In Antonucci v. SBA, the United States District Court for the District of Connecticut granted a motion for summary judgment in favor of defendants, U.S. Small Business Administration and the U.S. Department of the Treasury Bureau of the Fiscal Service, and against a business owner objecting to an administrative wage garnishment for a personal guaranty on a small business loan. No. 3:17-CV-01139 (MPS), 2018 U.S. Dist. LEXIS 168604 (D. Conn. Sep. 30, 2018). The case highlights the perils to a business owner inherent in the power of personal guaranty.
Facts of the Case – SBA Loan Approval with Business Owner Personal Guaranty
The Plaintiff, Richard Antonucci owned Robrich Associates, LLC (Robrich) and Annexed Used Cars, Inc. (Annexed). In the 2007, Robrich and Annexed, as co-borrowers, obtained a $430,000.00 small business loan from the Home Loan Investment Bank, F.S.B. (HLIB). The loan was approved and guaranteed for up to 75% of its value by the U.S. Small Business Administration (SBA). Business property was used as collateral and Antonucci signed a personal guaranty for the loan. As a result, the loan was secured by a Mortgage, Note, and the personal guaranty of Antonucci. The personal guaranty by Antonucci was unconditional and included the following language:
- Guarantor unconditionally guarantees payment to Lender of all amounts owing under the Note.
- This Guarantee remains in effect until the Note is paid in full.
- Guarantor must pay all amounts due under the Note when Lender makes written demand upon Guarantor.
- Lender is not required to seek payment from any other source before demanding payment from Guarantor.
Antonucci citing ECF No. 14, Administrative Record ("AR") at 46. Robrich and Annexed defaulted on the loan and HBIL initiated foreclosure proceedings on the business property in 2009. After lengthy court proceedings, the property was foreclosed and sold. Yet, the sale of the property did not recapture the full amount owed by Robrich and Annexed.
The SBA paid out its 75% guarantee to HBIL and then sought to recover the deficiency amount from Antonucci through an administrative collection action. The administrative collection action commenced and the SBA to notified Antonucci that the Bureau of the Fiscal Services (Treasury Department) sought an administrative wage garnishment. Antonucci objected to the garnishment, in part, because no deficiency judgment was entered during the foreclosure proceedings and the SBA paid HBIL on the guarantee. Antonucci also objected to the SBA and Treasury Department action because the business property was improperly valued, and payments were improperly applied to the underlying loan account.
An administrative hearing officer (hearing officer) rejected Antonucci’s argument regarding the deficiency judgment and sustained the SBA and Treasury Department actions. The hearing officer determined that neither the SBA nor the lender needed a deficiency judgment to seek repayment from a guarantor.
Antonucci appealed the administrative decision to the United States District Court for the District of Connecticut. The defendants, the SBA and Treasury Department, sought dismissal of Antonucci’s appeal or, in the alternative, summary judgment. The court granted summary judgment in favor of the defendants and against Antonucci. See Antonucci at 26.
Challenging the Power of Personal Guaranty
The Court upheld the hearing officer’s decision and rational about enforcement of Antonucci’s personal and the ability of the defendants to collect on it. See Antonucci at 20. The Court explained that once the SBA steps in, acts on their guarantee, and purchases the loan debt from a lender, the SBA then has the right to collect from the obligors of the loan, including the guarantors.
The SBA loan guarantee protects lenders and does not alleviate any obligations of the small business borrower or its guarantors. Id. at 21. The rationale for this is to provide the SBA with the ability to repay 75% to 85% of a loan to lenders to allow them to provide funding to other small businesses that need assistance to maintain working capital and grow their footprint.
In turn, the SBA generally requires an unlimited and unconditional personal or corporate guaranty to allow the lender or itself the ability to recover funds in the event the small business defaults, becomes insolvent, or the loan otherwise becomes uncollectable. The SBA unlimited unconditional guaranty is a standardized form, Form 148, and contains the language cited in the Antonucci case. Again, the language of the guarantee is clear and provides a powerful mechanism for lenders and the SBA to recoup funds extended to small businesses. This mechanism is not limited to lenders providing SBA backed small business loans as it also is utilized by lenders for conventional commercial financing.
Risks Inherent in a Personal Guaranty
The decision in the Antonucci case is not just important for lenders, but it is also a cautionary tale for small businesses and their owners. More than being cognizant of the power of personal guaranty, small business owners must be mindful of their financial condition and the burdens they are seeking to undertake. Owners take on huge financial risks to sustain or grow their businesses at times when their revenue is insufficient to support that growth. As a result, owners may look to disreputable lenders with predatory lending practices that set borrowers up to default on the loans. Undoubtedly, these disreputable lenders require a personal guaranty.
Business Owners Need Competent Legal Counsel
After defaulting, the business owner will be subjected to personal collection efforts after the business was preyed upon by lenders providing quick money and larger payments than a small business can sustain. Consequently, small businesses and their owners should not go through the lending process without proficient legal counsel to protect their businesses and personal finances from harm by predatory small business lenders.
McKenna Storer provides dedicated support and assistance to lenders and small business owners alike. We understand the needs of borrowers and lenders dealing with loan amounts from as small as $20,000.00 and up to $5,000,000.00. Feel free to contact us for assistance in growing your small business or in growing your lending opportunities to small businesses. Please contact Jaime Dowell for questions about this case or any other matters related to bankruptcy or small business formation.