Jeffrey S. Feldman, Esquire

            There comes a time in every lender's portfolio when its workouts are no longer working out, and the only commercially reasonable course of action is to sue the obligors. When a lender participating in the SBA's 7(a) program sees that time approaching, it must work closely with its counsel to ensure that its litigation plans fully comply with the SBA's requirements.

           The first step towards a valid litigation plan is the retention of qualified collections counsel. The SBA requires that the attorney hired by the 7(a) lender have expertise in debt collection and bankruptcy law, be licensed to practice law where the litigation will be conducted, maintain adequate malpractice insurance, and have no conflicts of interest. In addition, the attorney's fees must reasonable for the locality where the litigation is being brought, and his or her billing practices must conform to the SBA's requirements. A lender should confirm these understandings in its written engagement agreement with its counsel.

            The most important threshold issue to be addressed by the lender and its counsel in formulating a litigation strategy on a 7(a) loan is whether it is necessary to submit a litigation plan to the SBA for approval. In general, a written litigation plan must always be prepared and submitted for approval in advance by the SBA unless: (1) the litigation qualifies as "Routine Litigation," or (2) the SBA grants a limited waiver of the need for a litigation plan. "Routine Litigation" is uncontested litigation for which the estimated legal fees do not exceed $10,000 in the aggregate. A limited waiver of the written litigation plan requirement may be granted by the SBA in its discretion upon request if certain extraordinary circumstances exist that warrant granting a temporary waiver.

            The form and content of any litigation plan submitted by a lender and its counsel should follow the template used in the SBA's official form, which is available at www.sba.gov. Every section of the form should be completed in order to avoid delays in its processing. Although the form is completed by counsel, the lender is responsible for providing its counsel with a variety of information and documentation related to its loan that must be included in the plan.

             If the litigation plan involves a bankrupt obligor or a claim against a deceased obligor's estate, the SBA requires that a specific series of steps be taken to protect the SBA's interests. Where applicable, lenders should ensure their proposed litigation plan references and fulfills those requirements. In addition, a lender should also review its litigation plan to ensure that it does not incur legal fees that the SBA either will not pay or has the discretion not to pay. Finally, the lender should also review any proposed pro-rata application of legal fees and recovery between the SBA loan and any other loans.

            When the plan is complete, it should be promptly submitted to the SBA for approval via e-mail to loanresolution@sba.gov. Once received, the SBA will generally approve or deny the litigation plan within 15 business days. If the SBA fails to do so, however, that cannot be deemed an implied consent by the SBA - it must provide its express consent to the lender in writing.

            After the plan is approved, a lender must monitor its litigation to determine whether (a) it has taken any actions that materially deviate from, or were not included in, the original litigation plan, and/or (b) it has incurred any expenses that exceed the estimates in the existing plan by more than 15%. If either has occurred, the lender must submit an amended litigation plan to the SBA for approval prior to taking any further action. Similarly, a lender who has been pursuing Routine Litigation without an approved plan must submit a litigation plan when (a) it incurs legal fees in excess of $10,000 or (b) other changes occur that render its litigation "Non-Routine."

            SBA lenders should select qualified litigation counsel who are experienced with the regulations governing the liquidation of SBA loans to ensure that their pursuit of the obligors' assets does not inadvertently jeopardize their own most valuable asset - the SBA's guarantee.

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