Federal Land Bank of St. Louis v. Wilson

Decision Date31 October 1983
Docket NumberNo. 82-1535,82-1535
PartiesFEDERAL LAND BANK OF ST. LOUIS, Appellee, v. John WILSON and Georgia Wilson, Appellants. The First State Bank of Newport, formerly The First National Bank of Newport, Arkansas, United States Department of Agriculture by and through Farmers Home Administration and Bank of Newark, Appellees.
CourtU.S. Court of Appeals — Eighth Circuit

David Hodges, Little Rock, Ark., for appellant.

Jerry Post, Batesville, Ark., Donald P. Raney, Lightle, Beebe, Raney & Bell, Searcy, Ark., and George E. Pike, Jr., Friday, Eldredge & Clark, Little Rock, Ark., George W. Proctor, U.S. Atty., Sherry P. Bartley, Asst. U.S. Atty., Little Rock, Ark., for appellee Federal Land Bank of St. Louis.

Before BRIGHT, ROSS and JOHN R. GIBSON, Circuit Judges.

ROSS, Circuit Judge.

Georgia Wilson appeals from the judgment of the district court 1 rejecting her claims in a foreclosure action. The foreclosure action was an action against the United States pursuant to 28 U.S.C. Sec. 2410. This cause was removed from the Independence County, Arkansas, Chancery Court to the United States District Court pursuant to 28 U.S.C. Secs. 1441(b) and 1444, at the request of the United States of America, acting through the Farmers Home Administration (FmHA). Other parties in this rather involved and complex proceeding are: The Federal Land Bank of St. Louis (Federal), First State Bank of Newport (State Bank), 2 Bank of Newark (Newark), John Wilson and Georgia Wilson. 3

A. CLAIM OF FEDERAL:

On January 14, 1974, John and Georgia Wilson executed a promissory note to Federal in the sum of $20,000.00 with interest at the rate of 7 1/2% per annum. Under the terms of the note, Federal possessed the option to invoke a variable rate of interest if economic conditions warranted the action. Contemporaneously, the Wilsons executed a mortgage to Federal conveying the following property in Independence County to secure the promissory note:

Part of the West Half of Lot 5 of the Northeast Fractional Quarter of Section 5, Township 12 North, Range 4 West, of the 5th P.M., described as follows:

Commencing at the Southwest Corner of said Lot 5, thence East 264 feet to the point of beginning, thence North 330 feet, thence East 198 feet, thence South 330 feet, thence West 198 feet to the point of beginning.

On February 20, 1980, Federal filed a foreclosure action against the Wilsons in the Chancery Court of Independence County alleging that the Wilsons were in default in their payments on the note, that Federal had elected to accelerate the indebtedness and declare the entire principal indebtedness due, and praying for a judgment against the Wilsons for $21,828.10, interest due and reasonable attorney's fees.

Federal made State Bank, FmHA and Newark party-defendants, asserting that these defendants were necessary parties since each claimed a security interest in the property in question.

B. CLAIM OF NEWARK:

On March 10, 1980, Newark filed its answer and "cross-complaint" alleging that on June 19, 1978, John Wilson executed and delivered to Newark a promissory note for $10,500.00; and that on August 22, 1978, John and Georgia Wilson executed to Newark a deed of trust as security for the note to the extent of $7,556.75.

Newark alleged that John Wilson had failed to make payments as promised and requested a judgment in rem against the Wilsons for $7,556.75, interest at the rate of 10% per annum from August 22, 1978, and reasonable attorney's fees.

C. CLAIM OF FmHA:

John and Georgia Wilson obtained several loans from FmHA over a seven-year period. The initial loan was extended on January 9, 1974, and the most recent loan was made on February 24, 1978. On June 4, 1979, John Wilson filed a voluntary Chapter 7 bankruptcy petition; Georgia Wilson was not a party to this bankruptcy proceeding. When John Wilson filed his bankruptcy petition, FmHA was the holder of the following three unpaid promissory notes, each of which had been executed and delivered by John and Georgia Wilson:

                DATE OF NOTE     AMOUNT    INTEREST RATE
                -------------  ----------  -------------
                Feb. 20, 1976  $32,500.00      8 1/2%
                Feb. 16, 1977   16,174.64      8%
                Feb. 16, 1977   48,800.00      5%
                

The first two notes were secured by two junior real estate mortgages against the property involved in the foreclosure action (as well as a security interest in the farming equipment and crops of John Wilson and Georgia Wilson). The third note for $48,800.00 was secured only by farming equipment and crops.

