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November 19, 2014

Best Practices: When is the Sale of an SBA Loan Obligor’s Business Personal Property “Voluntary”?

by Starfield & Smith

SBA Standard Operating Procedure (“SOP”) 50 57 allows an SBA lender to liquidate a loan obligor’s business personal property collateral (“BPP”) in several different ways, including a release of the lender’s lien for consideration, the voluntary sale of the BPP by the loan obligor, a UCC sale, and judicial foreclosure. An SBA lender needs to have a firm understanding of which liquidation method it is pursuing so that it can document its loan file in accordance with the regulatory requirements for the applicable method.  In particular, an SBA lender needs to be careful to distinguish between a voluntary sale and a UCC sale, as the former requires different documentation from the latter, especially with regard to the treatment of other lienholders with competing interests in the BPP.

In a voluntary sale, an SBA lender must document that all other lienholders have provided their consent to the sale of the BPP.  SOP 50 57, Chapter 18(C)(2)(c), p. 105.  The consent of the other lienholders is necessary to avoid, among other things, potential attempts by those lienholders to rescind the sale or assert claims against the loan obligor or the SBA lender for conversion of their property.  In contrast, in a UCC sale, all parties with a  lien on the BPP are not required to provide their prior consent to the sale.  Instead, they are only required to be given reasonable notice of the sale in accordance with the UCC and applicable state law.

Occasionally, if the circumstances of the sale do not involve a straightforward contract between the loan obligor and a third party for the sale of the BPP, SBA lenders can become unclear on whether the BPP at issue is being sold voluntarily by the loan obligor as the title owner of the BPP or sold involuntarily by the lender as a secured creditor with an interest in the BPP. In determining which situation is applicable, SBA lenders should consider the following facts:

  1. Who Has Contracted With The Auctioneer Or Broker?  If there is a contract with an auctioneer or broker to sell the BPP, who is the party to that contract?  If the obligor is the contracting party, the SBA may view the transaction as being a voluntary sale.  If the lender is the contracting party, the SBA is more likely to conclude that the lender is liquidating as a secured creditor, either via a UCC sale or otherwise.
  2. Who Is Sending Out The UCC Notices To Other Lienholders?  If the BPP is being liquidated through a UCC sale, whose name is on the notices being sent to other lienholders with an interest in the BPP?  Again, if the obligor’s name is on the notices, the SBA may view the transaction as being a voluntary sale by the obligor.
  3. Who Has Possession And Control Of The BPP Being Sold?  If the obligor controls the property instead of the lender, the transaction may be considered to be a voluntary sale.  Thus, if the loan obligor is cooperating with the SBA lender and allowing the sale of the BPP to occur without the repossession or removal of the collateral (as is typically the case), the SBA lender should document that fact in its file.

Lenders should always be sure to ask their legal counsel about any potential lender liability issues that might arise with regard to these situations, as well as any regulatory compliance issues that could potentially jeopardize their SBA guaranty.

For more information regarding SBA loan liquidation, please contact Jeff at jfeldman@starfieldsmith.com or at 267-470-1231.