USA v. Chappell CV-98-524-M 06/15/00 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

United States of America, Plaintiff

v. Civil No. 98-524-M Opinion No.

Ronald C. Chappell and Susan L. Chappell, Defendants

O R D E R

The United States, through the Farm Service Agency ("ESA"),

a successor to the Farmers Home Administration ("FmHA"), seeks a

deficiency judgment against defendants Ronald and Susan Chappell,

after having foreclosed on defendants' dairy farm. The

government has moved for summary judgment, saying it is entitled

to judgment as a matter of law in the amount of approximately

$140,000, plus accumulating interest. Defendants, who are

proceeding pro se, object and have themselves moved for summary

judgment, asking that "all monies collected from offset by [the

government] be returned." Defendants' motion for summary

judgment (document no. 12) at 1. Background

Briefly stated, the material facts appear as follows. In

1982, the FmHA extended financing to defendants so that they

might purchase a dairy farm in Colebrook, New Hampshire. The

FmHA secured its $92,000 loan to defendants through a mortgage

deed on the property.

Almost immediately after purchasing the property, defendants

encountered numerous unanticipated problems, including seriously

ill cattle, structural problems with the barn, plumbing and

electrical problems with the house and barn, and a non­

functioning septic system. With financial assistance from the

FmHA, they sued the people from whom they purchased the farm and

apparently settled their claims short of trial. Nevertheless,

those problems, combined with a decline in the profitability of

dairy farming in the area, a high mortality rate in their herd,

and low milk output, caused defendants to incur substantial cash

flow difficulties and apparently prevented them from paying

approximately nine years' worth of state real estate taxes. The

2 record suggests that the government assisted defendants by making

tax payments on their behalf (averaging between $2,500 and $3,000

per year). Monies used to satisfy defendants' state tax

obligations were added to their total indebtedness to the FmHA.

In 1985, the FmHA refinanced defendants' loan to help them

stay current. Then, in 1986, and again in 1987, the FmHA

extended defendants additional credit, in the form of a $1,000

and then a $4,000 dollar loan. In 1988, defendants' obligations

to the FmHA were secured by a new mortgage deed. On November 22

of that year, however, defendants again stopped making payments

on their obligations to the government. Approximately three and

one-half years later, in March of 1992, the FSA accelerated

defendants' obligations, essentially demanding that they

immediately pay the full amount owed to the government.

Defendants apparently remained in default and made no further

payments. Roughly one year later, in May of 1993, defendants

abandoned the property.

3 More than 18 months after defendants abandoned the property,

and more than six years after they defaulted, FSA finally

foreclosed on the farm. The foreclosure sale yielded $40,000.

Notwithstanding the fact that defendants paid in excess of

$90,000 for the farm in 1982, and made substantial improvements

to it, the government says the relatively modest amount received

at the foreclosure sale was reasonable due to several factors,

including a downturn in the local economy and real estate market,

a decline in the profitability of dairy farms in the area, waste

and mismanagement by defendants, and the general deterioration of

the property since defendants abandoned it in 1993.

The government now seeks the balance of the sums owed by

defendants, which, as of December 9, 1998, it calculates to be

$138,616.58, with interest accumulating at the rate of about

$13.17 per day. That sum represents defendants' total

indebtedness to the government, less the $40,000 obtained at

foreclosure.

4 Although defendants do not directly challenge the procedural

aspects of the foreclosure sale, they do interpose several

objections to the government's motion for summary judgment. None

of defendants' objections appears to have much legal merit, but

then defendants are not schooled in the law and the case no doubt

appears complex to them. Nevertheless, the court concludes that

several unresolved legal and factual matters apparent in the

record preclude the entry of judgment as a matter of law in favor

of the government, at least at this point.

Discussion

The record suggests that the FmHA and FSA made an effort

over the years to assist defendants in making their dairy farm

profitable. The affidavit submitted by Patrick Freeman, the Farm

Loan Chief of the FSA, summarizes some of those efforts:

The FSA did not simply give up on this family and cut off their financing; instead it worked with them to resolve their problems through additional funding, rewriting loans, and advancing money for nine years' worth of real estate taxes to save the farm from being sold at tax sale. FSA also assisted the family through forbearance. For example, payments due FSA through a

5 milk assignment were returned to them, while other creditors were being paid as agreed; FSA accepted interest payments only on new loans to help the family build up their operation; FSA made new loans to the family after protective advances were made to buy feed for cows which the Chappells could not afford to buy.

Affidavit of Patrick Freeman, submitted with the government's

motion for summary judgment, at para. 10.

