The Lender did not do X and my lawyer says that I have rights. I hear something like the above at least twice a week. In nearly all cases a prospective client has been told they have rights, so are their lawyers just wrong? Yes and No. Invariably it is true that the client had (past tense) rights available to them under state law. They may well have waived those rights when they signed the SBA’s Unconditional Guarantee. Therefore, a careful review of the guarantee agreement is advisable.

Federal Law

When the Small Business Administration (SBA) is the holder, the Note and the Guarantee will be construed and enforced under federal law, including SBA regulations. The Lender or the SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, the SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to your Guarantee, a Guarantor may not claim or assert any local or state law against the SBA to deny any obligation, defeat any claim of the SBA, or preempt federal law.

Waivers are not your friend.

I have rights don’t I? Prospective clients describing their problems almost shout this when describing how they have been wronged by a lender. The answer is not quite so simple. When you signed your Guarantee agreement, you probably did not read it too closely because you were excited to be getting a new business loan and defaulting was not in your future plans. In any event, you probably did not use a lawyer because, after all, it was just a loan. Regrettably, you probably unknowingly waived many valuable rights.

For example:

A. Guarantor waives all rights to:

1) Require presentment, protest, or demand upon Borrower;
2) Redeem any Collateral before or after Lender disposes of it;
3) Have any disposition of Collateral advertised; and
4) Require a valuation of Collateral before or after Lender disposes of it.

B. Guarantor waives any notice of:

1) Any default under the Note;
2) Presentment, dishonor, protest, or demand;
3) Execution of the Note;
4) Any action or inaction on the Note or Collateral, such as disbursements, payment, nonpayment, acceleration, intent to accelerate, assignment, collection activity, and incurring enforcement expenses;
5) Any change in the financial condition or business operations of Borrower or any guarantor;
6) Any changes in the terms of the Note or other Loan Documents, except increases in the amounts due under the Note; and
7) The time or place of any sale or other disposition of Collateral.

C. Guarantor waives defenses based upon any claim that:

1) Lender failed to obtain any guarantee;
2) Lender failed to obtain, perfect, or maintain a security interest in any property offered or taken as Collateral;
3) Lender or others improperly valued or inspected the Collateral;
4) The Collateral changed in value, or was neglected, lost, destroyed, or underinsured;
5) Lender impaired the Collateral;
6) Lender did not dispose of any of the Collateral;
7) Lender did not conduct a commercially reasonable sale;
8) Lender did not obtain the fair market value of the Collateral;
9) Lender did not make or perfect a claim upon the death or disability of Borrower or any guarantor of the Note;
10) The financial condition of Borrower or any guarantor was overstated or has adversely changed;
11) Lender made errors or omissions in Loan Documents or administration of the Loan;
12) Lender did not seek payment from the Borrower, any other guarantors, or any Collateral before demanding payment from Guarantor:
13) Lender impaired Guarantor’s suretyship rights;
14) Lender modified the Note terms, other than to increase amounts due under the Note.
15) Borrower has avoided liability on the Note; or
16) Lender has taken an action allowed under the Note, the Guarantee, or other Loan Documents.

Conclusion

So, what does all this mean? Well, at a minimum, it means that banks can make mistakes, or just use bad judgment in some cases, or perhaps not let you know about the sale of collateral, or even choose not to sell it at all. In nearly all jurisdictions, there is case law validating these waivers. In short, the waivers are probably enforceable, but that does not mean you should give up, and you should bring these waivers to the attention of your lawyer if you are reviewing your legal options.

When signing your SBA Guarantee, do it with eyes wide open.