B-143700, SEPTEMBER 21, 1960, 40 COMP. GEN. 181

B-143700: Sep 21, 1960

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

IS RESTRICTED BY SECTION 41 (G) (3) (B) OF THE ACT. WHOSE FARMS HAVE BEEN ACQUIRED BY THE SECRETARY BY DEED IN LIEU OF FORECLOSURE IN SATISFACTION OF AN UNSECURED INDEBTEDNESS. THE COMPROMISE AUTHORITY MAY BE USED FOR THE ACCEPTANCE OF AN AGREEMENT BY WHICH THE BORROWER CONVEYS HIS FARM TO THE UNITED STATES IN SATISFACTION OF BOTH SECURED AND UNSECURED DEBTS WHERE THE VALUE OF THE FARM IS IN EXCESS OF THE SECURED INDEBTEDNESS BUT LESS THAN THE COMBINED OUTSTANDING BALANCE OF THE SECURED AND UNSECURED DEBT. (2) AND (4) OF THE ACT ARE MET. CONCERNS CIRCUMSTANCES WHICH HAVE ARISEN IN THE SERVICING OF LOANS BY THE FARMERS HOME ADMINISTRATION OF THE DEPARTMENT OF AGRICULTURE. IN THOSE SITUATIONS IN WHICH THE BORROWER WISHES TO CONVEY HIS FARM TO THE UNITED STATES IN SATISFACTION OF BOTH A SECURED INDEBTEDNESS AND UNSECURED INDEBTEDNESS WHERE (1) THE VALUE OF THE FARM IS SUBSTANTIALLY IN EXCESS OF THE AMOUNT OF THE SECURED INDEBTEDNESS BUT IS LESS THAN THE COMBINED OUTSTANDING BALANCES OF THE SECURED AND THE UNSECURED INDEBTEDNESS.

B-143700, SEPTEMBER 21, 1960, 40 COMP. GEN. 181

DEPARTMENT OF AGRICULTURE - COMPROMISE AUTHORITY - DEBT SATISFACTION BY DEED IN LIEU OF FORECLOSURE IN THE ABSENCE OF ANY INDICATION THAT THE BROAD AUTHORITY CONFERRED ON THE SECRETARY OF AGRICULTURE TO COMPROMISE CLAIMS INCIDENT TO FARMERS' HOME ADMINISTRATION PROGRAMS UNDER SECTION 41 (G) (2) OF THE BANKHEAD- JONES FARM TENANT ACT, 7 U.S.C. 1015 (G) (2), IS RESTRICTED BY SECTION 41 (G) (3) (B) OF THE ACT, WHICH AUTHORIZES THE RELEASE OF PERSONAL LIABILITY OF BORROWERS, WHOSE FARMS HAVE BEEN ACQUIRED BY THE SECRETARY BY DEED IN LIEU OF FORECLOSURE IN SATISFACTION OF AN UNSECURED INDEBTEDNESS, THE COMPROMISE AUTHORITY MAY BE USED FOR THE ACCEPTANCE OF AN AGREEMENT BY WHICH THE BORROWER CONVEYS HIS FARM TO THE UNITED STATES IN SATISFACTION OF BOTH SECURED AND UNSECURED DEBTS WHERE THE VALUE OF THE FARM IS IN EXCESS OF THE SECURED INDEBTEDNESS BUT LESS THAN THE COMBINED OUTSTANDING BALANCE OF THE SECURED AND UNSECURED DEBT, AND THE OTHER CONDITIONS IN SECTION 41 (G) (1), (2) AND (4) OF THE ACT ARE MET.

TO THE SECRETARY OF AGRICULTURE, SEPTEMBER 21, 1960:

A LETTER DATED AUGUST 4, 1960, FROM THE ACTING SECRETARY OF AGRICULTURE, CONCERNS CIRCUMSTANCES WHICH HAVE ARISEN IN THE SERVICING OF LOANS BY THE FARMERS HOME ADMINISTRATION OF THE DEPARTMENT OF AGRICULTURE. THE ACTING SECRETARY REQUESTS A DECISION AS TO WHETHER WE WOULD BE REQUIRED TO OBJECT TO THE SETTLEMENT OF A BORROWER'S ACCOUNT BY THE DEPARTMENT OF AGRICULTURE UNDER THE AUTHORITY OF SECTION 41 (G) (2) OF THE BANKHEAD-JONES FARM TENANT ACT, AS AMENDED, 7 U.S.C. 1015 (G) (2), IN THOSE SITUATIONS IN WHICH THE BORROWER WISHES TO CONVEY HIS FARM TO THE UNITED STATES IN SATISFACTION OF BOTH A SECURED INDEBTEDNESS AND UNSECURED INDEBTEDNESS WHERE (1) THE VALUE OF THE FARM IS SUBSTANTIALLY IN EXCESS OF THE AMOUNT OF THE SECURED INDEBTEDNESS BUT IS LESS THAN THE COMBINED OUTSTANDING BALANCES OF THE SECURED AND THE UNSECURED INDEBTEDNESS, AND (2) THE CONDITIONS SPECIFIED IN SECTION 41 (G) (1), (2), AND (4) OF THAT ACT CAN BE MET.

