How to Avoid Defaulting on Your SBA Loan Payment
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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.
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