Federal Land Bank of St. Paul v. Overboe

• Decision Date: 16 April 1987
• Docket Number: No. 11129,11129
• Citation: 404 N.W.2d 445
• Court: North Dakota Supreme Court
• Parties: The FEDERAL LAND BANK OF SAINT PAUL, Plaintiff and Appellant, v. David A. OVERBOE and Debora Overboe, Defendants and Appellees, and United States of America, Production Credit Association of Fargo, Victor P. Zajac, and Ames Sand & Gravel, Inc., Defendants. Civ.

Page 445

404 N.W.2d 445

The FEDERAL LAND BANK OF SAINT PAUL, Plaintiff and Appellant, v. David A. OVERBOE and Debora Overboe, Defendants and Appellees and United States of America, Production Credit Association of Fargo, Victor P. Zajac, and Ames Sand & Gravel Inc., Defendants.

Civ. No. 11129.

Supreme Court of North Dakota.

April 16, 1987.

Gunhus, Grinnell, Klinger, Swenson & Guy, Fargo, for plaintiff and appellant; argued by Craig R. Campbell.

Bruce E. Bohlman, Grand Forks, for defendants and appellees.

GIERKE, Justice.

The Federal Land Bank of Saint Paul [FLB or Bank] appeals from a district court judgment which denied foreclosure of its mortgage on the farmland of David and Debora Overboe and ordered that the principal and interest owing on the underlying obligation be reamortized over the longest period allowed under FLB regulations. We affirm, but modify the judgment by striking the order that the loan be reamortized.

The Overboes executed a mortgage to FLB during December 1979. The principal sum of the underlying promissory note was $285,000, and payments were due on July 1 of every year beginning in 1980. The Overboes made the first mortgage payment, but the July 1, 1981 payment was only partially made, and the 1982 payment was not made until February 1983. During June 1983, David Overboe requested that his payment date be changed from July 1 to December 31 of each year to more properly meet the cash flow needs of his farming operation. Roger Durensky, a loan officer for the Federal Land Bank Association of Fargo, responded by letter that in order to grant the change in payment dates it would be necessary to reamortize the loan, and that "based on your financial statement, income and expense information available to us, we find that we are unable to grant a reamortization of this loan." Overboe met with Durensky after the initial denial of his request and stated that he would present his own income and expense statements for the past three years for FLB officials to review. Overboe supplied the information, including income projections for the 1983 crop year. FLB officials ultimately denied the request in August 1983. Overboe then requested a ten-day extension to make the delinquent July 1, 1983 payment, but this request was also denied.

FLB brought this foreclosure action in November 1983. Overboe asserted in part that the foreclosure action should be dismissed because FLB "failed to follow its own policies in this matter and has failed to follow Congressional Mandates in regard to past due loans." Following a bench trial, the court denied FLB's request to foreclose the mortgage. ¹ The court found that the policies of FLB mandated a thorough evaluation of the Overboes' situation and that FLB "failed to follow its own procedures and guidelines with respect to the duties owed to borrowers generally, and reconsideration of Mr. Overboe's request for extension." The court concluded that the "payment obligation should be reformed and this equitable remedy is appropriate for the situation and will do justice to both parties." The court ordered that the promissory note be reformed "so that the interest at the regular rate is capitalized into the principal obligation and that the obligation shall be extended for the maximum period of time allowable under the rules" of FLB. The court further ordered that the first payment shall be due December 1, 1985, and be applied to the principal obligation. This appeal followed.

FLB asserts in effect that a failure to comply with the policies, regulations, and procedures promulgated under the Farm Credit Act of 1971, 12 U.S.C. Sec. 2001 et seq., is not a valid defense to a foreclosure action. Alternatively, FLB asserts that the trial court's findings that it did not follow its policies and procedures are clearly erroneous.

The federal Farm Credit Administration regulation at issue in this case, 12 C.F.R. Sec. 614.4510(d)(1), provides:

"(d) In the development of the bank and association loan servicing policies and procedures, the following criteria shall be included:

"(1) Term loans. The objective shall be to provide borrowers with prompt and efficient service with respect to justifiable actions in such areas as personal liability, partial release of security, insurance requirements or adjustments, loan division or transfers, conditional payments, extensions, deferments or reamortizations. Procedures shall provide for adequate inspections, reanalysis, reappraisal, controls on payment of insurance and taxes (and for payment when necessary), and prompt exercise of legal options to preserve the lender's collateral position or guard against loss. The policy shall provide a means of forbearance for cases when the borrower is cooperative, making an honest effort to meet the conditions of the loan contract, and is capable of working out of the debt burden. Loan servicing policies for rural home loans shall recognize the inherent differences between agricultural and rural home lending." [Emphasis added.]

