United States Small Business Administration v. Bensal

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

UNITED STATES SMALL No. 14-17404
BUSINESS ADMINISTRATION, an
agency of the government of the D.C. No.
United States of America, 3:13-cv-02263-WHO
Plaintiff-Appellee,

v. OPINION

MICHAEL D. BENSAL, an
individual,
Defendant-Appellant,

and

SUSAN J. BENSAL, as trustee of
the Edward D. Bensal Trust;
MICHAEL EDWARD BENSAL, an
individual; SOPHIA BENSAL, an
individual,
Defendants.

Appeal from the United States District Court
for the Northern District of California
William Horsley Orrick, District Judge, Presiding

Argued and Submitted December 12, 2016
San Francisco, California
2 SMALL BUS. ADMIN. V. BENSAL

Filed April 4, 2017

Before: Michael Daly Hawkins, Marsha S. Berzon,
and Mary H. Murguia, Circuit Judges.

Opinion by Judge Murguia

SUMMARY*

Federal Debt Collection Procedures Act

The panel affirmed the district court’s judgment in favor
of the United States Small Business Administration (“SBA”)
in the SBA’s action seeking to satisfy a default judgment
assigned to SBA, arising after the default on a loan that SBA
guaranteed between a private bank and appellant Michael
Bensal’s company.

Michael Bensal did not accept an inheritance in his
deceased father’s trust, and instead signed a disclaimer, which
transferred his trust share to his children and prevented
creditors from accessing his trust share under California law.

The Federal Debt Collection Procedures Act
(“FDCPA”)’s “fraudulent transfer” provision allows the
federal government to void a fraudulent transfer by a debtor
owing a debt to the United States. The SBA sought to void
Bensal’s disclaimer under the FDCPA as a fraudulent transfer

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 SMALL BUS. ADMIN. V. BENSAL 3

that prevented SBA from collecting the debt Bensal owed on
the default judgment.

The panel held that the FDCPA displaced California’s
disclaimer law, California Probate Code § 283. The panel
concluded that Bensal’s disclaimer constituted a transfer of
property under the FDCPA, and California disclaimer law did
not operate to prevent the SBA from reaching Bensal’s trust
share.

The panel held that Bensal owed a “debt” to the United
States. The panel concluded that the portion of the default
judgment based on a second loan, which was guaranteed by
the SBA, was a “debt” within the meaning of the FDCPA.

COUNSEL

Brian D. Seibel (argued), Seibel & Finta LLP, Concord,
California, for Defendant-Appellant.

David M. Wiseblood (argued), San Francisco, California, for
Plaintiff-Appellee.
4 SMALL BUS. ADMIN. V. BENSAL

OPINION

MURGUIA, Circuit Judge:

This case requires us to interpret two provisions of the
Federal Debt Collection Procedures Act (“FDCPA”), which
Congress enacted “to create a comprehensive statutory
framework for the collection of debts owed to the United
States government.” United States v. Gianelli, 543 F.3d 1178,
1183 (9th Cir. 2008) (quoting H.R. Rep. No. 101-736, at 32
(1990)).

The United States Small Business Administration
(“SBA”) guaranteed a loan between a private bank and
Appellant Michael Bensal’s (“Bensal”) company, Bensal &
Coburn Investments LLC (“BCI”). After BCI defaulted on
the loan, the private bank sued BCI as the borrower and
Bensal as a personal guarantor. The private bank recovered a
default judgment and assigned that judgment to the SBA.

Several years later, Bensal inherited a share in his
deceased father’s trust. Bensal did not accept his inheritance;
instead, he signed a disclaimer, which legally passed his trust
share to his two children and prevented creditors from
accessing his trust share under California law. After Bensal
executed his disclaimer, the SBA filed a lawsuit seeking to
satisfy its default judgment. The district court held that:
(1) the SBA is allowed to recover from Bensal’s trust share
under the FDCPA despite contrary California law, and (2) the
default judgment was a debt within the meaning of the
FDCPA. We affirm.
 SMALL BUS. ADMIN. V. BENSAL 5

BACKGROUND

In 1999, BCI sought to establish TransWorld Burgers, a
fast-food restaurant with an airline-inspired theme and decor.
To finance this operation, BCI took out two loans from
Millennium Bank (“Millennium”). In connection with the
second loan, but not the first, BCI sought a guaranty from the
SBA.

