Analysis that outlines the unconstitutionality of a power of sale provision in a mortgage contract by federally chartered bank corporations created for public and national purposes

submitted by Rueben Nieves

It has been awhile since I posted this analysis that outlines the unconstitutionality of a power of sale provision in a mortgage contract by federally chartered bank corporations created for public and national purposes. Although several appellate courts concluded that it was constitutional none have weighed the issue against several Supreme Court decisions, which, if the courts would have looked for guidance would have arrived at a different conclusion. There has also been but one law review that attempted to analyse the issue. The one that I have found was written in 1997 by Daniel E. Blegen attached:

University of Arkansas ∙ School of Law ∙ Division of Agriculture
NatAgLaw@uark.edu ∙ (479) 575-7646
An Agricultural Law Research Article
Constitutionality of Power of Sale Foreclosures
By Federal Government Entities
AgriBank FCB v. Cross Timbers Ranch
By
Daniel E. Blegen
Originally published in MISSOURI LAW REVIEW
62 MO. L. REV. 425 (1997)
http://www.NationalAgLawCenter.org
The Constitutionality of Power of
Sale Foreclosures by
Federal Government Entities
AgriBank FCB v. Cross Timbers Ranchl

1. INTRODUCTION

When loaning money, lenders often require that obligations be secured by
a mortgage on real estate owned by the borrowers.2 In Missouri, the prevailing
form of mortgage is the deed of trust3 with a power of sale4 provision.s Upon
default,6 the trustee is allowed to sell the property without a judicial hearing? and
1. 919 S.W.2d 263 (Mo. Ct. App. 1996).
2. See generally GRANT S. NELSON & DALE A. WmTMAN, REAL ESTATE FINANCE
LAW § 1.1 (3d ed. 1994).
There are many variations on a mortgage, but all involve the debtor, or mortgagor,
giving the creditor, or mortgagee, an interest in the land which can be exercised if the
mortgagor fails to repay the debt. Id. Generally, the debtor and creditor will execute a
promissory note for the debt amount, and a mortgage on land as security for the debt. Id.
3. A deed of trust is an alternative to a traditional mortgage which “normally
involves a conveyance of the realty to a third person in trust to hold as security for the
payment of the debt to the lender-note holder whose role is analogous to that of the
mortgagee.” NELSON & WmTMAN, supra note 2, § 1.6.
4. Upon default, a power of sale authorizes the mortgagee or a third party to sell
the property at a public sale after varying amounts of notice. NELSON & WmTMAN, supra
note 2, § 7.19. This method is allowed in over thirty jurisdictions. NELSON & WmTMAN,
supra note 2, § 7.19 n.1.
5. Mo. REv. STAT. §§ 443.290-443.410 (1994). For text and discussion of specific
sections, see infra notes 7-8.
6. Default has been defined as ”the omission or failure to … observe a promise or
discharge an obligation ….” Bradbury v. Thomas, 27 P.2d 402, 405 (Cal. Ct. App.
1933).
Default is often defined by the promissory note itself. If it is not defined in the
note, however, the plain meaning is used. See, e.g., Derry Finance N.V. v. Christiana
Companies, Inc., 797 F.2d 1210, 1213-14 (3d Cir. 1986) (plain meaning used instead of
contextual interpretation because recourse note was plain on face); Chrysler Credit Corp.
v. BJ.M., Jr., Inc., 834 F. Supp. 813, 831 (E.D. Pa. 1993) (since not defined in Article
9 of the U.C.C., “default” given its plain meaning).
7. The statute provides that the trustee may foreclose and sell the property pursuant
to a valid power of sale provision in the mortgage or deed of trust, and does not require
any hearing or other determination of the rights of the parties. MO. REv. STAT. § 443.290
(1994).
The foreclosure sale may be carried out in as few as twenty days, depending on the
426 MISSOURI LAWREVIEW [Vol. 62
after giving only limited notice.s Because of the limited notice and opportunity
to be heard required under the Missouri statute, which is similar to other states’
power of sale statutes,9 borrowers often raise the issue of whether the statute
violates the due process required under the FifthlO or Fourteenthll Amendments
to the United States Constitution.
The constitutionality of non-judicial power of sale foreclosures is well
settled as applied to private lenders because of the lack of state or federal
action. 12 The question becomes more difficult, however, when the lender is the
federal government or a corporation formed by the federal govemment.13
notice requirements for the particular county, and the mortgagor’s only recourse is to pay
the entire amount due prior to the sale, or pay the amount due within a statutorily
prescribed redemption period following the sale. Mo. REv. STAT. § 443.410 (1994).
8. The notice section of the statute provides:
The notice required by section 443.310 shall … be given by advertisement,
inserted for at least twenty times, and continued to the day of the sale, in some
daily newspaper, in counties having cities of fifty thousand inhabitants or
more, and in all other counties such notice shall be given by advertisement in
some weekly newspaper published in such county for four successive
issues ….
Mo. REv. STAT. § 443.320 (1994).
