Ricks v. United States

• Citation: 434 F. Supp. 1262
• Decision Date: 05 October 1976
• Docket Number: No. CV376-1.,CV376-1.
• Parties: Mrs. J. H. RICKS, Sr., Plaintiff, v. UNITED STATES of America, and the Bank of Soperton, Defendants.
• Court: U.S. District Court — Southern District of Georgia

434 F. Supp. 1262

Mrs. J. H. RICKS, Sr., Plaintiff, v. UNITED STATES of America, and the Bank of Soperton, Defendants.

No. CV376-1.

United States District Court, S. D. Georgia, Dublin Division.

October 5, 1976.

Benjamin M. Garland, William T. Exum (Hall & Bloch), Macon, Ga., for plaintiff.

Edmund A. Booth, Jr., Asst. U. S. Atty., Augusta, Ga., for United States.

J. Carlton Warnock, Soperton, Ga., for Bank of Soperton.

Edwin D. Ledford, District Counsel, Small Business Administration, Atlanta, Ga., for defendant.

ORDER

LAWRENCE, District Judge.

FINDINGS AND CONCLUSIONS AS TO PRELIMINARY INJUNCTIVE RELIEF

Plaintiff filed this action in equity seeking to enjoin foreclosure proceedings against her property by the Small Business Administration. The Bank of Soperton is also a party. The case is before this Court on plaintiff's prayer for preliminary injunctive relief and on motions for summary judgment filed by the plaintiff and the defendants. An extensive evidentiary hearing was held on March 12, 1976, at which testimony was heard from a number of witnesses and affidavits received from others.

I History of Litigation

The evidence shows that on November 15, 1972, Ricks IGA Foodliner, Inc., a Georgia corporation which owned and operated a grocery store business in Soperton, Georgia, executed a promissory note in favor of the Bank of Soperton in the principal amount of $100,000. As security therefor it executed a first mortgage in favor of the Bank on the grocery store property. The note and mortgage were subsequently assigned to the Small Business Administration.¹

Plaintiff was the Secretary of the corporation. Her son, J. H. Ricks, Jr., was President. At the time of the execution of the promissory note referred to, Mrs. Ricks executed a deed to secure debt on her residence as security for her guaranty of the corporate note. Plaintiff alleges that on or about May 6, 1975, the Small Business Administration foreclosed on the grocery store. The property was sold at public outcry for $60,000. Mrs. Ricks contends that this price was grossly below the fair market value of the property.

In January, 1976 foreclosure proceedings were instituted by the government against plaintiff's residential property in Soperton. The sale was set for February 3, 1976, at the Treutlen County Courthouse. By agreement of the parties to this action, it was postponed pending the outcome of this litigation.

Plaintiff says that the foreclosure proceedings should be enjoined because

(1) SBA did not comply with Ga.Code Ann. § 67-1503 which requires that an application for judicial confirmation be made within 30 days of the foreclosure sale as a condition to any action for a deficiency judgment.

(2) The guaranty agreement executed by plaintiff is null and unenforceable in that she did not know that a portion of the loan proceeds of $100,000 was to be applied by the Bank of Soperton to satisfy a prior secured indebtedness (approximately $18,570) owed to the Bank by her husband.

(3) There was a novation of plaintiff's guaranty relieving her of liability thereunder as a result of the subsequent loan by the Bank of $30,000 to Ricks IGA Foodliner, Inc.

(4) The guaranty of the loan by Mrs. Ricks was in reality a contract of suretyship executed by a married woman and is void and unenforceable against her property.

On February 17, 1976, the Government filed a motion to dismiss the complaint or in the alternative a motion for summary judgment. SBA contends that federal law governs the rights of the parties in this case and that the requirement of judicial confirmation is inapplicable to such agency. The United States also challenges the jurisdiction of this Court to enjoin SBA and asserts sovereign immunity against such relief.

An evidentiary hearing was held at Savannah on March 12, 1976. On the same day plaintiff filed a Motion for Summary Judgment in which she contends that she is entitled to judgment as a matter of law because the Small Business Administration made no application to the Superior Court for a judicial order of confirmation following the foreclosure and sale of the "Ricks' Food Center" property.

On March 22, 1976, the Bank of Soperton filed a Motion to Dismiss or in the alternative for Summary Judgment on the ground that no fraud was perpetrated upon plaintiff in connection with the $100,000 loan made by the Bank to Ricks IGA Foodliner, Inc.

Briefs have been filed by both sides.

