A lender should prepare a litigation plan based on the facts known and reasonable assumptions of the loan liquidation. A litigation plan needs to be developed if a foreclosure will occur or legal action is going to be taken against the borrower or guarantors. Understanding how to properly engage an attorney and how much legal malpractice insurance is required is important in preparing for a litigation plan. Legal Counsel must have a minimum of $1,000,000 in malpractice insurance to represent your bank in litigation against an SBA borrower. Most litigation plans do not have to be approved by the SBA; however, in certain circumstances, SBA must approve the litigation plan.
The plan must include the work to be performed and the fees to be charged. Depending on the nature and anticipated cost of the work, SBA may need to approve the plan prior to implementation. Typically the Fee Amount that causes a Litigation Plan to need SBA’s approval is $10,000. It is important to budget for the litigation properly. As a lender you do not want to have surprises that necessitate the quick production and approval of a litigation plan. So the rule of thumb is if you believe that litigation expenses are going to be close to $10,000, get the litigation plan approved by the SBA.
A Lender must obtain SBA’s approval of a litigation plan before proceeding with any Non-Routine Litigation, such as 1. All litigation where factual or legal issues are in dispute, 2. Any litigation where legal fees are estimated to exceed $10,000, 3. Any litigation involving a loan where a Lender has an actual or potential conflict of interest with SBA, and 4. Any litigation where the Lender has made a separate loan to the same borrower which is not a 7(a).
A final area of concern related to SBA Loan Litigation Plans is Receivership issues. Sometimes when a property is going to be foreclosed a Receiver may be appointed to help protect the value of the property and maximize the recovery. A receiver should only be considered when the use of a Receiver will Maximize the recovery, minimize the loss, or it is necessary to operate the business until it is sold. An example is a gas station. A gas stations value is frequently determined by the volume of gas sold and the volume of inside sales. The value of a gas station is significantly more in most cases as an operational business.
The appointment of a Receiver is certainly non-routine litigation. It requires an approved SBA Litigation plan and there is additional information about the Receiver that has to be presented to the SBA for approval.
Hopefully this article will help to clarify the need and utilization of a Litigation Plan for SBA Lenders. Prudent Lenders LLC. has experts who understand SBA loans, Litigation Plans, and Receivership Request. Please contact me at email@example.com if you have questions or need assistance in servicing your non-performing SBA loans.