The SBA is a federal government agency that assists
small businesses by, among other things, guaranteeing
commercial loans from private banks. By providing its
guaranty that a commercial loan will be repaid, the SBA
eliminates some of the risk private lenders face and
encourages private lenders to extend more loans to small
businesses. 15 U.S.C. § 636(a) (“The [SBA] is empowered
. . . to make loans to any qualified small business . . . either
directly or in cooperation with banks or other financial
institutions through agreements to participate on an
immediate or deferred (guaranteed) basis.”); see also United
States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3 (1979)
(noting that “[t]he SBA prefers to guarantee private loans
rather than to disburse funds directly”).

A. The SBA Guaranty and BCI’s Default

Over the course of several months, the parties signed
several documents as part of the SBA’s guaranty of the
second loan between BCI and Millennium. First, Millennium
submitted an application to the SBA for an SBA guaranty of
75% of a proposed $250,000 loan to BCI. In a signed
document (“SBA Authorization”), the SBA reduced the loan
amount to $175,000, but otherwise approved the bank’s
application, agreeing to guarantee up to 75% of the loan.
6 SMALL BUS. ADMIN. V. BENSAL

Next, BCI and Millennium executed a standard loan contract
(“Business Loan Agreement”), in which BCI borrowed
$175,000 from Millennium. BCI signed a form (“SBA Note”)
acknowledging its second loan with Millennium, and Bensal
signed a form (“SBA Guaranty”) personally guaranteeing
repayment of the second loan if BCI defaulted. Both the SBA
Note and the SBA Guaranty appeared on SBA letterhead,
referenced the same SBA loan-identifying information, and
defined rights SBA held against Bensal and BCI.

In January 2000, BCI defaulted on its payment
obligations under both loans; some time before the default,
Millennium had assigned both loans to First Bank & Trust
(“FBT”). FBT filed suit in California state court and alleged,
among other claims, that BCI had breached the SBA Note
and Bensal had breached the SBA Guaranty. The state court
entered default judgment against BCI and Bensal in the
following sums: (1) $95,576.66 in principal and interest owed
on the first loan, (2) $140,905.63 in principal and interest
owed on the second loan, (3) $50,257.92 in attorney fees, and
(4) $902.50 in costs.

Because neither BCI nor Bensal satisfied the default
judgment, FBT requested that the SBA honor its guaranty of
the second loan. In 2005, the SBA negotiated a monetary
adjustment with FBT and ultimately paid $54,027.39 to
satisfy its obligations as a guarantor on the second loan. In
2011, FBT assigned to the SBA its right to collect the entire
amount owing on the default judgment (over $300,000) from
BCI and Bensal.
 SMALL BUS. ADMIN. V. BENSAL 7

B. Bensal’s Inheritance and Disclaimer

In July 2011, Bensal’s father died, leaving behind the
Edward D. Bensal Trust (“EDB Trust”), which consisted of
cash and securities valued at $400,692.94. The trust
document awarded Bensal 40% of the EDB Trust. In October
2011, Bensal executed a “Disclaimer of Interest in Trust,”
which means he renounced—refused to accept—his 40%
share of the trust. The legal effect of the disclaimer under
California law was that Bensal’s trust share passed to his two
children. CAL. PROB. CODE § 282.

After Bensal executed the disclaimer, the SBA filed suit
in federal district court against the EDB Trust, Bensal, and
Bensal’s two children. The SBA sought to void Bensal’s
disclaimer under the FDCPA. In its complaint, the SBA
claimed that Bensal had fraudulently transferred his trust
share to his children by executing the disclaimer, thereby
preventing the SBA from collecting the debt Bensal owed on
the default judgment.

Bensal advanced two arguments in response. First, he
asserted that his disclaimer was not a fraudulent transfer
because the California Probate Code provides that “[a]
disclaimer is not a voidable transfer.” CAL. PROB. CODE
§ 283. Second, he maintained that the default judgment
assigned to the SBA was not a “debt” within the meaning of
the FDCPA.

The district court rejected both of Bensal’s arguments,
granted summary judgment in favor of the SBA, and ordered
the defendants to “transfer all property representing Bensal’s
trust share to the SBA in satisfaction of the portion of the
default judgment relating to the second loan.” At the time of
8 SMALL BUS. ADMIN. V. BENSAL

the district court’s summary judgment order, the amount
Bensal owed on the portion of the default judgment relating
to the second loan was over $300,000,1 while the value of
Bensal’s trust share totaled $153,944.03. Bensal timely
appealed.