This statute has been in existence in Missouri, in essentially its present form, since
1885 with only minor changes relating to the population of the town within the county.
In 1989, the section was rewritten, but the general notice requirement has not materially
changed.
In addition to the publication requirements, the statute provides for individual
notice by certified or registered mail, not less than 20 days before the sale, as follows:
(1) To each person whose name and address is set forth in any such request
recorded at least forty days prior to the scheduled date of sale; and
(2) To the person shown by the records in the office of the recorder of deeds
to be the owner of the property as of forty days prior to the scheduled date of
foreclosure sale at the foreclosing mortgagee’s last known address for said
record owner; and
(3) To the mortgagor or grantor named in the deed of trust or mortgage at the
foreclosing mortgagee’s last known address for said mortgagor or grantor.
Mo. REV. STAT. § 443.325 (1994).
The statute does not require that the individual to whom notice is to be sent actually
receive the notice, however, as long as an attempt is made to get notice to him.
9. Over thirty jurisdictions offer some form of power of sale foreclosure. NELSON
& WHITMAN, supra note 2, § 7.19 n.1.
10. “No person shall … be deprived of life, liberty, or property, without due
process of Iaw …. ” U.S. CaNST. amend. V.
11. “No state shall … deprive any person of life, liberty, or property, without due
process of law …. “U.S. CaNST. amend. XIV, § 1, cI. 2.
12. See infra notes 52-66 and accompanying text.
13. Federal governmentally-formed corporations include the Federal National
1997] POWER OF SALE FORECLOSURES 427
To date, courts have rarely addressed the issues raised when the government
forecloses on a mortgage, primarily by failing to find sufficient federal action to
raise a constitutional issue. 14 On the few occasions that courts have found
sufficient federal government action, however, they have found that state power
of sale statutes lack the due process required under the Constitution. IS
While many governmentally-created lenders have escaped constitutional
scrutiny by not being considered federal actors, there is a potential argument,
based upon a recent decision by the United States Supreme Court,16 that the
actions of at least some of those protected lenders should be considered federal
actions. l
? To that end, the present case provides an opportunity to discuss the
constitutional issues raised and the results the courts facing this issue have
reached, while exploring a possible new approach to finding federal action.
II. FACTS & HOLDING
Allison Brothers, Inc., which later became Cross Timbers Ranch
(hereinafter “Cross Timbers”),18 together with William E. Allison and Mallie A.
Allison, in their personal capacity, executed a $500,000 promissory note in 1978
to the Federal Land Bank of St. Louis, which later became AgriBank, FCB
(hereinafter “AgriBank”)}9 A deed of trust on 3,736 acres of property in
Hickory County, Missouri, secured the note.20 In the case of a default, the deed
of trust contained a power of sale provision.21
Mortgage Association (FNMA), the Government National Mortgage Association
(GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Farm Credit
Banks (FCB), among others. These corporations will be discussed in detail infra, notes
67-117 and accompanying text.
This question also exists when a state government forecloses a mortgage through
its various agencies. Many of the same issues would arise with state government lenders.
For the purposes of this Note, however, the discussion will focus on federal government
lenders.
14. See infra Part III.B.
15. See infra Part III.B.
16. Lebron v. National R.R. Passengers Corp., 115 S. Ct. 961 (1995).
17. See infra Part III.C.
18. The record is not clear on the reasons for the change in name; however, the
name change was not an issue in the appeal.
19. AgriBank FCB v. Cross Timbers Ranch, Inc., 919 S.W.2d 263, 265 (Mo. Ct.
App.1996).
20. Id.
21. Id.
428 MISSOURI LA W REVIEW [Vol. 62
After Cross Timbers suffered financial problems, the note went into
default.22 AgriBank offered to restructure the loan in February 1992;23 however,
AgriBank limited the time for acceptance to March 1992.24 Cross Timbers did
not file an application for restructuring during the time period set by AgriBank.25
On May 21, 1992, one day prior to the date set for the original foreclosure
sale, Cross Timbers filed for bankruptcy under Chapter 12 of the Bankruptcy
Code,26 in the United States Bankruptcy Court for the Western District of
Missouri,27 On February 11, 1993, the bankruptcy court granted AgriBank relief
from the automatic stay28 and AgriBank began foreclosure proceedings29 under
the power of sale clause in the deed oftrust.30
On February 16, 1993, Cross Timbers applied for restructuring with
AgriBank.31 AgriBank rejected the application because of the ongoing
foreclosure proceedings.32
Cross Timbers then appealed the relief from the stay to the United States
District Court for the Western District of Missouri,33 On March 9, 1993,
however, the bankruptcy court dismissed Cross Timbers’ bankruptcy
proceedings under Chapter 12 because of Cross Timbers’ failure “to obtain
22. Jd. at 266.
23. The statute requires an offer to restructure for farm credit banks pursuant to
their charter from the federal government:
Not later than 45 days before any qualified lender begins foreclosure
proceedings with respect to a loan outstanding to any borrower, the lender
shall notify the borrower that the loan may be suitable for restructuring and
that the lender will review any such suitable loan for restructuring ….
