B-181432, APRIL 5, 1979

B-181432, APRIL 5, 1979

DIGEST: IN ACCORDANCE WITH B-181432, MARCH 13, 1975, AND SUBSEQUENT OPINIONS UPHOLDING THAT DECISION, DETERMINATION BY SMALL BUSINESS ADMINISTRATION (SBA) TO TERMINATE ITS GUARANTY ON LOAN MADE BY BANK OF EL PASO WAS CORRECT SINCE SBA HAS NO AUTHORITY TO ACCEPT LATE PAYMENT OF GUARANTY FEE FROM LENDER IF LOAN IS ALREADY IN DEFAULT, AS DEFINED IN SBA'S REGULATIONS, OR LENDER HAS REASON TO BELIEVE DEFAULT IS IMMINENT. ALTHOUGH SBA MIGHT IN CERTAIN CIRCUMSTANCES BE AUTHORIZED TO REINSTATE ITS GUARANTY IF DEFAULT WAS COMPLETELY CURED BY BORROWER, WITHIN REASONABLE PERIOD OF TIME AND FEE WAS PAID PRIOR TO OCCURRENCE OF ANY NEW DEFAULT, THIS CASE IS NOT APPROPRIATE ONE FOR SUCH ACTION SINCE CURING WAS INADEQUATE.

BANK OF EL PASO - SMALL BUSINESS ADMINISTRATION GUARANTEED LOAN:

THIS IS IN RESPONSE TO A REQUEST FROM THE PRESIDENT OF THE BANK OF EL PASO THAT WE ADVISE THE SMALL BUSINESS ADMINISTRATION (SBA) TO REVERSE ITS DECISION TO WITHDRAW ITS 90 PERCENT GUARANTEE OF A $200,000 LOAN TO ARITEX, INC. BECAUSE THE BANK HAD NOT PAID THE REQUIRED GUARANTEE FEE PRIOR TO DEFAULT BY THE BORROWER.

THE BANK OF EL PASO IS NOT ENTITLED, AS A MATTER OF LAW, TO A FORMAL DECISION FROM OUR OFFICE. SEE 31 U.S.C. 74, 82D (1976); AND B-181432, NOVEMBER 12, 1975. HOWEVER, SINCE SBA'S DETERMINATION THAT A VALID GUARANTEE OF THIS LOAN NO LONGER EXISTS, AND ITS REFUSAL TO PURCHASE THE GUARANTEED PORTION OF THE LOAN, WAS BASED ON OUR DECISION B-181432, MARCH 13, 1975, WE WILL CONSIDER THE ARGUMENTS SET FORTH IN THE BANK'S LETTER.

BASED ON THE INFORMATION PROVIDED BY THE BANK AND THE ACCOMPANYING ENCLOSURES, INCLUDING A LETTER FROM SBA DATED DECEMBER 15, 1977, IN WHICH SBA ADVISED THE BANK THAT THE LOAN WAS NO LONGER GUARANTEED, THE FACTS CONCERNING THIS MATTER APPEAR TO BE AS FOLLOWS.

ON JANUARY 4, 1977, THE SBA OFFICE LOCATED IN EL PASO, TEXAS, APPROVED A 90 PERCENT GUARANTEE OF A $200,000 LOAN TO BE MADE BY THE BANK OF EL PASO TO ARITEX, INC. THE BANK DISBURSED THE LOAN FUNDS TO THE BORROWER ON FEBRUARY 18, 1977, ALTHOUGH THE GUARANTEE FEE WAS NOT PAID UNTIL JUNE 10, 1977, AT WHICH TIME THE BORROWER WAS ALREADY IN DEFAULT. IN ITS LETTER OF DECEMBER 15, 1977, TO THE BANK, THE DIRECTOR OF SBA'S OFFICE OF PORTFOLIO MANAGEMENT STATED THAT SBA COULD NOT PURCHASE THE GUARANTEED PORTION OF THE LOAN. THE LEGAL BASIS FOR ITS DECISION WAS EXPLAINED AS FOLLOWS:

