In re Nelson

Decision Date26 July 1991
Docket NumberNo. Civ. 91-4039.,Civ. 91-4039.
PartiesIn re David E. and Marsha R. NELSON, Debtors. UNITED STATES of America, through the FARMERS HOME ADMINISTRATION, Appellant, v. David E. and Marsha R. NELSON, Appellees.
CourtU.S. District Court — District of South Dakota

Ted L. McBride, First Asst. U.S. Atty., Sioux Falls, S.D., for appellant.

Michael J. McGill, Beresford, S.D., for appellees.

MEMORANDUM OPINION AND ORDER

JOHN B. JONES, Chief Judge.

Introduction

FmHA appeals from a ruling of the bankruptcy court prohibiting the trustee's sale of the debtors' property.

Jurisdiction

This Court takes jurisdiction over this matter pursuant to 28 U.S.C. § 158(a).

Standard of Review

This Court shall review the decisions of law of the bankruptcy court de novo (In re Newcomb, 744 F.2d 621, 625 (8th Cir. 1984).), and findings of fact shall be upheld unless clearly erroneous (Bankruptcy Rule 8013.).

BACKGROUND

Debtors own a farm encumbered by a first mortgage securing a loan from FmHA. The debtors have been delinquent on their loan since sometime in 1986. Debtors have not lived on the land since 1985, but rented the land to a neighbor. Debtors live and work in Beresford.

In 1987, FmHA sent the debtors an "Intent to Take Adverse Action" letter, but foreclosure proceedings were stayed by a nation-wide moratorium on FmHA foreclosures. In 1988, after the lifting of the moratorium and the passage of the 1987 Agricultural Credit Act, FmHA sent debtors a "Notice of Availability of Loan Servicing Programs." The debtors did not respond. Another notice of servicing options was sent to the debtors in April 1989, but again the debtors did not respond. FmHA requested mediation from the South Dakota Mediation Board, however the debtors did not respond and no hearing was held. Thereupon, FmHA accelerated debtors' loan.

In March of 1990, debtors filed a Chapter 12 bankruptcy. Pursuant to its regulations, FmHA sent the debtors' attorney a 1951-S Servicing Letter. That letter stated as follows:

We were recently notified that your borrower, David E. Nelson, has filed bankruptcy. The enclosed forms explain some of the loan servicing options that FmHA has available. We would appreciate your informing your client of these options. In order to ascertain whether your client is eligible for these options, it is necessary for FmHA\'s employees to work closely with your client. We are concerned about whether such contact will be in violation of the automatic stay.
If your client has filed under Chapter 11, 12, or 13 and wants to apply for servicing relief from FmHA, the case must be dismissed or the automatic stay must be modified for the limited purpose of permitting your client to apply for servicing relief. . . . Unless the automatic stay is modified for this purpose . . . or the case is dismissed, FmHA will not discuss any of the servicing options with you or your client. You may, of course, choose to file a proposed plan which may or may not contain debt restructuring features similar to those available from FmHA.
If you intend to file a motion to allow your client to request and be granted servicing relief, we ask that you do so within 45 days. If no motion is filed within that time, we will assume that your client does not intend to make a request for servicing, and we will proceed to protect our interest, as allowed by the Bankruptcy Code.

The rights referred to in FmHA's letter are 1) primary loan servicing, and 2) preservation loan servicing. Primary loan servicing is an effort to rewrite the borrower's loan in such a way as to enable the borrower to repay it. Preservation loan servicing covers land to which FmHA has already received title — land "acquired" or held in "inventory" by FmHA. 7 U.S.C. § 1991(b)(3) & (4).

The debtors did not respond to FmHA's letter, but continued in the bankruptcy. The debtors received a discharge, but the case has not been closed. On 28 December 1990, pursuant to 11 U.S.C. § 363(f), and with FmHA's consent, the trustee undertook to sell the farm free of all liens and encumbrances.

The debtors filed objections to the Trustee's Notice of Proposed Action to Sell Real Property Free and Clear of Liens and Encumbrances. The bankruptcy court held a hearing on the objections and subsequently issued a memorandum opinion and Order Denying Sale of Real Estate.

The bankruptcy court held that

1) The letter from FmHA was an attempt to collect a prepetition debt, and therefore violated the automatic stay;

2) FmHA's consent to the trustee's sale violated the federal regulations which require FmHA to cease all foreclosure action upon the filing of the bankruptcy; and

3) The debtors have a Homestead interest in the farm, and the Homestead right includes the preservation loan servicing rights; therefore the land is encumbered by the debtors Homestead interest and cannot be sold free and clear.

FmHA appeals from these rulings.

