The borrower applied for and received a Small Business Administration (“SBA”) backed small business loan from the bank for his business. The bank told the borrower that the SBA required that the borrower’s wife also sign the loan application and a guaranty. At the time, the wife (the “guarantor”) was the business’s secretary but was otherwise unemployed and had no “income or liquid assets” or an ownership interest in the small business. The guaranty included terms stating that it was “continuing and unconditional” and that the loan would make the borrower and the guarantor “jointly and severally liable” until all the loan obligations were satisfied. The borrower’s business failed to make payments on the loan. The loan terms were restructured to extend the repayment schedule, but the business defaulted again under the restructured terms. The bank filed suit against the guarantor to collect on the loan based on her personal guaranty. The guarantor denied liability for the loan, arguing the guaranty was illegal. Eventually, the bank transferred the debt to the SBA. After a series of communications with the guarantor, the SBA began withholding portions of the guarantor’s Social Security payments to satisfy the debt. The guarantor sued both the bank and the SBA, disputing the enforcement of the guaranty because the “requirement that she personally guarantee the loan violated both federal regulations and the SBA’s Standard Operating Procedures.” The bank and SBA both moved to dismiss, and the district court granted both motions. The guarantor appealed two of her claims—fraudulent misrepresentation and negligent misrepresentation—against the bank and sought a declaratory judgment against the SBA that her personal guaranty was unenforceable due to illegality, fraudulent inducement, mutual mistake of fact, and novation.
In Oldham v. U.S. SBA, No. 19-10644, 2025 WL 1393867, 2025 U.S. App. LEXIS 11673 (5th Cir. May 14, 2025) (unpublished opinion), the Fifth Circuit affirmed in part, reversed in part, vacated in part, and remanded the case to the district court for further proceedings. The court first found that the district court properly dismissed the guarantor’s claims against the bank as barred by the statute of limitations. A four-year statute of limitations governs fraudulent misrepresentation claims, and a two-year statute of limitations governs negligent misrepresentation claims. In Texas, the statute of limitations begins to run “at the time the alleged false statement or misrepresentation is made.” The two claims against the bank were based on the bank’s 2006 statement that the SBA required that the guarantor personally guarantee the borrower’s loan. Because the suit was not brought until 2018, the court found that the statute of limitations had run. The court rejected the guarantor’s argument that the statute of limitations for both claims had been tolled under the discovery rule. It explained that the rule requires due diligence and a “potential plaintiff [is required] to ‘make themselves aware of pertinent information available on public record.’” Both the sources of violations claimed by the guarantor—violation of federal regulations and SBA’s standard operating procedures— “are public information.” The court explained that the guarantor should have “availed herself of this information” at the time she signed the guaranty in 2006 and certainly by the time the bank first sued her to enforce the guaranty in 2012. The court also held that the guarantor’s argument that the bank committed a separate tortious act in selling the alleged illegal guaranty to the SBA was forfeited because she failed to raise the issue in her amended complaint or opening brief; instead, it was only raised in her reply brief.
Next, the court addressed the declaratory judgment sought by the guarantor against the SBA, in which she sought a finding that the guaranty was unenforceable based on illegality, fraudulent inducement, mutual mistake, and novation. The Fifth Circuit explained that it had authority to affirm the district court’s dismissal “on any ground supported by the record or argued” by the SBA on appeal and addressed each of the SBA’s four arguments for dismissal as a potential basis to affirm. The SBA’s first argument was that “the court lacked subject-matter jurisdiction because [the guarantor] sued the SBA and not the SBA administrator.” The court found this argument to be unpersuasive and stated that the district court erred to the extent it relied on this argument to dismiss. The SBA’s administrator “can ‘sue or be sued in any court of record of a State having general jurisdiction, or in any United States district court,’ meaning sovereign immunity is waived, and jurisdiction is conferred on the district courts. 