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SBA Loans: How to Maximize Recovery by Liquidating Real Property
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SBA Loans: How to Maximize Recovery by Liquidating Real Property

November 13, 2020 Banking & Financial Services Industry Legal Blog

Reading Time: 10 minutes

When a small business association (“SBA”) loan is converted to liquidation status, the lender must begin liquidating the collateral. Lenders must liquidate all personal property that has a Recoverable Value over $5,000. If the Recoverable Value is over $5,000, the lender must decide which method of liquidation is the most appropriate to maximize the recovery in the shortest amount of time. Before a lender should commence liquidation of personal property collateral, it must know what is means to have a Recoverable Value of over $5,000, what the different liquidation methods are, and what factors should influence the lender’s decision on choosing the most appropriate liquidation method to maximize recovery.

sba lenders sba loans liquidating personal property liquidating methods

Is the Recoverable Value of the Property Over $5,000?

The “Recoverable Value” is “the net dollar amount that a prudent lender could reasonably expect to recover by liquidating a particular piece of collateral.” SOP 50 57. The Recoverable Value is calculated by deducting the following amounts from the price the collateral will likely sell for, if sold quickly and with limited exposure to potential buyers:

  1. the balance owed on senior liens (less amounts waived or subordinated by a loan document;
  2. any SBA approved, necessary, reasonable and customary costs incurred that are associated with any necessary lien foreclosure action; and
  3. if the collateral is likely to be acquired by SBA or the lender at the foreclosure sale, the expenses associated with the care, preservation and resale of the acquired collateral.

See SOP 50 57.
If the prudent lender reasonably expects the Recoverable Value to be over $5,000, then the personal property must be liquidated unless there is a “documented compelling reason for not doing so.” SOP 50 57. If the lender commences liquidation of the personal property, but then realizes the Recoverable Value is less than $5,000, the lender may abandon its pursuit of recovery on the property. The decision and justification for abandoning the collateral, including the basis for the Recoverable Value estimate, must be documented in the loan file. SOP 50 57.

Liquidation Methods

There are several liquidation methods that the lender must choose from before commencing liquidating personal property. In Florida, the lender can choose from the following methods:

UCC Sale

Step 1: Take Possession of the Collateral through Self-Help or Replevin
Self-Help Repossession: In Florida, a secured creditor may use self-help repossession to take possession of collateral, provided its efforts do not breach the peace. § 679.609(2)(b), Fla. Stat. Florida case law provides that a breach of the peace occurs if the secured creditor enters the debtor’s land to repossess the collateral, without the debtor’s consent. Northside Motors of Florida Inc. v. Brinkley, 282 So. 2d 617 (Fla. 1973). Repossession efforts may be lawful, provided the debtor does not object, and the collateral is taken from unenclosed parts of the debtor’s property, such as the driveway. Quest v. Barnett Bank of Pensacola, 397 So. 2d 1020 (Fla. 1st DCA 1981). If a secured creditor breaches the peace, it may be liable to the debtor for damage done to the debtor or its premises during an unauthorized entry. Since “breach of the peace” is not defined in Florida statutes, and case law does not provide a clear definition, it is highly recommended to consult with legal counsel before exercising self-help repossession.
Replevin: If the property cannot be repossessed without breaching the peace, or if the lender seeks to avoid any potential lender liability for breaching the peace, then the secured creditor should consult legal counsel and commence a replevin action, pursuant to Chapter 78 of the Florida Statutes. If a secured creditor is successful and obtains a writ of replevin, the sheriff will take possession of the personal property on the secured creditor’s behalf.
Step 2: Notice of Sale
In Florida, the secured creditor must notify the debtor and any secondary obligor when selling the personal property collateral. If the collateral is anything other than consumer goods, then the secured creditor must also provide notice to the following: any person or entity who provided notice of a claim to the collateral, and a secured party or lienholder that has a perfected security interest in the same collateral. § 679.611(3), Fla. Stat.
Secured creditors are not required to provide notice to unknown creditors. However, secured creditors have an obligation to search for other creditors. A secured creditor fulfills this notice requirement by conducting a search using commercial reasonable methods between 20 and 30 days before the sale, and sending notice to those secured creditors identified in the search. § 679.611(5), Fla. Stat.
The notice of sale must:

  • describe the debtor and the secured creditor;
  • describe the collateral;
  • state the method of intended disposition;
  • state that the debtor is entitled to an accounting of the unpaid indebtedness and the cost of the accounting; and
  • provide the date, time, and location of  public sale, or the time after which any other type of disposition will be made. § 679.613(1), Fla. Stat.

If the collateral is a consumer good, the notice must also contain:

  • a description of any liability for a deficiency owed to the notice recipient;
  • a telephone number of the secured party; and
  • a telephone number or mailing address where additional information concerning the sale may be obtained. § 679.614(1), Fla. Stat.

