Magnolia Federal Bank for Savings v. United States

United States Court of Appeals,

Fifth Circuit.

No. 93-7365.

MAGNOLIA FEDERAL BANK FOR SAVINGS, a Federal Savings Bank,
Plaintiff-Appellant,

v.

UNITED STATES of America, et al., Defendants-Appellees.

Jan. 24, 1995.

Appeal from the United States District Court for the Southern
District of Mississippi.

Before POLITZ, Chief Judge, JONES, Circuit Judge, and FULLAM*,
District Judge.

EDITH H. JONES, Circuit Judge:

Relying on Mississippi law, Magnolia Federal Bank for Savings

("Magnolia") sued the United States Small Business Administration

("SBA") for a declaratory judgment subordinating or extinguishing

two SBA liens against certain real property upon which Magnolia

also held a lien. The district court granted summary judgment for

the SBA, equating Magnolia's effort with a desire to assert a state

statute of limitations against the federal agency. The district

court was only half right. Insofar as Magnolia's claim would

subordinate rather than bar enforcement of SBA's liens for

untimeliness, state law is properly invoked against the federal

agency. The statute on which Magnolia relies does not, however,

apply to the facts of this case. Consequently, the judgment

against Magnolia must be affirmed.

*
District Judge of the Eastern District of Pennsylvania,
sitting by designation.

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 BACKGROUND

In 1964, Harold and Emma Bozied ("the Bozieds") obtained real

property in Jackson, Mississippi by warranty deed. They also

executed a deed of trust in favor of Bridges Loan and Investment

Company.

In 1967, Harold Bozied obtained a $7,000 business loan from

Gulf National Bank secured by a second deed of trust on the

property. The loan had a stated maturity date of October 19, 1972;

SBA guaranteed repayment of up to 75% of the loan balance.

In 1970, after Hurricane Camille, the Bozieds obtained a

$16,000 disaster loan directly from the SBA, for which they

executed a third deed of trust. That loan had a stated maturity

date of March 18, 1980.

In 1972, the Bozieds filed a joint Chapter VII bankruptcy

petition. In December 1972, following default on the Gulf National

Bank loan, the SBA paid Gulf National 75% of the outstanding

balance and received an assignment of that note and deed of trust.

In February 1973, the Bozieds' personal liability on the SBA loan

was discharged in bankruptcy.

In 1989, the successors in interest to the Bridges Loan and

Investment Company note canceled the first deed of trust. All of

the described title documents concerning the Bozieds' property were

duly and timely recorded.

On July 17, 1991, SBA notified the Bozieds in writing that it

intended to foreclose on its two deeds of trust. At that time, the

Bozieds were negotiating to borrow and did borrow $43,000 from

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Magnolia; as security for repayment of that loan, the couple

executed a deed of trust in favor of Magnolia. During its title

search, Magnolia discovered the two deeds of trust in favor of the

SBA but determined that they were not clouds on title by operation

of settled principles of Mississippi law. Many years had passed

since the indebtedness secured by those deeds of trust reached

their stated dates of maturity (1972 for the second deed of trust,

1980 for the third deed of trust).

In November 1991, the SBA scheduled a foreclosure sale on the

property, provoking this suit by Magnolia for a declaratory

judgment affirming the validity and priority of its lien over the

SBA liens. From the district court's adverse summary judgment

ruling, Magnolia has appealed.

DISCUSSION

Magnolia, like the appellants in the Muirhead case that was

considered in tandem with this one1, argued first that the SBA's

right to foreclose was extinguished according to Mississippi law,

which states that "[i]n all cases where the remedy at law to

recover the debt shall be barred, the remedy in equity on the

mortgage shall be barred."2 Magnolia also contended that the SBA's

liens should be subordinated to Magnolia's lien under Mississippi

law regarding ancient mortgages. The district court ruled that the

United States was not bound by state statutes of limitations and

1
Farmers Home Administration v. Muirhead, No. 93-7414, ---
F.3d ---- (5th Cir. Jan. 24, 1995).
2
Miss.Ann.Code § 15-1-21.

