A primary reason for a repair of the SBA guaranty is a lender’s failure to obtain the required lien position on collateral. When a lender fails to obtain the required lien position and suffers a loss as a result the SBA will typically recommend a repair by deducting a specific dollar amount paid on the loan guaranty.
In the context of a business acquisition, obtaining the proper lien position on assets purchased with loan proceeds can be particularly challenging. Here is a common scenario: Borrower/Buyer enters into an agreement with Seller to purchase all of the business assets of ABC, Inc., with such assets to be free and clear of all liens at closing. A lien search of ABC, Inc. reveals a UCC financing statement indicating that the existing creditor has a perfected lien on “all assets” of ABC, Inc.. Seller obtains a payoff letter from such existing creditor. At closing, Lender, expecting to have a first lien on the assets of ABC, Inc., pays off all outstanding obligations to the existing creditor in the amount set forth in the payoff letter. Several months later, a post closing lien search of ABC, Inc. reveals that the existing creditor has not filed a UCC termination statement. The existing creditor is unresponsive to the Lender’s requests to file a termination statement. As a result, Lender’s security interest remains behind the existing creditor’s, putting the SBA guaranty at risk.
According to the Uniform Commercial Code (“UCC”), merely paying off an existing debt does not terminate a lien; the UCC financing statement related to the lien must be terminated. If the secured party of record fails to file a termination statement after payoff, what can a lender do? Under the UCC, the debtor may file the UCC termination statement, once a loan is paid off and there are no obligations secured by the collateral, after following the steps set forth in Section 9-513:
First, the debtor must send an “authenticated” (signed) demand to the secured party of record, sent to the name/address indicated on the financing statement. Under the UCC, the address provided on the financing statement is deemed to be the correct address for such purposes, even if the address is incorrect;
Second, the debtor must wait for a period of 20 days. Under the UCC, the secured party has 20 days to either terminate the filing or send a termination statement to the debtor for the debtor to file. If, after 20 days have elapsed and the debtor has not received anything from the secured party, the debtor may file a termination statement; and
Third, the debtor must file (or request a third party service provider, to file) the UCC termination statement. It is critical that the termination statement accurately set forth the original UCC financing statement number and the box identifying the termination statement as a debtor-authorized filing, is checked off.
It is good practice to obtain a post-closing search on the Seller to confirm that any UCC financing statement, filed in connection with paid off debt, has been terminated appropriately. It is also good practice to require that an asset purchase agreement contain a provision which would obligate a Seller, who has agreed to transfer the subject assets free and clear of liens, to file a debtor-filed termination statement if needed. Such practices are important to confirm a lender’s required lien position and ultimately, may be critical to protecting the SBA guaranty.
To request more information or additional best practices to protect a SBA loan guaranty, contact us at 215-542-7070 or via email at email@example.com.