U.S. Through Farmers Home Admin. v. Nelson, 91-3262

• Decision Date: 07 July 1992
• Docket Number: No. 91-3262,91-3262
• Parties: , Bankr. L. Rep. P 74,738 UNITED STATES of America, Through the FARMERS HOME ADMINISTRATION, Appellee, v. David E. NELSON; Marsha R. Nelson, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 626

969 F.2d 626

23 Bankr.Ct.Dec. 283, Bankr. L. Rep. P 74,738

UNITED STATES of America, Through the FARMERS HOME

ADMINISTRATION, Appellee, v. David E. NELSON; Marsha R. Nelson, Appellants.

No. 91-3262.

United States Court of Appeals,

Eighth Circuit.

Submitted May 14, 1992.

Decided July 7, 1992.

Michael J. McGill, Beresford, S.D., argued, for appellants.

Ted L. McBride, Sioux Falls, S.D., argued (Craig P. Gaumer, on the brief), for appellee.

Before BOWMAN, BEAM, Circuit Judges, and LARSON, ^* District Judge.

BOWMAN, Circuit Judge.

David and Marsha Nelson appeal the District Court's ¹ decision (1) holding moot the Nelsons' appeal from the bankruptcy court's finding that the Farmers Home Administration (FmHA) violated the automatic bankruptcy stay and (2) reversing the ruling of the bankruptcy court that prohibited the trustee's sale of the Nelsons' property. We affirm the judgment of the District Court, but express our disagreement with a portion of the court's opinion.

In 1984, the Nelsons received a loan from the FmHA secured by a first mortgage on a sixty-acre farm in Union County, South Dakota. In 1985, the Nelsons moved from the farm to Beresford, South Dakota, and periodically over the next few years rented the farm to a neighbor. In 1986, the Nelsons stopped making payments on their loan. In 1987, the FmHA sent an "intent to take action" notice to the Nelsons, but any such action the FmHA might have taken was stayed by a nationwide moratorium on FmHA farm foreclosures. See Coleman v. Block, 580 F.Supp. 192 (D.N.D.1983).

In November 1988, with the moratorium lifted and the protections of the Agricultural Credit Act of 1987 in place, the FmHA sent the Nelsons a "Notice of the Availability of Loan Service Programs for Delinquent Farm Borrowers." See 7 C.F.R. pt. 1951, subpt. S, ex. A (1989). ² The Nelsons did not respond to that notice within the forty-five days permitted, nor did they respond to a follow-up sent in April 1989. After contacting the Nelsons in September 1989 in another attempt to resolve the problem of the delinquent loan, the FmHA accelerated the loan and sought mediation from the South Dakota mediation board. The Nelsons were not responsive to these efforts on the part of the FmHA.

On March 26, 1990, the Nelsons filed for protection as family farmers under Chapter 12 of the Bankruptcy Code. On April 6, 1990, the FmHA sent the Nelsons' counsel a "Notice to Borrower's Attorney Regarding Loan Servicing Options." See 7 C.F.R. pt. 1962, subpt. A, ex. D (1990). There was no response. The bankruptcy filing was converted to a Chapter 7 liquidation case on August 9, 1990, because the Nelsons did not earn more than 50% of their gross income from farming operations during the taxable year prior to filing. See 11 U.S.C. §§ 101(17)(A), 109(f) (1988). On October 5, 1990, the bankruptcy court approved a stipulation between the FmHA and the bankruptcy trustee to sell the farm. In December, the trustee attempted to sell the property free of all encumbrances, and the Nelsons objected.

The bankruptcy court considered the objections and held that the FmHA violated the automatic bankruptcy stay by sending the post-petition loan servicing letter on April 6, 1990. In re Nelson, 123 B.R. 993, 1000 (Bankr.D.S.D.1991) (subsequent history omitted). The court further held that the property may not be liquidated "until [Agricultural Credit] Act obligations have been fulfilled." Id. at 1004. In the view of the bankruptcy court, the Nelsons were entitled to so-called "preservation rights" under the Act, which would grant them the first opportunity to attempt to buy or lease back the property from FmHA. According to the court's reasoning, these statutory preservation rights somehow attached to the Nelsons' homestead interest in the farm and so were exempted from the bankruptcy estate under state law, up to a value of $30,000. Id. at 1002-03. In addition, the court held that by stipulating to a liquidation sale the FmHA had accomplished the equivalent of foreclosing and taking the property into inventory, at which point the Nelsons became eligible for preservation rights. The FmHA appealed and the District Court reversed the bankruptcy court. The Nelsons appeal the decision of the District Court.