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further, that 28 U.S.C. § 2415(a), the federal statute of

limitations limiting the government's right to bring a civil action

on the underlying notes, did not cut off the SBA's right to

foreclose on the deeds of trust. This court reviews de novo the

trial court's conclusions of law.

Based on the analysis in Muirhead, which Magnolia does not

here dispute, MISS.CODE ANN. § 15-1-21, a state statute of

limitations governing actions on mortgages, is not binding on SBA

as a federal agency.

Magnolia's argument that the SBA's liens should be

subordinated to Magnolia's lien on the property raises a much

different question, notwithstanding the trial court's conflation of

this argument with the statute of limitations issue. The

alternative argument relies on MISS.CODE ANN. § 89-5-19, which

provides in pertinent part:

§ 89-5-19. When a lien appears by the record to be barred, it
ceases.

Where the remedy to enforce any mortgage, deed of trust, or
other lien on real or personal property which is recorded,
appears on the face of the record to be barred by the statute
of limitations (which, as to a series of notes or a note
payable in installments, shall begin to run from and after the
maturity date of the last note or last installment), the lien
shall cease and have no effect as to creditors and subsequent
purchasers for a valuable consideration without notice, unless
within 6 (6) months after such remedy is so barred the fact
that such mortgage, deed of trust, or lien has been renewed or
extended be entered on the margin of the record thereof, by
the creditor, debtor, or trustee, attested by the clerk, or a
new mortgage, deed of trust, or lien, noting the fact of
renewal or extension, be filed for record within such time.
If the date of final maturity of such indebtedness so secured
cannot be ascertained from the face of the record the same
shall be deemed to be due one year from the date of the
instrument securing the same for the purpose of this section.

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 Magnolia strenuously argues, and we agree that this case is

controlled by the Supreme Court's holding in United States v.

Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711

(1979); see also United States v. Currituck Grain, Inc., 6 F.3d

200 (4th Cir.1993) (adopting North Carolina substantive commercial

law as federal rule of decision for determining priority of FmHA's

secured interest in grain). In Kimbell Foods, the Court sought

to determine whether contractual liens arising from certain
federal loan programs [administered by the SBA & FmHA] take
precedence over private liens, in the absence of a federal
statute setting priorities. To resolve this question, we must
decide first whether federal or state law governs the
controversies; and second, if federal law applies, whether
this Court should fashion a uniform priority rule or
incorporate state commercial law. We conclude that the source
of law is federal, but that a national rule is unnecessary to
protect the federal interests underlying the loan programs.
Accordingly, we adopt state law as the appropriate federal
rule for establishing the relative priority of these competing
federal and private liens.

440 U.S. at 718, 99 S.Ct. at 1453.

Kimbell Foods identified three critical factors that bear upon

whether federal common law or state law should fill in the gaps in

federal loan programs. Applying these factors to the question

whether state or federal common law should determine lien

priorities when SBA and FmHA liens conflict with those of private

creditors, the Court found: 1) that uniform nationwide standards

favoring the United States' claims were not needed to ease program

administration or protect the Federal Treasury from defaulting

debtors, 440 U.S. at 729, 99 S.Ct. 1459; 2) that incorporating

state law "would in no way hinder administration of the SBA and

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FmHA loan programs," id.3; and 3) that creditors who "justifiably

rely on state law to obtain superior liens would have their

expectations thwarted whenever a federal contractual security

interest suddenly appeared and took precedence." 440 U.S. at 739,

99 S.Ct. at 1464; see also id., n. 42 ("Developing priority rules

on a case-by-case basis, depending on the types of competing

private liens involved, leaves creditors without the definite body

of law they require in structuring sound business transactions.").

Kimbell Foods strongly counsels that Mississippi law should be

applied as the federal rule for establishing the relative priority

of competing federal and private liens.4 To state law we turn.