THE ACCEPTANCE OF TITLE TO PROPERTY SECURING LOANS IS SPECIFICALLY AUTHORIZED UNDER SECTION 51 OF THE ABOVE-CITED ACT, AS AMENDED 7 U.S.C. 1025, WHICH AUTHORIZES THE SECRETARY OF AGRICULTURE, AMONG OTHER THINGS,"TO BID FOR AND PURCHASE AT ANY FORECLOSURE OR OTHER SALE OR OTHERWISE ACQUIRE PROPERTY PLEDGED, MORTGAGED, CONVEYED, ATTACHED OR LEVIED UPON TO SECURE THE PAYMENT OF ANY SUCH INDEBTEDNESS; TO ACCEPT TITLE TO ANY PROPERTY SO PURCHASED OR ACQUIRED; * * *.' IN ADDITION SECTION 41 (G) GIVES THE SECRETARY THE POWER TO:

(G) COMPROMISE, ADJUST, OR REDUCE CLAIMS AND ADJUST AND MODIFY THE TERMS OF MORTGAGES, LEASES, CONTRACTS, AND AGREEMENTS ENTERED INTO OR ADMINISTERED BY FARMERS' HOME ADMINISTRATION UNDER ANY OF ITS PROGRAMS, AS CIRCUMSTANCES MAY REQUIRE: PROVIDED, HOWEVER, THAT---

(1) COMPROMISE, ADJUSTMENT, OR REDUCTION OF CLAIMS OF $15,000 OR MORE MUST BE EFFECTED BY REFERENCE TO THE SECRETARY OF THE TREASURY OR TO THE ATTORNEY GENERAL PURSUANT TO THE PROVISIONS OF SECTION 3469 OF THE REVISED STATUTES (31 U.S.C. 194);

(2) COMPROMISE, ADJUSTMENT, OR REDUCTION OF CLAIMS SHALL BE BASED ONA REASONABLE DETERMINATION BY THE SECRETARY OF THE DEBTOR'S ABILITY TO PAY AND THE VALUE OF THE SECURITY AND WITH OR WITHOUT THE PAYMENT OF ANY CONSIDERATION AT THE TIME OF SUCH ADJUSTMENT OR REDUCTION;

(3) RELEASES FROM PERSONAL LIABILITY MAY ALSO BE MADE WITH OR WITHOUT THE PAYMENT OF ANY CONSIDERATION AT THE TIME OF ADJUSTMENT OF CLAIMS AGAINST--

(A) BORROWERS WHO HAVE TRANSFERRED THE SECURITY PROPERTY TO OTHER APPROVED APPLICANTS UNDER AGREEMENTS ASSUMING THE OUTSTANDING SECURED INDEBTEDNESS; AND

(B) BORROWERS WHO HAVE TRANSFERRED THEIR FARMS TO OTHER APPROVED APPLICANTS UNDER AGREEMENTS ASSUMING THAT PORTION OF THEIR OUTSTANDING INDEBTEDNESS AGAINST THE FARM WHICH IS EQUAL TO THE VALUE OF THE FARM AT THE TIME OF THE TRANSFER, AND BORROWERS WHOSE FARMS HAVE BEEN ACQUIRED BY THE SECRETARY, IN CASES WHERE THE COUNTY COMMITTEES CERTIFY AND THE SECRETARY DETERMINES THAT THE BORROWERS HAVE COOPERATED IN GOOD FAITH WITH THE SECRETARY, HAVE FARMED IN A WORKMANLIKE MANNER, USED DUE DILIGENCE TO MAINTAIN THE SECURITY AGAINST LOSS, AND OTHERWISE FULFILLED THE COVENANTS INCIDENT TO THEIR LOANS, TO THE BEST OF THEIR ABILITIES;

(4) NO COMPROMISE, ADJUSTMENT, OR REDUCTION OF CLAIMS SHALL BE MADE UPON TERMS MORE FAVORABLE THAN RECOMMENDED BY THE APPROPRIATE COUNTY COMMITTEE ESTABLISHED PURSUANT TO SECTION 42 OF THIS ACT; AND * * *

