United States v. H & S REALTY CO.

• Decision Date: 17 November 1986
• Docket Number: Civ. No. 85-0272-P.
• Citation: 647 F. Supp. 1415
• Court: U.S. District Court — District of Maine
• Parties: UNITED STATES of America, Plaintiff v. H & S REALTY CO., Defendant and Third-Party Plaintiff, v. KEY BANK OF CENTRAL MAINE, Third-Party Defendant, v. KEMPCHEN & CO., and Chase Commercial Corp., Parties-in-Interest.

647 F. Supp. 1415

UNITED STATES of America, Plaintiff v. H & S REALTY CO., Defendant and Third-Party Plaintiff, v. KEY BANK OF CENTRAL MAINE, Third-Party Defendant, v. KEMPCHEN & CO., and Chase Commercial Corp., Parties-in-Interest.

Civ. No. 85-0272-P.

United States District Court, D. Maine.

November 17, 1986.

Ronald E. Colby, III, Asst. U.S. Atty., Augusta, Me., for plaintiff.

Michael A. Nelson, Portland, Me., for defendant H & S Realty.

Frank G. Chapman, Lauren C. Folsom, Augusta, Me., for third-party defendant Key Bank.

M. Kelly Matzen, Barbara L. Raimondi, Auburn, Me., for party in interest Chase Commercial Corp.

GENE CARTER, District Judge.

MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF'S AND THIRD-PARTY DEFENDANT'S MOTIONS TO STRIKE AND FOR SUMMARY JUDGMENT

This case is before the Court on motions to strike and motions for summary judgment filed by Plaintiff United States of America and Third-Party Defendant Key Bank of Central Maine.¹ Parties-in-interest Kempchen & Co. and Chase Commercial Corp. have not yet filed any pleadings, motions or memoranda in connection with the pending matter. For the reasons stated herein, the motions to strike are denied and the motions for summary judgment are granted with respect to all claims except H & S Realty's Claim IV against Key Bank.

The Court of course recognizes that by order dated February 18, 1986, it has previously affirmed the Magistrate's Recommended Decision and denied Key Bank's motion to dismiss, which motion was based on several of the same grounds advanced in support of these motions for summary judgment. The Court has determined, however, based on its consideration of the parties' memoranda, the evidentiary materials on this motion, and a thorough review of the relevant cases, that summary judgment is now appropriate.

FACTUAL BACKGROUND

In February of 1980, Hamilton & Son, a Maine corporation specializing in custom metal fabrications, borrowed $500,000 from and executed a note in that amount in favor of Depositors Trust Co. of Maine, now known as Key Bank of Central Maine and referred to hereinafter as Key Bank. The loan was a deferred participation loan, a portion of which was guaranteed by the Small Business Administration (SBA). As collateral, Hamilton & Son gave Key Bank a security interest in its machinery and equipment, furniture and fixtures, inventory, accounts receivable, and contract rights. At the same time, Defendant H & S Realty (whose owner, Robert Hamilton, then owned Hamilton & Son) executed a form SBA loan guaranty covering the Key Bank loan to Hamilton & Son. As security for the guaranty, H & S Realty mortgaged to Key Bank certain premises owned by H & S Realty and leased to Hamilton & Son for use as its place of business.² By 1982, Hamilton & Son's president, James Donoghoe, acquired full ownership of Hamilton & Son from Mr. Hamilton.

In June 1983, after several late payments by Hamilton & Son and amid allegations by Mr. Hamilton of financial wrongdoing by Mr. Donoghoe, Key Bank declared the loan in default. The bank took possession of the premises in July of 1983, and an involuntary bankruptcy proceeding was commenced against Hamilton & Son. Key Bank obtained relief from the automatic stay and attempted to auction off Hamilton & Son as a going concern, but received no bids. Key Bank therefore requested the SBA to honor its guaranty and assigned the note and collateral papers to the SBA in November of 1983. The SBA held an auction which netted approximately $289,000 and notified Defendant H & S Realty that it was obligated under the guaranty to pay the deficiency. H & S Realty has refused to pay and the SBA now sues for the principal sum of approximately $159,000 plus interest and, in default of such payment, for an order of foreclosure upon the premises mortgaged by H & S Realty as security for the loan guaranty.

H & S Realty's answer raises a number of defenses to the SBA's action. Chief among these are the allegations that the SBA and/or its assignor, Key Bank, breached various duties of commercial reasonableness and good faith owed to H & S Realty in connection with the administration of the loan and the maintenance of and realization upon the loan collateral. H & S Realty has also sued Key Bank as a third-party defendant, claiming damages for similar breaches of duties of commercial reasonableness and good faith. H & S Realty also asserts a claim for damages to the mortgaged premises due to a pipe freeze-up allegedly caused by Key Bank's negligence while Key Bank was in possession of the premises pursuant to a lease assignment executed by Hamilton & Son.

