The sale of a lender's collateral is not uncommon in bankruptcy cases.  Those sales, however, potentially have added complications when the underlying loan is backed by the SBA.  The need to be mindful of SBA requirements is particularly acute if the proposed sale is to the lender or to an insider of the debtor.  

Ordinarily, the sale of collateral falls within a lender's unilateral authority.  But the SBA Servicing and Liquidation Actions 7(a) Lender Matrix states that prior SBA approval is required before collateral can be sold to: the lender, an employee of the lender, a close relative of a lender employee, a guarantor (or other obligor), or a close relative or associate of a guarantor.  

In these situations, SBA approval is required, even if the sale takes place in bankruptcy and is subject to bankruptcy court approval.  In fact, bankruptcy court approval triggers most of the SBA complications.  

In many cases, there is tremendous transactional pressure to get a sale approved by the bankruptcy court.  The debtor may be operating under other bankruptcy code deadlines that compress the time to finalize a sale.  The buyer also may press to get the loan closed quickly to meet its own needs.  While bankruptcy courts are generally set up to accommodate that sense of urgency, the SBA must consider a variety of interests, including those of the American taxpayer and the Treasury Department, which require the agency to scrutinize bankruptcy plan approvals more carefully.  Accordingly, a debtor can sometimes file a motion and get a bankruptcy court order approving a sale in a shorter amount of time than the lender can get the SBA to sign off on the sale.  

When a debtor files a motion to approve an insider sale without consulting the lender beforehand, the lender likely will need to file an objection to the sale to protect itself from negative action by the SBA on the lender's guaranty purchase package.  But typically, the debtor will consult the lender on the sale process.  The lender in that circumstance can either require the parties to receive SBA approval before allowing the debtor to file a sale motion in bankruptcy court, or the lender can require that the bankruptcy court's approval of the sale is specifically conditioned on SBA approval.  

If the court approves the sale over the lender's objection, or refuses to condition its approval on the SBA's additional blessing, the lender can show the SBA it did everything it could to comply with SBA's requirements.  If the lender takes no action and lets an insider sale happen, the lender is very unlikely to persuade the SBA that it did everything commercially reasonable to comply with SBA's requirements.  

The lender also must make a strong case in favor of the sale to the SBA.  The lender's primary concern in gaining SBA approval is proving that the sale price is fair and reasonable.  The lender should obtain an appraisal of the collateral being sold.  If the proposed sale price to the insider does not equate with the appraised value, the lender needs to provide the SBA with a strong explanation for the disparity or object to the sale in bankruptcy court.  

In all cases, the lender needs to be mindful of its obligations to the SBA, even if the case is in bankruptcy.  Many bankruptcy cases proceed very quickly.  The prudent SBA lender cannot bow to those pressures if it wants to remain complaint with applicable SBA regulations and protect the integrity of its SBA guaranty.  

For more information regarding bankruptcy sales, please contact Greg at 215-390-1023 or at gkupniewski@starfieldsmith.com.