Emanuel v. SBA CV-97-012-JD 10/16/98 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Michael S. Emanuel, et al.

v. Civil No. 97-012-JD

United States Small Business Administration

O R D E R

Michael Emanuel, the pro se plaintiff, has asserted various

claims against the defendant, the United States Small Business

Administration (the "SBA"), arising from the SBA's foreclosure

sale of the business property of Quality Discount Foods Corp.

("Quality"), a company owned by Emanuel. Before the court is the

defendant's motion to dismiss the plaintiff's amended complaint

(document no. 27).

Background

The court incorporates by reference the factual background

discussed in its order of March 6, 1998. See Emanuel v. United

States Small Bus. Admin., No. 97-012-JD, slip op. at 1-2 (D.N.H.

Mar. 6, 1998). In that order the court rejected counts one and

three of the plaintiff's initial complaint, alleging in essence

misrepresentation or fraud, because it lacked subject matter

jurisdiction over those claims. See id. at 5-8. In count two. however, the plaintiff asserted that the defendant breached

contractual duties owed him. The defendant moved for dismissal

of this claim as well, asserting, inter alia, that the claim was

barred by the statute of limitations. However, the plaintiff

failed to plead this claim with sufficient particularity to allow

the court to resolve the issue. The court therefore granted

leave to the plaintiff to amend his complaint as follows:

the plaintiff's complaint must include clear, specific statements identifying: (1) the contract and terms that the defendant has allegedly breached; (2) the duties the defendant allegedly owed the plaintiff that arose from the contract; and (3) the actions of the defendant that allegedly breached the contractual duties owed the plaintiff.

Id. at 10.

On April 3, 1998, the plaintiff filed his amended complaint.

In the amended complaint, the plaintiff alleges that: (1)

Quality borrowed $261,600 from the SBA as a "displaced business

loan" in 1974 to purchase a site for a supermarket (the "Quality

property")1; (2) Quality encountered financial difficulties and

purchased inventory with money allocated for the payment of real

estate taxes; (3) the SBA foreclosed on the Quality loan; (4) the

principle on the loan had been reduced to roughly $90,000; (5)

the Quality property was sold by the SBA at public auction for

1The record indicates that the plaintiff co-signed the loans as a guarantor.

2 $134,OOO2; (5) there were no other bidders at the auction besides

the purchasers; (6) the Quality property was subsequently resold

by the purchasers for $350,000; (7) the city of Laconia appraised

the Quality property at $959,000; (8) the property was appraised

by another creditor at $500,000 to $700,000; (9) the SBA

appraised the property at $300,000; (10) the SBA's appraisal was

inaccurate as it used improper comparables; and (11) the public

auction was conducted inappropriately as it was held on the

coldest day of the year.

The plaintiff asserts that the SBA is liable because it

should not have initiated the foreclosure on the property, the

property should not have been sold at auction for less than its

value, and the conduct of the sale was inappropriate as the sale

was held on the coldest day of the year. The plaintiff also

asserts a novel claim of a conflict of interest between the SBA,

United States Senator Judd Gregg, and the New Hampshire law firm

of Sullivan and Gregg. The defendant has again moved for

dismissal, re-asserting its earlier arguments as well as new

arguments in response to the amended complaint.

2The defendants assert that the sale price included payment of $43,000.00 for overdue taxes in addition to the $134,000.00.

3 Discussion

A motion to dismiss under Federal Rule of Civil Procedure

12(b)(6) is one of limited inquiry, focusing not on "whether a

plaintiff will ultimately prevail but whether the claimant is

entitled to offer evidence to support the claims." Scheuer v.

Rhodes,

(1974). Accordingly, the court must

take the factual averments contained in the complaint as true,

"indulging every reasonable inference helpful to the plaintiff's

cause." Garita Hotel Ltd. Partnership v. Ponce Fed. Bank,

(1st Cir. 1992); see also Dartmouth Review v.

Dartmouth College,

(1st Cir. 1989). In the end,

the court may grant a motion to dismiss under Rule 12(b) (6)

"'only if it clearly appears, according to the facts alleged,

that the plaintiff cannot recover on any viable theory.'"

Garita,

(quoting Correa-Martinez v. Arrillaaa-

Belendez,

(1st Cir. 1990)).

"Our judicial system zealously guards the attempts of pro se

litigants" to represent their own interests. See Ahmed v.