THE ACTING SECRETARY STATES THAT SECTION 41 (G) (3) (B), BY ITS TERMS, AUTHORIZES RELEASES OF PERSONAL LIABILITY OF BORROWERS WHOSE FARMS HAVE BEEN ACQUIRED BY THE SECRETARY WITH APPROPRIATE FINDING AS TO GOOD FAITH AND DILIGENCE, BUT THIS PARTICULAR AUTHORITY IS NOT NECESSARILY LIMITED TO SETTLEMENT OF INDEBTEDNESS AGAINST THE FARM, I.E., SECURED INDEBTEDNESS. HE ALSO STATES THAT IN CASES OF TRANSFERS OF SECURITY PROPERTY TO OTHER APPROVED APPLICANTS AND TRANSFERS OF FARMS PURSUANT TO AGREEMENTS UNDER WHICH THE TRANSFEREE ASSUMES ONLY A PORTION OF THE OUTSTANDING INDEBTEDNESS, THE STATUTE SEEMS TO AUTHORIZE RELEASES ONLY OF SECURED INDEBTEDNESS. IT IS HIS BELIEF THAT THE LEGISLATIVE HISTORY OF THESE PROVISIONS CLEARLY INDICATES THE INTENTION OF CONGRESS TO AUTHORIZE RELEASES OF DEFICIENCY BALANCES IN CONNECTION WITH DEEDS IN LIEU OF FORECLOSURE AND TRANSFERS. THE ACTING SECRETARY ADVISES THAT BECAUSE OF THE DOUBT AS TO WHETHER A RELEASE AFTER A DEED IN LIEU OF FORECLOSURE CAN BE GIVEN ONLY WITH RESPECT TO THE SECURED INDEBTEDNESS AS IS TRUE IN TRANSFER CASES, YOUR DEPARTMENT HAS NOT HERETOFORE SETTLED UNSECURED BALANCES OF INDEBTEDNESS ARISING UNDER TITLE II OF THE ACT EVEN THOUGH THE ADMITTED VALUE OF THE REAL ESTATE CONVEYED BY DEED IN LIEU OF FORECLOSURE FOR THE SECURED INDEBTEDNESS UNDER TITLE I SUBSTANTIALLY EXCEEDS THE BALANCE DUE ON THE SECURED INDEBTEDNESS.

THE ACTING SECRETARY STATES THAT EVEN THOUGH IT MAY NOT BE POSSIBLE TO CONSTRUE SECTION 41 (G) (3) (B) TO AUTHORIZE SETTLEMENTS OF THE TYPE DESCRIBED, THERE IS FOR DECISION WHETHER THAT SECTION OPERATES RESTRICTIVELY UPON THE BROADER GENERAL COMPROMISE AUTHORITY OF SECTION 41 (G) (2). HE IS OF THE VIEW THAT THE EXCESS VALUE OF THE FARM OVER AND ABOVE THE SECURED INDEBTEDNESS COULD UNDER GENERAL LAW BE ACCEPTED AS A CONSIDERATION FOR THE COMPROMISE AND ADJUSTMENT OF THE UNSECURED INDEBTEDNESS.

THE LETTER CONTINUES IN PART AS FOLLOWS:

IT SHOULD BE KEPT IN MIND THAT THE QUESTION WITH WHICH WE ARE DEALING INVOLVES A SITUATION IN WHICH THE BORROWER IS NOT OBLIGATED IN ANY WAY TO OFFER HIS SECURITY PROPERTY TO THE GOVERNMENT IN SATISFACTION OF ANY OF HIS INDEBTEDNESS. IT IS CONCEIVABLE THAT IN SOME CASES ALL OF HIS INDEBTEDNESS MAY BE CURRENT BUT THAT HE WILL BE UNABLE TO CONTINUE TO KEEP IT CURRENT OR TO PAY IT IN FULL, AND THAT BECAUSE OF ILL HEALTH OR OTHER REASONS HE DESIRES TO QUIT FARMING AND TO SETTLE HIS DEBTS. HOWEVER, IN NEARLY ALL CASES AT LEAST THE UNSECURED TITLE II LOAN BALANCE WILL BE IN DEFAULT, SINCE IT BECAME UNSECURED AS A RESULT OF VOLUNTARY SALE OR FORCED LIQUIDATION OF THE CHATTEL SECURITY AND APPLICATION OF THE SALE PROCEEDS ON THE ACCOUNT. THE BORROWER COULD REFRAIN FROM MAKING SUCH AN OFFER AND FORCE THE GOVERNMENT TO FORECLOSE ITS LIEN WHERE THE SECURED INDEBTEDNESS IS ALREADY IN DEFAULT OR WHEN DEFAULT OCCURS. FORECLOSURE WOULD BE AN EXPENSIVE AND TIME-CONSUMING PROCESS, PARTICULARLY IN THOSE STATES REQUIRING JUDICIAL FORECLOSURES AND PROVIDING FOR REDEMPTION PERIODS.