STANDARD OF REVIEW

This case involves only statutory interpretation, which we
review de novo. See Millard v. United Student Aid Funds,
Inc., 66 F.3d 252, 253 (9th Cir. 1995). We review a district
court’s grant of summary judgment de novo. Entrepreneur
Media v. Smith, 279 F.3d 1135, 1139–40 (9th Cir. 2002).

DISCUSSION

At the heart of this case lies the FDCPA’s “fraudulent
transfer” provision, which allows the federal government to
void a fraudulent transfer by a debtor owing a debt to the
United States.2 28 U.S.C. §§ 3301–3308. Specifically, the
FDCPA provides that

a transfer made or obligation incurred by a
debtor is fraudulent as to a debt to the United
States which arises before the transfer is made
or the obligation is incurred if—

1
In the default judgment issued in 2002, the state court determined
that BCI and Bensal owed $140,905.63 on the second loan. Since that
time, interest has accrued at a rate of 10% annually, bringing the total
amount owed on the second loan to over $300,000.
2
The SBA falls within the definition of the “United States” under the
FDCPA. 28 U.S.C. § 3002(15).
 SMALL BUS. ADMIN. V. BENSAL 9

(1)(A) the debtor makes the transfer or incurs
the obligation without receiving a reasonably
equivalent value in exchange for the transfer
or obligation; and

(B) the debtor is insolvent at that time or the
debtor becomes insolvent as a result of the
transfer or obligation[.]

28 U.S.C. § 3304(a).

Based on the statutory language, the SBA must prove:
(1) the existence of a debt predating the transfer, (2) a transfer
of assets, (3) lack of equivalent value in exchange for the
transfer, and (4) the debtor’s insolvency at the time of
transfer. Neither party contests that the third and fourth
requirements are satisfied. Instead, the dispute centers on:
(1) whether Bensal’s disclaimer qualifies as a transfer of
property, and (2) whether the default judgment constitutes a
debt.

I. Whether Bensal’s Disclaimer is a Transfer of
Property

Bensal contends that California law, which expressly
states that “[a] disclaimer is not a voidable transfer,” controls
over the FDCPA and prevents the SBA from reaching the
EDB Trust assets. CAL. PROB. CODE § 283. We disagree and
hold that the FDCPA displaces California’s disclaimer law.

A. Preemption

“The Supremacy Clause of the Constitution provides that
any state law conflicting with federal law is preempted by the
10 SMALL BUS. ADMIN. V. BENSAL

federal law and is without effect.” Nathan Kimmel, Inc. v.
DowElanco, 275 F.3d 1199, 1203 (9th Cir. 2002) (citing U.S.
Const. art. VI, cl. 2). Where a statute contains an express
preemption clause, we “focus on the plain wording of the
clause, which necessarily contains the best evidence of
Congress’ preemptive intent.” Chamber of Commerce of U.S.
v. Whiting, 563 U.S. 582, 594 (2011) (quoting CSX Transp.,
Inc. v. Easterwood, 507 U.S. 658, 664 (1993)) (internal
quotation marks omitted).

The FDCPA contains an express preemption clause,
which “preempt[s] State law to the extent such law is
inconsistent with a provision of [the statute].” 28 U.S.C
§ 3003(d). Echoing this preemption clause, federal
regulations provide:

No person, corporation, or organization that
applies for and receives any benefit or
assistance from SBA, or that offers any
assurance or security upon which SBA relies
for the granting of such benefit or assistance,
is entitled to claim or assert any local or state
law to defeat the obligation incurred in
obtaining or assuring such Federal benefit or
assistance.

