(1947). As an experienced lender with prior participation in the SBA loan program, Heritage cannot evade its statutory obligation by shifting the burden of disclosure to the SBA. Federal Crop Ins. Corp., 332 U.S. at 382-85; Eastern Illinois Trust & Savings Bank, 826 F.2d at 618; First Nat'l Bank of Louisa, 6 Cl. Ct. at 244-45.
The remaining issue is whether failure to disclose Parker's board membership amounts to a material breach of Heritage's duties under the guaranty agreement.
Four issues affect materiality: (1) whether the breach operated to defeat the bargained-for objectives of the parties; (2) whether the breach caused disproportionate prejudice to the non-breaching party; (3) whether under custom and usage the breach is considered material and (4) whether the allowance of reciprocal nonperformance will result in the accrual of an unreasonable and unfair advantage. Eastern Illinois Trust & Savings Bank, 826 F.2d at 617. Because one of the parties to this agreement was a federal agency, the court must also consider whether the breach significantly undermined the regulatory objectives of the SBA program. Id.
Failure to disclose a director's participation in a transaction financed by the lender violates SBA regulations and constitutes a material breach of the guaranty agreement. Eastern Illinois Trust & Savings Bank, 826 F.2d at 618; First Nat'l Bank of Louisa, 6 Cl. Ct. at 243-45. The guaranty agreement required Heritage to comply with all applicable SBA regulations. SBA Facts para. 2. Without prior disclosure, the regulations provided that the SBA would not guarantee loans where the proceeds were used to finance the purchase of property from a bank director. 13 C.F.R. § 120.5(a) (1982); Eastern Illinois Trust & Savings Bank, 826 F.2d at 616; First Nat'l Bank of Louisa, 6 Cl Ct. at 243. Disclosure of Parker's identity as a Heritage board member thus was an express condition precedent to SBA liability. Id. Heritage's failure to disclose Parker's conflict of interest constituted a breach of trust that undermined the integrity of the application process and threatened the regulatory objectives of the SBA program. Eastern Illinois Trust & Savings Bank, 826 F.2d at 618; First Nat'l Bank of Louisa, 6 Cl. Ct. at 243-45. Therefore, the SBA was not required to purchase 90 percent of the Kautzmann loan. Id.
There being no material issues of fact in dispute, the SBA is entitled to judgment on Count I as a matter of law. Id. This court declines to exercise its jurisdiction over Heritage's pendent state claims in Count II. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966).
The SBA's motion for summary judgment on Count I is granted. Heritage's motion for summary judgment on Count I is denied. Count II is dismissed without prejudice.
JUDGMENT IN A CIVIL CASE - February 8, 1989, Filed
Decision by Court. This action came to trial or hearing before the Court. The issues have been tried or heard and a decision has been rendered.
IT IS ORDERED AND ADJUDGED judgment is entered for defendants, JAMES ABDNOR, U. S. SMALL BUSINESS ADMINISTRATION, LEWIS F. MATUSZEWICH and LEWIS F. MATUSZEWICH, P.C., and against plaintiff, HERITAGE BANK & TRUST COMPANY on Count I. Count II is dismissed without prejudice.