The Restructuring Report

The COVID-era CARES Act greatly expanded the Small Business Administration’s (SBA) disaster loan program by extending Economic Injury Disaster Loans (EIDLs) to businesses impacted by the effects of the pandemic and attendant shutdowns. The loans provided generous repayment terms, for as long as 30 years. Depending on the size of the loan, the SBA required the business to pledge its personal property assets, provide a mortgage if real estate was owned by the business, and a guarantee of the loan by the business owners. The SBA typically perfected its liens by filing UCC-1 financing statements and if applicable, recorded mortgages, but SBA liens were junior to existing lenders’ liens such as traditional bank financing.

Now that we are several years into these loans, problems for distressed or near distressed businesses are arising from the existence of the liens and administration of the loans. In a typical scenario, the business owners may propose a sale of the assets of the business to a buyer. The buyer will then want to purchase the assets free of secured creditor liens, including the SBA liens. In cases where there is insufficient cash being paid for the assets to pay off the SBA EIDL loan, there are different methods that may be employed to complete the sale. Those methods might involve use of the Bankruptcy Code section 363 to obtain a sale free and clear of the SBA liens, a state court receivership or assignment for benefit of creditor, or a “friendly foreclosure” under Article 9 of the UCC conducted by a senior creditor. One method suggested by the SBA is to seek a consensual lien release from the SBA.

The right tool to use depends on a number of factors, including timing and speed needed to get to the closing on the sale (especially important in the case of a “melting ice cube” business), cooperation of other secured creditors and the buyer in supporting a particular process, and desires to minimize publicity around a sale and the like. A full discussion of all these methods is beyond the scope of this note, but the option of seeking a lien release from the SBA should be considered.

The SBA describes the process by which a lien release can be requested on its website: see Manage your EIDL | U.S. Small Business Administration. The SBA requires the borrower or guarantor to submit a great deal of information in connection with requesting a lien release, including:

1. A detailed letter from the borrower(s) or guarantor(s) (if any) detailing the request.
2. Completed, signed and dated Consent to Verify Information and 3rd Party Authorization (Borrower Authorization) for all SBA borrowers and guarantors (if any).
3. Copy of the signed Agreement (Sale Agreement, Bill of Sale or Settlement Statement).
4. Copies of the previous two years’ federal tax returns for the business.
5. A recent UCC Lien Search indicating the SBA’s lien position.
6. Title Report, if applicable real estate is involved.
7. Payoff letter(s) for any senior creditors, if applicable.
8. If the business is to be permanently closed following the disposition of the assets, dissolution paperwork or final tax returns.
9. Proof of Insurance as required by the SBA Loan Authorization and Agreement.

SBA guidance suggests that the SBA will respond in 15 business days from submission of the above information. In practice, the SBA may require additional information that in effect resets the 15-day clock. In our experience, that is a typical initial response from the SBA. Therefore, it may be necessary to submit paperwork as early as practicable in the sale process, so there is ample time to respond to SBA follow-up requests. This may mean that the initial submission might be based on a letter of intent or expression of interest pending the negotiation and signing of an asset purchase agreement. In our experience, it can take weeks to months to get a final decision from the SBA.

SBA guidance further provides that the required information be submitted to one of the three EIDL loan servicing centers — Birmingham, Alabama; El Paso, Texas or the National center in Santa Ana, California. Generally, the package is submitted to a generic inbox at the center where the loan is being administered. In times past, no single person would be assigned to respond to the lien release and any follow up, and it was a bit of luck of the draw in terms of continuity and timing for a response. More recently, the SBA seems to have focused the requests on a single point of contact once the process is initiated and the process is somewhat faster than what it was a year or more ago.

If the SBA responds favorably, it will provide a written consent to release its liens, often with instructions on how to handle proceeds if any remain for application to the SBA loan. If there is a broker or closing agent involved, the SBA may require that its payment be handled and paid to the SBA by the closer.

Note, this lien release process is different than the process of notifying the SBA of the winddown and dissolution of a business or settling the liability of a guarantor. If the selling business is being formally dissolved post-closing on the sale of assets, there is an additional process to go through to notify SBA of the winddown and dissolution. Likewise, a guarantor will have to go through a compromise process to try to resolve guarantor liability on the loan.

While not a perfect solution, this process may be appropriate in situations where other methods to dispose of assets free of liens are not a good fit and should be in the advisor’s arsenal of options.

For questions or more information, contact Clint Cutler.