"BY LETTER DATED JUNE 10, 1977, THE BANK ADVISED SBA THAT THE BORROWER WAS IN DEFAULT FOR THE PAYMENT DUE MAY 18, 1977, AND FORWARDED THE GUARANTY FEE ON THE LOAN THEREWITH. THE SBA FORM 750, LOAN GUARANTY AGREEMENT, PARAGRAPH 2, EXECUTED BETWEEN YOUR BANK AND SBA PROVIDES THAT 'AN APPROVED LOAN WILL NOT BE COVERED BY THIS AGREEMENT UNTIL LENDER SHALL HAVE PAID THE GUARANTY FEE FOR SAID LOAN AS PROVIDED IN PARAGRAPH 5 OF THIS AGREEMENT.' PARAGRAPH 5 PROVIDES IN PERTINENT PART, THAT 'WITHIN 5 DAYS OF THE FIRST DISBURSEMENT ON ACCOUNT OF EACH LOAN, LENDER SHALL PAY SBA A ONE-TIME GUARANTY FEE AMOUNTING TO 1 PERCENT OF THE TOTAL AMOUNT GUARANTEED BY SBA.'

"BY OPINION NO. B-181432, DATED MARCH 13, 1975, THE COMPTROLLER GENERAL HAS DETERMINED THAT SBA HAS NO AUTHORITY TO PURCHASE THE GUARANTEED PORTION OF ANY LOAN WHEREIN THE GUARANTY FEE WAS NOT PAID WITHIN 5 DAYS OF DISBURSEMENT AND THE BORROWER IS IN DEFAULT OR THE LENDER OR SBA HAS KNOWLEDGE OF IMMINENT DEFAULT BY THE BORROWER. THE OPINION FURTHER PROVIDES 'WITH REGARD TO SBA'S ACCEPTING THE GUARANTY FEE AFTER A LOAN IS IN DEFAULT IT IS CLEAR THAT SUCH ACTION WOULD MODIFY TO THE GOVERNMENT'S DETRIMENT THE TERMS OF SECTION 2 OF THE GUARANTY AGREEMENT REQUIRING PAYMENT OF THE GUARANTY FEE BEFORE THE LOAN IS COVERED BY THE GUARANTEE. THE STATED RULE IN THIS REGARD IS THAT NO OFFICER OR AGENT OF THE GOVERNMENT HAS THE AUTHORITY TO WAIVE CONTRACTUAL RIGHTS WHICH HAVE ACCRUED TO THE UNITED STATES OR TO MODIFY EXISTING CONTRACTS TO THE DETRIMENT OF THE GOVERNMENT WITHOUT ADEQUATE LEGAL CONSIDERATION OR A COMPENSATING BENEFIT FLOWING TO THE GOVERNMENT. SEE 46 COMP.GEN. 874 (1967); 45 ID. 224 (1965: 44 ID. 746 (1965); 41 ID. 169 (1961); AND DECISIONS CITED THEREIN.'

"THE FACTS AS PRESENTED BY BOTH YOUR BANK AND THE EL PASO SBA OFFICE CLEARLY ESTABLISH THAT NO CONTRACT EXISTED WITH REGARD TO THIS LOAN, AND SBA HAS NO AUTHORITY TO PURCHASE."