15 U.S.C. § 634(b)(1). The court noted that the guarantor named the administrator in the amended complaint caption, included the administrator as a party to receive service of summons, and included language in the amended complaint regarding the administrator and how the administrator could be served. On appeal, the SBA presented a slightly different argument: that the guarantor had failed to properly effectuate service on the SBA administrator or add the administrator’s name to the docket. The court found this argument had been forfeited because the SBA had failed to raise it in its motion to dismiss. The SBA’s second argument was that the guarantor “failed to exhaust her administrative remedies before the SBA.” The court again found this argument had been forfeited because the SBA had failed to raise it in the district court. The SBA’s third argument was that the guarantor’s “declaratory judgment action neither waived the SBA’s sovereign immunity nor independently conferred jurisdiction to the court.” Specifically, the SBA argued that the Federal Declaratory Judgment Act (“FDJA”) does not by itself act “to waive sovereign immunity or to confer jurisdiction on the federal courts” and, therefore, an independent basis was required. The court agreed with the SBA’s argument regarding the effect of the FDJA but found that the “sue and be sued” clause of 15 U.S.C. § 634(b)(1) served as an independent basis to confer jurisdiction. Therefore, the court found the third argument unpersuasive. The SBA’s fourth and final argument was that the guarantor “failed to state a plausible claim for relief on any of the theories supporting her declaratory judgment action.” These theories included illegality, fraudulent inducement, mutual mistake of fact, and novation. As a preliminary matter, the court found that the guarantor was permitted to assert these contract defenses offensively in the declaratory judgment action; in other words, it did not matter that these defenses had not been raised defensively. As to the illegality theory, the court held that the guaranty was improper, and that the district court had erred in finding otherwise. The guarantor alleged that the guaranty was illegal because 13 C.F.R. § 120.160 (as it was in 2006) and the SBA’s standard operating procedures “prohibited the [b]ank from requiring a personal guaranty from her.” The SBA argued that the regulations and procedures gave the bank’s loan officer discretion to decide “whether to require a personal guaranty from an individual with less than five percent ownership” in the small business. The court agreed that discretion was allowed, but only under certain circumstances, none of which were present here. The 2006 version of 13 C.F.R. § 120.160 provided that personal guarantees were “normally required” of holders of at least 20% ownership and a lender “in its discretion … may require other appropriate individuals to guarantee the loan as well, except SBA will not require personal guarantees from those owning less than 5% ownership.” The SBA operating procedures further clarified the regulation, giving examples of the “exceptional circumstances” when personal guarantees may be required regardless of ownership, such as when the individual is a “key management person,” that would be “vital to repayment ability” of the business. The examples also provide that a spouse may be the additional personal guarantor “if the spouse volunteers.” However, neither the bank nor the SBA had the discretion to require a non-owner spouse to be a guarantor unless state law otherwise allowed or required it. The court explained that the guarantor did not fit any description or example of a non-owner spouse whom the bank could require to sign a personal guarantee as a condition of the loan. As to the fraudulent inducement theory, the court vacated the district court’s finding and remanded it for consideration based on the Fifth Circuit’s finding that the personal guaranty had been improperly required. The guarantor argued that the bank had made false representations in stating that her personal guarantee was required, even though requiring such a guarantee was illegal. The court explained that the district court had no opportunity to consider this claim because it had already found the guaranty not illegal. As to the mutual mistake of fact theory, the court found the district court did not err in dismissing the claim. The court explained that, in Texas, to prove mutual mistake, a party must present “‘evidence showing both parties were acting under the same misunderstanding regarding the same material fact.’” Here, because the guarantor intended to sign the guaranty to allow the borrower’s business to obtain an SBA-backed loan, there was no mistake in her intent to sign the guaranty; she was mistaken only about whether it was required by law. As to the novation theory, the court found the district court did not err in dismissing the claim. The guarantor argued that the restructured loan terms “extinguished all prior debt, including her personal guaranty.” The court explained, however, that for the guaranty to be extinguished it must be clear that the parties intended a novation, and that intent is not presumed. Fulcrum Cent. v. AutoTester, Inc., 102 S.W.3d 274 (Tex. App.—Dallas 2003, no pet.). Here, the guarantor had failed to allege that the bank or the SBA intended to release the guarantor from her personal guaranty as a part of the restructured agreement.
Ultimately, the Fifth Circuit (1) affirmed the district court’s dismissal of the guarantor’s claims against the bank; (2) affirmed the district court’s dismissal of the guarantor’s mutual mistake of fact and novation declaratory judgment claims; (3) reversed the district court’s dismissal of the guarantor’s illegality declaratory judgment claim; (4) vacated and remanded the district court’s dismissal of the guarantor’s fraudulent inducement declaratory judgment claim; (5) remanded the entire case for further proceedings based on its opinion.
By Will Strum [email protected]
Edited By Kristin Meurer [email protected]