U.S. v. Sims

• Decision Date: 21 December 1978
• Docket Number: No. 75-4424,75-4424
• Citation: 586 F.2d 580
• Parties: UNITED STATES of America, Plaintiff-Appellant Cross-Appellee, v. John Junius SIMS et al., Defendants, Lois E. Sly, Executrix of the Last Will and Testament of Howard B. Sly, Defendant-Appellee Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 580

586 F.2d 580

UNITED STATES of America, Plaintiff-Appellant Cross-Appellee, v. John Junius SIMS et al., Defendants, Lois E. Sly, Executrix of the Last Will and Testament of

Howard B. Sly, Defendant-Appellee Cross-Appellant.

No. 75-4424.

United States Court of Appeals, Fifth Circuit.

Dec. 21, 1978.

Robert E. Hauberg, U. S. Atty., Joseph E. Brown, Jr., Asst. U. S. Atty., Jackson, Miss., for plaintiff-appellant cross-appellee.

T. Eugene Caldwell, Thomas G. Lilly, Joseph P. Wise, Jackson, Miss., for defendant-appellee cross-appellant.

Appeals from the United States District Court for the Southern District of Mississippi.

Before COLEMAN, SIMPSON and TJOFLAT, Circuit Judges.

TJOFLAT, Circuit Judge:

The Small Business Administration (SBA), after proceeding against the collateral securing a defaulted $350,000 loan, brought this suit ¹ for the deficiency against the three makers of the loan ² and the executrix of the estate of a guarantor. ³ A default judgment for the full deficiency, $16,877.24, was entered against each of the makers. Following a bench trial, the district court entered judgment against the executrix but, for equitable considerations, reduced her liability to one-fourth of the deficiency. On the executrix's crossclaim against the makers, she was awarded judgment for that one-fourth amount.

The principal issue presented at trial and in the briefs filed on this appeal ⁴ is whether the SBA's release of some of the collateral without notice to the executrix operated to extinguish her decedent's obligations under the guaranty. A recent decision of this court, United States v. Terrey, 554 F.2d 685 (5th Cir. 1977), handed down subsequent to the proceedings in district court and the briefing on this appeal, is dispositive of the issue. Following the Terrey rationale, we must uphold the district court's conclusion that SBA's failure to give notice did not discharge the executrix and remand the case for the purpose of determining whether the fair market value of the collateral released without notice was sufficient to pay the debt it secured. If the fair market value of the collateral was sufficient, the executrix cannot be held liable on the guaranty; to the extent that the fair market value was not sufficient to satisfy the indebtedness, she is liable for the deficiency.

I

The evidence in this case is not in dispute, except as to the fair market value of the released collateral. On that issue, no probative evidence was adduced. ⁵

On February 17, 1966, First National Bank of Jackson, Mississippi (the Bank), loaned $350,000 to the three Sims brothers, partners in a timber and sawmill business called Sims Enterprises. The loan was necessary to enable the partnership to purchase some sawmill machinery and equipment, costing in excess of $200,000, from Howard B. Sly, the executrix's late husband. The loan was evidenced by a note signed by the Simses and was secured by written guaranties of payment executed by each of the brothers and by Mr. Sly. The Bank received additional security from the borrowers: a deed of trust covering five tracts of land, totalling 1130 acres, in Smith and Jasper counties, Mississippi; a chattel deed of trust encumbering certain sawmill machinery and equipment; an assignment of $50,000 in life insurance on each of the Sims; and the assignment of the proceeds of a woodchip contract between Sims Enterprises and Masonite Corporation.

SBA participated in the loan to the extent of 75%. This participation was reflected in the interest provision of the note on 25% Of the loan the Bank was to receive interest at the rate of 8% Per annum, and on the remaining 75% The SBA was to be paid at the rate of 4% Per annum. The loan was to be amortized over seven years with monthly payments of $5053.00 beginning May 17, 1966.

Payments were made when due until the October 1966 installment. In July 1967, SBA consented to the Bank's granting of a six-month moratorium, without notice to Mr. Sly. Thereafter, the loan, as extended, remained approximately two months delinquent for over two years, though the monthly installments came in fairly regularly.

