LITIGATION PLANS AND LEGAL FEE REIMBURSEMENT REQUESTS

7(A) AND 504 LOANS

What They Are and Why They are Important for SBA Lenders

10/16/2017 www.sba.gov 1

October 17, 2017

TRAINING OBJECTIVES

Outline Lenders’ responsibilities and Litigation Plan requirements prior to commencement of all non-routine litigation.

Explain reimbursable and non-reimbursable expenses.

10/16/2017 www.sba.gov 2

What They Are

Lenders must make two separate and distinct submissions when pursuing litigation against an Obligor of an SBA loan. 1. Litigation Plan

• Lender’s counsel must submit a Litigation Plan in the new suggested template provided setting forth scope of work, strategy, estimate of recovery and proposed legal budget.

• Must be approved in writing by SBA before active litigation commences, except in emergency situation (13 CFR 120.540(f).

10/16/2017 www.sba.gov 3

What they are

2. Legal Fees Reimbursement Requests

• SBA only pays legal fees and expenses that are necessary, reasonable and customary in the locality.

• Must be submitted to the appropriate SBA Servicing Center.

10/16/2017 www.sba.gov 4

LITIGATION PLANS RULES & REGS: THE CFR

13 CFR 120.540 (c)

(c) Litigation plan. An Authorized CDC Liquidator and a Lender must obtain SBA's prior approval of a litigation plan before proceeding with any Non-Routine Litigation. SBA's prior approval is not required for Routine Litigation.

10/16/2017 www.sba.gov 5

What is “Non Routine Litigation”?

13 CFR 120.540 (c)(1)

(1) Non-Routine Litigation includes:

(i) All litigation where factual or legal issues are in dispute and require resolution through adjudication;

(ii) Any litigation where legal fees are estimated to exceed $10,000;

(iii) Any litigation involving a loan where a Lender or Authorized CDC Liquidator has an actual or potential conflict of interest with SBA; and

(iv) Any litigation involving a 7(a) or 504 loan where the Lender or CDC has made a separate loan to the same borrower which is not a 7(a) or 504 loan.

10/16/2017 www.sba.gov 6

What is a “Routine Litigation”?

13 CFR 120.540 (c)(2)

(2) Routine Litigation means uncontested litigation, such as non-adversarial matters in bankruptcy and undisputed foreclosure actions, having estimated legal fees not exceeding $10,000.

10/16/2017 www.sba.gov 7

MORE ON LITIGATION PLANS

Except with regard to emergencies, all Lenders and CDCs, must submit a Litigation Plan for SBA’s written approval prior to initiating Non-Routine Litigation. (13 CFR 120.540(c)(1)).

Lenders and CDCs are not required to submit a Litigation Plan to SBA prior to initiating Routine Litigation.

BUT

All Lenders and CDCs must submit a Litigation Plan if a material change arises during the course of Routine Litigation that transforms it into Non-Routine Litigation, e.g. the legal fees exceed $10,000 in the aggregate. (13 CFR 120.540(c))

10/16/2017 www.sba.gov 8

TIMING OF LITIGATION PLANS

• Required for all Non-Routine Litigation.

• Must be approved before litigation starts. • Emergency exception: a waiver must be requested in writing as soon as possible if there are extraordinary or urgent circumstances. 13 CFR 120.540(f).

10/16/2017 www.sba.gov 9

Elements for Obtaining Approval of Litigation Plans

• Cost–effectiveness

• Necessity

• Reasonableness

• Customary

10/16/2017 www.sba.gov 10

How to Submit a Litigation Plan

• A request for approval of a proposed Litigation Plan (or amended Litigation Plan) must be submitted to the appropriate SBA Center.

• Litigation Plans should contain all information in SBA’s new Litigation Plan template.

10/16/2017 www.sba.gov 11

NEW!

• Lender Litigation Guidelines (See Handout)

• Litigation Plan Template https://www.sba.gov/sites/default/files/articles/2016_Litigation_Plan_1.pdf

10/16/2017 www.sba.gov 12

10/16/2017 www.sba.gov 13

10/16/2017 www.sba.gov 14

10/16/2017 www.sba.gov

15 15

Failure to File Litigation Plans

Beginning on October 4, 2016, if a Lender proceeds with litigation without first getting its Litigation Plan or

Amended Litigation Plan approved in writing the SBA may deny a request to reimburse Lender for its legal

fees for failure to follow program requirements.

