Great Southwest Life Ins. Co. v. Frazier

Decision Date26 October 1988
Docket NumberNo. 87-3966,87-3966
Citation860 F.2d 896
Parties7 UCC Rep.Serv.2d 817 GREAT SOUTHWEST LIFE INSURANCE CO., a Texas corporation, Plaintiff, and United States of America, acting through the Small Business Administration, Counter-claimant-Appellee, v. Darlene FRAZIER, a widowed woman, the Estate of Fred M. Frazier; Darlene Frazier, as Personal Representative of the Estate of Fred M. Frazier, deceased; and any and all unknown heirs or devisees of Fred M. Frazier, Defendant-cross-defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Frank J. Dykas, Boise, Idaho, for defendant-cross-defendant-appellant.

Jeffrey W. Ring, Asst. U.S. Atty., Boise, Idaho, for counter-claimant-appellee.

Appeal from the United States District Court for the District of Idaho.

Before FLETCHER, and REINHARDT, * Circuit Judges, and GEORGE, ** District Judge.

FLETCHER, Circuit Judge:

Darlene Frazier, mortgagor, appeals the district court's finding that the Small Business Administration ("the SBA"), second mortgagee, is entitled to a deficiency judgment against her for the balance of her SBA loan after the sale of collateral. Frazier contends that under Idaho law the SBA is barred from obtaining a deficiency judgment. She asserts defenses of impairment of collateral, estoppel, violation of agency procedures, and breaches of good faith and fair dealing, inter alia.

Because we find that the impairment of collateral defense is not available to the co-maker of a note given for an SBA loan, we affirm the deficiency judgment of $503,718.64 against Frazier.


Darlene Frazier and her deceased husband, Fred M. Frazier, mortgaged their 7,420 acre ranch in Blaine County, Idaho to Great Southwest Life Insurance Company for $1,263,000 in May 1978. The Fraziers gave the SBA a second mortgage on the same property on August 28, 1979, as security for a loan of $449,000 under the SBA disaster loan program. Both Fred and Darlene Frazier signed the note to the Great Southwest's claims were settled in the course of a complicated swap of deeds in lieu of foreclosure. Following its purchase in 1977 the ranch had been variously valued--as shown by appraisals and purchase offers--at between $1.7 and $1.9 million. By 1985, however, in the wake of Fred Frazier's death, the subsequent failure of the ranch operation, and a statewide drop in land values, all the parties apparently agreed that the ranch's value had plummeted. When Great Southwest offered to trade clear title of 120 acres of the total to the SBA in exchange for the SBA's second mortgage rights to the remainder, the SBA agreed without even considering making a counter offer or performing an appraisal to determine the property's fair market value (FMV). Frazier agreed to the exchange and signed and delivered to Great Southwest a deed in lieu of foreclosure for the 7,300 acre parcel, obtaining in exchange its relinquishment of any rights to a deficiency judgment. Frazier contends, and the SBA disputes, that the SBA also had agreed to relinquish its rights to a deficiency judgment in exchange for title to the 120 acre parcel. When the SBA failed to so stipulate--after Great Southwest's documents were already recorded--Frazier refused to sign the deed conveying Frazier's title to the 120 acre parcel to the SBA. When the dust settled, Great Southwest had received title to all but 120 acres of the ranch, clear of any claim to title by Frazier or lien by the SBA, in exchange for a full release to Frazier of her indebtedness to it and a release of its lien on the 120 acres; the SBA held a first deed of trust on the 120 acres; and Frazier retained title to the 120 acres, subject to the SBA's lien, and owed the SBA $503,718.64, including interest.

SBA. After Fred Frazier's death in 1980 Darlene Frazier continued to make annual payments to the SBA through November 1982 but thereafter defaulted. In December 1983 Great Southwest initiated a foreclosure action against Darlene Frazier, individually and as the Personal Representative of the Estate of Fred M. Frazier ("Frazier"), in Idaho state court and named the SBA, a junior lien holder, as a co-defendant. The SBA cross-claimed against Frazier for foreclosure of its mortgage and a deficiency judgment, and removed the action to federal district court.