Rosenblatt,

(1st Cir. 1997), cert, denied,

(1998). The court has a duty to liberally construe a

pro se plaintiff's complaint. See id. If a pro se plaintiff

alleges sufficient facts from which the court can intuit a cause

of action, even if the plaintiff imperfectly pleads the cause of

4 action, the court must not dismiss the case. See id. "However,

pro se status does not insulate a party from complying with

procedural and substantive law." Id.

A. Commercial Reasonableness

The plaintiff has asserted that the SBA undervalued the

property at issue, wrongfully sold the property for an

insufficient amount, and should not have conducted the sale,

inter alia, on the coldest day of the year. The issue presented

by the plaintiff's allegations is whether there was a duty on

behalf of the SBA to realize some minimum price and to engage in

some minimum standard of conduct in connection with its

foreclosure of the property at issue.

This case arises from a nationwide federal program designed

to assist small businesses in part through dispersing federal

funds in the form of loans or guarantees under the auspices of

the SBA. Federal legislation does not address the rights and

obligations of the SBA as a mortgagee in foreclosing upon

property. Many circuits have found incorporation of state law

warranted to fill the interstices of the federal legislation.

In United States v. Conrad Publishing Co., the Eighth

Circuit incorporated the Uniform Commercial Code ("UCC"), as

adopted by North Dakota, into federal law and upheld the district

5 court's determination that the SBA had not conducted a

foreclosure in a commercially reasonable manner. See

(8th Cir. 1978) . In Great Southwest Life Ins. Co. v

Frazier, the Ninth Circuit incorporated the UCC, as adopted by

Idaho, into federal law, and found that: (1) a co-maker of a

note could not assert an impairment of collateral defense; and

(2) defenses provided under Idaho's rendition of the UCC, as

incorporated into federal law, survived a contractual waiver.

See

, 899-903 (9th Cir. 1988). In United States v.

Dismuke, the Fifth Circuit found the SBA's suit for a deficiency

judgment precluded as the SBA had failed to comply with a Georgia

statute, incorporated by the court into federal law, that

reguired judicial confirmation of a foreclosure sale. See

(5th Cir. 1980). In Wainriaht Bank & Trust Co.

v. Railroadmens Fed. Sav. & Loan Ass'n., the Seventh Circuit

applied the UCC as adopted by state law, and the commercial

reasonableness standard, to determine the rights and obligations

of the SBA in foreclosing on loans. See

at 149-50

(7th Cir. 1986). C f . United States v. Warwick,

(7th Cir. 1982) (applying the UCC as federal law to determine

rights and obligations of SBA without specific reference to state

law). See also, Regan v. United States Small Bus. Admin.,

(11th Cir. 1991) (incorporating state law into

6 federal law governing rights and obligations of SBA).

The First Circuit has not expressly determined that federal

law governing the rights and obligations of the SBA should

incorporate state law, although approval of such an incorporation

can be inferred from United States v. Baus. See

(1st Cir. 1987). In Baus, the First Circuit addressed

whether the SBA, representing the Economic Development

Administration, had breached a duty it allegedly owed to the

guarantors of a loan it had foreclosed upon. The court noted

that it was "well-established" that a secured creditor who seizes

and disposes of loan collateral after a default must do so in

good faith and in a commercially reasonable way.

at 1125

(citing the UCC's adoption by forty-nine states) . The court in

Baus also noted that other courts applying federal law have

repeatedly referred to the UCC, see

, and observed

that a breach of a duty of commercial reasonableness may have

occurred in the case, see

. The First Circuit

revisited the issue in United States Small Bus. Admin, v.

Sotomavor-Santos, stating that "absent agreement to the contrary,

a federal lender like SBA may be subject to a general obligation

to behave reasonably in disposing of any collateral upon which it

forecloses."

(1st Cir. 1996) (citing Baus,

).

7 New Hampshire has also adopted the UCC as state statutory

law. See RSA § 382-A (1994). Following a majority of courts

that have considered the question, and an indication that the

First Circuit would join the majority in an appropriate case, the

court will use state law pertinent to a secured party's right to

dispose of collateral after a default as federal law in

considering the SBA's obligations and plaintiff's claims in this

case. Section 504(3) provides:

Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms but every aspect of the disposition including the methods, manner, time, place and terms must be commercially reasonable.

