August 7, 2013
Best Practices: The New SBA Litigation Plan Tabs
by Kimberly A. Rayer
The U.S. Small Business Administration (“SBA”) has recently released new Litigation Plan Tabs that must be completed for Non-Routine litigation matters. These new Tabs replace the prior Litigation Plan form provided by SBA and are more consistent with the requirements set forth in SOP 50 57. The Litigation Plan Tabs should be used for any new “Non-Routine Litigation,” which is defined by SOP 50 57 as, “(a) all litigation where factual or legal issues are in dispute and require resolution through adjudication; (b) any litigation where legal fees are estimated to exceed $10,000 in the aggregate; (c) any litigation involving a loan where a Lender has an actual or potential conflict of interest with SBA; or (4) any litigation involving a 7(a) Loan where the Lender has made a separate loan to the same Borrower that is not an SBA loan.” See 13 C.F.R. § 120.540(c)(1).
SBA describes Routine Litigation as, “any uncontested litigation or non-adversarial matters in bankruptcy and undisputed foreclosures which do not exceed $10,000 in legal fees.” Note that once legal fees exceed $10,000, all litigation is deemed Non-Routine Litigation and the Litigation Plan must be approved by SBA. Further, if there is a material change to the Litigation Plan which would impact legal expenses as approved, an amended Litigation Plan must be submitted to the SBA for re-approval.
Generally the new Litigation Plan Tabs expand upon the requirements set forth in the prior SBA Litigation Plan form. Below are some of the additional information required by the new Litigation Plan Tabs not required under the prior form:
Tab 1 – Contact Information – Lender must identify all companion SBA loans (Loans to any affiliates or guarantors or individuals).
Tab 2 – Attorney information – Lender needs to include the Attorney Engagement Letter and needs to provide proof of the Attorney’s specialization and/or experience in a particular area of law (i.e. resume or law firm biography).
Tab 3 – Collateral Information – Lender must include a copy of all Loan Authorizations and amendments to the SBA loan for which it is submitting a Litigation Plan.
A Cost Benefit Analysis/Valuation worksheet is also included in Tab 3. This is to be used to determine whether or not litigation is appropriate based on anticipated recovery and the cost to pursue it. The Cost Benefit Analysis/Valuation worksheet requires the lender to identify the collateral and its type (commercial or residential real estate), the required lien position per the Loan Authorization, the actual lien position and whether the collateral has been liquidated, remains or is abandoned.
Next, the Lender must identify if each type of Collateral that is being pursued through enforced collection proceedings, and provide supporting documentation. Note that if the collateral is Commercial Real Estate the lender must provide an Environmental Investigation Report. The Lender must give an estimate of the aggregate Recovery Amount. Finally, the Lender must list each Guarantor and identify whether it is remaining, released, bankrupt, limited or deceased.
Tab 4 – Proposed Actions – This Tab is where Lenders must lay out their Litigation Strategy to the SBA. Two new questions that must be addressed under this Tab are (i) whether actions against individuals independent of foreclosure are justified by sufficient assets of the individual and (i) if a proposed action will result in the inability to pursue a deficiency balance, the Lender must justify that decision.
Tab 5 – Estimated Legal Budget – This Tab is fairly consistent with the requirements of the prior Plan to provide the method of billing, names of attorneys working on the matter and their rate, as well as estimated costs and the aggregate amount of the legal fees and costs.
Tab 6 – Legal Invoices – Lenders must now attach all legal invoices to date. The invoices are not reviewed for reimbursement, but are examined in connection with the Litigation Plan review.
Lenders should keep in mind that all legal fees related to litigation, whether Routine, or Non-Routine will be reviewed by SBA’s counsel to ensure that they were necessary, reasonable and customary.
Tab 7 – Receiverships – The SBA considers the appointment of a receiver to be a Non-Routine Ligation, and Lender must propose a Plan prior to commencing receivership proceedings.
If you have questions regarding the new Litigation Plan Tabs please contact Kimberly Rayer at 215.542.7070 or at firstname.lastname@example.org