WE SHOULD POINT OUT THAT THE DECISION OF MARCH 13, 1975, UPON WHICH SBA RELIED IN THIS MATTER, HAS BEEN CONSISTENTLY AND REPEATEDLY UPHELD IN SUBSEQUENT OPINIONS ISSUED BY OUR OFFICE. B-181432, NOVEMBER 12, 1975; B-181432, AUGUST 15, 1977; B-181432, JULY 4, 1978; AND MOST RECENTLY IN B-181432, OCTOBER 20, 1978. IN OUR OCTOBER 20, 1978, DECISION, WHICH RESULTED FROM A REQUEST BY SBA TO RECONSIDER OUR MARCH 13, 1975, DECISION, WE AMPLIFIED AND EXPANDED UPON THAT DECISION. WE HELD THAT THE PROVISION IN PARAGRAPH 2 OF THE BLANKET GUARANTY AGREEMENT, WHICH HAD BEEN THE PRIMARY BASIS FOR OUR ORIGINAL DECISION, WAS A MATERIAL AND UNAMBIGUOUS CONDITION PRECEDENT TO SBA'S GUARANTEE. FURTHERMORE, WE HELD THAT SBA HAD NOT WAIVED THAT PROVISION AND COULD NOT BE ESTOPPED FROM ENFORCING IT. WE BELIEVE THAT THE RATIONALE OF OUR DECISION IN THAT CASE, AS WELL AS THE OTHER CITED DECISIONS, IS EQUALLY APPLICABLE TO THE LOAN IN QUESTION HERE.

THE BANK MAKES A VARIETY OF ARGUMENTS TO SUPPORT ITS REQUEST THAT WE ADVISE SBA TO REVERSE ITS DECISION TO TERMINATE THE GUARANTEE ON THIS LOAN. FIRST, IT EXPLAINS THE REASON THE GUARANTEE WAS NOT PAID AT THE TIME THE LOAN WAS DISBURSED. THE BANK'S LETTER STATES THAT THE DELAY RESULTED FROM DIFFICULTY IN OBTAINING SBA REQUIRED LIFE INSURANCE ON THE SECRETARY-TREASURER OF ARITEX, WHICH FINALLY RESULTED IN THE BANK'S DETERMINATION, AFTER APPROXIMATELY 4 MONTHS, THAT THE INSURANCE WAS NOT OBTAINABLE. IT WAS NOT UNTIL THEN THAT THE $1,800 CHECK FOR THE GUARANTEE FEE WAS SUBMITTED TO SBA, TOGETHER WITH CERTAIN OTHER REQUIRED DOCUMENTS. SUBSEQUENTLY, SBA AGREED THAT THE INSURANCE COVERAGE COULD NOT BE OBTAINED AND A FORMAL WAIVER OF THAT REQUIREMENT WAS MADE BY SBA. ALTHOUGH OUR OFFICE HAS NO REASON TO DISPUTE THESE ALLEGATIONS, WE DO NOT BELIEVE THAT THEY HAVE ANY LEGAL SIGNIFICANCE SINCE IT IS CLEAR UNDER THE TERMS OF THE GUARANTY AGREEMENT THAT UNTIL THE FEE WAS PAID THE LOAN WAS NOT COVERED BY SBA'S GUARANTY.

SECOND, IT IS MAINTAINED THAT "A GROSS MISUNDERSTANDING OF THE FACTS" WAS DEMONSTRATED BY SBA WHEN IT STATED IN ITS LETTER OF DECEMBER 15, 1977, THAT THE BANK HAD ADVISED IT ON JUNE 10, 1977, OF THE DEFAULT AND AT THE SAME TIME, PAID THE GUARANTY FEE ON THE LOAN. THE BANK MAINTAINS THAT TWO SEPARATE LETTERS WERE INVOLVED-- ONE ADVISING SBA OF THE DEFAULT, AND THE OTHER CONTAINING THE CHECK FOR THE GUARANTY FEE, TOGETHER WITH SEVERAL OTHER DOCUMENTS. IT STATES:

"THE TWO LETTERS WERE SENT BY TWO DIFFERENT OFFICERS OF THE BANK AND WERE PURELY COINCIDENTAL IN TIMING OF THEIR ORIGIN AND DELIVERY TO SBA. IT IS OUR CONTENTION THAT THE LENDER (MR. CLARKE HARVEY) WAS NOT AWARE OF, OR HAD ANY INFORMATION INDICATING IMMINENT DEFAULT AT THE TIME HE WROTE HIS LETTER BECAUSE THE LETTERS ORIGINATED IN TWO SEPARATE DEPARTMENTS WITH NO PRIOR KNOWLEDGE OF THE EXISTENCE OF THE OTHER LETTER."

