SBA Loan Default: The Equitable Estoppel Defense
For federally-backed SBA loans (SBA 7(A) or SBA 504) which are offered to Small Business Borrowers, the Lender of Record or Certified Development Corporation (CDC) usually demands that the small business owners sign a personal guaranty or pledge additional collateral such as requesting that the small business owners and their spouses sign a deed of trust or mortgage resulting in a lien being recorded on the small business owners’ personal residence.
In certain instances, for example, the Lender of Record or CDC, through its representatives tell the small business owner that the SBA loan will not close without an executed personal guarantee or a recorded lien on the owner’s home. We have heard stories where lenders make certain representations to the small business owners and their spouses that after a certain number of consecutive payments on the loan (e.g., 12-36 monthly payments), the lender would then release or remove the recorded lien on the pledged home. In almost all cases where these promises were made in order to close the SBA-backed loan, the lender’s promise to release the lien on the home before maturation of the SBA-backed loan, was a complete falsehood. However, the end result is that the small business owner has not only pledged the business’s collateral for the loan, signed a personal guarantee, but also has allowed a lien on his or her family residence with the latter pledge happening only because of the lender employee’s false promise. If an SBA loan default happens to occur, then the lender (including its assignees such as the SBA) now has superior leverage over the small business owner because of the recorded lien on the home – which is now subject to a foreclosure or other action pursuant to a collateral liquidation plan.
If faced with this problem, folks who have pledged their home as additional collateral based on a lender’s fraudulent representation that that lien would only be temporary, should consider exploring defenses and remedies such as “equitable estoppel.”
Requirements of General Estoppel Defense
A party can present a defense of estoppel if he or she shows a misrepresentation of a material fact upon which the party asserting estoppel detrimentally relied. The elements of equitable estoppel are: (1) representation as to a material fact that is contrary to a later-asserted position; (2) reliance on that representation; and (3) a change in position detrimental to the party claiming estoppel that is caused by the representation and reliance thereon. The doctrine of equitable estoppel precludes a person from maintaining inconsistent positions to the detriment of another.
Equitable estoppel is based on principles of fair play and essential justice and arises when one party lures another party into a disadvantageous legal position. Equitable estoppel is the effect of the voluntary conduct of a party whereby he or she is absolutely precluded, both at law and in equity, from asserting rights which perhaps have otherwise existed, either of property, contract, or remedy, as against another person who has in good faith relied upon such conduct and has been led thereby to change his or her position for the worse and who on his or her part acquires some corresponding right, either of property, contract, or remedy. Simply put, equitable estoppel is generally words or conduct which cause another person to believe a certain state of things exists and to consequently change his or her position in an adverse way.
Generally speaking, equitable estoppel operates as a shield, not as a sword, and operates against the wrongdoer, not the victim. It is designed to prevent a loss rather than help a litigant in gaining something. The prime purpose of the doctrine of equitable estoppel is to prevent a party from profiting from his or her wrongdoing. Therefore, where the words or conduct of one party causes another to forbear to his or her detriment, equitable estoppel could be argued and applied to prevent harm to the innocent party.
In order to assert a defense of estoppel, it is generally necessary that the representations, whether consisting of words, acts, omissions, or conduct of the party against whom the estoppel is being asserted, were believed by the party claiming the estoppel. The party asserting equitable estoppel must prove that he or she reasonably relied on the conduct of the other party.
Equitable estoppel rests largely upon injury or prejudice to the rights of the party who asserts it. Because the function and purpose of the doctrine of estoppel is the prevention of fraud and injustice, there can be no estoppel where there is no loss, injury, prejudice, or detriment to the party claiming it. Hence, the defense of estoppel by fraud and deceit is not proper where the evidence establishes no detrimental change in position by the party claiming the fraud and deceit.
In summary, the general elements of equitable estoppel in the SBA-backed loan context with a personal residence pledged as additional collateral based on a misrepresentation of the lender are:
When these elements are present, equitable estoppel could be used as a defense to a foreclosure action or as leverage for resolving an SBA loan problem.
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.
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 executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
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.
.jpg)
.jpeg)