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UNITED STATES v. CAPE FEAR CAPITAL CORP.

June 20, 1968

UNITED STATES of America, Plaintiff,
v.
CAPE FEAR CAPITAL CORPORATION, a North Carolina Corporation, Defendant



The opinion of the court was delivered by: NEALON

 NEALON, District Judge.

 In this action, plaintiff, United States of America, seeks a determination and adjudication by this Court that defendant, Cape Fear Capital Corporation, has violated Sections 308(c) and 308(d) of the Small Business Investment Act of 1958, as amended, 15 U.S.C. § 687(c) and 687(d). In addition, plaintiff seeks money damages and costs.

 This proceeding arises from the plaintiff's administration, through its agency, the Small Business Administration, of a program authorized by the Small Business Investment Act of 1958, as amended (15 U.S.C. § 661 et seq.). Congress enacted the Small Business Investment Act of 1958 to provide an additional source of equity capital and long-term loans for small business concerns, to provide those concerns with funds needed for sound financing of their business operations and for growth, expansion and modernization. In order to achieve that purpose, Congress authorized the Small Business Administration to license small business investment companies, to regulate them, and to finance them. The Act permits small business investment companies to make equity investments in and long-term loans to small business concerns, subject to regulations promulgated by the Small Business Administration. It was in furtherance of this program that the Small Business Administration licensed and loaned money to defendant, Cape Fear Capital Corporation.

 Specifically, on July 10, 1961, the Small Business Administration purchased a subordinated debenture from defendant corporation in the principal amount of $150,000.00, the principal of which was to be repaid in ten annual installments beginning July 10, 1972, with interest on outstanding and unpaid principal to be paid semiannually.

 Section 308(c) of the Act, 15 U.S.C. § 687(c) *fn1" authorizes the Small Business Administration to prescribe regulations governing the operation of small business investment companies. The regulations adopted by the Small Business Administration, 13 C.F.R. § 107.802, provide:

 
"(c) Reports to SBA. Each Licensee shall submit to SBA at the end of the first six months period of each fiscal year, a report containing financial statements covering such six months period; at the end of each fiscal year a report containing financial statements for the fiscal year; and, when requested by SBA, interim financial reports. The fiscal year to which such reports shall relate shall be for SBA purposes the period beginning April 1 and ending March 31.
 
"(1) The report as of the end of each fiscal year shall contain, or be accompanied by, an independent accountant's opinion on the financial statements for the fiscal year included therein, unless a different twelve-month period to be covered by the annual audit is expressly given prior approval in writing by SBA. * * *
 
"(d) (1) * * * Such annual report shall be submitted in triplicate to the Investment Division, Small Business Administration, 811 Vermont Avenue N.W., Washington, D.C. 20416, on or before the last day of the third month following the close of the fiscal year for SBA purposes to which such annual report relates * * *"

 Further, such companies are required by the regulations (13 C.F.R. § 107.802, as amended, 31 F.R. 4954, March 25, 1966) to submit Progress Evaluation Reports to the Small Business Administration, as follows:

 
"(i) Program Evaluation Reports.

 Plaintiff contends, and the evidence supports this contention, that defendant has not filed either the audited financial report or the Program Evaluation Report as required by the regulations. On November 1, 1966, the Small Business Administration notified defendant that the indebtedness including principal and accrued interest evidenced by the debenture, was immediately due and payable and made demand for payment in full. Subsequently, on November 22, 1966, plaintiff commenced this action, alleging the non-compliance with, and violation of, the Act and asked for a determination and adjudication under Section 308(d), 15 U.S.C. § 687(d). *fn2"

 Defendant does not deny that it has not filed the required reports, but defends on the grounds that (1) it was not subject to the reporting requirements because it was an inactive investment company in the process of liquidating its holdings pursuant to an agreement with SBA; (2) plaintiff is estopped from declaring a default because defendant was led to believe by SBA representatives that strict compliance would not be demanded inasmuch as defendant was attempting to minimize expenses while arranging liquidation, and (3) Section 308(d) of the Act allows ...


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