SBA Information Notice 5000-1394

10/16/2017 www.sba.gov 16

GENERAL RESPONSIBILITIES

Lenders are responsible for:

• Conducting the litigation of its loans; • Managing outside counsel;

• Consult with outside counsel to determine a cost-effective and

appropriate litigation strategy;

• Managing their SBA portfolio with the same diligence as their non SBA loans.

10/16/2017 www.sba.gov 17

Selecting Outside Counsel

• An attorney retained by Lender must:

• Be licensed in the state where the litigation will be conducted.

• Be competent and have the appropriate experience.

• Be local.

• Be covered by adequate legal malpractice & current insurance.

• Have no conflicts of interest with any parties to the loan.

10/16/2017 www.sba.gov 18

Considerations for Litigation on SBA Loans

• Litigation should be necessary, reasonable and customary for the locale.

• Litigation should be cost-effective. Potential recovery amount, or lack thereof, must be determined prior to embarking on litigation!

10/16/2017 www.sba.gov 19

COMMENCEMENT OF LITIGATION

• Litigation takes place after Obligor defaults on payments of a Note and Loan is placed “In Liquidation”.

• A lawsuit affecting repayment of the loan is brought by Lender against Obligor.

• Bankruptcy is filed by Obligor.

10/16/2017 www.sba.gov 20

Amendments to Litigation Plans

• Must submit as soon as material changes in the plan are necessary or actual legal fees increase by 15%.

• Must state amount of legal fees incurred to date.

• Must justify the request to amend the litigation plan and the additional fee request.

• New Litigation Plan contains a section for this purpose (see slide 13- Litigation Plan, page 1).

10/16/2017 www.sba.gov 21

Receivers

A remedy generally available in only narrow circumstances.

(SOP 50 57 2, Chapter 21; SOP 50 55 Chapter 24)

• Lenders must perform a cost benefit analysis to demonstrate that the net recovery will be greater if a receiver is used as opposed to the lender liquidating the collateral directly.

• Must be submitted for approval to the appropriate Center prior to

appointment.

• A Litigation Plan which requires a receiver will be declined if the receiver has not been approved by the Center.

10/16/2017 www.sba.gov 22

Legal Fee Reimbursement Requests

SBA only pays for legal fees and expenses that are necessary, reasonable or customary in the locality, with hourly rates that were previously approved in the Litigation Plan.

10/16/2017 www.sba.gov 23

Additional Information

Lenders should include in the invoices:

• A statement with a description of hourly fees, hours worked, work performed, attorney/paralegal name and total fees and expenses incurred to date;

•Reconciliation of the invoices to the budget approved in the Litigation Plan; and,

• A summary of the litigation activities.

10/16/2017 www.sba.gov 24

Legal Fee Reimbursement Requests

Reimbursement Process: Submit copies of itemized legal invoices, significant pleadings and correspondence to the appropriate SBA Loan Center. • For 7(a) loans, invoices must be sent at time of submission of Loan Guaranty Purchase Package or with Wrap Up Report. SOP 50 57 2 Chapter 22. • For 504 loans, the CDC may submit requests when recoverable expenses total $5,000 or more per loan, or, with the Wrap Up Report. SOP 50 55 Chapter 25. 10/16/2017 www.sba.gov 25

Lender Certification

Each Lender who submits a request for reimbursement of legal fees and expenses must certify to SBA that the submission complies with all applicable statutory, regulatory, and contractual requirements.

False Claim Warning

Knowingly making a false statement to the SBA is a violation of Federal law and could result in criminal prosecution, significant civil penalties, and denial of program participation. A false statement is punishable under 18

U.S.C. §1001 and §3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 U.S.C. §645 by imprisonment of

not more than two years and/or a fine of not more than $5,000.