RSA § 382-A:9-504(3) (1994). The official comment appended to

section 382-A:9-504 indicates that section 382-A:9-507(2)

provides some relevant tests to determine "commercial

reasonableness." "If the secured party either sells the

collateral in the usual manner in any recognized market therefor

or if he sells at the price current in such market at the time of

his sale or if he has otherwise sold in conformity with

reasonable commercial practices among dealers in the type of

property sold he has sold in a commercially reasonable manner."

RSA § 382-A:9-507(2) (1994). Section 382-A:9-507(1) in turn

provides that if "the disposition has occurred the debtor or any person entitled to notification or whose security interest has

been made known to the secured party prior to the disposition has

a right to recover from the secured party any loss caused by

failure to comply with the provision of this Part." RSA 382-A:9-

507(2) (1994) .

Moreover, the New Hampshire Supreme Court has held that

"[i]n his role as a seller, the mortgagee's duty of good faith

and due diligence is essentially that of a fiduciary." Murphy v.

Financial Dev. Corp.,

,

(1985). "This duty is owed not only to mortgagors, but also to

guarantors." First NH Mortgage Corp. v. Greene,

,

(1995).

The court finds that the plaintiff's amended complaint

alleges sufficient facts to state a cause of action against the

SBA for abridging a duty of conducting the sale in a commercially

reasonable manner.3 This is premised in part upon the appraised

values of the property, the price received at foreclosure for the

property, and the subseguent resale value of the property.4

3The court clarifies that this does not mean the plaintiff has proven his case, but has merely established the elements necessary to state an actionable claim.

4A s discussed above, the plaintiff alleges that the property at issue was appraised by the city of Laconia for $959,000 and by the SBA for roughly $300,000, that it was sold at auction for $134,000, but then subseguently resold for $350,000. The defendant indicates that roughly $43,000 in back taxes were also If the plaintiff intends to assert a cause of action against

the SBA alleging that it breached an obligation of commercial

reasonableness under N.H. RSA §§ 382-A:9-504 and 507, and a

fiduciary duty, incorporated as federal law, the plaintiff is

granted leave to file a second amended complaint by November 16,

1998. The second amended complaint must identify those aspects

of the foreclosure that the plaintiff asserts were not

commercially reasonable, and must allege facts that support such

a claim. Failure to comply with this order will result in

dismissal of this case with prejudice. The plaintiff has already

been given one opportunity to amend his complaint.

In light of the above discussion, the court denies the

defendant's motion to dismiss, premised upon the statute of

limitations, without prejudice to renew upon the filing of the

plaintiff's second amended complaint.

B. Discretionary Decisions

In the plaintiff's "Memorandum of Law & Objection to Motion

to Dismiss," he asserts that the defendant breached a contract

when it failed to exercise its discretion under its statutory

authority to extend the loan rather than foreclose on it.

paid in consideration for the property.

10 Specifically, the plaintiff first cites 15 U.S.C.A. § 631a(a)

(West 1997), under the heading "Congressional declaration of

small business economic policy," for the Congressional policy of

fostering small businesses. He then relies on

(a)(7) to establish the Administration's power to defer

payment on the principal of loans.5 From these statutory

provisions he concludes that the SBA breached a contract.

Section 631a(a) is a statement of general policy. Section

636(a)(7) limits the SBA's authority to defer loan payments to

situations where "it deems [it] necessary and appropriate to

assure the successful establishment and operation of such

concern." The language is permissive, indicating the

discretionary nature of the decision. C f . SGA Financial Corp. v.

United States Small Bus. Admin.,

(D. N.J.

1981), aff'd SGA Financial Corp. v. United States Small Bus.

Admin.,

(3rd Cir. 1981) (permissive language a

factor indicative of administrative discretion).

The court is aware of no support for the proposition that

5The plaintiff's reliance on

(b)(7) and

(5) (West 1994) is inapposite as they relate to loans issued by the Secretary of Commerce under the Public Works and Economic Development Act,

(West 1994), and the plaintiff's loans were issued under the SBA's disaster lending authority pursuant to

(b) (3) (repealed 1986) (West 1997).

11 the SBA's failure to exercise its discretion to extend rather

than foreclose a loan constitutes a breach of contract with the

mortgagor, giving rise to a viable cause of action. Indeed,

courts have found the SBA's decision to grant or extend a loan to

be non-reviewable by the courts. See Gifford v. Small Bus.

Admin.,

(9th Cir. 1980); United States v. Capital

Assistance Corp.,

(9th Cir. 1972); Copake Lake Dev.