Pursuant to this regulation, the Federal Land Bank of Saint Paul adopted "District Policy 2501," which was in effect at all pertinent times in this case and provides as follows:

"A borrower is required to pay loan installments and taxes on or before the due date and maintain required insurance coverage. However, if circumstances beyond the borrower's control prevent prompt payment, appropriate assistance may be granted provided the borrower meets the following tests:

"1. Is doing his honest best, and

"2. Is applying the proceeds of production, over and above necessary living expenses, on the payment of primary obligations, and

"3. Is taking proper care of the security, and

"4. Is capable of working his way out of his existing burden of debt.

"Borrowers who are deserving of assistance in accordance with the above policy should be expected to notify the association of their problems and request assistance prior to the due date of an installment." ²

In Federal Land Bank of St. Paul v. Halverson, 392 N.W.2d 77 (N.D.1986), we addressed the effect of the administrative forbearance regulation in the context of a summary judgment rendered against the defendant borrower. We recognized that federal courts have unanimously concluded that borrowers do not have a private cause of action against federal land banks for damages or injunctive relief under the Farm Credit Act and regulations, but noted that these decisions do not bear "directly on the different issue of whether a qualified borrower may resist a foreclosure upon the grounds that he did not receive the forbearance called for by the regulation." Halverson, supra, 392 N.W.2d at 84.

We discussed the three reported state decisions which had addressed the issue, see Federal Land Bank of Wichita v. Read, 237 Kan. 751, 703 P.2d 777 (1985); Federal Land Bank of Springfield v. Saunders, 108 A.D.2d 838, 485 N.Y.S.2d 342 (1985); Farmers Production Credit Association of Ashland v. Johnson, 24 Ohio St.3d 69, 493 N.E.2d 946 (1986), cert. denied, --- U.S. ----, 107 S.Ct. 878, 93 L.Ed.2d 832 (1987), and concluded that to decide the effect of the administrative forbearance regulation in a foreclosure action, "a better exposition of the facts is needed about the development of a forbearance policy by the Bank, as well as about Halversons' qualifying for forbearance and about the Bank's actions in extending forbearance to Halversons." Halverson, supra, 392 N.W.2d at 85. We therefore reversed the summary judgment and remanded for trial.

This case reaches us after a full trial on the merits of the alleged administrative forbearance defense. We deem this record sufficient to resolve the issue.

An action to foreclose a mortgage is an equitable proceeding. See Union State Bank v. Miller, 335 N.W.2d 807, 809 (N.D.), cert. denied, 464 U.S. 1019, 104 S.Ct. 554, 78 L.Ed.2d 727 (1983); First National Bank of Waseca v. Paulson, 69 N.D. 512, 288 N.W. 465, 471 (1939). Although no implied private right of action may exist for damages or injunctive relief under the Farm Credit Act and regulations, ³ e.g., Bowling v. Block, 785 F.2d 556 (6th Cir.), cert. denied sub nom. Bower v. Lyng, --- U.S. ----, 107 S.Ct. 112, 93 L.Ed.2d 60 (1986), courts have recognized that federal regulations which have been held to not imply a private cause of action may nevertheless afford a basis for an equitable defense to a foreclosure action.

In a similar context, under the National Housing Act, 12 U.S.C. Secs. 1701 et seq., the Department of Housing and Urban Development (HUD) has promulgated regulations governing "conditions of special forbearance" upon default, the "recasting" of mortgages under certain circumstances, and other mortgage servicing techniques. See 24 C.F.R. Secs. 203.500 et seq. At one time these mortgage servicing guidelines were published in a HUD handbook but were not yet a part of the Code of Federal Regulations. See Brown v. Lynn, 392 F.Supp. 559 (N.D.Ill.1975). Although it has been consistently held that the HUD handbook and regulations do not imply a private cause of action for alleged violations of the guidelines therein, e.g., Roberts v. Cameron-Brown Co., 556 F.2d 356 (5th Cir.1977), courts have made a distinction regarding the effect of those guidelines in state foreclosure proceedings. After ruling that the HUD guidelines were not enforceable in an action seeking monetary damages and injunctive relief, the court in Brown v. Lynn, supra, 392 F.Supp. at 562-563, stated:

"The decision does not limit state or federal foreclosure courts from exercising their equity powers by refusing to grant foreclosures where mortgagees have flagrantly disregarded the forebearance (sic) provisions of the HUD Handbook.... Our consideration of the enforceability of the HUD Handbook is limited solely to plaintiffs' instant action for monetary damages and injunctive relief for alleged violations of the non-binding guidelines. Since the Handbook does not...