If you’re litigating, do you need a Litigation Plan? Maybe. But you do need to plan!

“Plans are nothing; planning is everything.”
Dwight D. Eisenhower
U.S. President, 1953-1961

Truer words were never spoken. A plan is a blueprint of what needs to be done. Planning is the process of evaluating and strategizing in advance to reach an objective. That’s especially true when you’re considering legal action to collect on an SBA loan. To reach our goals and objectives, we must consider all possible contingencies. That’s the planning part.

In working through a collection scenario of an SBA loan, there are two objectives:

  1. Obtain maximum recovery of amounts owed; and
  2. Obtain SBA’s reimbursement of its pro-rata share of the expense.

 To litigate or not to litigate? That is the question.  The SBA leaves it to the lender to make that determination, so careful analysis and advance planning are key. Sometimes battles are won or lost at the very beginning so this step is crucial. Things to consider: Will there be enough to liquidate collateral?  Or will more be needed?

 Before initiating litigation, what should a lender do? As a lender, you need to perform due diligence to evaluate whether the litigation will be cost effective. This includes and isn’t limited to reviewing the financial picture of the borrower and guarantors, and on obtaining current credit bureau reports and asset searches. Should you call a lawyer at this stage?  Consulting with legal counsel is helpful. An attorney can outline the path and the cost estimates which you can weigh against the potential recovery.

 Do you need SBA’s permission to initiate litigation? Nope.  Yet to obtain SBA’s pro rata share of legal expenses, you must exercise good judgment and comply with SBA’s requirements regarding preparing and submitting a Litigation Plan.

 What’s a Litigation Plan? It’s a template the SBA provides for lenders to complete. It provides the SBA with details regarding the lender’s actions in pursuing the obligors. It also highlights actions the lender will take /has taken, including proposed legal actions, anticipated defenses or counter claims, and an estimated completion date.

 Do you need a Litigation Plan? It depends. When expenses won’t exceed $10,000, it’s considered routine for the lender to pursue the borrower for payment, so a Litigation Plan isn’t necessary. However, for non-routine scenarios, you MUST prepare a Litigation Plan when:

  • Disputes arise involving factual or legal issues and a judge or arbiter must review evidence and argumentation between the lender and borrower to determine each party’s rights and obligations. (adjudication).
  • It becomes clear that legal expenses will exceed $10,000.
    • The Plan must be prepared and submitted prior to initiating litigation.
    • Or if in routine litigation, the matter becomes escalated and costs will exceed $10,000, a Litigation Plan MUST be completed and submitted to SBA immediately.
  • There is a conflict of interest (or potential conflict) between the lender and the SBA.
  • ANY litigation involving a 7(a) loan where the lender also has made a separate non-SBA loan to the borrower.

 How soon will SBA approve a Litigation Plan?  SBA typically responds within 15 days of receiving a Litigation Plan. Follow up with SBA if a you don’t get a response within that time frame. A non-response doesn’t mean the Plan is approved. Make sure you have the approval in hand so there are no surprises at the end. Contacting the SBA will prevent your legal expense claims from being denied when submitting a Wrap Up /Charge Off Report.

What if the Litigation Plan changes?  Can I submit an amended Plan? Plans can change. We often must make decisions based on new circumstances or events. If that happens, you can submit an amended Litigation Plan that must include any prior SBA Litigation Plan approval notification(s) for that borrower.

Like Ike said, “… planning is everything.”

Paul Baker
JRB Associate