On April 23, 1969, Mr. Sly was killed in an airplane crash, and on May 2, 1969, letters testamentary were issued to his widow, Lois E. Sly, the executrix now before us. On June 13, 1969, the Bank made claim against Sly's estate for $247,088.24, the amount owing on the note which was then two months in default. ⁶ Later in that year, or early in 1970, the Bank, with SBA's consent, granted the Sims brothers another extension, this one for three months. The executrix was not notified of the extension. The last installment paid on the note came on June 18, 1970. The following month the sawmill closed, and Sims Enterprises ceased operations. In September 1970, SBA assumed the servicing of the loan. On December 15, 1970, SBA, by assignment without recourse, acquired the Sims' note and the collateral, including the Sly guaranty.

From the time Sims Enterprises went out of business until the commencement of this action in district court, SBA's collection efforts succeeded in reducing the principal balance due on the loan to $16,877.24, the amount sued for in these proceedings. Most of the reduction came from the proceeds of the collateral. SBA obtained $15,599.82 in the form of loans against the cash values of the assigned life insurance policies; $118,628.00 for releasing, in two separate transactions, its security interest in 1120 acres of the land under the deed of trust; and $68,456.33 from the foreclosure sale of the sawmill, equipment, and the remaining ten acres of the land encumbered by the deed of trust.

SBA's claim against the executrix was tried before the district court on a pretrial order that incorporated addenda, prepared by the parties, that purported to frame the legal issues central to the case. Record, vol. 1, at 116, 121, 131-33. The addenda failed to accomplish that purpose, and the case proceeded to trial without a joinder of issues. As the case progressed, what we consider to be the prime issue in the controversy SBA's authority to release its security interest in the 1120 acres of land without notice to the guarantor eventually surfaced. After considering the evidence presented by both sides, the district court, in its opinion of January 7, 1975, concluded that Sly's guaranty was valid and enforceable by SBA against his estate ⁷ and that neither Sly nor his executrix were entitled by the provisions of the guaranty to receive notice of the payment moratoriums that had been granted the Simses, notice of the ensuing default, or notice of SBA's releases of its security interest in the 1120 acres of land held in trust. Id. at 152-63. The court reached this conclusion by giving effect to language of the guaranty, quoted in the margin, ⁸ under which the guarantor purported to waive, inter alia, notice of the payment moratoriums and notice of any default and to consent to the Bank's and SBA's, release of the collateral, without prior notice to the guarantor. In the court's view, the only limitation imposed on SBA's right to dispose of the collateral is the proviso that makes SBA accountable for any deterioration, waste, or loss of collateral "caused by the willful act or willful failure to act of Bank" or SBA ⁹, and no evidence was produced to bring that limitation into play. The limitation was considered by the court to be so narrow that SBA could not be called to answer for disposing of collateral, without notice, even at an inadequate price. Id. at 161-62. Consequently, it held meritless the executrix's contention that SBA's release of its security interest in 1000 (of the 1120) acres of land for $105,000, when the land was shown to be worth $160,000 a year later, should operate to discharge her from further liability under the guaranty. Id. at 160. The court reasoned that under the guaranty any objection to the adequacy of consideration realized for collateral was waived, Id., unless it could be demonstrated that "the consideration was so inadequate as to equate with fraud or gross negligence," Id. at 161-62. Neither fraud nor gross negligence on SBA's part was proved. As we have indicated, ¹⁰ there was no competent evidence as to the value of the land, so the court could not have properly found that the $105,000 price SBA received for its security interest was inadequate. Moreover, in view of SBA's conclusion, based on an appraisal it had obtained, that the land had a "liquidating value" of $99,839.00, Id. at 161, the court found that SBA was acting in good faith in releasing its interest in the property.

Having concluded that the executrix was liable under the guaranty for the full amount of the deficiency, $16,877.24, plus interest and costs, the court directed the Government to prepare a final judgment providing for a recovery against the executrix in that sum and for her indemnification against the Simses on her crossclaim. Id. at 162. It also directed the Government to consider a compromise settlement with the executrix for two "equitable" reasons. First, the court was concerned by the fact that one of the Simses' wives, Mrs. John Junius Sims, a year after SBA released the 1000 acres of land to her as owner of record for $105,000, had sold the land to Masonite Corporation for $160,000, all to the probable benefit of the principal debtors, the Simses. The court observed that "this profit would be more than ample to extinguish the indebtedness without the necessity of proceeding against the (executrix), who as a result of the tragic death of her husband in a plane crash, has been deprived of her principal means of support." Id. at 163. Second, the court considered it to be poor business judgment on the part of the Bank and SBA in not requiring the Simses' wives to execute, along with their husbands, both the need of trust, covering the 1130 acres of land, and the guaranty agreements. The court raised this...