AGAIN, WE ARE NOT QUESTIONING THE ACCURACY OF THIS INFORMATION. HOWEVER, LEGALLY THE BANK OF EL PASO, LIKE ANY OTHER PRIVATE BUSINESS INSTITUTION, IS BOUND BY THE KNOWLEDGE AND ACTIONS OF ITS EMPLOYEES OR AGENTS AS TO ITS BUSINESS AFFAIRS. THE KEY FACTOR IN DETERMINING WHETHER OR NOT LATE PAYMENT OF THE FEE CAN BE ACCEPTED, THEREBY REVIVING SBA'S GUARANTY, IS WHETHER OR NOT A DEFAULT HAS ALREADY OCCURRED OR THE LENDER, AS A SINGLE LEGAL ENTITY, HAS REASON TO BELIEVE DEFAULT IS IMMINENT. IT IS CLEAR THAT BY THE TIME THE FEE WAS PAID ON JUNE 10, 1977, THE BANK WAS AWARE THAT THE BORROWER HAD DEFAULTED BY FAILING TO MAKE THE PAYMENT DUE MAY 18, 1977.

IT IS ALSO ALLEGED THAT THE BANK NEVER REQUESTED SBA TO PURCHASE THE GUARANTEED PORTION OF THE LOAN BECAUSE THE BANK WAS NEVER CONVINCED THAT TRUE DEFAULT EVER EXISTED. ALTHOUGH DEFAULT IS NOT SPECIFICALLY DEFINED IN THE GUARANTY AGREEMENT, IT IS DEFINED IN SBA'S REGULATIONS, WHICH ARE INCORPORATED BY REFERENCE INTO THE GUARANTY AGREEMENT BY PARAGRAPH 1 THEREOF, TO MEAN "NON-PAYMENT OF PRINCIPAL OR INTEREST ON THE DUE DATE." SEE 12 C.F.R. 122.10(B) (1977). WE NOTE THAT NOT ONLY DID ARITEX OMIT THE MAY 18, 1977, PAYMENT, BUT AS OF APRIL 1978, IT WAS NOT CURRENT AS TO PAYMENTS DUE BY NOVEMBER 1977. IT IS CLEAR THAT THE LOAN WAS IN DEFAULT. SINCE THE BANK HAD NOT PAID THE GUARANTY FEE PRIOR TO DEFAULT BY THE BORROWER, THE LOAN WAS NOT COVERED BY SBA'S GUARANTY WHEN THE DEFAULT OCCURRED. IN OUR VIEW, IT IS IMMATERIAL WHETHER THE BANK FORMALLY REQUESTED SBA TO PURCHASE THE LOAN. ONCE THE LOAN IS IN DEFAULT, SBA MAY NOT ACCEPT THE GUARANTY FEE AND THE LOAN MAY NOT BE GUARANTEED.

YOU ALSO CONTEND THAT EVEN IF THE GUARANTY DID NOT EXIST PRIOR TO THE PAYMENT OF THE FEE, SBA DID ACCEPT LATE PAYMENT OF THE REQUIRED FEE AND THEN INITIATED ACTION TO PURCHASE THE LOAN FROM THE BANK. AS STATED IN SBA'S LETTER OF DECEMBER 15, 1977, TO THE BANK, SBA HAS NO AUTHORITY TO ACCEPT THE GUARANTY FEE FROM A BANK AFTER THE BORROWER HAS DEFAULTED. THEREFORE, SBA'S ACCEPTANCE OF THE GUARANTY FEE IN SUCH CIRCUMSTANCES IS NOT LEGALLY BINDING ON THE GOVERNMENT.

