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.
1
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
2
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.
3
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.
4
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
5
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.
6
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,
7
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
8
underlying indebtedness. The judgment of the district court is
AFFIRMED.
9