Small Business Administration v. McClellan
Headline: Small Business Administration wins priority: Court restores federal priority for SBA’s share of joint bank-government loans, allowing the government to collect before other creditors and aiding SBA lending.
Holding: The Court held that the Small Business Administration’s three-fourths interest in a joint bank–government loan is entitled to federal priority in bankruptcy, even if it agreed to share collections and assigned the note later.
- Allows SBA to claim government priority on its share of joint loans.
- Makes it easier for SBA to induce banks to join loans by sharing repayments.
- Assignment after bankruptcy does not defeat SBA's priority.
Summary
Background
The case involves the Small Business Administration (SBA), a private bank, and a small business that borrowed $20,000—$5,000 from the bank and $15,000 from the Government Treasury. Nine months later other creditors forced the borrower into bankruptcy. The SBA filed a claim for $16,355.69 and sought priority for its 75% share ($12,266.75). Lower officials and courts denied priority for different reasons: the bankruptcy referee said the SBA was a separate legal entity, the District Court focused on a formal assignment made after the bankruptcy began, and the Court of Appeals relied on the SBA’s contract to share collections with the bank.
Reasoning
The Court asked whether the SBA’s interest in that joint loan is a “debt due to the United States” under R.S. §3466 and §64 of the Bankruptcy Act, even though the SBA agreed to share any money it collected with the private bank. The Court rejected comparisons to other government-created corporations and treated the SBA as an integral part of the federal government. It held the SBA owned its three-fourths interest from the loan date, so a later formal assignment did not defeat priority. The Court also explained that agreeing to pay the bank part of collections does not strip the government of its statutory priority because collected funds become Treasury money and may lawfully be disbursed.
Real world impact
The decision means the SBA can claim federal priority on its share of joint loans, making it easier to induce banks to participate by sharing repayments. That result may advantage the participating bank over other unsecured creditors, but the Court viewed that outcome as a consequence of a lawful contract that furthers the SBA’s statutory mission.
Dissents or concurrances
Justice Douglas dissented, noting disagreement with the majority’s conclusions.
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