13 C.F.R. § 101.106(d) (emphasis added). When Bensal
signed the SBA Guaranty, in which he personally guaranteed
the second loan, he agreed to a provision that tracks the
language of the regulation: “As to this Guarantee, Guarantor
may not claim or assert any local or state law against SBA to
deny any obligation, defeat any claim of SBA, or preempt
federal law.”
 SMALL BUS. ADMIN. V. BENSAL 11

The state law at issue here is California Probate Code
§ 283, which provides that “[a] disclaimer is not a voidable
transfer.” This law directly conflicts with the FDCPA, which
defines “transfer” in such a way as to include Bensal’s
disclaimer. The FDCPA defines “transfer” as “every mode
. . . of disposing of or parting with an asset or an interest in an
asset. . . .” 28 U.S.C. § 3301(6) (emphasis added). “‘Asset’
means property of a debtor. . . .” Id. § 3301(2) (emphasis
added). The term “property” is defined as

any present or future interest, whether legal or
equitable, in real, personal (including choses
in action), or mixed property, tangible or
intangible, vested or contingent, wherever
located and however held (including
community property and property held in trust
....

Id. § 3002(12) (emphasis added). Based on the plain language
of the FDCPA, Bensal’s disclaimer of the trust property
qualifies as a transfer of property because Bensal “disposed
of” a “present or future interest” in his 40% share of
“property held in trust” by executing a disclaimer that
channelled the trust share to his children.

Under the FDCPA, Bensal’s disclaimer is a transfer of
property that can be voided, 28 U.S.C. § 3304(a), but under
the California Probate Code “[a] disclaimer is not a voidable
transfer.” CAL. PROB. CODE § 283. It seems quite clear that
California law is inconsistent with the FDCPA and must give
way to the federal statute in light of the express preemption
clause.
12 SMALL BUS. ADMIN. V. BENSAL

B. Supreme Court Precedent

Even aside from the preemption clause, our conclusion
that the FDCPA controls over California disclaimer law also
finds support in the Supreme Court’s decision in Drye v.
United States, 528 U.S. 49 (1999). Bensal argues that Drye is
inapplicable to the facts of this case and urges us instead to
apply the holding of In re Costas, 555 F.3d 790 (9th Cir.
2009). Because both Drye and Costas addressed state
disclaimer laws that are virtually identical to the California
law at issue here, these two cases are best discussed in
tandem.

In Drye, the debtor, who owed a substantial tax debt to
the federal government, inherited his mother’s estate.
528 U.S. at 52. Soon after being named sole heir, the debtor
disclaimed his interest in the estate, which then passed by
operation of Arkansas state law to his daughter. Id. Upon
learning of the debtor’s inheritance, the Internal Revenue
Service (“IRS”) filed a notice of federal tax lien, but the
debtor argued that Arkansas inheritance law disallowed
creditors from reaching disclaimed property. Id. at 53. The
Supreme Court rejected this argument and explained,

The question whether a state-law right
constitutes “property” or “rights to property”
is a matter of federal law. We look initially to
state law to determine what rights the
taxpayer has in the property the Government
seeks to reach, then to federal law to
determine whether the taxpayer’s state-
 SMALL BUS. ADMIN. V. BENSAL 13

delineated rights qualify as “property” or
“rights to property” within the compass of the
federal . . . legislation.

Id. at 58 (internal citation and quotation marks omitted). The
Court then looked to state law and noted that Arkansas gave
the debtor a choice: he could either “receive the entire value
of his mother’s estate,” or choose to “channel that value to his
daughter.” Id. at 61. Based on this choice, the Court
concluded that the debtor held a “control rein” over his
inheritance and, therefore, possessed “property” within the
meaning of the federal tax lien statute. Id. at 61. Ultimately,
the Drye court concluded that state law did not bar the IRS
from recovering against the debtor’s trust share. Id.

In Costas, we addressed a nearly identical state disclaimer
statute in the context of bankruptcy law and arrived at a
different result. The debtor in Costas received a share in her
father’s trust upon his death in 2002; shortly thereafter, she
executed a disclaimer under Arizona law to relinquish her
interest, which passed the trust share to her children. 555 F.3d
at 791–92. A few weeks later, the debtor filed for bankruptcy,
and the Chapter 7 bankruptcy trustee sought to void the
disclaimer under the bankruptcy code’s fraudulent transfer
provision. Id. at 792. The debtor argued that under Arizona
law, creditors were prohibited from reaching disclaimed
property; in response, the trustee invoked Drye for the
proposition that Arizona disclaimer law does not control over
federal law. Id. at 792–93. We distinguished Drye both
factually and legally. Id. at 795–97.