In the fall of 1979, FmHA sought and obtained the abandonment by the bankruptcy trustee of the farming equipment in which FmHA had a security interest. The abandoned security items were sold at a public auction on February 12, 1980, and the net proceeds were applied to the Wilsons' FmHA account. On the date of the chattel liquidation sale, FmHA was still the holder of the three unpaid promissory notes mentioned earlier: the $32,500.00 and $16,174.64 notes, secured by junior real estate mortgages, and the $48,800.00 note secured only by perfected security interests in farming equipment and crops.

Instead of requesting the application of the liquidation sale proceeds to the $48,800.00 loan, which was secured only by the equipment which was sold, the FmHA county supervisor, who did not have custody of the Wilsons' file and assumed all three notes to be secured by real estate mortgages, instructed the FmHA finance office to pay the oldest loan in full and thereafter to pay the balance against the note bearing the higher rate of interest. Consequently, the net sale proceeds were initially credited to retire the $32,500.00 note and pay down the $16,174.64 note.

Realizing that the aforementioned allocation of the proceeds from the chattel sale was not in its best interest, FmHA, on January 23, 1981, reallocated the proceeds as follows: $19,573.37 as principal and $5,175.82 as interest to the note of February 20, 1976, and $12,855.57 as principal and $5,181.55 as interest to the note of February 17, 1977. The effect of the reallocation was to increase the unpaid balance on the reamortized note of February 16, 1977, from an unpaid balance of $3,323.49 as principal and interest at 8% per annum to an unpaid balance of $16,174.64 as principal and $6,519.03 as interest; and reduce the unpaid balance on the $48,800.00 note of February 17, 1977, from $26,354.67 as principal and $836.12 as interest to an unpaid balance of $9,130.73 as principal and $310.70 as interest.

FmHA did not seek any relief for the February 17, 1977 indebtedness in the foreclosure proceeding, since this note was not secured by the real estate involved. 4

D. CLAIM OF GEORGIA WILSON:

Mrs. Wilson asserted that she was awarded possession of the real property in question under the divorce decree terminating her marriage to John Wilson; because of this, she maintained that the foreclosure action by the mortgagees, Federal, Newark and FmHA is subordinate to her claim and right to possession of the realty. Mrs. Wilson also challenged FmHA's and Newark's claims, asserting usury as an affirmative defense. The court rejected all of Mrs. Wilson's claims. 5 On appeal, Mrs. Wilson contends that the district court erred:

1) in sustaining FmHA's reallocation of proceeds from the sale of certain collateral,

2) in excluding certain evidence concerning appellant's financial situation,

3) in holding that the Farm Credit Act of 1971 preempted Arkansas' usury laws, and

4) in denying appellant's claim to her residence and one half of a soybean crop.

I. Reallocation of Proceeds from Chattel Sale

The district court found that FmHA was not precluded from reallocating the proceeds from the sale of the farm equipment after discovering the mistake in the initial application. Appellant argues that the court erred; she contends that a creditor cannot change the application of proceeds once an account has been credited. In support of her argument, appellant cites 60 AM JUR 2d PAYMENT Sec. 86 (1972): "By mutual agreement, the debtor and creditor may change the application of a payment * * * but only if the rights of third parties are not prejudiced." In the case at bar, however, there is no risk of prejudice to any third party. The Bank of Newark originally contested the reallocation, but the district court rejected its claim, and the bank abandoned the claim on appeal.

A debtor desiring to avail himself of his right to direct the application of a payment must give the direction therefor either before or at the time of the payment; otherwise, the right is lost, because thereafter the money ceases to be his, and is no longer subject to his control. See St. Paul Fire & Marine Ins. Co. v. United States, 309 F.2d 22 (8th Cir.1962), cert. denied, 372 U.S. 936, 83 S.Ct. 883, 9 L.Ed.2d 767 (1963). Here, at the time the farm equipment was publicly auctioned, neither of the Wilsons requested that the FmHA appropriate the sale proceeds in any particular manner. A creditor can, absent clear direction otherwise, apply a payment from a debtor to any debt he chooses to maximize his security. Federal Deposit Ins. Corp. v. Freudenfeld, 492 F.Supp. 763, 770 (D.Wis.1980).

While it is often said that a creditor lacks the freedom to allocate involuntary payments made by a debtor that he has on receipt of a voluntary, unallocated payment, it is the right of the creditor to apply sums received from the debtor or for his account in such fashion as to give the creditor the utmost advantage of such security as the creditor may possess. And in the absence of any other creditor who would be prejudiced by such an allocation, the courts must respect this right of a secured creditor.

United States v. Pollack, 370 F.2d 79, 80 (2d Cir.1966).

We are mindful of the fact that reallocation is improper in some instances. Where an application of payment has been made and the debtor notified, the debt is discharged. Only...

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