Menu   4 ABR 92 


In re Case No. F93-00659-DMD )
Anne Smith, aka Judy A. Smith, ) Chapter 13
dba Miner's House & Hide-a-way, )
fdba Flying "F" Fur Ranch, fdba )
Frosty Toes Kennel,)
Debtor,           )
___________________________________ )
JUDITH ANNE SOWELL, ) Bancap No. 94-4042
) Adv. No. F93-00659-001-DMD
Plaintiff,           )
          vs. )
Defendants.           )
___________________________________ )


This is an action by Judith Sowell (Sowell) primarily against the Small Business Administration (SBA) to determine the priority and extent of liens against a restaurant and motel located in Delta Junction, Alaska. Sowell also seeks relief from Lee Davis and Donald R. Davis on differing theories. This court has jurisdiction pursuant to 28 U.S.C.  157(b)(2)(K). I find for the defendant SBA on all issues. Donald Davis has never been served. The plaintiff's complaint will be dismissed without prejudice as to him. Plaintiff's complaint against the defendant Lee Davis will be dismissed with prejudice.

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Factual Background

Sowell and her former husband, Edgar J. Smith (Smith), purchased C's Motel in Delta Junction in June of 1973. During their ownership the Smiths undertook improvements to the property. The improvements were financed by loans from First National Bank of Fairbanks, now known as Key Bank. Their last loan was in the amount of $115,000 and was secured by a first deed of trust against the property. The deed of trust was dated February 19, 1980, recorded on March 4, 1980, and required monthly payments of $1,197.

Sowell and Smith divorced in October of 1981. Sowell was awarded the motel in the divorce subject to existing encumbrances and a lien in Smith's favor for $120,000. Sowell was to pay Smith $120,000 with interest at 10.5% over a 20-year term in monthly installments. Smith retained a right of first refusal on any sale of the property. In April of 1982, Sowell obtained a loan for kitchen improvements from First National for $20,000. It was secured by a recorded deed of trust. Sowell's attorney, James Hackett, obtained a judgment for attorney's fees in the divorce in the amount of $12,380.09. Hackett recorded the judgment in December of 1982.

Sowell did not want the motel in the divorce proceedings. She desired absolutely no link with her ex-husband, Smith, whom she felt was abusive. Sowell decided to sell the property to Lee Davis. Davis leased the restaurant at the motel. Sowell and Davis met with Fairbanks attorney Eugene Belland who drafted a document entitled "Offer to Purchase Business Property," dated July 13, 1982. Smith and Davis each paid half of the attorney and recording fees for the offer. This document provided a purchase price of $550,000 with a down payment of $131,000 in cash and real property. Prior to closing, Davis paid rental payments to Sowell in the amount of $4,000 per month and received a $1,000 credit against the purchase price for each payment. The offer contained a variety of options for financing the property. Davis could pay cash, assume some of the existing loans, refinance, or give a note for $419,000 to Sowell. Davis and Sowell traded possession of their homes in June, 1982. Davis deeded her home to Sowell in November of 1982. The home had a stipulated value of $102,000. The remainder of the   TOP    4 ABR 94  transaction did not close at that time, however.

Sowell did not do well financially. She borrowed at least $30,000 from Davis prior to the time the sale closed in September, 1983. Sowell did not pay Hackett's attorney's fees. She failed to make timely payments to Smith and he threatened foreclosure.

Sowell encouraged Davis to apply for an SBA loan. Paul Merrifield (Merrifield), an officer at First National, processed an SBA loan for Davis in the amount of $285,000. Merrifield, Davis, and Sowell may have met and discussed the loan prior to closing. Regardless of whether an actual three-party meeting occurred before closing, I find Sowell knew of the source and amount of the SBA loan. The purpose of the loan was to discharge underlying obligations against the property. They included: 1) a First National loan of $115,000; 2) Sowell's obligation to Smith of $120,000; and 3) James Hackett's $12,380 judgment lien. The balance of the purchase price was to be paid as follows: $96,000 as a second deed of trust to Sowell, and the remainder to be paid in cash, in rent credits, or in release of other debts of Sowell to Davis.

The SBA loan closed September 13, 1983. Sowell contacted attorney Robert Downes just prior to the closing. Downes or his assistant, Mike Stepovich, prepared a warranty deed, note and deed of trust, and possibly a bill of sale for the closing. The warranty deed did not contain a clause excepting the $115,000 First National deed of trust from warranty. The SBA deed of trust was recorded on September 13, 1983. Sowell's deed of trust was recorded September 16, 1983, three days after the SBA deed of trust.

Sowell and Lee Davis were friends. Their business relationship was very informal -- so informal that Sowell stated their ultimate agreement did not "remotely resemble" the terms of the July 13, 1982, offer of purchase. No definitive closing statements were prepared for the buyers and seller for the sale transaction. No written subordination agreement was executed between First National and Sowell.

The amount of the down payment received by Sowell is difficult to determine because it was never itemized at closing. This amount and the precise calculation of the dollar amounts surrounding the transaction are inconsistent and cannot be reconciled. Of the $285,000 distributed from
  TOP    4 ABR 95  the SBA loan, Sowell received a benefit of about $273,000. When combined with a down payment of $146,000 and the second deed of trust, the purchase price equals roughly $515,000, rather than the $550,000 found in the Belland agreement. Sowell and Davis executed the closing documents, however, and the disbursements from closing are not at issue.