First, we noted a factual distinction based on the timing
of the disclaimer in the two cases. The debtor in Drye
executed his disclaimer after the government already had a
14 SMALL BUS. ADMIN. V. BENSAL

pre-existing interest in his property; therefore, “[a]pplication
of the state law . . . would have stripped the government of
[its] interest.” Id. at 796. In contrast, the debtor in Costas
executed her disclaimer before filing for bankruptcy, meaning
that the bankruptcy estate did not have any prior interest in
the disclaimed property and “the state law did not operate to
defeat any pre-existing interests.” Id. We explained that Drye
is more analogous to post-petition disclaimers (i.e., where the
debtor executes a disclaimer after filing for bankruptcy)
because in those situations “courts have generally included
disclaimed property in the estate, reasoning that the right to
disclaim itself belongs to the estate as of the time of filing.”
Id. In short, we concluded that when a debtor executes a
disclaimer after a debt has already been accrued, then a state
disclaimer law does not control.

Next, we noted differences in the purpose and structure of
the federal tax lien statute and the bankruptcy code. As to
purpose, we explained that the federal tax lien statute is
primarily concerned with collection of federal debts, which
“justifies the extraordinary priority accorded” to the federal
government and “contrasts sharply with the policy of
bankruptcy law, which largely respects substantive state law
rights.” Id. at 796–97. We also highlighted a structural
dissimilarity between the two statutes, explaining that the
federal tax lien statute recognizes “only a narrow range of
[property] exemptions, none of which mention[] disclaimers,”
whereas the bankruptcy code’s property “exemptions are . . .
quite broad, allowing a debtor to take advantage of all
available state law exemptions.” Id. at 797 (citing 11 U.S.C.
§ 522).

Ultimately, we “refuse[d] to extend [Drye’s] logic to the
bankruptcy context” in the Costas decision. Id. Unlike
 SMALL BUS. ADMIN. V. BENSAL 15

Costas, however, this case presents a situation that factually
and legally fits within the Drye framework.

First, the IRS in Drye and the SBA here both had a pre-
existing interest in the disclaimed property because the debtor
in each case executed a disclaimer after the debt had already
accrued. Id. at 796. In contrast, the trustee in Costas had no
prior interest in the debtor’s disclaimed property, because the
disclaimer there occurred before the debtor filed for
bankruptcy. Id. This factual distinction is crucial, as we
recognized in Costas, because “[a]pplication of the state law
[disclaimer] would . . . strip[] the government of [its pre-
existing] interest.” Id.

Next, the purpose of the FDCPA is more similar to the
federal tax lien statute at issue in Drye than the bankruptcy
code involved in Costas. Much like the federal tax lien
statute, the FDCPA is primarily concerned with the collection
of federal debt, as it was enacted to “create a comprehensive
statutory framework for the collection of debts owed to the
United States government.” Gianelli, 543 F.3d at 1183
(quoting H.R. Rep. No. 101-736, at 32 (1990)). This purpose
is also reflected in the legislative history of the FDCPA,
which reveals that Congress’ goal was to

bring an end to the present situation whereby
a crazy patchwork of laws in the 50 states
dictate the debt collection remedies available
to [the federal government] in collecting
Federal debts. It would provide consistent and
fair creditors’ rights to the Government
regardless of the state of residence of the
debtor and eliminate the preferences certain
16 SMALL BUS. ADMIN. V. BENSAL

state laws presently confer on Federal debtors
who just happen to live in states which are
regarded as notorious ‘debtors havens.’

H.R. Rep. No. 101-825 (1990).

The FDCPA does share the bankruptcy code’s extensive
list of property exemptions. See 28 U.S.C. § 3014(a)(1)
(expressly incorporating the bankruptcy code’s property
exemptions into the FDCPA). This single, shared feature
between the FDCPA and the bankruptcy code, however, is
dwarfed by the significant parallels between the FDCPA and
the federal tax lien statute. More importantly, we
acknowledged in Costas that despite the bankruptcy code’s
extensive property exemptions, if the facts there had been
more similar to the facts here (i.e., a disclaimer after the
bankruptcy estate “gain[ed an] interest in the right to
disclaim”) the state disclaimer law would not have prevented
creditors from accessing the disclaimed property. In re
Costas, 555 F.3d at 796. The considerable similarity between
the federal tax lien statute and the FDCPA supports extending
the reasoning in Drye to the present case. See Exp. Imp. Bank
of U.S. v. Asia Pulp & Paper Co., 609 F.3d 111, 117 (2d Cir.
2010) (extending the Drye analysis from the federal tax lien
statute to the FDCPA context).

