Question. Can the SBA Bring a Contract Action More than 6 Years After the Default?
Answer. 28 U.S.C.§ 2415(a) establishes the federal statute of limitations applicable to SBA actions to recover under contract. Under this statue the SBA has 6-years to file suit to recover under the contract for non-payment under the Note. More specifically, it be must be filed within six years after the right of action accrued. Section 2416 dictates that the right of action accrues at the point when “facts material to the right of action” are known or should have been known by a government official who is “charged with the responsibility to act in the circumstances.” Id. § 2416. In general, the SBA’s right to sue would be limited to 6-years; however, the following example illustrates how the malfeasance of a guarantor can drastically alter the result.
Let us assume that Lender A loaned Borrower, ABC Corporation, $500,000 and that the principals personally guaranteed payment of the promissory note. Let us further assume that one of the principals, Guarantor A, submitted a financial statement to the lender upon which the lender relied in making the loan. The financial statement showed over $2,000,000 in assets and a positive net worth of nearly $1,500,000. Shortly after the loan was made ABC Corporation experienced sudden and unexpected financial difficulties and could not make its payments under the loan.
Guarantor saw the writing on the wall and began secretly divesting his assets by selling them to friends and family for little or no understanding with the understanding they would be returned in the future. The actions we have described amount to a fraudulent conveyance and are clearly illegal, but Guarantor A worked hard to build up his net worth and was unwilling to lose it over one bad mistake.
The lender filed suit against Guarantor A to recover on the notes. Counsel for Guarantor A, not a party to the fraudulent conveyances and unaware of the scheme, submitted Guarantor A’s financial statement along with a letter indicating no ability to pay an evidencing assets of $25,000 and debt of $75,000. A few years later, Lender A assigned its right under the Note to the SBA and the SBA filed suit against Guarantor A. Guarantor A defended and argued that the state stature of limitations had already run. The court awarded judgment for the government, but why?
First, it is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights. United States v. Fernon, 640 F.2d 609, 612 (5th Cir. 1981). In United States v. Neidorf, 522 F.2d 916 (9th Cir.1975), cert. denied, 423 U.S. 1087, 96 S.Ct. 878, 47 L.Ed.2d 97 (1976), the court found that even if fraudulent conveyance actions are generally governed by state law, “when brought by the United States, the limitation must be determined by reference to section 2415.
Second, while a fraudulent conveyance action to recover the transferred assets is a quasi-contractual action and 2415 does apply, there is still the question of when the 6-years began to run. Because Guarantor A’s actions were not known to the government, their right of action had not yet accrued until shortly before suit. Therefore, the 6-year limitations period under 28 U.S.C. § 2415(a) had only just started to run when suit was filed.
The result for Guarantor A was not what he expected. The government, in our example, was successful and the assets recovered. We might also assume Guarantor A later faced prosecution with jail time being likely. Surreptitiously transferring assets to a third-party and hoping that the passage of time will safeguard those assets is likely to fail and land you in jail as well. Defrauding the SBA is not a good idea.