Court Opinion

ID: 9684655
Source: CourtListenerOpinion
Date Created: 2023-08-24 14:07:29.363843+00
Date Added: 2024-06-11T18:17:58.656979
License: Public Domain

John A. Fogleman, Justice, dissenting. I would affirm the decree of the chancery court in every respect. I agree with all of the majority opinion except the treatment of the factual situation with reference to the acceleration in this case. The chancellor made specific findings that appellee validly exercised the right to declare the entire mortgage debt due and payable and that it had valid business reasons for withholding its consent to the sale of the mortgaged property to the Belchers. While I agree with appellants that they had the burden of showing that appellee’s refusal to accept the Belchers as purchasers was unreasonable, capricious and inequitable, I submit that they failed to meet this burden. I also agree that they stated the proper test rather than the majority’s retrospective determination of reasonableness. I believe, however, that the UCC rule stated in Ark. Stat. Ann. § 85-1-208 (Add. 1961) was intended to and does govern. Whether it does or not, or however the test may be stated, that section is a clear, concise statement of the test that should be applied. In other words, the courts should direct their inquiry toward a determination whether the option to accelerate was exercised in the good faith belief that the prospect of payment or performance was impaired and the burden of establishing lack of good faith on the party against whom the power has been exercised. Appellants’ argument addressed to this point consist mainly of these assertions in their brief: that the association paid no attention to the security involved, to the care given other property by the Belchers or to their income; that foreclosure was brought as punishment to the seller and the purchasers and as an object lesson to others because Tucker sold to the Belchers with the association’s approval, that the association has not established objective standards for granting or withholding its consent, which can be ascertained by a mortgagor; that appellee’s fears are remote; that the Belchers’ payment record was not bad; that the association’s record at the time the application for transfer was made was incomplete, because it did not reflect the divorce of Vassie Belcher from his former wife, his remarriage or the present financial stability of the Belchers, both of whom are employed. I submit that the evidence does not lend any support to some of these assertations, and that it does not clearly preponderate against the chancellor’s finding in any event. I further submit that many of these assertions are not appropriate to the subject under inquiry. I shall direct my attention only to die question that is most pertinent, in view of the majority opinion, i.e., were the chancellor’s findings as to the validity of appellee’s exercise of its right to accelerate and the validity of appellee’s withholding its consent to the sale clearly against the preponderance of the evidence? In reviewing the evidence, equity requires that, while looking over the shoulder of the officers of appellee, we try to gain their perspective, not as the caretakers of their own money, but as guardians of the savings of many people, some of whom are widows and orphans. The responsibilities of these officers are great and they are called upon to exercise their best judgment gained from many years of experience in the lending of other people’s money in a manner that will insure the best possible return to appellee’s investors. It is also imperative that we remember that Tucker’s right to sell his property to whomever he chose, at his own risk, is not questioned here. The only question is whether appellee is required to accept any purchaser he chose as its primary obligor, and, as appellants put it, whether in its refusal to consent and the resulting acceleration, appellee acted capriciously or whimsically. First, I should like to note that the record is totally devoid of any evidence that appellee’s officers acted punitively. Only one seeking to reach that result could find any inference from the testimony on which to base such a finding. Even if such a strained inference could be drawn there is certainly no preponderance of evidence to support such a finding, and there is even a greater certainty that the chancellor’s contrary findings are not clearly against the preponderance of the evidence. In reviewing the evidence it must be remembered that two separate occasions for the exercise of judgment and discretion by appellee’s officers arose. The first was whether to consent to the transfer. The second was whether to accelerate. In order to evaluate the matter from the point of view of a sincere, conscientious officer of a savings and loan association, a review of the background pertaining to this loan at the time of the first decision is imperative. The property, a three-unit apartment at 2010 West 17th Street in Little Rock, was sold to Tucker on December 22, 1965, by Mrs. Patricia Keck and her daughter Mrs. Doris Marie Koon for $25,000. The appraisal for a loan by appellee indicated a property value of $23,500 to $24,000. Appellee usually restricted its loans to 70% or 75% of appraised value. It was unwilling to make a loan with the property as the only security, and with the 24-year-old Dan Tucker, unmarried, as the only person liable on the note. The loan of $23,000 was made on December 22, 1965, the date of the conveyance to the borrower, after Troy Tucker, father of Dan Tucker, signed the note as a comaker, and the sellers pledged $5,500, which was in the form of a savings account with appellee, as additional security, or indemnity, to induce appellee to make the loan. It seems obvious to me that this was a marginal loan from the very beginning. Tucker testified that: When he bought the property, it was in an “all white” neighborhood; he lived in one apartment and rented the others for a rental adequate to pay the loan installments and enable him to live “rent-free”; the neighborhood gradually changed to “colored” and the difficulty in obtaining and keeping renters eventually resulted in the property remaining vacant for a full year; efforts of a real estate agent to sell the property were unsuccessful for several months, after which a real estate agent found the Belchers, who made the only offer Tucker received; he sold his equity to them for $1,500, even though he had thought it to be worth $4,000 to $5,000. The indemnity deposit by Tucker’s grantors had shrunk to $4,500, pursuant to the agreement which permitted the indemnitors to withdraw $500 for each $1000 paid on the loan principal. At the time the application was made for appellee’s approval of the transfer, only $2,000 of the principal had been