Business owners who’ve given a personal guarantee often ask us: if the lender took a judgment against them, or if the lender didn’t, does that change their ability to settle? It seems like people think the judgment is the key. A federal case from Connecticut in 2018, Antonucci v. SBA, makes clear that the guarantee itself is what gives the lender its power, judgment or no judgment.
Richard Antonucci was the owner of two companies, Robrich Associates LLC and Annexed Used Cars Inc. In 2007, both companies co-borrowed $430,000 from Home Loan Investment Bank (HLIB). The loan was guaranteed up to 75% by the Small Business Administration (SBA). The business property served as collateral for the loan, and Antonucci also signed a personal guaranty. In other words, this loan was backed by a mortgage, a promissory note and a personal guaranty.
The guaranty Antonucci signed was unconditional. It guaranteed payment of all sums due under the note. It continued until the note was paid in full. He must pay when the lender demands in writing. The lender does not need to collect from any other source before coming to him. Read that language again. When the guarantor agrees to this language, the lender does not have to get a judgment.
Then both companies defaulted. The business property was put into foreclosure in 2009, and after lengthy court proceedings it was eventually sold. The sale did not cover the amount the businesses owed to the bank. When SBA paid its 75% guarantee to the bank, it didn’t let his deficiency go away. SBA then followed up on the deficiency and pursued Antonucci personally through an administrative collection action rather than a lawsuit. Antonucci then received a notice from the Treasury Department’s Bureau of the Fiscal Service seeking an administrative wage garnishment on his paycheck.
Antonucci objected. His main point was that the court never entered any judgment for deficiency in the foreclosure case, and the SBA had already paid the bank for its guarantee. Oh, and, apparently, the property was valued wrong and his payments were applied wrong to the loan account. If those arguments sound familiar, it’s because they remind us of a lot of clients we’ve seen. Debtors often seem to think the court will save them somehow.
A hearing officer rejected the deficiency judgment argument. The hearing officer found that neither the SBA nor the lender was required to obtain a deficiency judgment before pursuing a guarantor. Antonucci then appealed to the U.S. District Court for the District of Connecticut. The SBA and Treasury asked the court to dismiss or grant summary judgment. The court granted summary judgment against him. In doing so, the court emphasized that a guarantor’s personal obligation comes from the guaranty, not the court’s judgment.
The court agreed with the hearing officer: when an SBA loan defaults, the SBA steps in, pays on its guarantee and buys the loan debt from the lender. The SBA has the right to collect from everyone obligated on the loan, including the guarantors. The SBA guarantee protects the lender; it does not in any way reduce what the borrower or the guarantors owe. Why does it work this way? Because the SBA is repaying 75% to 85% of the loan to the lender, so the lender can use that money to lend to other small businesses. In return, the SBA generally requires an unlimited, unconditional personal guaranty, on a standard form, Form 148, with the same language as Antonucci’s. The same kind of guaranty is used by conventional commercial lenders.
Explore Settlement
So, back to the settlement question. Technically the judgment does not make you liable, it’s the guarantee that makes you liable. In Antonucci there was no judgment of deficiency, but the wage garnishment was upheld nonetheless. Don’t plan on technical arguments. Assume the guarantee is enforceable. What does that mean for you, if you are the one who signed the guarantee? It means that you should be negotiating a settlement with the lender or the SBA just as if you had a judgment entered against you for the deficiency. So don’t confuse the judgment with the tool that powers the collection. Negotiating a real reduction is hard enough without getting technical about the guaranty. Find out how much money you do have, and what options are open to you. Explore settlement.
The Antonucci case is also a cautionary tale: when your cash flow is too tight to support a growth strategy, do not borrow on impulse to launch said strategy. Too many owners do it anyway. More desperate than wise, these owners and CEO’s then will turn to disreputable lenders. The terms are gruesome. The loan is quick. The repayment is much larger than the business can generate and, therefore, set up to default. Every single loan requires the borrower to provide a personal guaranty. If it defaults, the collectors go after the owner personally. Don’t sign an SBA (or any other bank) loan guarantee if you are unwilling or unable to pay on it. You will get hit.
Know how much power a personal guaranty gives the lender, and get a good lawyer before you sign and when the collection starts to protect your business and finances from predatory business people.