LASTLY, WE HAVE CONSIDERED WHAT IN OUR VIEW APPEARS TO BE THE MOST SIGNIFICANT ARGUMENT CONTAINED IN THE BANK'S LETTER. AFTER A DETAILED DISCUSSION CONCERNING THE REASONS FOR THE BORROWER'S DEFAULT ITS GUARANTY, THE "CURING" OF THE DEFAULT MUST BE TOTAL; THAT IS, THE BORROWER MUST HAVE BROUGHT THE LOAN INTO A FULLY PAID, CURRENT STATUS. THE DELINQUENT PAYMENTS MUST IN FACT BE PAID RATHER THAN FORGIVEN, RESCHEDULED OR OTHERWISE CORRECTED BY MEANS OF A RESTRUCTURING OF THE LOAN. SECOND, THE AMOUNT OF TIME A BORROWER MAY BE ALLOWED IN WHICH TO CURE THE DEFAULT SHOULD NOT BE UNLIMITED. IN MAKING THIS DETERMINATION AS TO THE MAXIMUM AMOUNT OF TIME THAT SHOULD BE PERMITTED SBA MIGHT CONCLUDE THAT SINCE A BANK CAN ONLY REQUEST IT TO PURCHASE A LOAN AFTER THE LOAN HAS CONTINUED IN DEFAULT FOR AT LEAST 60 DAYS (UNLESS SBA AGREES TO A SHORTER PERIOD), A DEFAULT SHOULD HAVE TO BE CURED WITHIN THE PERIOD IN ORDER FOR SBA TO REINSTATE ITS GUARANTY. BEYOND THAT, IT DOES APPEAR TO US THAT AS AN OUTSIDE LIMIT, A LOAN GUARANTY SHOULD PROBABLY NOT BE REINSTITUTED AFTER SBA HAS SPECIFICALLY DETERMINED THAT ITS GUARANTY OF THAT LOAN WAS NO LONGER IN EFFECT BECAUSE OF THE BANK'S FAILURE TO PAY THE FEE BEFORE DEFAULT, WHETHER OR NOT SBA'S DECISION RESULTED FROM THE BANK'S FORMAL REQUEST THAT SBA PURCHASE THE LOAN.

APPLYING THESE STANDARDS TO THE INSTANT MATTER, WE DO NOT BELIEVE THAT THE GUARANTY OF THIS LOAN SHOULD NOW BE REINSTATED. FIRST, IT APPEARS THAT THE ALLEGED CURING OF THE LOAN RESULTED FROM A PROPOSED LOAN RESTRUCTURING AND RESCHEDULED LOAN PAYMENTS, RATHER THAN THE ACTUAL PAYMENT BY THE BORROWER OF THE DELINQUENT INSTALLMENTS. SECOND, THE ALLEGED CURING OF THE DEFAULT OCCURRED AFTER SBA FORMALLY DENIED THE EXISTENCE OF A VALID GUARANTY BASED ON NON-PAYMENT OF THE FEE.

HOWEVER, AS TO THE POSSIBILITY OF A REFINANCING OF THIS LOAN, SHOULD THE BANK WISH TO MAKE A NEW LOAN TO THE BORROWER TO REPAY THE EXISTING ONE AND REQUEST SBA TO ISSUE A NEW GUARANTEE ON THE SECOND LOAN, WE EXPRESS NO OPINION SINCE WE BELIEVE THAT THIS DETERMINATION CAN BEST BE MADE BY SBA IN ACCORDANCE WITH WHATEVER REGULATORY PROVISIONS OR INTERNAL SBA GUIDELINES MIGHT BE APPLICABLE TO A SITUATION IN WHICH AN EXISTING NON- GUARANTEED LOAN IS TO BE REFINANCED BY AN SBA GUARANTEED LOAN. THIS OF COURSE ASSUMES THAT THE BANK'S ALLEGATIONS AS TO THE BORROWER'S IMPROVED CIRCUMSTANCES COULD BE SUBSTANTIATED SO THAT REPAYMENT OF THE LOAN WAS REASONABLY ASSURED AS REQUIRED BY 15 U.S.C. 636(A)(7) (1976). IF THERE IS ANY DOUBT CONCERNING SBA'S AUTHORITY IN THIS REGARD, THE MATTER MAY BE SUBMITTED HERE FOR FURTHER CONSIDERATION.