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When is an SBA Guarantee Legally Unenforceable
Book a Consultation CallObtaining commercial financing is one of the most difficult challenges facing small businesses. Many small businesses turn to SBA loan programs to finance their businesses.
Without adequate sources of collateral, the participating SBA lender and the SBA always require a personal guarantee before it agrees to approve a loan to the small business. While SBA lenders, banks, financing companies, or other SBA loan underwriters attempt to collect on a personal guarantee, there are certain circumstances where the SBA personal guarantee agreement may be legally unenforceable.
An SBA personal guarantee is a promise to pay a debt for another –which is usually the small business borrower. The SBA personal guarantor is the person making the promise – who is usually a member or shareholder of the small business borrower seeking the SBA loan. SBA Standard Operating Procedures (SOPs) state that participating SBA lenders are required to obtain the personal guarantees of individuals owning at least 20% of a small business’s interest or shares.
When you sign an SBA personal guarantee on behalf of an eligible small business, you agree to be personally responsible for repaying that SBA debt in the event the small business later becomes insolvent. For example: your small business manufactures and sells widgets, and it needs commercial equipment to do so. You go to an SBA lender and obtain financing for the commercial equipment, and part of the financing agreement contains an SBA personal guarantee. Sometime later, due to unexpected circumstances, your small business customers suddenly no longer need your widgets, and your small business fails as a result. If the SBA lender cannot recover the balance of its loan from the assets of your small business, it will then consider suing you personally for the remaining balance pursuant to the SBA personal guarantee you signed.
In other words, when you sign an SBA personal guarantee in order for your small business to receive a loan, you pledge your personal assets as collateral, including your home, the cash in your personal checking account, your savings and investments, and your future wages, which the SBA lender or SBA can try to seize.
SBA personal guarantees are a critical aspect of many SBA loan transactions, so entrepreneurs and small business owners should familiarize themselves with the potential consequences of signing one. In general, to be enforceable, SBA personal guarantee must meet certain criteria.
An SBA personal guarantee must be in writing and it must be signed by the SBA guarantor in the SBA guarantor’s personal capacity.
While this may be obvious, this cannot be overlooked. To be legally enforceable, the signatory to the SBA personal guarantee agreement must sign in his or her personal capacity and not as the “President” or “CEO” of the small business receiving the loan, which is its own legal entity, separate and apart from the people that run and operate it.
An SBA personal guarantee is not legally enforceable without consideration
In fact, no contract is legally enforceable without consideration. An SBA personal guarantee is a type of contract. A contract is an enforceable promise. The legal enforceability of a contract comes from one party’s giving of “consideration” to the other party. Here, the SBA lender gives an SBA-guaranteed loan (the consideration) in exchange for the SBA personal guarantor’s promise to repay it. In a lawsuit to collect a debt, the SBA lender must prove that it has the right to collect the debt, i.e., that it gave the loan (i.e., the consideration) to the debtor. Sometimes, the parties to an SBA loan transaction cannot produce documents showing a right to collect; this may be attributable, at least in part, to the number of times that SBA loans are resold on the secondary market or assigned to other counterparties.
An SBA personal guarantee may be legally unenforceable if it was obtained under fraudulent circumstances or it violates federal law or public policy.
Under certain circumstances, an SBA personal guarantee may be found to legally unenforceable if, for example, it was required from a business owner’s spouse who was not an owner, shareholder, officer or employee of the small business. Obtaining a spousal guarantee under certain circumstances may violate the Equal Credit Opportunity Act (ECOA) and could render the SBA personal guarantee signed by the spouse void.
Can an SBA personal guarantee be revoked?
An otherwise valid and legally enforceable SBA personal guarantee can be revoked in several different ways. An SBA personal guarantee much like any other contract, can be revoked if both the SBA guarantor and the SBA lender agree (with the SBA’s approval) in writing. Some debts owed by SBA personal guarantors can also be discharged in bankruptcy or declared invalid pursuant to court order through litigation.
Many factors can affect the legal enforceability of SBA personal guarantees. If you have any questions about the legal enforceability of an SBA personal guarantee that you are about to sign or have already signed, consult with one of our experienced SBA debt attorneys who can assess your situation and offer thoughtful and practical guidance to assist in your decision.
Contact us today to set up an appointment to discuss your SBA loan issues and problems.
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.
Small business and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency. After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.
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 several trust deeds pledging seven (7) real estate properties and unconditional personal guarantees for an SBA 7(a) loan from the participating lender. The clients' small business failed and eventually defaulted on repayment of the loan exposing all collateral pledged by the clients. The SBA subsequently acquired the loan balance from the lender, including the right to liquidate and collect all pledged collateral pursuant to the trust deed instruments.
The Firm was hired to negotiate separate release of lien proposals for all 7 real estate properties. In preparation for the work assignment, the Firm Attorneys initiated discovery to secure records from the SBA and Treasury's Bureau of Fiscal Service. After reviewing the records and understanding the interplay between the lender and the SBA, the attorneys then prepared, submitted and negotiated the release of lien (ROL) for each of the 7 real estate properties for consideration.
After submitting the proposals, the assigned SBA Loan Specialists approved each ROL package - significantly reducing the total SBA debt claimed.
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