In re Mongello

Citations: 171 B.R. 662; 1994 Bankr. LEXIS 1308; 1994 WL 422652Docket: Bankruptcy No. 93-08309-PHX-CGC

Court: United States Bankruptcy Court, D. Arizona; July 18, 1994; Us Bankruptcy; United States Bankruptcy Court

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The case involves a loan from Liberty National Bank to Arminex, Inc., guaranteed by the Small Business Administration (SBA). The loan, initiated in 1986, defaulted in 1987, and the SBA later assumed control of the note following the bank's failure and subsequent FDIC involvement. The SBA has focused its claims on the property rather than personal liability against the Debtor.

Key issues include determining whether Arizona or federal law governs the statute of limitations for enforcing the SBA's lien rights, and whether the SBA is entitled to relief from the automatic stay under federal law or if its second lien claim should be disallowed under Arizona law. 

The Debtor argues for Arizona law, citing a case that applies a six-year statute of limitations for foreclosures, asserting the SBA's lien is unenforceable due to failure to act within this period. In contrast, the SBA contends that federal law applies, which lacks a specific statute of limitations for lien foreclosures, referencing cases that support this view. The court finds the Debtor’s argument unpersuasive, noting that the deed of trust explicitly states it is governed by federal law, and similarities with previous cases involving SBA loans further undermine the Debtor's position.

The Debtor contends that in United States v. Kimbell Foods, Inc., the Supreme Court established that federal law aligns with state law in certain contexts, particularly regarding the priority of loans. Kimbell examined the priority of federal loans versus private loans, concluding that federal law governs priority issues in federally regulated loan programs. In situations lacking a federal statutory framework, federal law mirrors state law. However, the current case differs from Kimbell since there is a specific federal statute, 28 U.S.C. § 2415(a), which relates to money judgments and does not extend to foreclosure procedures. Despite this, the Debtor argues that § 2415(a) does not define a limitation period applicable to foreclosures, which is insufficient to support their position.

The Supreme Court in Kimbell identified three factors for considering state law as federal law: 1) the need for uniformity in federal programs, 2) whether state law would undermine federal objectives, and 3) the potential disruption of established commercial relationships. The Court determined that state law could govern lien priority without frustrating federal loan program goals, noting the existing uniformity in the Uniform Commercial Code. It also emphasized that treating the government as a commercial lender does not necessitate the same protections afforded to tax creditors. In applying these principles, the current case illustrates a clear need for uniformity in statutes of limitations across states, as discrepancies could hinder the SBA loan program's objectives by increasing credit risks and complications post-default.

The application of existing federal law, which imposes no time limit on foreclosures, does not disrupt the expectations of private creditors but may benefit private debtors if the government delays action. The Small Business Administration (SBA), which guaranteed the loan, may experience unfavorable outcomes if it cannot exercise its foreclosure rights until after the statute of limitations expires. Unlike an assignee of a deed of trust who assumes the seller's position, the SBA was involved from the start, making it unreasonable for the Debtor to claim that the SBA's involvement was merely as a later participant subject to state law limitations. 

The Debtor has not made payments on either lien for several months and lacks equity in the property, having executed a quit claim deed to his mother years ago. Although Debtor's counsel claims he can address defaults on the first lien, there is no plan or agreement to address arrears on the second lien, leaving SBA's interests inadequately protected. Consequently, relief from the automatic stay is warranted. The Court will allow a thirty-day period for the parties to negotiate a resolution regarding the second lien, after which the Debtor may propose a plan for adequate protection. If a proposal is submitted within this timeframe, an expedited hearing will be scheduled; failure to provide a good faith proposal may result in sanctions. 

The Court overrules the Debtor's objection to the SBA claim, allowing it as a non-recourse claim, and grants the SBA relief from the automatic stay effective in thirty days. The SBA’s argument regarding the statute of limitations for its in personam claim remains unaddressed as it has abandoned that claim.