II The Georgia Law Governing Actions for Deficiency Judgments Following Foreclosure

Under the law of this State, when real estate is sold pursuant to a power in a security deed, no action may be taken to obtain a deficiency judgment against the debtor unless the foreclosing party reports the sale within 30 days to the judge of the superior court and obtains an order of confirmation following notice of the hearing and proof as to the true market value of the property sold. Ga.Code Ann. §§ 67-1503 et seq. In the instant case that procedure was not followed by SBA. The term "debtor" as used in § 67-1505 includes a guarantor of the debt. First National Bank & Trust Company v. Kunes et al., 128 Ga.App. 565, 567, 197 S.E.2d 446.² That decision involved an attempt by a mortgagee to obtain a deficiency judgment against a guarantor to whom the required notice of the confirmation hearing was not given.

No deficiency judgment as such is sought against Mrs. Ricks. However, there was a deficiency between the total indebtedness due by the borrower and the amount the grocery store property brought at the sale. It was sold to Horace Harrell as highest bidder for $60,000. Plaintiff argues that the imminent sale of her home under the security deed given to secure her guaranty of the principal loan is merely an attempt to satisfy the deficiency resulting from the sale of the mortgaged corporate property. It follows, contends plaintiff's counsel, that SBA cannot, in the absence of compliance with Ga.Code Ann. § 67-1503, foreclose on her residence in order to make up such deficiency.

SBA replies that it is not endeavoring to obtain a deficiency judgment within the meaning of that term as used in § 67-1503. Its foreclosure proceeding against the guarantor has as its purpose, says the Government, enforcement of the guaranty securing the corporate debt.

The Government's answer to the failure of SBA to have the sale judicially confirmed is that federal common law governs rather than the statutory protection afforded by the State to debtors in foreclosure proceedings. This is ground over which federal lending agencies and borrowers and their guarantors have frequently fought as will be seen below.

III Applicability to the Pending SBA Foreclosure of the Georgia Statute Requiring Judicial Confirmation of Sale as a Condition to Deficiency Judgment

United States v. Yazell, 382 U.S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404 involved a loan made to a husband and his spouse which was secured by a chattel mortgage. Following default and foreclosure, suit was brought by SBA for the deficiency. Mrs. Yazell defended on the ground that under Texas law she could not personally bind herself or her property in such a case. The Fifth Circuit upheld the district court's ruling based on Texas law in favor of the wife. The Supreme Court affirmed, stating:

"It is clear that the state rule should govern. There is here no need for uniformity. There is no problem in complying with state law; in fact, SBA transactions in each state are specifically and in great detail adapted to state law. There is in this case no defensible reason to override state law unless, despite the contrary indications in Fink v. O'Neil 106 U.S. 272, 1 S.Ct. 325, 27 L.Ed. 196 and elsewhere as has been set forth, we are to take the position that the Federal Government is entitled to collect regardless of the limits of its contract and regardless of any state laws, however local and peculiarly domestic they may be." At 357-58, 86 S.Ct. at 509.

The Fifth Circuit has held that rights and liabilities of parties in actions by the United States on FHA farm mortgages are determinable with reference to federal law. United States v. Hext, 5 Cir., 444 F.2d 804. That Court has also said that federal common law controls the rights of the parties in the case of a guaranty by SBA of a loan fraudulently induced by a borrower. First National Bank, Henrietta v. Small Business Administration, 5 Cir., 429 F.2d 280. In United States v. Columbia Milling Company, D.C.Fla., 379 F.Supp. 225, aff'd, 497 F.2d 1367 (5th Cir.) it was said that "Federal law controls the rights of parties to Small Business Administration loan guaranty agreements, and particularly to the granting of deficiency decrees arising therefrom." 379 F.Supp. at 226.

However, none of these cases reaches the problem we have here, the applicability, under the facts of this case, of state statutory restrictions on deficiency judgments as related to a guarantor against whose property the federal agency seeks to enforce its rights as mortgagee.

In Bumb, Trustee v. United States, 276 F.2d 729 (9th Cir.) the enforcement of a chattel mortgage held by the Small Business Administration collided with the bulk sales statute of California with which the lending agency failed to comply. SBA contended that it is a federal agency and that the validity of its security was to be tested by federal as distinguished from state law. The Ninth Circuit held that the chattel mortgage was not exempt from the bulk sales law and was conclusively presumed to be fraudulent and void. "We are unable to conclude that any federal policy in this case requires us to override the sound and well-established policy of the several states which have a vital interest in the protection of local property rights and local creditor citizens." At 738.³

In United States v. MacKenzie, 9 Cir., 510 F.2d 39 the same Court was confronted with a situation where SBA foreclosed on real estate securing a guaranty of a...