EIDL Funds Subject to Seizure by Judgment Creditor?

[Lidig8r 1,870]

Gentlemen (and ladies, if any), we all know that so many more businesses are going to cease operations and/or declare bankruptcy. Even those entities which received EIDL loans.

Let us assume that Commercial Landlord obtains a judgment for defaulted amounts under a lease with a corporate tenant. Before the lawsuit is filed, the commercial tenant receives EIDL funds but the funds do not come in time to save the business. Also assume the majority of the funds are being held in a separate bank account.

The SBA has a UCC1 over all assets of the corporate tenant (including presumably the funds in the bank account).

Thoughts and opinions on whether the EIDL funds in the corporate tenant EIDL account should be subject to garnishment.

The immediate answer is probably yes, but, there has to be more to the equation than that.

Let's also assume that the Commercial Landlord refused to work with any of the tenants for rent abatement or deferral. Balls to the wall, fuck you pay me.

Thoughts on whether an implied duty was created for commercial landlords as a result of Covid-19 to devise and implement a rent deferment or abatement plan for tenants assuming it can be shown that the vast majority of landlords created this plan.

[TwiceHorn 31,435]

Just spitballing, but the implied duty sounds far-fetched.

Seems like a more "profitable" area might be the EIDL loan documentation, which might create some kind of security interest in favor of the government.  Which doesn't help your client keep the money, but keeps them out of some kind of dutch with the SBA.

[troph 24,781]

Article 9 is going to apply. Secured creditor beats out the judgment creditor if the original lien for the judgment creditor was unsecured. EIDL docs say they are not superseding existing liens. SBA takes best available. But landlords usually only have liens on tangible property on the premises by statute and contract. So SBA should beat out a landlord in normal circumstances, even if the landlord was first.

 

Key doc to look at is the lease though a contract lien could be broader. This part I’m less sure about - thinking out loud proceeds probably won’t include loan proceeds but only proceeds from the sale of goods and services (or proceeds from the sale of other property). So even a prior lien on proceeds might not apply.

[troph 24,781]

Just spitballing, but the implied duty sounds far-fetched.
Seems like a more "profitable" area might be the EIDL loan documentation, which might create some kind of security interest in favor of the government.  Which doesn't help your client keep the money, but keeps them out of some kind of dutch with the SBA.

Yes, SBA takes a lien on all business assets other than real estate and is the most senior position available at the time (which can be subordinate).

[troph 24,781]

And no implied duty, at least not in Texas. Contracts are contracts and unless there is an argument in the language or existing common law theory - force majuere, impossibility of performance, frustration of purpose then nope. In hospitality cases you might look at the condemnation section. Those could be useful for abatement or even termination of leases in tenant favorable provisions where you are out of business and trying to avoid a judgment or suit on a personal guaranty. Theory is Abbott took your leasehold interest with the shut down. I think it could work. Some of the language is dead on point.