paid. Thus, because of the trend, Tucker received only $1,500 for his $2,000 cash payment and his $2,000 loan principal payment. This meant that the value of the security to appellee had already diminished by $3,500, i.e., $2,500 reduction in property value and $1,000 reduction of the indemnity. The property, on the basis of this sale had a value of only $21,000 to $21,500, and the loan became virtually 100% of the property value. The association officers had observed serious problems in connection with some of their loans. At the time of the decisions made in this case, they were having an average of 10 transfers per month. They had found, however, that the rate of delinquency on assumed loans was alarmingly high, posing a problem which was becoming progressively more serious, and causing appellee’s concern about it to intensify. This rate reached the point where it was approximately 50% higher than those on which the title remained in the original borrower. Little Rock savings and loan associations have historically been among the most liberal in permitting transfers of property on which they have mortgages. As the money market has become more competitive, these associations have attempted to analyze their businesses more carefully. While appellee formerly had no requirements relating to transfers, and made no investigation of purchasers, as the delinquency rate on assumed loans increased, its officers began to give attention to its approach to the matter. The cost of servicing delinquent accounts is a significant cause for concern, and makes such a loan expensive to the lender, because a great deal of time must be devoted by someone in bringing such accounts up to date, and appellee has found that the process must usually be repeated again and again. Around July 1, 1969, appellee started procedures to give more attention to property sales where an existing loan was to be assumed. Since that time appellee has investigated all purchasers in such cases. Appellee adopted a policy of separately evaluating each case involving a loan assumption and accepting as purchasers those who were satisfactory credit risks. The examination of applications to transfer was made by a loan committee, on which several officers of the association served. Among the members of the committee were W. P. Gulley, president and chief executive officer for 11 years and previously assistant secretary, vice president and director, John D. Greenway, head of the loan department, who is now executive vice president and previously a vice president for more than eight years, Howard Boddy, an assistant vice president, who is now a branch manager, but was a loan officer at all times pertinent to this controversy, and who had been employed by the association for 7 1/2 years, Guy Maris III, a five-year employee who was an assistant vice president and loan officer in 1969 and 1970, and was in charge of delinquent accounts. A Mr. Giddings and Mr. Byrd, who are not further identified, are also members of this committee. No minutes were kept of these meetings and attendance was not recorded. The approval of at least four of the members was required before a loan could be made. The procedure required an application by the proposed purchaser. The applicant was required to meet with a loan officer and give personal information and references and information as to the transaction. In addition to past personal credit performance, the association considers the applicant’s income in relation to the cost of the house, the amount of the monthly payments to be assumed, estimated cost of utilities and maintenance, the proposed occupancy and the applicant’s manner of occupancy and maintenance, the relationship of applicant’s living expenses to his income, the length of time employed in his current job, the amount and type of applicant’s income, and, to a lesser extent, the applicant’s net worth. The major items are past credit performance and stability of earnings. After the application is made, the loan officer to whom it is made obtains a credit report from the Retail Credit Bureau, which usually reports by telephone. Since the inauguration of these procedures, the association has only withheld approval of one proposed purchaser other than the Belchers, but the seller in that case withdrew from the transaction. This is the first case in which the sale was carried out without the consent of the association. The Belchers made their application containing a financial statement and other personal information to Howard Boddy on December 3, 1969, who promptly obtained a credit report. It is clear that the loan committee decided to reject the application upon the basis of Belcher’s past credit performance, and never reached other factors it might have weighed had it found this one satisfactory. Discrepancies in the testimony of the officers as to whether Belcher’s past record with the association was considered along with the credit report, and as to the identity of the loan committee members acting are attributable largely to the fact that Boddy apparently arrived at a dedsion as soon as he saw the credit report and the fact that actually two decisions were made, i.e., whether to approve the transfer, and whether to accelerate. It is clear that the decision not to approve the transfer was unanimous among the members who participated, regardless of the makeup of the group. Boddy took the application, loan file and credit report to the loan committee meeting. He said that no final action was taken at the first meeting and that the ultimate decision was eventually left to him, Greenway and Gulley, all of whom agreed that the Belchers should not be approved because the credit report was unsatisfactory under the association standards. Boddy said that the association occasionally overlooked such things as an account 30 days overdue or a $5 or $10 collection, if everything else appeared favorable. His recollection was that, in the case of Belcher, there were numerous bad items— probably 10 or more. He was the first to raise the question whether the transfer should be approved. He did not recall having any knowledge of Belcher’s performance on the previous loan at the time of the disapproval of the assumption of the loan by Belcher, and his decision was not based on anything except the credit report. Greenway stated that the association made no record of all of the members of the loan committee passing on an application, but did keep a record as to two of them. Greenway felt that the committee did refer to Belcher’s previous payment record on a loan made to him by the association and that the rejection was based upon this and the credit report, but admitted that the loan record might possibly have been brought to his attention on the following day. He said that the credit report reflected 15 