Both the SBA and Key Bank have moved for summary judgment. They have also filed motions to strike certain material offered by H & S Realty in opposition to the summary judgment motions, on the ground that these materials are not admissible evidence. The Court will first dispose of the motions to strike and then will discuss the motions for summary judgment.

MOTIONS TO STRIKE

Key Bank has moved pursuant to Fed.R. Civ.P. 12(f) to strike those portions of H & S Realty's materials submitted in opposition to the summary judgment motions that do not conform to the admissibility requirements of Rule 56(e). The SBA joins in the motions, without specifically relying on Rule 12(f). For the following reasons, the Court will deny these motions.

A Rule 12(f) motion applies only to "pleadings," which Rule 7 clearly differentiates from "motions and other papers." Rule 7(a) states that "the rules applicable to captions and other matters of form of pleadings apply to all motions and other papers provided for by these rules," but a motion to strike is hardly a matter of form. Moreover, inadmissibility or non-compliance with Rule 56(e) is not one of the enumerated grounds for a Rule 12(f) motion.

The Court is, however, mindful of its obligation on a summary judgment motion to consider only those matters part of the discovery record or suggested by affidavit that would be admissible at trial. See 10A C. Wright, A. Miller, and M. Kane, Federal Practice & Procedure § 2722 & nn. 11-12, 14-15, 23, 38-39 (1983). To the limited extent to which it has been necessary to consider the evidence at all, the Court has considered the parties' contentions as to the admissibility of various items of evidence in the record and has considered only those items it finds to be admissible. There is no need at this time to rule individually on each contested item.

COMMERCIAL REASONABLENESS

H & S Realty asserts defenses against the SBA and claims against Key Bank based on the alleged failure of both defendants to follow commercially reasonable practices in administering the loan and maintaining and realizing upon the loan collateral. (H & S Realty raises no question about, and the Court's conclusions are not meant to apply to, the lender's and guarantor's rights and duties with respect to the guaranty collateral.) H & S Realty's Second Defense against the SBA and its Claim I against Key Bank assert breaches of express covenants of commercial reasonableness, but H & S has acknowledged that no such express covenants exist. See Memorandum of Law in Support of Objection to Motion to Dismiss Third-Party Complaint at 5 (Dec. 12, 1985). Key Bank is therefore entitled to summary judgment on Claim I, and the Court finds H & S Realty's "Second Defense" to be legally insufficient.

What remains are H & S Realty's Claim II, alleging Key Bank's negligence in failing to follow commercially reasonable practices, and its Third Defense, asserting a failure by both Key Bank and the SBA to follow legally required procedures in maintaining and realizing on the collateral. (H & S Realty's Statement of Material Facts in Issue at 1 makes clear that this Third Defense essentially asserts a commercial reasonableness defense.) H & S Realty further narrows the scope of Claim II and the Third Defense by acknowledging that only post -default conduct is subject to the commercial reasonableness requirement of Uniform Commercial Code section 9-504(3). See H & S Realty's Statement of Material Facts in Issue at 1; United States v. Mallett, 782 F.2d 302, 304-05 (1st Cir.1986); United States v. Cain, 736 F.2d 1195, 1197-98 (7th Cir.1984) ("The duty to act in a commercially reasonable manner is imposed on the SBA only with respect to sale of security after default.").

The Court must therefore focus on whether either Key Bank or the SBA breached any duty of commercial reasonableness owed to H & S Realty in the period after Key Bank declared the default on June 9, 1983. For the reasons set forth below, the Court concludes that because of the waiver provisions of the guaranty,³ neither Key Bank nor the SBA owed H & S Realty a duty of commercial reasonableness with respect to the loan collateral during this period; the Court therefore need not consider whether there is a genuine issue of material fact with respect to the breach of such a duty.

First, the Court notes that the interpretation of the guaranty and the validity of the Third Defense against the SBA are matters of federal common law. See 13 C.F.R. § 101.1(d)(2) (1986). ("Instruments... held by the administration ... such as... guaranty agreements ... shall be construed and enforced in accordance with applicable Federal law.") In the absence of any federal law on the issue, the Court may apply Maine law if not inconsistent with federal interests. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 729, 99 S.Ct. 1448, 1459, 59 L.Ed.2d 711 (1979); United States v. Kurtz, 525 F.Supp. 734, 744 n. 18 (E.D.Pa.1981), aff'd without opinion, 688 F.2d 827 (3d Cir.1982), cert. denied, 459 U.S. 991, 103 S.Ct. 347, 74 L.Ed.2d 387 (1982) (discussing federal common law's incorporation of state law in construing SBA loan guaranties). The relevant Maine law, of course, is article 9 of the Uniform Commercial Code, Me.Rev. Stat.Ann. tit. 11, §§ 9-101—9-507 (1964 & Supp.1985). The Court...