12 U.S.C. § 2202a(b)(2) (1994).
24. AgriBank FCB, 919 S.W.2d at 266.
25. Jd.
26. 11 U.S.C. §§ 1201-1231 (1994). Chapter 12 bankruptcy provides a specific
opportunity for restructuring debts to family farmers.
27. AgriBank FCB, 919 S.W.2d at 266.
28. 11 U.S.C. § 362(a)(4), (d) (1994). An automatic stay is allowed on all
proceedings regarding the property of a debtor to allow the bankruptcy trustee time to
develop a plan for disposition of debts.
29. Most states recognize either power of sale foreclosure, which does not require
any type of hearing, or judicial foreclosure, which requires a determination of the parties’
rights through a court proceeding. See generally NELSON & WmTMAN, supra note 2,
§§ 7.11-7.30. Missouri allows both procedures and outlines the minimum requirements
for a power of sale foreclosure by statute. Mo. REV. STAT. §§ 443.290-443.410 (1994).
30. AgriBank FCB, 919 S.W.2d at 266.
31. ld.
32. ld.
33. ld.
1997] POWER OF SALE FORECLOSURES 429
confirmation of a reorganization plan.”34 This dismissal ended Cross Timbers’
appeal from the earlier relief from the stay.35
On the day the foreclosure sale was to occur, Cross Timbers again filed for
bankruptcy, this time under Chapter 11.36 The trustee proceeded with the sale,
even after notice of the bankruptcy was given to the trustee, and sold the
property to AgriBank for $675,000.37 AgriBank asked the bankruptcy court to
approve the foreclosure sale in order to finalize the sale.38 The bankruptcy court
approved the entire sale, and on June 16, 1993, the trustee’s deed was recorded
conveying title to AgriBank.39
In November 1993, Cross Timbers filed a complaint in the United States
District Court for the Western District of Missouri, seeking an order that
AgriBank sell the property to Cross Timbers for the value of the property set by
the bankruptcy court in the Chapter 12 proceeding.40 The United States district
court denied the relief, and the Eighth Circuit Court of Appeals affirmed.41
34. Jd.
35. Jd. at 266 n.3.
36. Jd. at 266. While Chapter 12 proceedings are available only for family fanners,
Chapter 11 bankruptcy proceedings are available for corporate debtors as a method of
reorganization. 11 V.S.C. §§ 1101-1174(1994).
37. AgriBankFCB, 919 S.W.2d at 266. It is a common occurrence for the holder
Of the note to also be the buyer at the foreclosure sale. NELSON & WHITMAN, supra note
2, § 7.21.
Many other issues arise because of this common occurrence, particularly if the
property is sold for less than its fair market value, which would give the lender the debt
owed and a gain when the property is re-sold by the lender. This is potentially a bigger
issue because borrowers are often liable for any amount still due under the mortgage that
was not covered by the foreclosure sale price; therefore, the lender could get the property
for less than its value and still be able to sue the borrower for any deficiency. NELSON
& WHITMAN, supra note 2, § 8.1.
38. AgriBank FCB, 919 S.W.2d at 266.
39. 1d. Normally, completing a foreclosure sale prior to the bankruptcy court
relieving the creditor from the stay will render the title passed by the sale void, and
possibly subject the mortgagee to damages and contempt of court. NELSON & WHITMAN,
supra note 2, § 8.12. The Southern District Court of Appeals did not state the reason for
the bankruptcy court’s decision in its opinion.
40. AgriBank FCB, 919 S.W.2d at 266. The bankruptcy court set the properties
value at $522,000.00. Jd. Cross Timbers was claiming that it had a ”’right of first
refusal’ as the former owner of a property which had been foreclosed by a federal lending
agency.” Jd. (citing 12 V.S.C.A. § 2219a(a) (1994».
Cross Timbers also asked the court to review a decision by the Farm Credit
Administration, which did not allow Cross Timbers to stop AgriBank from selling the
property to a third party under the same provision. Jd.
41. Jd.
430 MISSOURI LAW REVIEW [Vol. 62
In May 1994, AgriBank petitioned the Circuit Court in Hickory County,
Missouri, for an injunction to prevent Cross Timbers and the Allisons from
harvesting and selling crops growing on the property.42 In response, Cross
Timbers filed a four-count counterclaim.43 Cross Timbers’ counterclaim was for
a declaratory judgment:
(1) that it had been deprived of its property without due process of law in a
Non-judicial foreclosure and praying for cancellation of the trustee’s deed; (2)
for wrongful foreclosure; (3) for specific performance of the statutory
obligation of AgriBank to sell the property to Cross Timbers for the fair
market value of $522,000.00; and (4) for compensatory and punitive
damages.44
AgriBank moved for summary judgment on the counterclaims, and the trial
court granted its motion.45 The Missouri Court of Appeals for the Southern
District affirmed the judgment.46
In its opinion, the Missouri Court of Appeals for the Southern District
addressed the issue of whether AgriBank violated the Fifth47 or Fourteenth48
Amendments to the Constitution by using the Missouri non-judicial power of sale
foreclosure statute.49 The court of appeals held that a power of sale foreclosure