I. Whether FmHA's letter to the debtors' counsel constituted a violation of the automatic stay.

The bankruptcy court determined that the letter sent to the debtors' attorney by FmHA on 6 April 1990 violated the automatic stay provided under 11 U.S.C. § 362. The letter notified the debtors that they may be entitled to primary or preservation loan servicing. The letter also informed the debtors that to be eligible for primary loan servicing they must respond within 45 days. The bankruptcy court determined that, because the letter forces the debtors to choose between dismissing their bankruptcy or modifying the stay and losing FmHA primary loan servicing rights, FmHA's letter of 6 April 1990 violated the automatic stay.

The only rights which the debtors lost by not responding to FmHA's letter were the primary loan servicing rights. The bankruptcy court correctly noted that primary loan servicing rights are not available to a debtor who has been granted a discharge in bankruptcy. Lee v. Yeutter, 917 F.2d 1104, 1108 (8th Cir.1990). The debtors have been granted a discharge of their FmHA obligation. Therefore, the debtors are not entitled to primary loan servicing rights. Further, the bankruptcy court did not sanction the FmHA official who sent the letter. Thus, the determination of whether the letter violated the automatic stay will have no real effect and the question is moot. See In re Smith, 921 F.2d 136, 138 (8th Cir.1990) (This Court may decide "only live controversies, cases that will have a real, practical effect."). This Court is, therefore, without jurisdiction to consider whether the letter violated the automatic stay. See Id. ("Mootness, if it exists, would destroy . . . jurisdiction.").

II. Whether FmHA's consent to the trustee's sale of the property violates 7 C.F.R. § 1955.15(d)(6).

The bankruptcy court held that FmHA's consent to the trustee's sale pursuant to 11 U.S.C. § 363 constituted "a foreclosure-type action." 123 B.R. 993, 1001. The bankruptcy court held that 7 C.F.R. § 1955.15(d)(6) prevents FmHA from conducting foreclosure activities. Thus, the bankruptcy court concluded that FmHA's consent to the trustee's sale violated 7 C.F.R. § 1955.15.

As the bankruptcy court found, "These provisions of 7 C.F.R. § 1955.15(d)(6) track 11 U.S.C. § 362(c)'s suspense of collection activities." 123 B.R. at 1001. The scope of § 1955.15(d)(6)'s prohibition is the same as the scope of the automatic stay for any creditor. Therefore, to the extent that an FmHA action does not violate the automatic stay, that action does not violate § 1955.15(d)(6). Equally, to the extent that the bankruptcy court has held that consenting to the trustee's sale under 11 U.S.C. § 363 constitutes a foreclosure action by the consenting creditor, that logic would preclude any creditor from ever consenting to a trustee sale.

Consenting to a trustee sale under 11 U.S.C. § 363 does not violate the automatic stay.

An action taken in the bankruptcy court can only be found to be a violation of the automatic stay when there is no basis under the Code for the action.

In re Hodges, 83 B.R. 25, 26 (Bankr. N.D.Cal.1988) (citing 2 Collier on Bankruptcy (15th ed.) § 362.02, p. 326-27).

The Bankruptcy Code provides that

The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.

11 U.S.C. § 363(b)(1).

The Code further provides that

The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if —
* * * * * *
(2) such entity consents;

11 U.S.C. § 363(f).

There is clearly a basis in the Code for the trustee to sell the debtors' farm, and there is clearly a basis in the Code for FmHA to consent to the trustee's sale.

The bankruptcy court held that FmHA could not consent to the trustee's sale "until act obligations are satisfied." 123 B.R. at 1002. The regulations promulgated pursuant to the Act impose two obligations on FmHA when a borrower files bankruptcy — send the borrower notice of loan servicing options and do not violate the automatic stay. All act obligations have been satisfied.

When the debtors filed for bankruptcy, FmHA was required to send them notice of their rights under Department of Agriculture regulations. 7 C.F.R. § 1962.47(a)(3) (1990). FmHA sent the debtors the required notice. That notice informed the debtors that, if they decided to pursue bankruptcy instead of primary loan servicing, "FmHA will proceed to protect its interest, as allowed by the Bankruptcy Code." The Bankruptcy Code allows the trustee to sell property of the bankruptcy estate. 11 U.S.C. § 363(b)(1). The bankruptcy court stated that "FmHA's stipulation with the trustee to sell the FmHA-encumbered farm eliminates normal foreclosure procedures." Memorandum Op. at 13. That is not the case. It is the Bankruptcy Code which eliminates normal foreclosure procedures, and it is the Bankruptcy Code which authorizes the trustee to sell the...

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