United States District Court, D. Oregon
F.J. BORESEK, TRUSTEE OF BORESEK TRUST, Plaintiff,
UNITED STATES DEPARTMENT OF AGRICULTURE, FARM SERVICE AGENCY; CHRISTIAN BUSSMANN and DEANA BUSSMANN. Defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
MICHAEL J. MCSHANE, District Judge.
Following partial summary judgment in favor of the plaintiff, F.J. Boresek, I held a court trial on February 9-10, 2015, and March 4, 2015. The parties presented lay and expert witness testimony to determine whether Boresek's ignorance of the FSA lien on the property of Christian Bussmann and Deana Bussmann ("the Bussmanns") held by the United States Department of Agriculture, Farm Service Agency ("FSA") was due to inexcusable negligence and whether Boresek's reliance on a defective preliminary title report was commercially reasonable. For the reasons that follow, I conclude that Boresek's ignorance of the FSA lien was due to inexcusable negligence, that Boresek's reliance on the defective preliminary title report was not commercially reasonable, and that the FSA would be prejudiced by equitable subrogation. The issue of marshaling is not ripe for adjudication at this time. Below are my findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).
In 2007, Boresek lent the Bussmanns $250, 000, secured by the Bussmanns' 10.5-acre parcel of land. This lot contained the Bussmanns' home and 10 acres of cranberry bogs. In completing this transaction, Boresek, through his agent Advanced Investment Corp. ("AIC"), bought out two first-position liens held by Sterling Savings Bank ("Sterling Bank"). Unbeknownst to Boresek, the FSA had a second-position lien on the Bussmanns' home property and a first-position lien on a separate 54 acre parcel owned by the Bussmans. These liens secured $440, 000 in loans from the FSA to the Bussmans. When Boresek paid off the Sterling Bank loans, the FSA moved up to first-position on the house property, while Boresek ended up with a second-position lien.
I find Marty Hall, the mortgage broker for AIC, to be generally credible. Hall is experienced in the field of hard money lending, but he is not experienced in the field of agricultural loans. Hall testified that he has only made one prior loan to a cranberry farmer, which took place many years ago. Trial Transcript ("Tr.") 57. Hall added that he had never encountered the FSA before, did not know what the initials FSA meant, and did not think that the FSA debt meant more or less than any other kind of debt. Tr. 364. Hall did acknowledge that the Bussmanns were clearly in the agricultural business, Tr. 61, and Hall personally drove by the property, which featured cranberry bogs. Tr. 57. Nevertheless, Hall testified that he merely assumed the $440, 000 FSA loan was secured by other farming operations. Due to Hall's lack of familiarity with the FSA, the method in which the FSA secures its loans, and with farm loans in general, I give Hall's testimony little weight as it pertains to the duty of care for an agricultural loan.
Specifically, I find that AIC did none of the following: verify the Bussmanns' income, review the Bussmanns' tax returns, review the Bussmanns' bank statements, meet with Mrs. Bussmann, review the Bussmanns' farm operations, ask the Bussmanns about the FSA, call the FSA at any point before making the loan, make any effort to determine what the FSA was, investigate the figures on the Bussmanns' financial statement, obtain an appraisal of the Bussmanns' property, or contact a credible real estate agent to perform a comparative market analysis ("CMA"). I find that AIC's due diligence rested almost entirely on the following: a title policy that followed a preliminary title report AIC knew to be incorrect; a CMA performed by a friend of a friend of Mrs. Bussmann who Hall never met and whose experience in the area of farms or marketing farms Hall was unaware; and a brief drive-by of the property by Hall himself, after which Hall decided to discount the valuation of the CMA. Hall testified that his primary concern was getting title assurance from Ticor Title ("Ticor") and that the rest of the debts "were of far less concern to me." Tr. 365.
I give the CMA report little weight. The CMA is based on properties that have little to no resemblance to the Bussmanns' property, other than being in the same general geographic area. Furthermore, the expertise of the agent who produced the CMA was never established, and the CMA is based on asking prices rather than closed sales. See Ex. 16. The CMA valued the Bussmanns' 10.5-acre property at $889, 000, while the FSA recently valued the Bussmanns' equipment, 10.5 acre parcel, and 54 acre parcel together at $718, 600. Tr. 227. In fact, the record is insufficient to establish at all the actual value of the Bussmanns' 10.5-acre parcel. I also give very little weight to the discounted figure of $550, 000 that Hall assigned to the 10.5-acre parcel. Hall based that figure on a brief drive-by of the property and the nearly worthless CMA. Hall admitted he knew nothing of the farming operation that he observed from the window of his moving car.
As the value of collateral is the most important aspect of a hard money loan, Hall certainly could have done more to learn the value of the Bussmans' home lot. Hall's practice is to make sure collateral is worth at least twice the value of the loan. Although Hall discounted the CMA to $550, 000, this figure may as well have been plucked out of thin air.
I give Hall's testimony little weight with regard to the commercial reasonableness of the preliminary title report. Hall testified that the idea of calling the title company when he received a preliminary title report that he knew to be inaccurate did not occur to him even though he considered the preliminary title report to be very important. Tr. 85, 87. Furthermore, Hall testified that he did not have an opinion as to whether the title company or escrow agent would want to know that there is a problem with the preliminary title report. Tr. 91-92.
In contrast, the escrow agent who facilitated the Boresek transaction, Diane Schafer, testified that she would expect a lender to inform her of a defective preliminary title report so that she could notify the title officer to do more research. Tr. 267. The FSA expert Denise Johnson testified that she has called title companies numerous times in the past to inform them of an inaccurate preliminary title report, and she would always do that in order to allow the title company to catch other potential errors. Tr. 296-97. Johnson testified that she had never in 36 years put a preliminary title report into her file that she knew to be inaccurate. Tr. 326. The other FSA expert, Dennis Lynch, testified that one should always alert the title company or the escrow agent to a defect in the preliminary title report. Tr. 333. Lynch stated that the failure to alert the title company precludes the possibility of correcting other unknown defects. Tr. 355-56. In light of the importance lenders place on preliminary title reports, I find the FSA experts and the escrow officer's testimony to be more convincing than that of Mr. Hall.
I also give the FSA experts' testimony more weight than Boresek's expert, Donald Burdick. Burdick agrees that "the private lender is usually much more focused on the security of the collateral value[, ]" and Burdick testified that the value of the collateral is the most important factor for a hard money lender to investigate. However, Burdick's due diligence analysis relied heavily on the baseless CMA performed by a friend of a friend of Mrs. Bussmann. Given that Burdick admits a hard money lender must perform greater due diligence with respect to the value of the collateral, I give little weight to his testimony that Boresek satisfied that higher burden by performing a brief drive-by of the property and asking the prospective borrowers to provide what turned out to be a worthless CMA.
I also discount Burdick's opinion because he gave "no weight" to exhibit 49, the unsigned list of the Bussmans debts and assets. Burdick gave exhibit 49 "no weight" because it was unsigned. But any lender, hard money or otherwise, is going to look at any information available when evaluating collateral and risk. I agree with Lynch that "if you were concerned about it, you would go in and you would look at that debt and you would try to determine where that debt is secured. You'd make a reasonable inquiry into the borrower as to that schedule of debt that doesn't show having any security associated with it. It's a listing of liabilities." Tr. 332. Signed or not, I agree that exhibit 49 should have raised red flags. Tr. 288.
CONCLUSIONS OF LAW
A party bringing an equitable subrogation claim admits their title is subordinate but argues equity demands the court place them in front of the party with priority. In Dimeo v. Gesik, 164 Or.App. 567, 571 (1999), the court provided a ...