by a federal government entity, under a valid contractual provision, does not
violate the Constitution.50 The court further held that, although AgriBank is a
federally chartered government instrumentality, AgriBank is still not considered
a federal government actor for Fifth Amendment purposes.51
42. Id.
43. Id.
44. Id. at 267.
45. Id.
46. Id. at 273.
47. See supra note 10.
48. See supra note 11.
49. AgriBank FeB, 919 S.W.2d at 268.
50. Id.
51. Id. at 269.
1997] POWER OF SALE FORECLOSURES 431
III. LEGAL BACKGROUND
A. Power of Sale as State Action
The Missouri power of sale statuteS2 has been challenged as unconstitutional
on its face on several occasions and has always been found to be constitutionaLS3
Mortgagors argue that the power of sale statute violates procedural due process
under the Fourteenth Amendment to the United States Constitution.s4 The
specific problems that are challenged are the limited notice procedure and the
lack of an opportunity to be heard.s6
Before a court may determine if the statute provides sufficient notice and
opportunity to be heard, however, the court must determine if the statute itself
provides sufficient state action to require constitutional scrutiny.s7 The presence
of state action is a constitutional prerequisite to a due process violation and
courts have used a variety of tests to determine if state action exists.S8
The two primary Missouri cases addressing the existence of state action are
Federal National Mortgage Association v. Howlett,S9 and Federal National
Mortgage Association v. Scott.60 In Howlett, the Missouri Supreme Court
determined that state action is not implicated by Missouri’s power of sale statute
52. Mo. REV. STAT. §§ 443.290-443.410 (1994). For text and discussion of
specific sections, see supra notes 7-8.
53. Courts have determined that the statute is constitutional and involves no state
action as it is written and utilized by lenders. Additional problems arise when the lender
foreclosing the mortgage is a state or federal actor. These problems are discussed infra
Part m.B.
54. See supra note 11.
55. See infra note 102.
56. See infra note 114.
57. NELSON & WHITMAN, supra note 2, § 7.27.
58. Among these tests, five are most often used: direct state action,
encouragement, governmental function, judicial enforcement, and pervasiveness.
NELSON & WHITMAN, supra note 2, § 7.27. See also Daniel K. Barklage, Constitutional
Law-Mortgages-ExtrajudicialMortgage Foreclosure Not State Action, 41 Mo. L. REv.
278,278-81 (1976).
For the purposes ofthis Note, it is sufficient to note that these arguments have not
been effective in Missouri to find state action inherent in the power of sale statute.
Additionally, courts could find state action if a state actor conducts the foreclosure
sale. NELSON & WHITMAN, supra note 2, § 7.27. This generally occurs when the county
sheriff is called upon to conduct the sale because of the inability of the trustee to conduct
the sale. In Missouri, this is a statutory alternative when the trustee is unwilling or
unable to conduct the sale. Mo. REV. STAT. § 443.340 (1994).
59. 521 S.W.2d 428 (Mo. 1975).
60. 548 S.W.2d 545 (Mo. 1977).
432 MISSOURI LAWREVIEW [Vol. 62
because the power of sale is a contractual right established between the parties
by the deed of trust held on the land.61 Therefore, the Missouri Supreme Court
held that the statute merely sets forth the minimum requirements for enforcing
the private contractual right and does not amount to state action implicating the
due process clause.62
In Scott, the Missouri Supreme Court addressed the same issues previously
raised in Howlett.63 In addition, the court considered the issue of whether the
foreclosing entity, the Federal National Mortgage Association (FNMA), was
subject to the constraints of the Fifth Amendment of the United States
Constitution because of FNMA’s status as a federal government entity.64 The
Missouri Supreme Court again applied the Howlett reasoning and held that the
foreclosure “was pursuant to power expressly granted by [the deed of trust] and
not to any power authorized or encouraged under state law.”65 In addition, the
court held that FNMA was “not a federal instrumentality and that its action in
foreclosing the deed of trust was not federal action, but was the action of a
private individual.”66
Therefore, the Missouri power of sale statute, even when utilized by a
federal government entity, can safely be said not to implicate state action for
Fourteenth Amendment purposes.
B. Power o/Sale as Federal Government Action
Primarily for public policy reasons, the federal government has established
many of its own lenders.67 These governmentally-created lenders and mortgage
61. Howlett, 521 S.W.2d at 432. See, e.g., Abrams v. Lakewood Park Cemetery
Ass’n, 196 S.W.2d 278 (Mo. 1946); Adams v. Boyd, 58 S.W.2d 704 (Mo. 1933); Kelsay
v. Farmers’ & Traders’ Bank, 65 S.W. 1007 (Mo. 1901); Spires v. Lawless, 493 S.W.2d
65 (Mo. Ct. App. 1973).
