The Dangers of an Asset Dump and Buy-Back Strategy to Escape SBA Loan Debt
There are some non-attorney loan workout companies out there that are actively promoting an asset protection plan for small businesses with troubled SBA loans wherein the small business transfers its assets in a self-interested transaction (also known as an Asset Dump and Buy-Back Strategy).
We receive calls from troubled small business owners with an SBA-backed loan who have heard about a fool-proof strategy that is supposedly guaranteed to strip their business assets of an SBA loan debt so that they can continue to operate the small business, while getting the SBA Lender or the SBA to go away and leave them alone.
In general, an Asset Dump and Buy-Back Strategy can follow these parameters: Your small business is in trouble. However, you have a friend, family member or some connected third-party individual who sets up a new company to “buy” your small business’s assets at liquidation value where you secretly provide the new company with the money to purchase the targeted assets in a private, controlled sale.
The SBA Lender or Certified Development Corporation (CDC) (with the approval of the SBA) agrees to the private sale believing that the sale is a fair arms-length transaction. After closing the private sale of the assets, you then submit an offer in compromise (OIC) to settle the remainder of the SBA debt or try to file for personal bankruptcy.
Thereafter, you either “buy back” the business assets or the new business from your friend, family member or connected third-party individual, or otherwise, you may be employed as a “manager” of the new business but are able to enjoy all the benefits of ownership of the new company.
There are several issues that arise from trying to perpetrate such a scheme as it is possible that some SBA Lenders would view such a transaction as fraudulent or involves collusion – especially if the small business owner fails to inform the SBA Lenders of the true nature of the relationship.
Moreover, it should be noted that on the “SBA Offer In Compromise” form, it states that one of the key elements for a workable offer is that there is “[n]o fraud or misrepresentation.” Thus, it can be argued that a “material omission” may conceivably be construed as “fraud or misrepresentation” such that 18 U.S.C. § 1001 has been implicated and potentially violated. Small business owners saddled with SBA debt, who are considering utilizing an Asset Dump and Buy-Back strategy should seriously review this federal statute (and the potential consequences) by clicking this link: 18 U.S.C. § 1001
All SBA-backed loans require the SBA Lender or Certified Development Corporation (CDC) obtain a lien against all of the business assets of your small business through a UCC filing. When a UCC filing has been obtained, this means that you are prohibited from selling or transferring your pledged business assets without the permission of the SBA Lender or CDC and without the proceeds going to the SBA Lender or CDC if you still owe on the SBA loan.
Case in Point
In a recent federal bankruptcy case, United States v. Bushey, the defendant tried to preserve his small business by utilizing the Asset Dump and Buy-Back scheme as outlined above. Once the United States Trustee discovered that Bushey had provided the money for the purchase of his business assets and acted as a manager of the new business, even going so far as to buy himself a new Porsche, the United States Trustee filed suit. Bushey lied under oath denying that he provided the money for the new business that purchased the assets.
The court sided with the Trustee and denied Bushey a discharge in his case with respect to any and all of his debts. This means Bushey remained personally liable not only for SBA backed loan but all other debts he may have sought to have discharged. Bankruptcy was no longer an option for him and Bushey put himself in a position to be charged with perjury by the United States government for his actions.
Some of the key facts and findings from the case have been reproduced below:
The Sale of Sun Center America, Inc. to Alameda Assets Management, Inc.
U.S. Bank acquired First Community Bank and became the holder of the loan. Mr. Bushey contacted Second Wind Consultants, Inc (“Second Wind”) sometime in 2012 to assist him with respect to the loan.
