciprocate with depositions of the SBA’s relevant witnesses.
During the discovery process, each party will also prepare his own case and marshal his own witnesses. It can take as much as a couple of years to proceed through the discovery phase and reach the trial stage. However, cases with no disputed factual issues, can be resolved much more quickly, and sometimes without a trial.
Assuming the entire case is not dismissed before trial, it will either be settled, won on a summary judgment motion or proceed to trial before a federal judge or magistrate as most SBA obligors generally waive their right to a jury when they initially executed the Unconditional Guarantee as part of the SBA loan process.
The discovery process is designed to insure that all parties have had an opportunity to ascertain all of the relevant facts in the case prior to trial. Ideally, the process facilitates final disposition or settlement. At its worst, the discovery process can be used to intimidate a party into settlement by imposing prohibitive pretrial costs.
After a trial, the judge or magistrate will render a decision. The court decree or order incorporating this decision is called a “judgment.” A judgment against an SBA defendant may also include a monetary damage award for which he is responsible. Pre-judgment interest, which in most cases is calculated from the date of the filing of the original civil action, will also be added to the total judgment amount. The losing party will be given the statutory time frame to file an appeal with an appellate court from the entry of judgment against him if he believes that the judge or magistrate in the trial court committed a serious error. The filing of the appeal stays the enforcement of the judgment, but does not stay the accumulation of interest on the judgment if it is upheld. The appeal process in court can take additional time. Many cases are settled during the appeal process because (a) the SBA, if it has won, wants the money sooner rather than later and is not willing to risk a reversal of its favorable verdict in the trial court on appeal, and (b) the defendant, if he has lost, is concerned that he may not be able to obtain a reversal of the adverse judgment.
After all appeals are exhausted and barring settlement, a final judgment is entered in the trial court. In this typical case, it has taken several years to get to this point. The successful SBA plaintiff can then obtain what is called an “execution” on the judgment from the court. The execution is an order by the court to the sheriff to enforce the judgment by seizing and selling, if necessary, assets of the SBA defendant sufficient to pay the judgment. At this point, the SBA plaintiff becomes what is known as a “judgment creditor.”
If an SBA defendant/debtor refuses to pay a judgment after service of an execution by the sheriff, the judgment creditor can use the execution to “levy and sell” the SBA defendant’s real or personal property. This is typically done through a “sheriff’s sale.”
If an SBA defendant refuses or fails to pay a judgment, the SBA judgment creditor can conduct post-trial discovery (interrogatories, document requests, requests for admissions, and depositions) in order to locate the defendant/debtor’s assets. Moreover, through a procedure called “supplementary process” the SBA judgment creditor can bring the SBA defendant/debtor before the court to question him with regard to his assets, income, transfers of property, and the like. The court can order the SBA defendant to deliver property to the judgment creditor, execute papers for the conveyance of property, or make periodic payments in satisfaction of the judgment. Attendance at supplementary process proceedings is enforceable by arrest. Failure to obey any supplementary process order of a court constitutes a contempt of court punishable by imprisonment or other penalty.
In most cases, an SBA judgment creditor generally has twenty years to collect on a judgment. An SBA defendant can be brought into court for additional supplementary process proceedings as long as the federal judgment remains unsatisfied. Note that the SBA can renew a federal judgment in increments of 20 years.
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