62. Howlett, 521 S.W.2d at 433. The court also indicated that “[u]nless the state
law dictates the choice to be made by the party or in some way significantly interferes
with the free exercise of that choice, the private conduct and state law are not subject to
constitutional restraints under the fourteenth amendment.” Id. at 436 (quoting William
M. Burke & David 1. Reber, State Action, Congressional Power and Creditors’ Rights:
An Essay on the Fourteenth Amendment, 46 So. CAL. L. REV. 1003, 1106 (1973)).
63. Scott, 548 S.W.2d at 548-49.
64. Id. at 549.
65. Id.
66. Id.
67. These lenders, such as the Government National Mortgage Association
(GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home
Loan Mortgage Corporation (FHLMC) generally work in areas that the federal
government thought would benefit from government involvement. Congress formed
GNMA and FNMA with the intent to “provide stability in the secondary market for
1997] POWER OF SALE FORECLOSURES 433
holders often must foreclose on the property on which they hold mortgages.68
When these mortgages include a power of sale clause, the governmentally
created lenders will foreclose using the power of sale statute of the state in which
the mortgage was created.69
By utilizing a power of sale clause, these governmentally-created lenders
are often challenged as violating the Due Process Clause of the Fifth
Amendment to the United States Constitution70 based upon their status as federal
government actors.71 For ease of analysis, these entities can be divided into three
categories: direct instrumentalities, federally-owned corporations, and federally chartered
corporations.
Direct instrumentalities of the federal government include such
governmental agencies as the Veterans Administration (VA), the Farmers Home
Administration (FmHA), and the Federal Housing Administration (FHA). These
agencies share the common trait of direct control by the federal government.72
residential mortgages … [and] promote access to mortgage credit throughout the
nation ….n 12 U.S.C. § 1716 (1994).
The purpose behind FHLMC was essentially the same as for FNMA. Act of Oct.
28, 1992, Pub. L. No. 102-550, § 1382(a), 106 Stat. 3672, 4002 (1992). See generally
NELSON & WHITMAN, supra note 2, § 11.
68. NELSON & WHITMAN, supra note 2, § 7.28.
69. The power of sale clause may be in a mortgage purchased by the lender or it
may be in the form used by the lender. The standard form used by most governmentally
created lenders includes a power of sale clause in the states which allow non-judicial
foreclosure. GRANT S. NELSON & DALE A. WmTMAN, CASES AND MATERIALS ON REAL
ESTATE TRANSFER, FINANCE AND DEVELOPMENT, 1317-19 (4th ed. 1992).
In addition, the Multifamily Mortgage Foreclosure Act of 1981 allows power of
sale foreclosure on certain properties held as security by the Secretary of Housing and
Urban Development. 12 U.S.C. §§ 3701-3717 (1994). See generally NELSON &
WHITMAN, supra note 2, § 7.19.
70. See supra note 10.
71. Essentially identical arguments can be used in regard to state-owned lenders
when attempting to find a violation of the Fourteenth Amendment.
This same argument was discussed and rejected by the Missouri Supreme Court in
Federal National Mortgage Association v. Scott, 548 S.W.2d 545, 548-49 (Mo. 1977).
See supra notes 63-66 and accompanying text.
72. These federal government agencies are part of the cabinet-level agencies, so
their actions are actions of the federal government. The Veterans Administration, now
Department of Veterans Affairs, is controlled by the Secretary of Veterans Affairs. 38
U.S.C § 301 (1994). The Farmers Home Administration is under the direction of the
Department of Agriculture. 7 U.S.\C. § 1981 (1994). The Federal Housing
Administration is under the direction of the Federal Housing Commissioner, who is an
Assistant Secretary of Housing and Urban Development. 42 U.S.C. § 3533 (1994).
434 MISSOURI LA W REVIEW [Vol. 62
Courts have found these and similar agencies to be federal government actors for
Fifth Amendment due process purposes.73
The courts have reached different conclusions as to federal action, however,
when the entity is a federally-owned or federally-chartered corporation.
Federally-owned corporations include lenders such as the Government National
Mortgage Association (GNMA), as well as other corporations that may
incidentally hold and foreclose a mortgage such as the Federal Deposit Insurance
Corporation (FDIC), which often forecloses on mortgages held by failed banks.74
Courts have split with regard to Fifth Amendment requirements of
federally-owned corporations. A federal district court has found the FDIC to be
the federal government for Fifth Amendment purposes when foreclosing
mortgages.7S
Other federally-owned corporations, however, have not been treated as the
federal government for Fifth Amendment purposes. Most notably, the Eighth
Circuit held that the GNMA was not the federal government for Fifth
Amendment purposes when foreclosing a mortgage under the Missouri power
of sale statute.76 The court determined that GNMA was acting as a private
corporation because there was not a “sufficiently close nexus between the
73. NELSON & WHITMAN, supra note 2, § 7.28. Instrumentalities such as the VA
and FmHA, that make direct home loans to the individuals they serve, will often be
required to foreclose on the mortgage. Id. In addition, the constitutionality of
foreclosures by other direct government instrumentalities has been tested using due
process standards. See, e.g., Johnson v. United States Dep’t of Agric., 734 F.2d 774
(11th Cir. 1984); Federal Deposit Ins. Corp. v. Morrison, 568 F. Supp. 1240 (N.D. Ala.
