United States v. Leslie

• Decision Date: 17 February 1970
• Docket Number: No. 19597.,19597.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Orville LESLIE, Dora Leslie, Orville L. Leslie, Jr., Benjamin T. Leslie and Otto L. Leslie, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

421 F.2d 763 (1970)

UNITED STATES of America, Plaintiff-Appellee, v. Orville LESLIE, Dora Leslie, Orville L. Leslie, Jr., Benjamin T. Leslie and Otto L. Leslie, Defendants-Appellants.

No. 19597.

United States Court of Appeals, Sixth Circuit.

February 17, 1970.

T. George Sternberg, Bay City, Mich., for appellants.

Fred M. Mester, Asst. U. S. Atty., Detroit Mich., for appellee, James H. Brickley, U. S. Atty., Detroit, Mich., on brief.

Before WEICK and EDWARDS, Circuit Judges, and O'SULLIVAN, Senior Circuit Judge.

WEICK, Circuit Judge.

Appellants, Leslies, were unconditional guarantors of payment of a negotiable promissory note in the amount of $80,000, which was executed and delivered by Leslie Motors, Inc., a family-owned corporation, to Oscoda State Savings Bank of Oscoda, Michigan (Bank), and upon default it was endorsed by Bank to Small Business Administration (SBA), an agency of the Government.

Orville Leslie (now deceased) and Dora Leslie, were husband and wife, and the remaining defendants were their sons.

On December 11, 1959, Bank loaned $80,000 to Leslie Motors, Inc. SBA acted as underwriter for 90% of the loan. The corporation executed a note to Bank on SBA form 154. At the time of the execution of the note and in order to secure payment thereof, the corporation executed and delivered to Bank a mortgage on its real property, which consisted of a parcel of land with a building thereon which housed a sales and service facility of the Ford dealership operated by the corporation. As additional security, the corporation executed and delivered to Bank a chattel mortgage on furniture, fixtures, equipment, tools, and other personalty. Each of the defendants individually executed and delivered to Bank a written guaranty of payment of the note. The guaranties were written on SBA form 148A.

On March 7, 1962, following default by the corporation in payment of the note, Bank endorsed the note and assigned the real estate and chattel mortgages and the guaranty contracts to SBA. The balance due on the note was $75,721.02.

On November 14, 1962, the present action was commenced by the Government in the District Court against the defendants on the separate contracts of guaranty, and it sought to recover the full amount due thereon, plus interest.

On November 15, 1962, an action for foreclosure of the mortgage on real estate by advertisement¹ was commenced by SBA. It bid in the real property at public sale for $55,969. The property was later redeemed from sale by Morris Motors, Inc., for $59,865.37. Morris Motors also purchased from SBA for $5,000, the collateral involved in the chattel mortgage, upon which payment the chattel mortgage was discharged.

At the trial the defendants raised two affirmative defenses. They contended: First, that since the Government had chosen a Michigan procedure to effect foreclosure of the mortgage on real property, it was required to follow the Michigan statute which they claim precluded it from maintaining an action against the guarantors once foreclosure was instituted; and Second, that the price bid by SBA on the real property was substantially less than its fair market value which would have been adequate to cover the amount still owing. The case was tried to the Court without a jury. The trial judge limited defendants' proof to the fair market value of the real property. He held that the evidence introduced by defendants —

"* * * as to value failed to take into account the loss of auto dealership franchise, or in the alternative, premised the assessment of value of the property on the continued existence of such a franchise. It would appear that the failure of the predecessor and successor dealership companies demonstrates the lack of realism in the opinions of defendants\' witnesses respecting the cash market value of the property at the time of the foreclosure sale."

He rendered judgment in favor of the Government in the amount of $28,566.08, which was the balance due after application of the proceeds of sale. The Leslies have appealed therefrom.

We do not understand that the Government seriously contends that it was not bound by the requirements of the Michigan statute on foreclosure by advertisement, which it chose to utilize. When the United States invokes a remedy provided by state law to enforce its claim, in our opinion it is required to follow the procedures provided thereby. See United States v. John Hancock Mut. Life Ins. Co., 364 U.S. 301, 308, 81 S.Ct. 1, 5 L.Ed.2d 1 (1960); Guaranty Trust Co. of New York v. United States, 304 U.S. 126, 134, 58 S.Ct. 785, 82 L.Ed. 1224 (1938); United States v. Glendale Nursing Home, 356 F.2d 651, 654 (3d Cir. 1966).

The question for us to decide is whether the Government complied with the provisions of the applicable Michigan statutes providing for foreclosure by advertisement when it did not dismiss the prior action against defendants on the contracts of guaranty after it commenced foreclosure proceedings. Section 3204(2) provides, in order to maintain such a foreclosure:

"That no suit or proceeding shall have been instituted, at law, to recover the debt then remaining secured by such mortgage, or any part thereof; or if any suit or proceeding has been instituted, that the same has been discontinued, or that an execution upon the judgment rendered therein has been returned unsatisfied, in whole or in part; * * *."

It is not disputed that the Government had commenced a suit against the defendants as guarantors one day prior to commencement of foreclosure under the statute. Nor is it disputed that the Government did not discontinue that action after it commenced foreclosure proceedings. The defendants claim that the Government's failure to discontinue the action against them as guarantors brings the Government squarely within the terms of § 3204. We disagree.

The statute was not enacted to protect guarantors of a note. As the Supreme Court of Michigan has stated:

"This statute² clearly refers to suits on the debt, and not to foreclosure proceedings on the mortgage, and its object is to prevent proceedings, at the same time to prosecute the personal liability of the mortgagor and pursue the land." Lee v. Clary, 38 Mich. 223, 227 (1878). (Emphasis added)

The language of Lee v. Clary is unmistakably clear that it is the purpose of the statute to force an election of remedies which if not made would create the possibility that the mortgagee could foreclose the mortgage and at the same time hold the maker of the note personally liable for the debt. Accord, Larzelere v. Starkweather, 38 Mich. 96, 105 (1878).

In the case before us, the debtor-mortgagor is Leslie Motors, Inc., not the defendants individually. No action was maintained against Leslie Motors on the debt. The action in the District Court was brought against the defendants in their capacity as guarantors. The guaranty is an obligation separate from the mortgage note. It is simply not the "debt" to which the statute refers. Because the obligation of guaranty is distinct from the debt, the Government was not maintaining an action against the debtor "to recover the debt then remaining secured * * *."

The guaranty executed by defendants was not conditioned by any requirement that the creditor proceed against the mortgagor or its property.³ Since no condition was written into the contract, there was no requirement that the Government proceed against the mortgagor or its property prior to asserting its rights against the guarantors. See Krekel v. Thomasma, 255 Mich. 283, 288-289, 238 N.W. 255, 81 A.L.R. 786 (1931).

The Government could have elected to proceed solely against the guarantors, who were liable for the amount of the debt. It should not be penalized for electing to proceed also against the mortgaged property, thereby reducing the liability of the guarantors to the amount of the deficiency. We are of the opinion that the guarantors were not prejudiced in any respect by the foreclosure instituted by the Government. No judgment was rendered against them until after the foreclosure proceedings were completed.

The contention of Leslies that the Government bid in the property at...