Ethan W. Smith, Esquire

Earlier this month we published an article on the general SBA requirement that borrowers pledge all available assets on under- secured SBA loans. In that article, my colleague, Jennifer Borra, set forth some examples of when assets may be deemed "unavailable" for pledge as security for the SBA loan due to a legal impediment, such as when the asset is subject to an irrevocable trust or a prenuptial agreement. Both of these are examples that SBA officials have either provided, or have agreed with when queried as to what constitutes a "legal impediment" that would prevent a pledge as security for an SBA loan. In response to our earlier article, SBA headquarters has contacted us to clarify what they believe correctly constitutes a "legal impediment" for purposes of determining whether all "available" assets have been pledged.

Black's law dictionary defines an impediment as "a disability or hindrance to the making of a contract." At first blush, it would seem that a prenuptial agreement is a contractual hindrance to the making of a contract to pledge certain separate assets owned by a spouse that would fit the definition of a "legal impediment". However, SBA has clarified that in order to qualify as a legal impediment that would result in the assets being left out of the transaction, the restriction cannot be "self-imposed" by any of the parties to the transaction. Accordingly, in the opinion of senior SBA officials, assets that are subject to a pre-nuptial agreement are subject to a "self-imposed restriction" and, therefore, may not be excluded from the SBA collateral pool.

Interestingly, the one example of a legal impediment set forth in the SOP, assets "held by the trustee of an irrevocable trust" (SOP 50 10 5(E), p.103), could also be seen to fall under the prohibition of self-imposed restrictions, if the irrevocable trust was set up by the principals of the business. It may be that the irrevocable nature of an irrevocable trust is the distinguishing factor, as prenuptial agreements can be rescinded by the parties to the agreement, whereas an irrevocable trust cannot be altered, amended or revoked without court approval.

So, what are the types of non-self-imposed legal impediments that would render collateral unavailable? In addition to an irrevocable trust, we believe that certain types of involuntary impediments would qualify to render assets unavailable for SBA loans, such as being under the legal age of majority (which should not be an issue where spouses are concerned), adjudicated legal incapacity, or a spouse's individually owned assets which are subject to an automatic stay in bankruptcy. However, Starfield & Smith has requested that SBA address this issue with greater specificity as the term "legal impediment" can reasonably be construed much more broadly than SBA indicates was their intent.

Look for updates to these and other SBA lending guidelines in the next version of the SOP, the SOP 50 10 5(F) which is anticipated to be released by the end of calendar 2012. For more information on SBA's requirements regarding all available assets or other SBA eligibility issues, contact Ethan at (215) 542-7070 or at ESmith@StarfieldSmith.com.

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