Applying the analytical framework set forth in Drye, we
look “to state law to determine what rights the [debtor] has in
the property the Government seeks to reach, then to federal
law to determine whether the [debtor’s] state-delineated
rights qualify as ‘property’ or ‘rights to property’ within the
compass of the [FDCPA].” 528 U.S. at 58. To determine what
rights Bensal possessed in his 40% share of the EDB Trust,
we must turn to the California disclaimer law at issue here,
 SMALL BUS. ADMIN. V. BENSAL 17

which is virtually indistinguishable from the Arkansas
disclaimer law addressed in Drye. Both statutes allow a
beneficiary to channel inherited property to his children and
expressly prohibit creditors from reaching disclaimed
property. Compare CAL. PROB. CODE § 282–83 with Drye,
528 U.S. at 53. In light of the nearly identical disclaimer
statutes, the Supreme Court’s holding in Drye mandates a
single outcome here: “[Bensal] had the unqualified right to
receive the . . . value of his [father’s] estate . . . or to channel
that value to his [children]. The control rein he held under
state law . . . rendered the inheritance ‘property’ or ‘rights to
property’ belonging to him within the meaning of [the
FDCPA].” Drye, 528 U.S. at 61.

Therefore, we conclude that Bensal’s disclaimer
constitutes a transfer of property under the FDCPA, and
California disclaimer law does not operate to prevent the
SBA from reaching Bensal’s trust share.

II. Whether Bensal Owes a “Debt” to the United States

The second disputed issue is whether the state court
default judgment assigned to the SBA constitutes a “debt”
within the meaning of the FDCPA. The FDCPA defines a
“debt” as follows:

(A) an amount that is owing to the United
States on account of a direct loan, or loan
insured or guaranteed, by the United States; or

(B) an amount that is owing to the United
States on account of a fee, duty, lease, rent,
service, sale of real or personal property,
overpayment, fine, assessment, penalty,
18 SMALL BUS. ADMIN. V. BENSAL

restitution, damages, interest, tax, bail bond
forfeiture, reimbursement, recovery of a cost
incurred by the United States, or other source
of indebtedness to the United States, but that
is not owing under the terms of a contract
originally entered into by only persons other
than the United States.

28 U.S.C. § 3002(3). Because the statute is written in the
disjunctive, an amount owed constitutes a “debt” as long as
it satisfies either subsection (A) or subsection (B). We hold
that the default judgment assigned to the SBA is a debt under
subsection (B), and therefore we need not address subsection
(A).

Subsection (B) contains a broad definition of “debt” that
encompasses a wide array of financial obligations as well as
a catch-all provision for any “other source of indebtedness to
the United States.” Id. § 3002(3)(B). The expansive definition
of “debt” set forth in subsection (B) is, however, cabined by
limiting language that excludes any amount “owing under the
terms of a contract originally entered into by only persons
other than the United States.” Id.

Neither party disputes that a default judgment falls within
the catch-all provision because it qualifies as an “other source
of indebtedness to the United States.” Id. The only question
before us, then, is whether the limiting language prevents the
default judgment from qualifying as a debt under subsection
(B); that is, whether the default judgment involves a debt
“owing under the terms of a contract originally entered into
by only persons other than the United States.”
 SMALL BUS. ADMIN. V. BENSAL 19

The Fifth Circuit has issued an instructive opinion
interpreting the limiting language of subsection (B). Sobranes
Recovery Pool I, LLC v. Todd & Hughes Const. Corp.,
509 F.3d 216 (5th Cir. 2007). In Sobranes, the Federal
Deposit Insurance Corporation (“FDIC”), a United States
agency, acquired the assets of a failing private bank in
receivership. Id. at 218. Among those assets was a loan
originally entered into between the defunct bank and a private
borrower, who had defaulted. Id. Shortly after acquiring the
bank’s assets, the FDIC brought suit against the defaulting
borrower and secured a judgment. Id. At issue before the
Fifth Circuit was whether the FDIC’s judgment constituted a
“debt” under subsection (B). Id. at 223. The Fifth Circuit
explained,

The subpart (B) limitation is directly
applicable to this case: the note underlying the
FDIC’s judgment was originally entered into
by only private parties. Thus, even though a
judgment obtained by the government can fall
within the scope of subpart (B), the final
clause prevents the judgment here from being
an FDCPA debt. . . . The judgment does not
create an obligation between the debtor and
holder that is independent of the note. That is,
the note establishes the rights and liabilities
of the parties, what is owed and to whom. . . .
The subpart (B) limitation captures this
relationship and applies it where the United
States was not a party to the underlying
contract.

