October 19, 2016

Best Practices: A Refresher on Liquidation Requirements for Submitting Litigation Plans to SBA

by Starfield & Smith

One of the benefits of the SBA Loan program, along with the government guaranteed portion of the loan, is that there are other expenses that the SBA will participate in, that a Lender would typically be expected to pay itself in a conventional loan in order to recover and liquidate its collateral and pursue any deficiency when a loan defaults. One prime example of such costs are legal fees for litigation. The SBA recently published an Information Notice to remind Lenders and CDCs of the SBA’s policies regarding requirements for submitting Litigation Plans to the SBA in order to ensure they get reimbursed by SBA for legal fees for liquidation. In Information Notice Control No. 5000-1394, which became effective on October 4, 2016, the SBA reminds Lenders and CDCs that they are required to submit any Litigation Plan for approval by the SBA prior to the beginning of what is considered “non-routine” litigation according to 13 C.F.R. 120.540. Examples of Non-Routine Litigation listed in the Information Notice include:

  1. All litigation where factual or legal issues are in dispute and require resolution through adjudication;
  2. Any litigation where legal fees are estimated to exceed $10,000;
  3. Any litigation involving a loan where a Lender has an actual or potential conflict of interest with SBA;
  4. Any litigation involving a 7(a) (or 504) loan where the Lender has made a separate loan to the same borrower which is not an SBA loan; or
  5. Any litigation involving receivership proceedings.

Also, if routine litigation becomes non-routine during the course of the litigation, or if the anticipated or actual legal fees increase by more than 15% of the original estimate, the Lender or CDC is required to submit an Amended Litigation plan to the proper SBA Loan Center. These are not optional conditions. The SBA may grant a limited waiver under emergency or exigent circumstances according to the Information Notice if the Lender or CDC satisfies the following requirements:

  • Makes a good faith effort to obtain written approval from the SBA before undertaking emergency action;
  • Submits a written Amended Litigation plan to SBA as soon after the emergency as possible;
  • Takes no further litigation action without the SBA’s approval of the Amended plan

The Lender or CDC risks losing out on a potentially large amount of money if they are not careful in complying and satisfying all of these requirements. The SBA, by virtue of this release, is further putting the Lenders and CDCs on notice that if they want to be reimbursed for legal fees in liquidation, they need to be aware of their responsibilities in the process, and that the onus is on the Lender to meet these requirements.

For more information on submitting Litigation Plans to SBA, contact Tim at