All notices must be sent after loan default and at least ten (10) days before the sale. § 679.612, Fla. Stat. The 10-day notice requirement does not apply if the collateral is perishable, declines in value at a rapid rate, or is customarily sold in a recognized market. § 679.611(4), Fla. Stat. The loan file should include a copy of the post-default lien search verifying the priority of the lien securing the SBA loan, the identity of any junior lienholders entitled to notice, a copy of the notices sent, and proof that the notice was transmitted. See SOP 50 57.

Step 3: Sale

In Florida, the method, manner, time, place, and other terms of the disposition of collateral, must be commercially reasonable. § 679.610(2), Fla. Stat. Pursuant to Florida case law, the disposition of collateral is considered commercially reasonable if it is:

A sale is considered commercially reasonable if it has been approved:

  • in a judicial proceeding;
  • by a bona fide creditors’ committee;
  • by a representative of creditors; or
  • by an assignee for the benefit of creditors. § 679.627(3), Fla. Stat.

The question of whether a sale is commercially reasonable usually only arises when the debtor opposes the secured creditor’s claim for deficiency. Whether a sale is commercially reasonable is a question of fact, and the secured creditor will have the burden of showing that every aspect of the disposition was commercially reasonable. See Burley v. Gelco Corp., 976 So. 2d 97 (Fla. 5th DCA 2008); S. Developers Earthmoving v. Caterpillar Fin. Servs., Corp., 56 So. 3d 56 (Fla. 2d DCA 2011). Accordingly, lenders must ensure that all sales are commercially reasonable.
The secured creditor should choose a good auction company to conduct the sale, by considering, for example, its reputation in the area, and whether it has the experience to attract the appropriate customers for the type of property involved. The bill of sale should state that the property is sold “as is” and “without warranties of any kind including those relating to title, possession, quiet enjoyment or the like.”

Collection of Accounts Receivable

If the SBA loan is secured by the debtor’s account receivables, the secured creditor may enforce the obligation by instructing the debtor’s account debtor to pay the secured creditor directly. § 679.607(1), Fla. Stat. Lenders should consult with legal counsel regarding best practices for collection of accounts receivable.

Voluntary Sale

If the obligors have provided cooperation during the liquidation process and their cooperation has increased recovery efforts, allowing the obligor to conduct a voluntary sale of the property may be a great option, provided it:

  1. maximizes recovery;
  2. the obligor has possession or control of the property;
  3. all other lienholders have provided their written consent to the sale;
  4. an appraisal has been obtained;
  5. the Recoverable Value of the collateral has been established;
  6. the sale is supervised by the lender;
  7. the costs of the sale are reasonable, necessary and customary;
  8. the lien securing the loan is only released in exchange for cash in an amount equal to or greater than the Recoverable Value of the collateral; and
  9. all of the net proceeds are applied to the principal balance of the SBA loan.

See SOP 50 57.
The proceeds from a voluntary sale will be applied to the balance of the SBA loan.

Set-Off of Deposit Account

Pursuant to Section 679.607(1) of the Florida Statutes, if a debtor defaults, a secured creditor may instruct a bank or other custodian to pay the money in the account over to the secured creditor, when holding a security interest in:

  • a deposit account perfected by control under Section 679.1041(1)(a) of the Florida Statutes; and
  • a deposit account perfected by control under Section 679.1041(1)(b) or (c) of the Florida Statutes.

Lien Foreclosure

If the personal property is a fixture attached to real property collateral, the secured creditor can use foreclosure to recover both the real and personal property. For a discussion on liquidation of real property, See SBA Loans: How to Maximize Recovery by Liquidating Real Property.

Cash Surrender Value of Life Insurance Policy

If all other collateral has been liquidated, a deficiency exists, and a life insurance policy with a cash surrender value has been assigned as collateral, the debtor should surrender the policy to the insurance company for the cash value. The proceeds will be applied to the balance of the SBA loans, unless it would be prudent to keep the policy in place. If the policy is kept in place, the premium payments should be treated as a recoverable expense. See SOP 50 57.

How to Choose the Most Appropriate Liquidation Method

There are several methods for a lender to choose from when liquidating personal property collateral. The most appropriate method depends on several, important factors, such as: whether the obligor is in active military service; whether there are any lienors; the amount owed on senior liens; whether the property has adequate hazard insurance; whether the property is contaminated; the time and costs involved in liquidating the collateral; and which method would yield the highest recovery in the shortest amount of time.
A thorough investigation of all of these factors, by conducting a diligent investigation, reviewing the SBA loan documents, ordering a lien search, and ordering an appraisal, is required for the lender to make a prudent decision on the most appropriate method that will maximize recovery in the shortest amount of time.


It is imperative that a lender consult with an attorney when determining the most appropriate method to liquidate personal property. If you are an SBA lender who is considering liquidating a debtor’s personal property collateral, the attorneys at Jimerson Birr can help you decide the best method of liquidating the personal property and assist you in maximizing your recovery on the SBA loan in the shortest amount of time.


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