1983), rev ‘d on other grounds, 747 F.2d 610 (11th Cir. 1984), reh ‘g denied, 763 F.2d
419 (1985); Matzke v. Block, 564 F. Supp. 1157 (D. Kan. 1983), aff’d in part, rev’d in
part, 732 F.2d 799 (10th Cir. 1984); Rickerv. United States, 434 F. Supp. 1251 (D. Me.
1976); United States v. Ford, 551 F. Supp. 1101 (N.D. Miss. 1982); Rau v. Cavenaugh,
500 F. Supp. 204 (D.S.D. 1980).
74. NELSON & WHITMAN, supra note 2, § 7.28.
75. Morrison, 568 F. Supp. at 1245. In Morrison, the Federal District Court for
the Northern District of Alabama determined that the FDIC was the same as the federal
government for purposes of Fifth Amendment due process. Morrison, 568 F. Supp. at
1246.
It is interesting to note that the district court in Morrison originally seemed to
decide the issue by declaring that the actions under the Alabama statute were governed
by a Fourteenth Amendment state action analysis. Id. at 1244-45. Less than two weeks
later, however, the court issued an addendum to its opinion which declared that the
correct reasoning for its opinion was under the Fifth Amendment because the FDIC was
a federal agency and that the Fourteenth Amendment analysis should be considered dicta.
Id. at 1246. The court then stated that “[t]he broader issue shall await another day,
another case, and perhaps another court.” Id.
76. Warren v. Government Nat’! Mortgage Ass’n, 611 F.2d 1229 (8th Cir.), cert.
denied, 449 U.S. 847 (1980).
1997] POWER OF SALE FORECLOSURES 435
government regulations and the challenged activity specifically at issue so that
the challenged activity itself may be fairly treated as truly that of the federal
government directly.”77
Federally chartered corporations that hold mortgages include many of the
lenders that the government has set up to serve specific needs. While all of the
federally chartered corporations were started by the federal government, they are
all established as private corporations with essentially the same rights and
protections that private corporations enjoy.18 In addition, many of the federally
chartered corporations also enjoy special status, such as exemption from taxes19
and original jurisdiction in federal courts.80 In addition, the government retains
the right to change the corporations and the statutes that control them.81
Among these federally chartered lenders are the Federal National Mortgage
Association,82 the Federal Land Banks (now Farm Credit Banks or FCBs),83 and
the Federal Home Loan Mortgage Corporation (FHLMC).84
FNMA was established to serve the secondary mortgage market.85 While
originally federally-owned, FNMA was restructured in 1968 as a private
77. Id at 1234.
78. Congress gave all three federally-chartered corporations discussed in the text
the general power to perform many essential corporate functions. The powers are set
forth at: 12 U.S.C. § 2013 (1994) (Farm Credit Banks); 12 U.S.C. § 1452(c) (1994)
(Federal Home Loan Mortgage Corporation); and 12 U.S.C. § 1723a(a) (1994) (Federal
National Mortgage Association).
79. All three corporations discussed are exempt from “Federal, State, municipal,
and local taxation” under federal statute. Farm Credit Banks’ exemption is in 12 U.S.C.
§ 2023 (1994), the Federal Home Loan Mortgage Corporation exemption is in 12 U.S.C.
§ 1452(e) (1994), and the Federal National Mortgage Association exemption is in 12
U.S.C. § 1723a(c) (1994).
80. FHLMC is given original jurisdiction under 28 U.S.C. §§ 1345, 1442, which
provide for original jurisdiction in the district courts of the United States for officers and
agencies of the United States. 12 U.S.C. § 1452(f) (1994).
81. In fact, in 1987, the section of the United States Code that establishes the
Federal Land Bank (FLB) system was restructured in an effort to save the Federal Land
Bank system. The change in the statute allowed the merger of the FLB and the Federal
Intermediate Credit Bank within each Federal Land Bank region. The resulting bank
after the merger would be a Farm Credit Bank (FCB). It was the result of one of these
mergers that formed the bank in the case at issue, AgriBank FCB.
82. 12 U.S.C. § 1717 (1994).
83. 12 U.S.C. § 2011 (1994).
84. 12 U.S.C. § 1452 (1994).
85. The secondary mortgage markets entities are able to buy outstanding mortgages
from local lending institutions to allow the local institutions to lend the money to a
different borrower. FNMA and FHMLC were both established to service this secondary
mortgage market. See generally NELSON & WHITMAN, supra note 2, § 11.3.
