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The Dangers of an Asset Dump and Buy-Back Strategy to Escape SBA Loan Debt
Small business owners and guarantors should be wary of strategies where 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 the 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 a debt resolution company sometime in 2012 to assist him with respect to the loan.
He executed a Contract for Services on November 15, 2012 with this debt resolution company. The 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 the debt resolution company 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 wit regarding the transaction. Mr. Dugger understood tha 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 the debt resolution company support this finding. Mr. Bushey’s email communication to the debt resolution company 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
If you are facing an SBA loan default involving an SBA Unconditional Guarantee or a Treasury/Bureau of Fiscal Service debt problem, contact us today for a consultation with an experienced SBA and/or Treasury workout attorney at 1-888-756-9969
We can analyze your SBA loan, Treasury/BFS debt or Private Collection Agency problem and advise you on a range of potential solutions.
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
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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.
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.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.
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