Corp. v. United States,

(E.D.N.Y. 1980); Tuepker

v. Farmers Home Admin.,

(W.D. Mo. 1981); see

also, Helgeson v. Bureau of Indian Affairs, Dep't of the

Interior, United States,

, at *3-4 (9th Cir. 1998) .

Nor does a general statement of policy provide a cause of action

for the plaintiff. See Concrete Tie, Inc. v. Liberty Constr.,

Inc.,

(9th Cir. 1997) ("Policies are the

result of discretionary decisions and are established to guide

the agency's employees; a declaration of policy does not create a

legally enforceable duty.").

Significantly, the plaintiff does not assert that he was

timely in his tax or loan payments such that the SBA breached its

contract in foreclosing on the loan. Such payments are a

necessary part of the contractual obligations as the mortgage

deed explicitly stated it was issued upon statutory conditions.

See RSA § 477:29(11) (statutory conditions include payment of

12 taxes "when due"); see also, Def.'s Mot. to Dismiss Am. Compl.,

Ex.2, Attach. 2 at 2 (note payable) (upon nonpayment of

indebtedness when due, holder is empowered to sell collateral at

public or private sale). Moreover, reliance on the SBA's prior

actions in not foreclosing earlier would be unfounded. See id.

at 1, 2 (note payable) (holder's failure to exercise rights does

not constitute waiver of them) (security rights of holder not

impaired by any indulgence).

The court concludes that the plaintiff has failed to state a

claim arising from the SBA's decision to initiate foreclosure on

the property at issue.

C. Misrepresentation, Fraud, and Constructive Fraud

As indicated above, the plaintiff reasserted claims alleging

misrepresentation, fraud, and constructive fraud that the court

had previously dismissed due to its lack of jurisdiction over

them. See Emanuel, slip op. at 5-8. The plaintiff attempts to

avoid the conseguences of the court's earlier ruling by arguing

that the SBA officials were acting beyond the scope of their

authority. Contrary to the plaintiff's assertions, the SBA is

granted broad authority under its enabling statute to foreclose

on mortgages on real property in connection with loans granted

under the statute. See

(b) (West 1997). The

13 plaintiff's complaint fails to allege facts indicating that the

SBA, or agents of the SBA, acted outside the scope of their

authority. The court dismisses the plaintiff's tort claims for

fraud, constructive fraud, or misrepresentation.

D. Conflict of Interest

The plaintiff's amended complaint asserts a conflict of

interest between Senator Gregg, the law firm of Sullivan and

Gregg, and the SBA, in that Sullivan and Gregg allegedly earned

$6,000 from the firm's representation of one mortgage holder.

Diversified Funding Services. There are no allegations that the

various individuals or entities identified exercised any

influence or control over, or had any interest in, each other, or

derived any benefit, financial or otherwise, from the

foreclosure, that would support a claim of conflict of interest.

The claim is therefore dismissed.

E. Quality Discount Market Corp.

The plaintiff appears in this case pro se in his capacity as

a guarantor of the SBA loans. Quality was the debtor to the SBA

for these loans. As a corporation can appear only by an

attorney, see Pridgen v. Andresen,

(2d Cir.

1997), the plaintiff cannot represent the interests of Quality.

14 Quality must therefore be represented by an attorney, who must

file an appearance on behalf of Quality before the second amended

complaint is filed. Failure to do so will result in the

dismissal of any claims Quality may have with prejudice.

Conclusion

The court perceives one potentially viable claim from the

plaintiff's amended complaint; an allegation that the SBA failed

to conduct the foreclosure in a commercially reasonable manner

and breached a fiduciary duty. Should this be the cause of

action the plaintiff seeks to assert, he is to file a second

amended complaint in accordance with Federal Rule of Civil

Procedure 8 by November 16, 1998. The SBA will thereby be

accorded an appropriate opportunity to answer the complaint and

assert affirmative defenses. The SBA's motion to dismiss

premised upon the statute of limitations is denied without

prejudice to renew. The plaintiff's request for a hearing is

denied. The plaintiff's claims alleging misrepresentation,

fraud, and constructive fraud are dismissed, as is his claim

asserting a conflict of interest. An attorney must file an

appearance for Quality before the second amended complaint. In

15 light of the above discussion, the court grants in part and

denies in part the SBA's motion to dismiss (document no. 27).

SO ORDERED.

Joseph A. DiClerico, Jr. District Judge

October 16, 1998

cc: Michael S. Emanuel, pro se T. David Plourde, Esguire

16