The SBA subsequently sought foreclosure on the 120 acre parcel and a deficiency judgment for the remainder of the debt. Frazier conceded the government's right to foreclose its deed of trust, but challenged the SBA's entitlement to a deficiency judgment on the ground that the SBA impaired its collateral by agreeing to the swap with Great Southwest. On February 9, 1987, following a bench trial, the district court found the 120 acre parcel's fair market value to be $30,000 and entered a judgment of $503,718.64 against Frazier that entitled the SBA to realize on any deficiency after sale of the parcel. 1 The district court, in finding the SBA entitled to a deficiency judgment, also found that the SBA did not waive its right to a deficiency judgment and that the SBA did not depreciate (impair) the value of the Frazier's collateral. The court assumed arguendo that Idaho law governed the case. This appeal followed. Frazier's appeal lies solely against the SBA.


On appeal Frazier has renewed her defense that the SBA impaired her collateral. She has also substituted an estoppel defense in place of the waiver defense, and has raised several other defenses for the first time on appeal. Specifically, Frazier now argues that the SBA violated agency procedures in not appraising the property; that it violated a contractual duty of good faith and fair dealing; that it violated its congressional mandate "to help, not hurt, small business in the administration of its programs"; that it violated Idaho's "one action" rule requiring full exhaustion of the security before proceeding against the debtor's personal assets; and that the amount of the deficiency judgment must be

computed as the combination of the first and second mortgages less the fair market value of the entire property. The SBA counters that Frazier waived her state law defenses and that the other new defenses should not be entertained.

I. Applicability of Idaho Commercial Law to SBA Transactions

Frazier's central defense against imposition of the deficiency judgment is that the SBA impaired its collateral by exchanging a valuable second mortgage on the full acreage for a paltry first mortgage on the 120 acre parcel. This defense rests in turn on accepting her contention that the rights of the parties under an SBA loan agreement are determined by reference to state law.

Idaho Code Sec. 28-3-606(1)(b) (1980) governs impairment of collateral by the holder of a note. It provides in pertinent part:

The holder discharges any party to the instrument to the extent that without such party's consent the holder ... unjustifiably impairs any collateral for the instrument given by ... the party....

The Idaho Code defines "party" as "a person who has engaged in a transaction or made an agreement within this act." Idaho Code Sec. 28-1-201(29) (1980). These provisions are identical to Uniform Commercial Code Secs. 3-606 and 1-201(29).

The SBA contends that federal, not state, law governs SBA loans, so that Idaho state law defenses are unavailable. The truth lies somewhere in between. It is true that federal law governs questions arising under the SBA, a nationwide federal program. Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943); see also 13 C.F.R. Sec. 101.2(d)(2). 2 But as the Supreme Court explained in Clearfield Trust, "[i]n the absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards." 318 U.S. at 367, 63 S.Ct. at 575; United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). Unless there is an overriding federal interest in uniformity, the applicable state law provides the rule of decision. United States v. Yazell, 382 U.S. 341, 348-49, 86 S.Ct. 500, 504-05, 15 L.Ed.2d 404 (1966).

In deciding whether to adopt state law or to fashion a nationwide federal rule, Kimbell Foods requires us to consider two factors in addition to a need for uniformity: 1) whether adopting the state law would frustrate the specific objectives of the SBA; and 2) whether applying a federal rule would disrupt commercial relations predicated on state law. 440 U.S. at 728-29, 99 S.Ct. at 1458-59. Quite specifically, Kimbell Foods encourages adoption of state U.C.C. provisions: "Because the state commercial codes 'furnish convenient solutions in no way inconsistent with adequate protection of the federal interest[s]' ... we decline to override intricate state laws of general applicability on which private creditors base their daily commercial transactions." 440 U.S. at 729, 99 S.Ct. at 1459 (citation omitted).

Several circuits accordingly have adopted state U.C.C. provisions as the federal common law rule in SBA loan cases. See Wainright Bank & Trust Co. v. Railroadmens Fed. Sav. & Loan Ass'n, 806 F.2d 146 (7th Cir.1986) (Indiana U.C.C. commercial reasonableness provision applicable to SBA disposition of collateral); United States v. Kukowski, 735 F.2d 1057 (8th Cir.1984) (adopting North Dakota U.C.C. provisions regarding waivability of guarantor's right to notice of intended disposition of collateral); United States v. H. & S. Realty Co., 837 F.2d 1 (1st Cir.1987), aff'g 647 F.Supp. 1415, 1419 (D. Maine 1986) (adopting waivability of guarantor's right under Maine U.C.C. to commercially reasonable sale of collateral); United States v. Lattauzio, 748 F.2d 559 (10th Cir.1984) At least one circuit court has adopted the state version of U.C.C. Sec. 3-606, the impairment of collateral provision at issue here, as the "governing rule" when...

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