436 MISSOURI LAWREVIEW [Vol. 62
corporation traded on the open market.86 FNMA is now owned entirely by the
private sector,87 but the board of directors is partially appointed by the President
of the United States.88
On several occasions, actions by FNMA have been determined not to be
actions by the federal government for Fifth Amendment purposes.89 In Northrip
v. Federal National Mortgage Association, the Sixth Circuit Court of Appeals
determined that FNMA’s actions in foreclosing a mortgage were not federal
government actions under the Fifth Amendment because, even though there is
some government involvement in FNMA’s activities, ”there is not a ‘sufficiently
close nexus’ between the state and the challenged act of foreclosure.”9o In
Federal National Mortgage Association v. Scott,91 the Missouri Supreme Court
held that the actions of FNMA in foreclosing the deed of trust were the same as
actions of a private individual.92
The Farm Credit Bank system was started by the federal government and
a federal statute controls the actions of the banks;93 however, the farmers that the
banks serve now own the banks.94 The banks do enjoy many special advantages
of being closely connected with the government, including an exemption from
taxation.95 The Farm Credit Banks have also not been found to be the federal
government for Fifth Amendment purposes.96
The Federal Home Loan Mortgage Corporation (FHLMC) is similar to
FNMA in that it buys mortgages on the secondary market.97 The FHLMC was
established in 1970 with the purpose of serving the secondary market for both
86. In 1968, Congress changed the status of FNMA to a private corporation whose
sole purpose was to buy and sell mortgages in the secondary mortgage market. 12 U.S.C.
§ 1717 (1994). The change resulted by splitting FNMA into FNMA and the Government
National Mortgage Association (GNMA). Id. See generally NELSON & WHITMAN, supra
note 2, § 11.3.
87. 12 U.S.C. § 1718 (1994).
88. Five of fifteen directors are appointed by the President with no consent of the
Senate required. 12 U.S.C. § 1723a(b) (1994).
89. Northrip v. Federal Nat’l Mortgage Ass’n, 527 F.2d 23,30-31 (6th Cir. 1975);
Federal Nat’l Mortgage Ass’n v. Scott, 548 S.W.2d 545, 549 (Mo. 1977).
90. Northrip, 527 F.2d at 30-33.
91. 548 S.W.2d 545 (Mo. 1977).
92. Id. at 549. For a more complete discussion, see supra notes 63-66 and
accompanying text.
93. 12 U.S.C § 2011 (1994).
94. 12 U.S.C. § 2011 (1994); DeLaigle v. Federal Land Bank of Columbia, 568 F.
Supp. 1432, 1439 (S.D. Ga. 1983).
95. 12 U.S.C § 2023 (1994).
96. DeLaigle, 568 F. Supp. at 1439; AgriBank FCB v. Cross Timbers Ranch, 919
S.W.2d 263, 269 (Mo. Ct. App. 1996).
97. See supra note 85.
1997] POWER OF SALE FORECLOSURES 437
federally insured and conventional mortgages.98 After several changes in 1992,99
the stock is now owned by the public and is freely transferable and the
President of the United States appoints five of the eighteen directors. 101 The
actions of FHLMC also have not been found to be federal government action for
Fifth Amendment purposes.
On the few occasions when courts have determined that federal action
existed, courts have determined that the power of sale statutes are
constitutionally deficient in both the notice and opportunity to be heard
requirements. 102 Courts thus far have allowed the government lenders to use the
statutory power of sale foreclosure process, provided they make the changes in
their policies that are necessary to remedy the due process problems. l03
To cure the limited notice defects, the court in Ricker v. United States104
required the Farmers Home Administration to comply with the constitutional
standard for notice set forth in Mullane v. Central Hanover Bank,105 when
foreclosing a mortgage using the Maine power of sale statute. 106
Interestingly, while the court in Federal Deposit Insurance Corporation v.
Morrison l07 found federal action, it held that the limited notice in the Alabama
statute did not violate Morrison’s due process rights because it was a contractual
provision. 108 The court determined that the mortgagor’s rights under Alabama
law only existed until the mortgagee exercised the power of sale, therefore it “is
impossible that this foreclosure infringed on [mortgagor’s] right.”I09 No other
98. NELSON & WHITMAN, supra note 2, § 7.28.
99. Act of Oct. 28, 1992, Pub. L. No. 102-550, § 1382(a), 106 Stat. 3672,4002
(1992).
100. 12 U.S.C. § 1453(a) (1994).
101. 12 U.S.C. § 1452(a)(2)(A) (1994).
102. See, e.g., Mennonite Bd. Of Missions v. Adams, 462 U.S. 791 (1983) (notice
by advertisement was not constitutionally sufficient); Federal Deposit Ins. Corp. v.
Morrison, 568 F. Supp. 1240 (N.D. Ala. 1983), rev’d on other grounds, 747 F.2d 610
(lIth Cir. 1984) (promissory note, which did not include provision for notice to
mortgagor, was not constitutionally sufficient). See generally NELSON & WHITMAN,
supra note 2, §§ 7.24-7.25. For additional cases, see infra note 114.
