Never Hide A Seller Take-Back Note From The Bank

I recently reviewed a client’s situation in one of our telephone consults and discovered that the seller to our client originally sold a business to him and took back a secret seller’s second, which both were purposefully hiding from the bank. This was deceptive and fraudulent and could put both of them in jail. In a perfect world, this would never come to light as the bank would be paid off as well as the seller take-back and everyone would have be satisfied. Alas, it is not a perfect world and revenues have plummeted causing the default on the bank loan and the secret second will soon be revealed to every one’s detriment and possible jeopardy.

Why? Two reasons:

1. The buyer/borrower lied, knowingly misleading the bank, as the bank would never had supported the deal with an inflated purchase price of over an additional million.

2. The bank will suffer damages because of this lie from the excessive leak of cash payments to the secret second paper take-back.

This is bank fraud and is a criminal act. Compounding the issue is the fact that his lawyer knowingly allowed this to happen, saying he did not want to hear anything more about the side deal, allowing the fraud to continue. Our client had a right to rely on the lawyer’s advice and the lawyer allowed this to occur despite knowing it was wrong.

What are we going to do? What should the defaulting borrower do?

It is a very tough call. The bank will undoubtedly take a huge loss here and since it is an SBA guaranteed loan they are obligated to exhaust their legal remedies. That may mean going after these two guys for conspiring to defraud the bank in a way that has now resulted in huge losses to the bank. It is very likely to be revealed as the workout continues. This is a huge problem for everyone involved.

If you are in this situation, you have committed a possible criminal act and must make an important decision. Do you allow such a fraud to continue, hoping that nothing goes wrong and everyone gets paid off as you continues to kick the can down the road? Alternatively, do you get in front of the train and disclose the issue to the bank before it becomes a breach, working it out honorably if possible as opposed to waiting to get caught?

Since we now know what has truly happened it is our intent to explain to our client that the only way to act is honorably and that this issue must be addressed and cleaned up. That process will start with complete disclosure to the bank, especially since the borrower is about to default on his loan payments which will bring this issue to the surface. It will go better if we act appropriately and honorably no matter what the consequences. We will have a far better opportunity to resolve this amicably for our client by handling it in this manner.

I have encountered this issue before and we were able to work this matter out successfully each time even though it was challenging and potentially dangerous. I believe if I hadn’t handled it in this manner the outcome would have been far less successful. No matter what happens, the best response to any issue is to act honorably and reveal deceit if it occurs. It is the first step to resolution.