unfavorable items, seven of which were turned over to another agency for collection, two of which were repossessions, two of which appeared to have been paid after being turned over to someone for collection and two of which were paid after becoming delinquent. Greenway said that the committee’s action was actually a recommendation and that the final decision was up to Gulley. Gulley reached his decision upon the basis of the credit report and the previously unsatisfactory account of Belcher with the association. He classified as “bad items” any charge account or balance that had been referred to an attorney or collection agency for collection, any suit to collect a debt, or any delinquent payment on an existing debt. He testified that appellee’s officers had learned from bitter experience that when one has been delinquent in the past, he is frequently delinquent in the future. Gulley said that these decisions were actually made by the loan committee, and in this case by Greenway, and reported to him for his concurrence or confirmation. Gulley said he considered the record on Belcher’s existing loan, or one that had been assumed by him. According to Gulley, the loan assumption by Belcher was disapproved on January 12, 1970, or within a day or two thereafter. The names recorded on the disapproval of the assumption were those of Greenway and Boddy. Gulley considered several items on the credit report unsatisfactory, among which were items on which two and three payments, respectively, were past due, and a repossession. He said that small items, when numerous, were not to be ignored as indicative of attitude toward prompt payment. After the transfer was disapproved, Mr. Belcher and his attorney presented Tucker’s deed to Belcher, dated February 18, 1970, to Guy Maris III, who informed them that the transfer had been disapproved. Maris was familiar with Belcher’s past record on a loan by appellee because of activities in collecting delinquent payments. He was unable to recall whether he had communicated that information to other members of the loan committee before the deed was presented to him. Because of this record and the past credit record, Maris concurred in the subsequent decision to accelerate the debt. He apparently did not consider the Belcher loan payment record in determining his fitness to assume the loan. Maris and Gulley stated the particulars relating to Belcher’s delinquencies on the previous loan. Maris thought he first called Belcher about a delinquency in 1966. Accounts were turned over to him as delinquent after nonpayment for either 15 or 30 days, depending upon the persistency of the delinquency. Gulley testified that the previous Belcher loan had been on the association’s books for 42 months, during which monthly payments were made on or before the due date on only 10 occasions, but payments averaged 12 days later overall and late payments averaged 15 days late. A check for a payment was returned twice in September 1969. He said that at the end of the year the association had to pay the taxes on the property. Maris found records of 27 “first and second” notices of delinquency to the Belchers. He found five instances where payments were more than 30 days late. The association considered this experience unsatisfactory, but did not feel that foreclosure was warranted, even though it considered a loan in default when a payment was more than 30 days overdue. There is no doubt that this record was known to those who participated in the decision to accelerate. This was the first such decision the association had been called upon to make after adoption of its new procedures, as this was the first time a transfer had been made without association consent. This decision must have been arrived at after deliberation, as several weeks intervened between the date the deed was presented to Maris and the institution of foreclosure. Maris advised Gulley, with whom the final decision rested, of the deed. Gulley testified that he acted upon the recommendation of Greenway and Boddy, the information supplied by the Belchers and that disclosed by association records. Greenway says that he recommended acceleration.' Gulley did not act, however, until he discussed the matter with Greenway, with Katherine Williamson, and Mackey Faulkner, treasurer and assistant treasurer of the association, and with directors Edward L. Wright, Joseph B. Hurst and Joshua Shepherd. Gulley stated that a marginal borrower’s account is expensive to handle, even if there is never a foreclosure. The association was confronted with a decision whether to accept a 58-year-old man with a questionable credit record and an unsatisfactory performance on a previous loan as primary obligor on a loan that was always marginal and promises to continue to be. Further, while Belcher held two jobs, he had been recently unemployed, had held his principal employment only 11 months, and had been divorced and remarried. While such a person might be carried as a borrower without foreclosure on one small loan, it is easy to see why he might not be an acceptable risk on two. There was evidence that the association followed FHA guidelines that payments should not exceed 20% of the borrower’s monthly income, and the price of a dwelling should not exceed 2 1/2 times the borrower’s annual income. There was also testimony that FHA and VA prohibit future loans when one person would have in effect more than one assumed loan at a time. Clearly, the decision arrived at was not arbitrary, capricious or whimsical. It is not for us or any judicial tribunal to pass on the business judgment of those whose experience gives them insight into such matters, so long as there are factors that require a choice between alternatives which are dependent upon the exercise of that judgment and there are any reasons that would support the choice made. This was clearly recognized by the chancellor, and I do not see how it is possible to say that the evidence clearly preponderated against his findings. It is no answer to say that the Tuckers are still liable and that there is no evidence that either anticipates leaving the state. In the first place, the current mobility of our society and the high percentage of our population who do change residences every year are matters of common knowledge that every businessman should take into account. Despite present intentions, collection from the Tuckers could become a serious problem during the life of the loan in spite of any lack of bad faith on their part. In the next place, it may well be questionable that either Belcher or the elder Tucker will survive the loan. I think the decree should be affirmed as not against the preponderance of the evidence because I do not think that the collective judgment of this court should supersede that of the association officers.