Federal Land Bank of St. Louis v. Wilson

Decision Date18 February 1982
Docket NumberNo. B-C-80-11.,B-C-80-11.
Citation533 F. Supp. 301
PartiesFEDERAL LAND BANK OF ST. LOUIS, Plaintiff, v. John WILSON and Georgia Wilson; 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, Defendants.
CourtU.S. District Court — Eastern District of Arkansas

Donald P. Raney, Lightle, Beebe & Raney, Searcy, Ark., for plaintiff.

David M. Clark, Hively, Ketz & Bell, Batesville, Ark., and David Hodges, Newport, Ark., for Georgia Wilson.

Larry Hartsfield, Newport, Ark., for First State Bank of Newport.

Sherry P. Bartley, Asst. U. S. Atty., Little Rock, Ark., for U. S. Dept. of Agriculture.

Jerry C. Post, Murphy, Blair, Post & Stroud, Batesville, Ark., for Bank of Newark.

MEMORANDUM OPINION

HOWARD, District Judge.

This foreclosure action was removed from the Independence County, Arkansas, Chancery Court to this Court pursuant to 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), Bank of Newark (Newark), John Wilson and Georgia Wilson.1

FACTUAL BACKGROUND

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 7½% 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.

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.

CLAIM OF FmHA:

John and Georgia Wilson executed the following promissory notes to FmHA: a note dated February 20, 1976, for $32,500.00, with interest at the rate of 8½% with a maturity date of February 20, 1977; a note dated February 16, 1977, which represented a reamortization of a $40,000.00 note dated January 9, 1974, for $16,174.64, bearing interest at the rate of 8% and with a maturity date of January 9, 1981; and a note dated February 17, 1977, for $48,800.00 bearing interest at the rate of 5% and with a maturity date of February 16, 1983. The February 20, 1976, and February 16, 1977, notes were secured by junior liens on the real estate involved in this action and a security interest in chattels and farm implements. The February 17, 1977, note for $48,800.00 was secured only by a security agreement involving the farm implements.2

On October 24, 1979, FmHA filed a creditor's application for disclaimer of certain assets in John Wilson's bankruptcy proceedings. FmHA sought the abandonment of any interest of the bankruptcy trustee in ten items of farm equipment and 606 bushels of soybeans. On January 3, 1980, the bankruptcy court entered its order authorizing abandonment of the farm equipment, but denied the request for abandonment of the soybeans. The abandoned property was sold on February 12, 1980. Pursuant to the instructions of the Independence County FmHA supervisor, the finance office of FmHA applied the net proceeds from this sale to the Wilsons' notes in the following manner: $19,573.37 as principal and $5,175.82 as interest to the February 20, 1976, note; and $12,855.57 as principal and $5,181.58 as interest to the February 16, 1977, note. Both notes were secured by junior liens on the real estate under consideration.

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 does not seek any relief for the February 17, 1977, indebtedness, in this foreclosure proceeding, since this note is not secured by the real estate involved.3

CLAIM OF STATE BANK:

On January 8, 1975, the Wilsons executed a promissory note to Phillip D. Hout, as Trustee of W. F. Hurley, Inc., for $7,180.57, payable as follows: $1,000.00 on March 15, 1975, $1,500.00 on December 31, 1975, $1,500.00 on December 31, 1977, and $1,608.50 on December 31, 1978, with interest at the rate of 10% per annum. On the same date, the Wilsons executed a deed of trust to Phillip D. Hout, as Trustee of W. F. Hurley, Inc., offering the real estate involved as security for the note.

On May 16, 1975, the promissory note and deed of trust were assigned to State Bank.

State Bank prays judgment jointly and severally against John Wilson, in rem, and Georgia Wilson, in personam, for $5,620.50, together with interest. State Bank concedes that it has a second lien on the real estate in question.

CONTENTION OF GEORGIA WILSON:

Georgia Wilson contends, first, that she was awarded possession of the real property in question under the divorce decree terminating the marital relationship between the Wilsons; and that the foreclosure action by the respective mortgagees, Federal, Newark and FmHA, is subordinate to her claim and right to possession of the realty.

Georgia Wilson also asserts that the promissory note of January 8, 1975, held by State Bank is void for failure of consideration and is usurious on its face.4

Finally, Georgia Wilson asserts usury as an affirmative defense to the claims of Newark and FmHA.

DISCUSSION OF THE ISSUES

I.

USURY:

The thrust of Georgia Wilson's defense of usury to the claim of Federal may be summarized: Federal "must forfeit its note and security for violating Article 19, Section 13 of the Arkansas Constitution.5 The issue is whether Congress intended to preempt the field of state usury laws when it enacted the Farm Credit Act of 1971."6See Farm Credit Act of 1971, Pub.L. 92-181; 12 U.S.C. § 2015.

It is well settled that the Farm Credit Act (Act) governs the terms and conditions of interest rates imposed in credit transactions involving Federal Land Banks. State usury provisions are inapplicable.

The Act, in relevant part, provides:

Loans made by a Federal land bank shall bear interest at a rate or rates, and on such terms and conditions, as may be determined by the board of directors of the bank from time to time, with the approval of the Farm Credit Administration. In setting rates and charges, it shall be the objective to provide the types of credit needed by eligible borrowers at the lowest reasonable costs on a sound business basis taking into account the cost of money to the bank, necessary reserve and expenses of the banks and Federal land bank associations, and providing services to stockholders and members. The loan documents may provide for the interest rate or rates to vary from time to time during the repayment period of the loan, in accordance with the rate or rates currently being charged by the bank. (Emphasis added)

In Beatrice Production Credit Association v. Vieselmeyer, 376 F.Supp. 1391 (D.Neb. 1973), the court made the following relevant comment:

As a general rule, there is no question that, when Congress legislates in an area in which it has constitutional authority, the laws of the states in the same field, to the extent that they are inconsistent with the federal law, must yield .... (Citations omitted)
. . . . .
Congress did not intend state interest limitations to control interest rates charged by Production Credit Associations. ... Its failure ... expressly allowing state usury laws to apply suggests that interest rates were to be determined in the manner set forth in the Act without reference to state interest limitations....

The promissory note executed by Georgia and John Wilson to Federal provides:

FOR VALUE RECEIVED, the undersigned ... promises to pay to THE FEDERAL LAND BANK OF ST. LOUIS ..., the principal sum of $20,000.00 with interest ... at the rate of 7½ per centum per annum or at said
...

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