IF THE GOVERNMENT FORECLOSED ITS TITLE I MORTGAGE AND THE PROPERTY BROUGHT MORE THAN THE SECURED DEBT, IT WOULD BE POSSIBLE IN SOME STATES FOR THE GOVERNMENT TO ATTACH THE SURPLUS SALE PROCEEDS FOR THE PURPOSE OF HAVING THEM APPLIED ON THE UNSECURED TITLE II DEBT. HOWEVER, THERE IS PENDING A CASE IN TEXAS INVOLVING THIS PRECISE TYPE OF SITUATION WHERE THE PROPERTY IS HOMESTEAD PROPERTY (WHICH MOST FARMERS HOME REAL ESTATE SECURITY IS) AND THE SURPLUS SALE PROCEEDS WOULD BE EXEMPT FROM EXECUTION FOR SIX MONTHS DURING WHICH TIME THEY MIGHT BE USED UP OR OTHERWISE DISPOSED OF OR INVESTED IN OTHER EXEMPT HOMESTEAD PROPERTY. (SEE ARTICLE 16, SECTION 50, TEXAS CONSTITUTION.)

IN THIS TEXAS CASE THE VALUE OF THE HOMESTEAD PROPERTY IS $8,000. THIRD PARTY HAS A FIRST DEED OF TRUST SECURING $2,000. THE GOVERNMENT'S SECOND DEED OF TRUST SECURES $1,990. THE CHATTELS WHICH SECURED THE GOVERNMENT'S OPERATING LOAN HAVE BEEN LIQUIDATED AND APPLIED ON THE INDEBTEDNESS, LEAVING AN UNSECURED CLAIM OF $4,310, AND IT APPEARS THAT THE BORROWER HAS NO OTHER DEBT PAYMENT ABILITY. THE BORROWER HAS PROPOSED TO CONVEY THE FARM TO THE GOVERNMENT SUBJECT TO THE $2,000 FIRST DEED OF TRUST HELD BY A THIRD PARTY. THE INDEBTEDNESS TO THE GOVERNMENT IS ALL DELINQUENT, BUT IF THE GOVERNMENT FORECLOSED IT COULD ONLY COLLECT THE $1,1990 SECURED CLAIM OUT OF THE PROPERTY SINCE, AS STATED ABOVE, THERE WOULD BE AN EXEMPTION WITH RESPECT TO THE SURPLUS SALE PROCEEDS. THEREFORE, IT IS POSSIBLE THAT THE GOVERNMENT COULD RECOVER APPROXIMATELY $4,000 MORE BY ACCEPTING THE COMPROMISE PROPOSAL.

IF THE COMPROMISE PROPOSAL IN THE TEXAS CASE AND IN OTHER SIMILAR CASES CANNOT BE ACCEPTED UNDER SECTION 41 (G) (2), IT MAY STILL BE POSSIBLE FOR THIS DEPARTMENT TO HANDLE SOME MATTERS OF THIS KIND IN OTHER STATES BY OTHER ALTERNATE METHODS. FOR EXAMPLE, IT IS SOMETIMES POSSIBLE TO GET THE BORROWER TO GIVE THE GOVERNMENT A SECOND MORTGAGE OR DEED OF TRUST TO SECURE THE OTHERWISE UNSECURED BALANCE DUE ON THE TITLE II LOAN AND THEN TAKE A VOLUNTARY CONVEYANCE UNDER SECTION 51 AND GRANT A RELEASE FROM PERSONAL LIABILITY UNDER SECTION 41 (G) (3) (B) IF ALL OF THE OTHER APPLICABLE REQUIREMENTS CAN BE MET. ANOTHER APPROACH WOULD BE TO TAKE A PERSONAL JUDGMENT FOR THE UNSECURED INDEBTEDNESS, FIX IT AS A JUNIOR LIEN ON THE REAL PROPERTY, AND THEN ENDEAVOR TO OBTAIN A VOLUNTARY CONVEYANCE UNDER SECTION 51 AND GRANT A RELEASE FROM PERSONAL LIABILITY UNDER SECTION 41 (G) (3) (B). HOWEVER, AFTER TAKING JUDGMENT IT IS UNLIKELY THAT THE BORROWER WOULD BE COOPERATIVE TO THE EXTENT OF MAKING A VOLUNTARY CONVEYANCE TO THE GOVERNMENT. TEXAS HOMESTEAD PROPERTY COULD NOT BE SUBJECTED TO EITHER THE JUNIOR DEED OR TRUST OR JUDGMENT LIEN. MANY OTHER STATES ALSO HAVE LAWS EXEMPTING HOMESTEAD PROPERTY IN WHOLE OR IN PART FROM EXECUTION SALES. CONSEQUENTLY, THESE ALTERNATE SOLUTIONS WOULD NOT BE LEGALLY AVAILABLE IN ALL CASES.