Id. at 223–24 (emphasis added). The court looked beyond
mere labels to the actual source of the debt in the default
20 SMALL BUS. ADMIN. V. BENSAL

judgment and determined whether the United States was
originally a party to the underlying contracts.

We find this to be a sensible approach that comports with
the statutory language and purpose of the FDCPA. For
instance, the FDCPA provides procedures allowing the
government “to recover a judgment on a debt,” which
indicates that the focus should be on the source of the debt.
28 U.S.C. § 3001(a)(1) (emphasis added). Moreover, the
House report accompanying the FDCPA states, “‘Debt’ is
defined broadly to include amounts owing to the United
States on account of a direct loan or loan insured or
guaranteed by the United State [sic] as well as other amounts
originally due the United States.” H.R. Rep. No. 101-736
(emphasis added). Additionally, during legislative discussion
preceding the enactment of the FDCPA, one representative
explained that “[t]he definition of ‘debt’ was carefully written
to make clear that the act will not apply to obligations which
begin as purely private loan or contract obligations.”
136 Cong. Rec. H13288-02, H13288 (1990) (statement of
Rep. Brooks). Overall, the language, purpose, and legislative
history of the FDCPA suggest that the statute was intended to
reach debt arising from transactions in which the federal
government was originally a party.

Applying the Sobranes approach, we look to the contracts
underlying the default judgment to determine whether the
SBA was originally a party. The default judgment here stems
from FBT’s lawsuit against BCI and Bensal, alleging breach
of the SBA Note and the SBA Guaranty. Both of these
documents were inextricably part of a larger, four-party
transaction between the SBA, Millennium, BCI, and Bensal.
In fact, the sole reason BCI and Bensal were required to sign
the SBA Note and SBA Guaranty, respectively, was to secure
 SMALL BUS. ADMIN. V. BENSAL 21

the SBA’s guarantee of the second loan. Moreover, both the
SBA Note and the SBA Guaranty appeared on SBA
letterhead, referenced the same loan-identifying information,
and defined rights held by the SBA against Bensal and BCI.
Finally, the form and substance of the SBA Note and SBA
Guaranty derive from the overarching SBA Authorization, in
which the SBA set forth its terms for the overall transaction.
Based on the underlying contracts, then, it appears the SBA
was a party to the original transaction.

Our conclusion that the SBA was a party also finds
support in the statutory authority delegated to the SBA by
Congress. When guaranteeing a loan, the SBA can “authorize
participating lending institutions to take actions relating to
loan servicing on behalf of the [SBA], including . . . loan
monitoring, collection, and liquidation.” 15 U.S.C.
§ 634(b)(7) (emphasis added). Even though the SBA can
authorize others to service a loan, the SBA remains a party to
the loan and retains the power to take over the loan servicing,
liquidation, collection, or related litigation activities. See id.;
13 C.F.R. § 120.535(d). The SBA also has statutory authority
to “pursue to final collection, by way of compromise or
otherwise, all claims against third parties assigned to the
[SBA] in connection with loans made by [it].” See 15 U.S.C.
§ 634(b)(4) (emphasis added).

Bensal advances several arguments in support of his
position that the default judgment was not a debt under the
FDCPA. First, Bensal points out that the FDCPA defines
“judgment” as “a judgment, order, or decree entered in favor
of the United States in a court and arising from a civil or
criminal proceeding regarding a debt.” 28 U.S.C. § 3002(8)
(emphasis added). Seizing on this language, Bensal argues
that the default judgment at issue here falls outside the
22 SMALL BUS. ADMIN. V. BENSAL

purview of the FDCPA because it was not “entered in favor
of the United States”; rather, it was entered in favor of FBT,
a private lender. But § 3002(3)(B), which allows the federal
government to recover any “other source of indebtedness to
the United States,” does not use the term “judgment,” and so
is not limited to the statutory definition of that term.

