Best Practices: Enforcement of Judgments on SBA Loans

The U.S. Small Business Administration addresses its policies on enforcement of judgments in Chapter 22 of the SOP 50 57 3 (the “SOP”), which is titled Litigation.  In that chapter, there is a section specifically addressing what actions lenders should take if they have chosen to obtain a judgment against any obligor on an SBA loan.

Lenders must consider the jurisdiction of a judgment carefully. The SOP states that after a lender has obtained a judgment against any obligor, “the Lender must record the judgment, or an abstract thereof, in any state or jurisdictional unit where the Obligors reside or has assets that the Lender or SBA can seize and sell to satisfy the judgment.”  See SOP, Chapter 22, Section E(6)(a).  This is significant because some states provide for statewide judgment liens, while others require the judgment to be recorded at the county level in order to be enforceable.  It would be advisable for a lender to consult with their legal counsel on the particular state law for that state where the judgment has been filed to determine whether the judgment should be transferred to a different county.  Since SBA indicated that lenders must record the judgment in these jurisdictions, it is important for a lender to review personal financial statements and any other available asset reports to understand exactly where an obligor’s assets may be located. It is critical that any judgments obtained be enforceable and that lenders do not miss out on an opportunity to recover due to recording in an improper jurisdiction.

Lenders must also consider how and when a judgment is enforced and the cost in doing so. The SOP goes on to state that lenders should take “all reasonable, necessary, and cost-effective actions to enforce and recover on any judgment obtained…”.  See SOP, Chapter 22, Section E(6)(b).  This section then also provides that significant steps should be taken within 90 calendar days of obtaining the judgment.  The key for lenders to focus on here is cost effective actions.  There are usually multiple options in most states for enforcing a judgment, but most can cost additional sums without showing much recovery depending on the execution method.  For example, bank garnishments may cost more in fees then any funds potentially frozen in the account.  Some states may provide for wage garnishment, but that may not be an option if your judgment is against a guarantor who worked for the borrower business that is now shut down.  Yet, that same wage garnishment may make sense if the guarantor does have outside employment. Failure to take appropriate and timely steps towards recovery can impact the guaranty, but SBA is also not willing to cover an unlimited amount of costs associated with enforcement.

Lenders should be thoughtful in their analysis of whether to sue and obtain judgment against any obligors on an SBA loan.  Once that judgment is obtained, the lender should take care to ensure the judgment is recorded in any locations where the party may own assets that could be seized and liquidated for recovery.  Lender should also be mindful of analyzing the costs associated with any execution action that they may be considering to ensure that the costs are reasonable in comparison to what the potential recovery may be. And finally, lenders should be taking those actions within 90 days of obtaining the judgment where possible.

If you have questions or concerns pertaining to enforcement of an SBA loan judgment, please feel free to contact Lyndsay Rowland at 267-470-1154 or lrowland@starfieldsmith.com.