While there appears little doubt that defendants are, in

fact, obligated to repay at least a portion of the outstanding

amount claimed by the government, the precise amount owed remains

uncertain. That uncertainty arises from issues concerning the

timing of some of the government's actions in this case. For

example, the following question presents itself: Whether the

government had an obligation to preserve the value of the assets

securing defendants' obligations (i.e., the farm, structures,

equipment, cattle, and related assets) by acting in a more timely

fashion to foreclose upon those assets.

6 Defendants defaulted on their obligations to the government

in 1988 and yet the government did not foreclose on the farm

until more that six years later. In the interim, the local real

estate market suffered an enormous downturn, causing the failure

of several major New Hampshire banks. More significantly,

defendants abandoned the property, which appears to have been

left unattended for at least 18 months prior to the foreclosure

sale. That, in turn, appears to have caused the property to

deteriorate substantially and may well have contributed

substantially to the low price at which defendants' farm was

eventually sold at foreclosure.

One might reasonably posit that if the government foreclosed

on the property within a reasonable time after defendants

defaulted in 1988, or after defendants' obligations were

accelerated in 1992, or, at a minimum, after defendants abandoned

the farm in 1993, the sums recovered at a foreclosure sale (which

would have been conducted prior to any deterioration suffered

during the 18 month period during which the property was

7 unattended) would likely have been much higher than the $40,000

eventually recognized. That, in turn, would have reduced the

outstanding obligations owed by defendants.

To be sure, there may be entirely plausible, reasonable, and

even laudatory reasons why the government did not foreclose on

the farm sooner. On that point, however, the record is silent.

And, the record does not disclose what obligation (if any) the

government might have had to act in a more speedy manner, aimed

at preserving the value of the loan's security, particularly as

time went on and it became apparent that New Hampshire was

plunging into a severely depressed real estate market, and in

light of the fact that, despite the best efforts of defendants

and the government, it certainly appeared that defendants would

never be able to make the farm self-sustaining.

Under New Hampshire law, a foreclosing "mortgagee's duty of

good faith and due diligence is essentially that of a fiduciary.

. . . A mortgagee, therefore, must exert every reasonable effort to obtain a 'fair and reasonable price under the circumstances.'"

Murphy v. Financial Development Corp.,

(1985)

(citation omitted). The precise point in time at which that duty

attaches is unclear. It is undeniable that it attaches once a

mortgagee decides to foreclose on any asset(s) pledged as

security for an underlying loan. It is, however, conceivable

that the government had some obligation (perhaps short of a

fiduciary duty) to protect the value of that security even before

it decided to foreclose. That is to say, if a reasonable lender

would have reasonably concluded, say in 1988 (when defendants

defaulted) or even 1993 (when defendants abandoned the property),

that defendants were unlikely to ever make the farm self-

sustaining, the government might well have been obligated to

conduct the foreclosure at or about that time. Had the

government done so, it would have foreclosed on defendants' farm

while it was still occupied or, at a minimum, before it had been

left abandoned for 18 months. Certainly a larger sum would

probably have been realized at the foreclosure sale if it had

occurred before 18 months of neglect ran its course.

9 Conclusion

The current record contains unresolved legal and factual

issues that the parties have yet to address including, at a

minimum, the following:

1. Whether, as a factual matter, it was commercially reasonable for the government to delay foreclosure on defendants' farm for more than six years after defendants defaulted on their obligations, particularly in light of evidence suggesting that, notwithstanding substantial assistance and forbearance from the government, it appeared that defendants would not be able to make the farm a viable and self-sustaining business.

2. Whether, as a factual matter, it was commercially reasonable for the government to delay foreclosure on defendants' farm for more than a year and one- half after defendants abandoned the property.

3. Whether the government had a legal obligation to take reasonable steps aimed at preserving the value of the farm which secured defendants' obligations (and thereby minimize the deficiency judgment to which defendants might be exposed) .

3. Whether the government had a legal obligation to foreclose on defendants' farm in a more timely manner.

4. Whether the government, along with defendants, must share in some of the farm's depreciated value (evidenced by the sum realized at foreclosure) as

10 a result of its delay in bringing foreclosure proceedings.

The current record is insufficiently developed to permit

resolution of those factual issues. And, because neither party

has had an opportunity to address the legal issues raised in this

order, it would be premature for the court to resolve them.

In light of the foregoing, the court concludes that

existence of genuine issues of material fact precludes it from

entering judgment as a matter of law in favor of the government.

According, its motion for summary judgment (document no. 11) is

denied, without prejudice. Likewise, defendants' motion for

summary judgment (document no. 12) is denied, without prejudice.

SO ORDERED.

Steven J. McAuliffe United States District Judge

June 15, 2000

cc: David L. Broderick, Esq. Ronald C. Chappell Susan L. Chappell

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