Next, Bensal contends that his financial obligation on the
second note was merely a “guaranty” not a “loan,” and
therefore it cannot constitute a “debt” under the FDCPA.
However, Bensal fails to provide any legal support for the
proposition that a “guarantor,” as opposed to a “direct
borrower,” somehow falls outside the purview of the FDCPA.
As explained above, the SBA is authorized to “pursue to final
collection . . . all claims against third parties assigned to the
[SBA] in connection with loans made by [it].” See id.
§ 634(b)(4) (emphasis added). The claim against Bensal is a
claim against a third party in connection with a loan
guaranteed by the SBA, and therefore falls within the SBA’s
statutory authority.

In fact, Bensal’s proposed rule—that a “guaranty” does
not qualify as a “debt” under the FDCPA—would lead to
disastrous practical consequences. The SBA requires personal
guarantees from individuals who own at least 20% of or hold
significant management positions in any business seeking a
direct loan or guarantee. 13 C.F.R. § 120.160 (a) (“Holders of
at least a 20 percent ownership interest generally must
guarantee the loan.”); see also Collateral, SMALL BUSINESS
A DMINISTRATION (last visited Jan. 20, 2017),
https://www.sba.gov/loans-grants/get-ready-apply/check-
your-credit/collateral (“For all SBA loans, personal
guaranties are required from every owner of 20 percent or
more of the business, as well as from other individuals who
 SMALL BUS. ADMIN. V. BENSAL 23

hold key management positions.”).3 These personal
guarantees provide an additional level of financial security,
allowing the SBA to extend and guarantee more loans to
small businesses. Bensal’s argument would eliminate the
SBA’s ability to recover from personal guarantors, which
would undermine the financial viability of the small business
loan program. This argument is legally unsupported and
practically untenable.

Bensal also contends that the SBA would be receiving a
windfall if allowed to recover the entire amount owed on the
default judgment when the SBA only paid a fraction of that
sum ($54,027.39) to satisfy its guaranty obligations. This
argument fails because, as explained above, the SBA is
authorized to pursue or delegate collection of guaranteed
loans. 15 U.S.C. § 634(b)(7). An entirely separate provision
addresses the SBA’s rights after it has paid an amount to
satisfy its guaranty obligations: “In the event the [SBA] pays
a claim under a guarantee . . . , it shall be subrogated fully to
the rights satisfied by such payment.” 15 U.S.C.
§ 634(g)(5)(A). By including these two separate provisions,
Congress intended to grant two separate authorizations, one
allowing the SBA to collect on a loan that it has guaranteed
and another allowing the SBA to recover an amount that it
has paid as a guarantor. Thus, the mere fact that the SBA did
not pay the full amount it now seeks to recover does not
somehow bar this action.

Finally, Bensal argues that the SBA improperly seeks to
enforce the entire default judgment, even though only a

3
“It is appropriate to take judicial notice of this information, as it was
made publicly available by government entities.” Daniels-Hall v. Nat'l
Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010).
24 SMALL BUS. ADMIN. V. BENSAL

portion of the judgment concerned the SBA’s guarantee of
the second loan. This argument is unpersuasive based purely
on the numbers here. As of January 31, 2013, the total value
of Bensal’s share in the EDB Trust was at least $153,944.30.
The amount Bensal owes as a guarantor on the second loan is
over $300,000 ($140,905.63 plus 10% interest accruing from
December 12, 2002). Therefore, it does not matter that the
default judgment also encompasses the first loan because the
amount owed to the SBA on the second loan by itself exceeds
the value of Bensal’s share in the EDB Trust.4

CONCLUSION

In sum, we hold that the SBA is allowed to reach Bensal’s
trust share because the FDCPA displaces California’s
disclaimer law. We also conclude that the portion of the
default judgment based on the second loan, which was
guaranteed by the SBA, is a debt within the meaning of the
FDCPA.

AFFIRMED.

4
Bensal also argues that claim preclusion and issue preclusion bar the
present action because the SBA’s claim is based on the second loan,
which is now merged in the state-court judgment and barred from re-
litigation. This argument fails because the SBA is not attempting under a
federal statute to re-litigate any issues previously adjudicated in the state
court action; rather, the SBA filed suit to void a fraudulent transfer—an
issue not implicated in the state court litigation.