Title 89 of the Mississippi Code contains Mississippi

statutes governing "Real and Personal Property." Chapter 5 of that

title is entitled "Recording of Interests." Section 89-5-19

governs lien priorities when a creditor takes a position secured by

a lien on real property at a time when an earlier creditor's lien

on the same property appears on the face of the public record to be

time-barred. In this situation, § 89-5-19 reverses the usual

"race/notice" priority rule set out in § 89-5-5.

3
See also id. at 733, 99 S.Ct. at 1461 ("Since there is no
indication that variant state priority schemes would burden
current methods of loan processing, we conclude that
considerations of administrative convenience do no warrant
adoption of a uniform federal law.").
4
This case is virtually indistinguishable from United States
v. Currituck Grain, Inc., 6 F.3d 200 (4th Cir.1993), in which the
Fourth Circuit, relying on Kimbell Foods, applied against the
FmHA North Carolina's U.C.C. provision that extinguishes liens on
certain agricultural products 18 months from the date of sale or
delivery to a purchaser. N.C.Gen.Stat. § 44-69.1.

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 The SBA concedes that Magnolia's lien would take priority

over the SBA's liens if the agency was merely another private

lender. SBA contends, however, that the government's right to

foreclose cannot be affected by Mississippi's statute of

limitations, United States v. Summerlin, 310 U.S. 414, 416, 60

S.Ct. 1019, 1020, 84 L.Ed. 1283 (1939). SBA argues that § 89-5-19

is an extension of the limitations statute. SBA is mistaken.

Unlike Section 15-1-21, the time-bar provision critical to the

Muirhead case, Section 89-5-19, the provision at issue here, is not

located in the statutes of limitations chapter of the Mississippi

Code. It does not bar SBA from foreclosing to enforce its lien

against the property, but rather dictates that

the lien shall cease and have no effect as to creditors and
subsequent purchasers for valuable consideration without
notice.

MISS.CODE ANN. § 89-5-19 (emphasis added). Further, the statute

allows for extension or renewals, if they are properly recorded

within specified times, to prevent such a subordination. This

provision of Mississippi's substantive law establishes an exception

to the "race/notice" scheme for determining priority of recorded

interests, not a statute of limitations.

The applicability of § 89-5-19 does not, however, salvage

Magnolia's claim to priority over the ancient SBA liens. Magnolia

argues that the statute essentially provides that because

collection of SBA's notes was barred by 28 U.S.C. § 2415(a), the

applicable federal statute of limitations, the SBA's liens must be

subordinated. The statute does not expressly so state. Instead,

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as noted above, it applies only

"where the remedy to enforce any mortgage, deed of trust or
other lien ... appears on the face of the record to be barred
by the statute of limitations ...

Section 2415(a) bars the government's right to enforce the SBA

notes, but not the remedy on SBA mortgages. See Muirhead, supra.

Magnolia suggests that the statute "compresses" the time limitation

applicable to enforcement of the security right with that

applicable to the underlying note. Indeed it does. As a result,

the fusion of those periods, which are one and the same for

purposes of Mississippi's lien theory of mortgages, cannot be

undone to suit Magnolia's position. The plain language of the

statute does not fit a case like this, where the limitations bar on

the note does not extinguish the remedy on the mortgage.

The court is sympathetic to Magnolia's policy arguments that

decry the nullification, as to federal government mortgages, of a

state law wisely enacted to promote the stability of land titles

and transferability of real property. Nearly every state has

passed laws to remove from land titles the dead hand of ancient

mortgages. Mississippi can, however, amend its law.

CONCLUSION

For the reasons stated above, following Kimbell Foods, the

Court finds that Mississippi law should be adopted as the federal

rule of decision for determining the priority of the competing

liens in this case. Section 89-5-19 does not, however, subordinate

an ancient mortgage when the remedy to enforce that mortgage is, as

here, not extinguished by the limitations period that governs the

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underlying indebtedness. The judgment of the district court is

AFFIRMED.

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