HomeCase Brief: Discharging Liability On SBA Guarantee

Case Brief: Discharging Liability On SBA Guarantee

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Unwinding the Facts: Alcock versus SBA in a Casual Chat

That tricky Alcock v. SBA case, do you recall it? Well, let’s crack it open together. It’s striking how California’s Uniform Commercial Code (U.C.C.) comes into play there, for personal liability perspective (SBA Assignee) on an SBA guarantor. The crux in that case is the unjustifiable impairment of collateral pledged for an SBA loan, which could lead to discharging of a guarantor, regardless of the express waivers present within the SBA Unconditional Guarantee Agreement.

Here’s the link to fully delve into the case, however, to make things easier, let’s focus on the essential deets:

The Meat of the Matter: Unpacking Alcock v. SBA

Our main character, so to speak, is Top Pac Growers and Shippers – they’re a tomato packing and shipping company. They borrowed a hefty sum from Crocker Bank, about $600,000. One-fourth of that is out of their pockets, with SBA playing fairy godmother and guaranteeing 75%. On the same day, Top Pac must have felt lucky and extended another $500,000 credit with Crocker.

All the parties involved had their safeguards – SBA with the first lien on real property at the Top Pac plant location, while Crocker had a second lien on the property. Not only that, but they also had first dibs on Top Pac’s equipment and intangible assets (not to mention personal guarantees), including Charles Alcock, a Top Pac stockholder.

For a moment, we hit a snag. Crocker Bank wasn’t happy with only having second dibs. Real estate priority shift occurs with SBA agreeing to shift their first lien on the property to Crocker – retaining their primary interest in the equipment. Guess what? The guarantors didn’t even get a heads up.

Moment of Drama: The Default Scenario

Fast forward to spring of 1984, Top Pac fails to keep its end of the bargain defaulting on the loan. SBA stands up to its part to Crocker Bank – hence shifting the SBA Note to itself, but discarding any real property interests. When March 1985 rolls around, Crocker goes assertive, foreclosing on the real property and buying it for a mere $130,000.

Alcock Strikes Back: Contending with SBA

Now, here comes the plot twist provided by Charles Alcock, an SBA loan guarantor, who fights back, claiming the impairment of assets by the SBA. In layman terms, Alcock urged for discharge from his guaranty citing that the SBA impaired the collateral, disposed of it without commercial reason, and didn’t notify him about the proceedings.

Turns out, the court sided with Alcock. Here’s a good time to peek into the California Commercial Code Section 3606. After SBA’s lien on land dropped down the priority list, the vulture courted disaster– they couldn’t sell the land and equipment as a going concern, and the market value plummeted. Even though subordination was justified with respect to Top Pac, Alcock – the guarantor – was left out to dry.

Adding insult to injury, the SBA guaranty agreement couldn’t waive Alcock’s defense under Section 3606, leading to his discharge from personal liability under SBA Unconditional Guarantee.

Final Call: Alcock Winds Up the Victor

So, the final page of this casebook doesn’t look good for the SBA. The SBA’s agreement to a later lien subordination on land, not equipment, led to a massive prejudice when the value of the whole property crumbled. Hence, Alcock was freed from being a guarantor. Quite a turn of events, wouldn’t you say?

Directing you through the Legal Labyrinth: Lawscape

Now, if you find yourself dancing with the SBA loan default devil, don’t break a sweat. You can directly reach out to the Lawscape. We can sit down and scour the details, discussing possible outcomes like an SBA offer in compromise.

Why us, you ask? From AWG Hearings to Cross-servicing Disputes, we have successfully tangled with millions in Treasury Debts. We’re equipped to offer top-notch services before the SBA, the SBA Office of Appeals, the Treasury Department, and the Bureau of Fiscal Service. Let us help you untangle these knots and navigate you out of the financial maze.

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If you’re struggling with business debt, we can help you understand your situation. During the initial consultation, we’ll go over the contract, and other legal documents you signed. After that, our firm will work with you to get a better understanding of your situation, and help you come up with a game plan that keeps your business alive. 

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