Does a Business Loan Show up on Your Personal Credit Report?
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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.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
Our firm successfully resolved an SBA 7(a) loan default in the amount of $140,000 on behalf of a husband-and-wife guarantor pair. The business had closed following a prolonged decline in revenue, leaving the borrowers personally liable for the remaining balance.
After conducting a comprehensive financial analysis and preparing a detailed SBA Offer in Compromise (SBA OIC) package, we negotiated directly with the SBA and the lender to achieve a settlement for $70,000 — just 50% of the outstanding balance. This settlement released the borrowers from further personal liability and allowed them to move forward without the threat of enforced collection.
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