He executed a Contract for Services from Second Wind on November 15, 2012. Second Wind’s stated strategy was to “prepare . . . for the implementation of the workout, which will include: a. A plan to protect the business assets . . . from the secured creditors; and b. If appropriate, . . . design and implement the asset sale which is the foundation of the re-organization.” Id. The Contract for Services also contemplated that Second Wind would assist in settling Mr. Bushey’s personal guaranty of the loan “[o]nce the assets are transferred and thus the business is re-organized under a new entity, with the assets (the collateral for the original loan) being released by the bank . . .” Id
On September 20, 2013, Sun Center and Alameda Assets Management, LLC (“Alameda Assets”) entered into a Purchase and Sale Agreement for the sale of substantially all of Sun Center’s assets to Alameda Assets for $30,000. Mr. Dugger owned 100% of Alameda Assets. The amount of the purchase price was the amount U.S. Bank agreed to accept from the buyer in exchange for releasing its lien against the assets. Mr. Dugger did not have any direct contact with U.S. Bank before the sale. Nor did Mr. Dugger have any direct contact with Second Wind regarding the transaction. Mr. Dugger understood that Second Wind prepared the documents for the transaction. Mr. Dugger agreed to the asset sale to help his friend, Mr. Bushey. Mr. Dugger does not remember reviewing any profit and loss statements, tax returns, or payroll records before agreeing to purchase the business. Even though Mr. Dugger was willing to help Mr. Bushey, Mr. Dugger made it clear that he would not put up the money to purchase the business; Mr. Bushey would have to come up with the money himself.
U.S. Bank released its lien on the collateral pledged to secure the loan to Sun Center upon its receipt of $30,000. U.S. Bank agreed to accept $30,000 in exchange for releasing its lien against the assets based on its belief that the purchase and sale transaction was at arm’s length. Mr. Bushey, on behalf of Sun Center, and Mr. Dugger, on behalf of Alameda Assets signed an Affidavit of “Arms Length Transaction” in connection with the sale of Sun Center’s assets to Alameda Assets. A Notice of Value issued by the Bernalillo County Assessor in May of 2013 valued Sun Center’s business equipment at $90,356 for its business located on Montgomery Boulevard.
Mr. Bushey took an active role in perpetrating a scheme to form a new entity to acquire Sun Center’s assets and obtain a release of lien from U.S. Bank by falsely making it appear to be an arm’s length transaction. Mr. Bushey’s secret funding of the purchase price, and emails from Mr. Bushey to Second Wind support this finding. Mr. Bushey’s email communication to Second Wind also appears to confirm that Mr. Bushey put up the $30,000 purchase price. Id. (“I have basically lost an additional $30K in cash this year due to the circumstances of the workout not going according to plan.”). Mr. Bushey never informed Plaintiffs of Sun Center’s asset sale to Alameda Assets.
A bankruptcy discharge is a privilege, not a right. Juzwiak, 89 F.3d at 427. See also,Wieland v. Gordon (In re Gordon), 509 B.R. 359, 370 (Bankr. N.D. Okla. 2014) (“‘[A] discharge in bankruptcy is a privilege, not a right, and should only inure to the benefit of the honest debtor.’”) (quoting Juzwiak, 89 F.3d at 427). Debtors “who ‘play fast and loose with their assets or with the reality of their affairs’” may find themselves ineligible to receive a discharge. Butler 377 B.R. at 927 (quoting Boroff v. Tully 818 F.2d 106, 110 (1st Cir. 1987)).
Mr. Bushey actively planned and participated in two sham transactions: 1) the sale of Sun Center’s assets to Alameda Assets; and 2) the sale of the membership interests in Alameda Assets to Charles O’Donnell. In both transactions, Mr. Bushey provided the money for the purchase price. He then lied about his role in these transactions at the Rule 2004 Exam, and at subsequent depositions given in connection with this bankruptcy case in an effort to hide these business dealings from his creditors. These false statements, made under oath in connection with his bankruptcy case were knowing, fraudulent, and material, and warrant denial of discharge under § 727(a)(4).
To review the federal court’s entire opinion regarding the Asset Dump and Buy-Back Strategy, click the following case citation: United States v. Bushey
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