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, 416 U.S. 232, 236 (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, 958
F.2d 15, 17 (1st Cir. 1992); see also Dartmouth Review v.
Dartmouth College, 889 F.2d 13, 16 (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, 958 F.2d at 17 (quoting Correa-Martinez v. Arrillaaa-
Belendez, 903 F.2d 49, 52 (1st Cir. 1990)).
"Our judicial system zealously guards the attempts of pro se
litigants" to represent their own interests. See Ahmed v.
Rosenblatt, 118 F.3d 886, 890 (1st Cir. 1997), cert, denied, 118
S.Ct. 1165 (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 589 F.2d
949, 952-54 (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 860 F.2d 896, 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 616
F.2d 755, 758-59 (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 806 F.2d 146 at 149-50
(7th Cir. 1986). C f . United States v. Warwick, 695 F.2d 1063
(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., 926
F.2d 1078, 1082 (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 834 F.2d 1114,
1125 (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. Id. 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 id. at 1126, and observed
that a breach of a duty of commercial reasonableness may have
occurred in the case, see id. at 1127. 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." 96 F.3d 584, 585 (1st Cir. 1996) (citing Baus, 834
F.2d at 1125-26).
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., 126 N.H. 536, 541, 495 A.2d 1245, 1249
(1985). "This duty is owed not only to mortgagors, but also to
guarantors." First NH Mortgage Corp. v. Greene, 139 N.H. 321,
323, 653 A.2d 1076, 1077 (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 15 U.S.C.A. §
636(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., 509 F. Supp. 392, 397 (D. N.J.
1981), aff'd SGA Financial Corp. v. United States Small Bus.
Admin., 673 F.2d 1301 (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 42 U.S.C.A. § 3142(b)(7) and 42 U.S.C.A. § 3211(5) (West 1994) is inapposite as they relate to loans issued by the Secretary of Commerce under the Public Works and Economic Development Act, 42 U.S.C.A. §§ 3121-3246 (West 1994), and the plaintiff's loans were issued under the SBA's disaster lending authority pursuant to 15 U.S.C.A. § 636(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., 626 F.2d 85 (9th Cir. 1980); United States v. Capital
Assistance Corp., 460 F.2d 256 (9th Cir. 1972); Copake Lake Dev.
Corp. v. United States, 490 F. Supp. 386 (E.D.N.Y. 1980); Tuepker
v. Farmers Home Admin., 525 F. Supp. 237 (W.D. Mo. 1981); see
also, Helgeson v. Bureau of Indian Affairs, Dep't of the
Interior, United States, 1998 WL 541372, 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., 107 F.3d 1368, 1372 (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 15 U.S.C.A. § 634(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, 113 F.3d 391, 393 (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