Davis defaulted in her performance of the $96,000 deed of trust on numerous occasions. Sowell initiated foreclosure of her deed of trust in March of 1987. Her notice of default specifically described the $285,000 first deed of trust held by First National and the SBA. Davis cured the default. Sowell initiated a second nonjudicial foreclosure in 1990. Davis again cured the default. Sowell commenced a third foreclosure and executed a verified declaration of default again describing the $285,000 first deed of trust on October 9, 1991. When Davis failed to cure, on May 18, 1992, Sowell conducted a nonjudicial foreclosure. Prior to the foreclosure, First National had drawn upon the SBA guaranty and assigned the loan to the SBA. The SBA did not receive statutory notice of the final foreclosure. After foreclosure, Sowell took possession of the property and continues in possession to the present time. Sowell incurred expenses repairing and/or improving the property following her repossession. Her statements with regard to actual repair and improvement expenses are inconsistent.


Sowell claims that her second deed of trust was never intended to be subordinate to the SBA $285,000 loan. Rather, she contends, her secondary obligation was intended to be subordinate solely to the $115,000 deed of trust executed February 19, 1980. No credible evidence supports her contention.

The documentary evidence in this case runs contrary to Sowell. The offer to purchase business property of July 13, 1982, contains no specific covenants regarding the priority of the Sowell deed of trust under the circumstances that occurred at closing. The documents prepared by attorneys Downes or Stepovich contain no covenants regarding the priority of the Sowell deed of trust. The SBA loan documents executed by Davis and her husband do not reference any subordination of the SBA   TOP    4 ABR 96  loan. Sowell's foreclosure documents specifically recognized the priority of the SBA $285,000 loan. Nothing in the hundreds of pages of documentary evidence admitted in this case lends any appreciable support to Sowell's position.

Nor do any of the witnesses support Sowell's contention. Attorney Eugene Belland's testimony did not support Sowell in any manner. Attorneys Downes and Stepovich knew nothing about subordination of the SBA loan or Davis's supposed assumption of the $115,000 first lien. Davis unequivocally denies any knowledge of a subordination agreement or any intent to assume the first lien. Merrifield does the same. Sowell stands alone in contending that somehow Merrifield and Davis, through a clandestine affair, conspired together to deny Sowell's deed of trust priority over the SBA.

Sowell lacks credibility. There is no factual basis for any charges of wrongdoing against Davis, Merrifield, and ultimately the SBA. Her version of the facts in this case is not only contrary to the overwhelming weight of the evidence, it is inconsistent with her conduct for nearly 10 years following the close of the sale of the property.

I specifically find that Sowell knew exactly what transpired at the closing in 1983. She knew at that time that Davis had obtained an SBA loan and had not assumed the first lien on the property. I find that Sowell is not entitled to any relief, whether legal or equitable. Sowell has not established any basis for a claim of breach of contract with the SBA or Lee Davis. She had no contract with the SBA. She has not established a claim for fraud against Davis or the SBA in any manner. Fundamental to a claim of fraud is the existence of a misrepresentation. Bubbel v. Wien Air Alaska, Inc., 682 P.2d 374, 381 (Alaska 1984). There were no misrepresentations made by the defendant SBA, its predecessors in interest, or Davis. Moreover, even if there was a claim for fraud or breach of contract, the statute of limitations expired long ago. If Ms. Sowell ever had a claim, she was aware of it nearly 12 years ago. Her present allegations are a result of a self-serving attempt to rewrite   TOP    4 ABR 97  history in her favor.(1)

I therefore find that any legal claims possessed by Sowell are barred by AS 09.10.070 or AS 09.10.050. Nor is Sowell entitled to equitable relief in any manner. She was not wronged by Davis, First National or the SBA. Even if she were, laches bars her pursuit of any equitable remedy at this late date. Sowell has no basis whatsoever for equitable relief, whether it be in the form of an equitable lien, equitable subordination, equitable reformation or corrective foreclosure.

Sowell also asserted the "doctrine of a vendor's purchase-money mortgage" as a basis for relief. In light of my finding that Sowell knew about the SBA loan when it was made, in 1983, she cannot successfully assert this doctrine now. Further, the statute of limitations has run on any such claim. Sowell's complaint was initiated on April 15, 1994. The sale to Davis closed on September 13, 1983. Even if the ten-year statute of limitations pertaining to real property applied, under AS 09.10.230 her claim is barred. Application of that statute to this situation is unlikely under Bauman v. Day, __ P.2d __, 1994 WL 663386, which applied tort and contract limitation periods to a dispute regarding the purchase of real property.

Finally, even if Sowell was entitled to priority over the SBA lien, she lost that priority when she conducted her nonjudicial foreclosure on May 18, 1992. Sowell did not give the SBA statutory notice of her sale. AS 34.20.070(c). The sale had no effect on the SBA lien. It remains fully valid and enforceable. Nystom v. Buckhorn Sales, Inc., 778 P.2d 1115 (Alaska 1989).

Conclusion and Order

Judith Sowell engineered the sale to Davis and the accompanying SBA loan. Her attempts to deny the results of her own actions are not well taken. Her lien is not entitled to priority against the SBA under any theory. Moreover, the SBA is entitled to attorney's fees and costs as   TOP    4 ABR 98  the rule of decision turns on interpretation of state law and not federal bankruptcy law. In re Bybee, 945 F.2d 309, 315 (9th Cir. 1991); AS 09.60.010; Alaska R. Civ. P. 82(a). A separate order and judgment will be issued consistent with this memorandum.

    DATED: June 2, 1995.

                BY THE COURT
                DONALD MacDONALD IV
                United States Bankruptcy Judge

1.   TOP    4 ABR 97  My credibility determinations as to Sowell are described at greater length in my Memorandum Regarding Motion for New Trial or Reconsideration, and Request for Investigation, dated June 2, 1995, which is incorporated herein by reference.