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 personally guaranteed SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
Clients personally guaranteed an SBA 7(a) loan that was referred to the Department of Treasury for collection. Treasury claimed our clients owed over $220,000 once it added its statutory collection fees and interest. We were able to negotiate a significant reduction of the total claimed amount from $220,000 to $119,000, saving the clients over $100,000 by arguing for a waiver of the statutory 28%-30% administrative fees and costs.
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