10/16/2017 www.sba.gov 26

Best Practices

To expedite the review of legal fee and expense reimbursement requests, SBA recommends that Lenders have their outside counsel submit billing records that meet the following standards: • Litigation Summary • Monthly invoices should be submitted in order and detail services and reimbursable expenses, itemized by matter; • Time entries should include the date services were rendered, a description of all services with the separate time and cost billed for each task, the individual who performed the task and his or her billing rate; • Reimbursable expenses should be itemized ( with the invoice for the expense included as applicable).

10/16/2017 www.sba.gov 27

Expenses Generally Reimbursable

Fees and Expenses directly connected to the litigation proceeding:

• Legal fees that are necessary, reasonable and customary that were pre-approved in a Litigation plan

• Court filing fees

• Court reporter fees

• Transcription fees

• Photocopies

• Mailing fees

• Title work done as part of the litigation

• Forbearance agreement or OIC/Settlement executed during the litigation proceeding

• Legal research, if advance authorization is given

• Fees for the preparation of necessary motions such as a motion for summary judgment or a motion to dismiss

Note: This list is LITIGATION expenses only. LIQUIDATION expenses (appraisal, environmental, etc.) are approved by loan specialists.

10/16/2017 www.sba.gov 28

Generally Non-Reimbursable

• Overhead fees such as conflict of interest determinations and file set-up

• Fees for intra-law firm communications including intra-office memos and emails

• Fees in excess of a reasonable rate (in Georgia, a reasonable hourly attorney rate is $300-350 and a reasonable hourly paralegal rate is $150-175)

• Fees for routine loan liquidation activities such as site visits and preparation of demand letters

• Fees related to travel not pre-approved by the SBA

• Fees for appointment of a receiver to perform routine liquidation activities or any receiver fees not approved in advance

• Fees found within non-itemized or blocked billing entries

10/16/2017 www.sba.gov 29

Generally Non-Reimbursable

• Fees resulting from duplication such as when multiple people are working on the same case

• Fees incurred for the sole benefit of the lender such as preparation of a litigation budget

• Fees incurred where no collectability existed and no recovery was realized

• Fees incurred because hired counsel is not local to the proceeding and reasonable local representation could have been obtained

• Legal fees incurred by the lender or CDC in the defense of a fraud or misrepresentation claim (See 13 CFR 120.542(a)(2))

• Fees incurred in negotiating a short sale on the property unless advance authorization is obtained (the SBA considers this a non-legal liquidation action)

10/16/2017 www.sba.gov 30

Common Reasons for Denial of Fees

• Preparation of the Litigation Plan or Amendments. • Intra-law firm communications. • Communications with SBA. • Loan servicing or liquidation tasks. • Travel not pre-approved by SBA. • Appointment of a receiver to perform routine liquidation activities. • Non-itemized or generic bills.

10/16/2017 www.sba.gov 31

Lessons in Bad Billing…

•Intra-Office Communications/Memos • Conferences, discussions, phone calls, emails, etc. between attorneys and/or paralegals in the same

office. • Internal memos written by an attorney/paralegal to another attorney/paralegal in the same office. • Instructions from attorney to attorney/paralegal.

•Excessive Review of Documents • SBA will not reimburse for excessive review or editing of same documents time after time.

•Duplicate Work • SBA does not reimburse for Attorney A to review documents (loan docs, pleadings, memos, etc.) and

also reimburse for Attorney B to review the same documents. •Vague Description of Work

• SBA does not reimburse for fees incurred for work that is so vaguely/poorly described that SBA has no way of determining what work was performed.

•Excessive Charges for “Form” Documents • Foreclosure notices, demand letters, etc.

10/16/2017 www.sba.gov 32

SUMMARY

• For fees to be reimbursed, Litigation plans must be approved in advance for all non-routine litigation and when routine changes to non-routine • All receivers must be approved in advance • Limited emergency waiver • SBA will not reimburse any fees and costs on the non-reimbursable list • Fees must be necessary, reasonable, customary and cost-effective.

10/16/2017 www.sba.gov 33

Questions

SBA Local Legal Counsel

Ashley H. Hou

SBA Baltimore/WV Counsel

Ashley.Hou@sba.gov

410-244-3343

10/16/2017 www.sba.gov 34