The issues raised by the Nelsons on appeal are questions of law. The District Court reviewed the bankruptcy court's conclusions de novo, and so do we. Bush v. Taylor, 912 F.2d 989, 992 (8th Cir.1990) (en banc).

The District Court held that the FmHA's appeal of the bankruptcy court's holding that the FmHA's post-petition loan servicing letter violated the automatic stay presented a moot issue to the court. The court noted that the only rights the Nelsons lost by not responding to the letter were primary loan servicing rights (the opportunity to restructure the loan so that the borrower is able to repay it), but those rights were unavailable to the Nelsons once they received their discharge in bankruptcy on November 21, 1990. Moreover, the District Court concluded that the bankruptcy court did not "sanction" the FmHA for sending the letter. Therefore the court viewed the issue's resolution on appeal as having "no real effect" and held that the issue was moot. United States ex rel. Farmers Home Admin. v. Nelson (In re Nelson), 143 B.R. 722, 724 (D.S.D.1991).

In order for a federal court to have jurisdiction over an action, there must be a live case or controversy at the time the case is decided. U.S. Const. art. III, § 2; Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 2334, 45 L.Ed.2d 272 (1975). Clearly this is very much a live issue insofar as the FmHA is concerned. We do not agree that the FmHA was not "sanctioned" for sending the letter. We think that an adjudication that the FmHA was in violation of federal law is indeed a sanction, and one that the FmHA should be permitted to seek to reverse on appeal. The FmHA has in fact "suffered some actual injury that can be redressed by a favorable judicial decision." Iron Arrow Honor Soc'y v. Heckler, 464 U.S. 67, 70, 104 S.Ct. 373, 375, 78 L.Ed.2d 58 (1983). This Court can reverse the determination that the FmHA violated federal bankruptcy law. "[T]he judicial function may be appropriately exercised although the adjudication of the rights of the litigants may not require the award of process or the payment of damages." Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241, 57 S.Ct. 461, 464, 81 L.Ed. 617 (1937). We hold that this issue is not moot and now address the merits.

Acknowledging the restrictions of the automatic stay in bankruptcy, the Secretary of Agriculture promulgated regulations pursuant to the power given by Congress, see 7 U.S.C. § 1989 (1988), for dealing with an FmHA borrower who becomes a debtor in bankruptcy. 7 C.F.R. § 1962.47 (1990). The regulations compel the FmHA county supervisor to send to the debtor's counsel explanations of the available loan servicing options, but prohibits the supervisor from sending the usual letter that accompanies such servicing information, which states that the FmHA will take legal action to collect the debt, including foreclosure, repossession, and offset--actions clearly in violation of the stay. Id. § 1962.47(a)(3). The letter that should accompany the servicing information, according to the regulations, and the one that was in fact sent to the Nelsons' counsel, is set forth in 7 C.F.R. pt. 1962, subpt. A, ex. D. See § 1962.47(a)(3).

The text of the letter to the Nelsons' counsel read 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. If your local jurisdiction does not sign orders providing limited relief from the automatic stay, please provide FmHA with a filed copy of your motion seeking limited relief from the automatic stay. A sample motion and order are available from the U.S. Attorney's office.. [sic] After dismissal or modification of the automatic stay, or attempted modification, your client must complete and return Attachment 2 of Exhibit A of Subpart S of Part 1951 of this chapter to enable FmHA to consider or grant any request for servicing. Unless the automatic stay is modified for this purpose or you seek a modification and it is not customary for your local bankruptcy court to approve such orders, 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.

FmHA's farmer programs debt servicing regulation is found at 7 CFR, part 1951, Subpart S. We cannot promise you or your client that a request for debt servicing will be approved. However, we can promise that a request will be fully and fairly considered by FmHA.

Letter from Rydell to McGill of 4/6/90, reprinted in Appellants' Addendum at 1-2. The letter is signed by the FmHA county supervisor.

We do not believe that this letter is in violation of the...