THE ACTING SECRETARY STATES THAT WHILE FOR CLARITY IN POSING THE QUESTION, HE HAS REFERRED TO INDEBTEDNESS UNDER TITLE I OF THE BANKHEAD JONES FARM TENANT ACT AND TO UNSECURED INDEBTEDNESS UNDER TITLE II OF THAT ACT, SECTIONS 51 AND 41 (G) OF THE ACT APPLY TO ALL PROGRAMS ADMINISTERED BY THE FARMERS HOME ADMINISTRATION, SO THAT THE QUESTION PRESENTED IS APPLICABLE TO INDEBTEDNESS UNDER ALL SUCH PROGRAMS. HE ADVISES THAT THOSE PROGRAMS PRESENTLY INVOLVED ARE LISTED IN 22 F.R. 8188.

IT IS CLEAR THAT UNDER SECTION 41 (G) OF THE BANKHEAD-JONES FARM TENANT ACT, AS AMENDED, THE SECRETARY OF AGRICULTURE HAS AUTHORITY TO COMPROMISE, ADJUST OR REDUCE CLAIMS ARISING UNDER FARMERS' HOME ADMINISTRATION PROGRAMS, SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 41 (G) (1), (2), AND (4) OF THE ACT. MOREOVER, WE FIND NOTHING IN SECTION 41 (G) (3) (B) OF THE ABOVE-CITED ACT, AS AMENDED, OR IN THE LEGISLATIVE HISTORY OF THAT SECTION, TO INDICATE THAT IT WAS INTENDED TO RESTRICT THE BROAD GENERAL COMPROMISE, ADJUSTMENT AND CLAIMS REDUCTION AUTHORITY GRANTED THE SECRETARY BY SECTION 41 (G) (2).

SINCE UNDER THE TYPE OF SETTLEMENT DESCRIBED IN THE ACTING SECRETARY'S LETTER (AND ABOVE) THE VALUE OF THE FARM INVOLVED WOULD BE SUBSTANTIALLY IN EXCESS OF THE SECURED INDEBTEDNESS (BUT LESS THAN THE COMBINED OUTSTANDING BALANCES OF THE SECURED AND UNSECURED INDEBTEDNESS), SUCH A SETTLEMENT WOULD CONSTITUTE A COMPROMISE, THE EXCESS VALUE OF THE FARM--- AS INDICATED IN THE ACTING SECRETARY'S LETTER--- BEING THE CONSIDERATION FOR THE COMPROMISE AND ADJUSTMENT OF THE UNSECURED INDEBTEDNESS.

IN LIGHT OF THE FOREGOING, IT IS OUR VIEW THAT, IN CONNECTION WITH THE SETTLEMENT OF A BORROWER'S ACCOUNT UNDER PROGRAMS ADMINISTERED BY THE FARMERS' HOME TENANT ACT, AS AMENDED, MAY--- IF HE DETERMINES IT IN THE INTEREST OF THE UNITED STATES TO DO SO--- ACCEPT A COMPROMISE AGREEMENT WHEREBY THE BORROWER AGREES TO CONVEY TO THE UNITED STATES HIS FARM IN SATISFACTION OF BOTH A SECURED INDEBTEDNESS AND UNSECURED INDEBTEDNESS WHERE (1) THE VALUE OF THE FARM IS SUBSTANTIALLY IN EXCESS OF THE AMOUNT OF SECURED INDEBTEDNESS BUT IS LESS THAN THE COMBINED OUTSTANDING BALANCES OF THE SECURED AND UNSECURED INDEBTEDNESS, AND (2) THE CONDITIONS SPECIFIED IN SECTION 41 (G) (1), (2) AND (4) OF THE ACT ARE MET. THE QUESTION PRESENTED IS ANSWERED ACCORDINGLY.