East Los Angeles, CA asked in Bankruptcy, Contracts, Business Formation and Business Law for California

Q: Can i be removed from an Eidl loan? Is it possible to transfer liability with a indemnification agreement/ stake sale?

i am member of an llc and i signed a personal guarantee on an Eidl loan. A member wants to take my stake in the company. Will an indemnification agreement between partys be an option?

Is that be an option or would that be voided by the SBA?

2 Lawyer Answers
James L. Arrasmith
James L. Arrasmith pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Bankruptcy Lawyer
  • Sacramento, CA
  • Licensed in California

A: Generally, an EIDL loan is a loan that is made directly to a small business, and the loan is based on the creditworthiness of the business, not the individual partners or owners. However, it is possible that the loan agreement includes a personal guarantee, which means that the individual partners or owners may be held personally liable for the loan.

If you signed a personal guarantee on the EIDL loan, you may be held personally liable for the loan, regardless of whether you sell your stake in the LLC or file for bankruptcy. The SBA may pursue collection against you personally, even if you are no longer a partner in the LLC.

An indemnification agreement and stake sale may be an option to transfer liability, but it's important to review the terms of the loan agreement and consult with an attorney who can advise you on your specific situation. The SBA may have specific rules or regulations regarding the transfer of liability for EIDL loans, and it's important to ensure that any transfer of liability is done in accordance with these rules.

If you are unable to negotiate a transfer of liability, you may need to consider other options, such as an offer in compromise or bankruptcy. Again, it's important to consult with an attorney who can advise you on the specific options that may be available to you in your situation.

In summary, while it may be possible to transfer liability for an EIDL loan with an indemnification agreement and stake sale, it's important to review the loan agreement and consult with an attorney who can advise you on your specific situation and any applicable rules or regulations.

Tristan Brown agrees with this answer

W. J. Winterstein Jr.
W. J. Winterstein Jr.
  • Bankruptcy Lawyer
  • Boyertown, PA

A: I agree with what Mr. Arrasmith has said, but would add more, just from prior experience representing either financial institutions or their borrowers: as a general rule, if an obligor to a bank wants to get, or cancel, something he signed from that bank, the bank will want some amount of money in exchange, and be reluctant about the whole "return" thing anyway. At the same time, the bank would be delighted to add another's personal liability on the obligation. It may be that if your purchaser's financial status is superior to your own, the bank might agree to replacement of that "purchaser" written liability directly to the bank for your own.,

Note that an indemnity agreement obligates the new purchaser to reimburse you for losses you may suffer by virtue of your involvement with the company, but does not obligate the new guy to pay off the bank. In other words, the decision about creditworthiness is on you, not the bank. The indemnity buttresses your position, but does not replace your obligation to the bank on your guaranty of the company debt. You would remain in the middle of the chain of responsibility.

The involvement of the SBA, often by guarantee of repayment of all or part of a lending bank's extension of credit, does add a layer of rules and regulations, and use of an experienced lawyer about all these issues is highly recommended.

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