103. See NELSON & WHITMAN, supra note 2, § 7.25. See also United States v.
Ford, 551 F. Supp. 1101 (N.D. Miss. 1982) (FmHA administrative hearing procedure
sufficient to supplement state power of sale statute).
104. 417 F. Supp. 133 (D. Me. 1976).
105. 339 U.S. 306 (1950). The Supreme Court in Mullane required notice
“reasonably calculated … to apprise interested parties ….” Id. at 314.
106. Ricker, 417 F. Supp at 138.
107. 747 F.2d 610 (lIth Cir. 1984), reh ‘g denied, 763 F.2d 419 (lIth Cir.), cert.
denied, 474 U.S. 1019 (1985).
108. Id. at 615.
109. Id.
438 MISSOURI LA W REVIEW [Vol. 62
court has followed this reasoning, and the reasoning has been attacked directly
by the Fifth Circuit. 110
Several courts have held that providing constitutionally sufficient notice in
excess of the notice required by the power of sale statutes could cure the due
process defects inherent in the statutes.11 I The United States Supreme Court has
held in a non-mortgage context, however, that if the notice is not directed by the
statute it cannot be corrected by supplying greater notice. IIZ This holding has not
yet been extended to the mortgage context; thus, for the present, lenders should
safely be able to cure defects by providing notice consistent with Mullane. 113
The lack of an opportunity to be heard has been addressed by several courts
that have held power of sale statutes to be deficient. I 14 Ricker addressed the lack
of an opportunity to be heard and determined that the Fifth Amendment requires
“a hearing at which [mortgagors] could challenge both the legal right of the
[mortgagee] to foreclose and the propriety of the decision to do SO.”115 To cure
the lack of a hearing, the court in United States v. Forcf 16 allowed the Farmers
Home Administration to use an administrative appeals process. I 17
110. Davis Oil Co. v. Mills, 873 F.2d 774, 786 (5th Cir. 1989).
Ill. See, e.g., Laughlin v. Walters, 718 F.2d 513, 515 (1st Cir. 1983); United
Companies Fin. Corp. v. Mellon Fin. Servo Corp. No.7, 922 F.2d 270, 271 (5th Cir.
1991); Fitzgerald V. Cleland, 498 F. Supp. 341, 349 (D. Me. 1980), affdinpart, vacated
in part 650 F.2d 360 (1st. Cir. 1981); United States v. Ford, 551 F. Supp. 1101 (N.D.
Miss. 1982); United States V. White, 429 F. Supp. 1245, 1253 (N.D. Miss. 1977);
Production Credit Ass’n V. Williamson, 755 P.2d 56,58 (N.M. 1988).
But cj Lehner V. United States, 685 F.2d 1187, 1190 (9th Cir. 1982), cert. denied,
460 U.S. 1039 (1983); Johnson v. United States Dep’t of Agric., 734 F.2d 774, 782 (lIth
Cir. 1984).
112. Wuchter v. Puzziotti, 276 U.S. 13,24 (1928).
113. See generally NELSON & WHITMAN, supra note 2, § 7.24.
114. See, e.g., Rickerv. United States, 417 F. Supp. 133 (D. Me. 1976); Gamerv.
Tri-State Dev. Co., 382 F. Supp. 377 (E.D. Mich. 1974); Northrip V. Federal Nat’l
Mortgage Ass’n, 372 F. Supp. 594 (E. D. Mich. 1974), rev’d on other grounds, 527 F.2d
23 (6th Cir. 1975); Turner V. Blackburn, 389 F. Supp. 1250 (W.o. N.C. 1975); Valley
Dev. at Vail V. Warder, 557 P.2d 1180 (Co. 1976). See generally NELSON & WHITMAN,
supra note 2, § 7.25.
115. Ricker, 417 F. Supp. at 139.
116. 551 F. Supp. 1101 (N.D. Miss. 1982).
117. Id. at 1105.
1997] POWER OF SALE FORECLOSURES 439
C. New Developments: Federal Government Corporations
as Federal Actors
Since the infancy of the United States, the federal government has
established many private corporations. 118 The first private corporation
established was the Bank of the United States, I 19 and the federal government has
been establishing private corporations to achieve the goals of the federal
government ever since that time.120 As with the mortgage lenders discussed
above, courts have declared that many other similar federal government
corporations are not the federal government for constitutional purposes.121
In 1995, however, the United States Supreme Court broadened the
definition of what constitutes a federal actor. In Lebron v. National Railroad
Passenger Corporation,122 Justice Scalia, in an 8-1majority opinion held that
Amtrak was a federal government actor for First Amendment purposes.l23
Lebron involved an artist who rented billboard space in Penn Station from
118. The power of the federal government to form corporations comes from the
Necessary and Proper Clause of the Constitution. U.S. CONST. art. I, § 8, cI. 18. A.
Michael Froomkin, Reinventing the Government Corporation, 1995 U. ILL. L. REV. 543,
551.
119. Lebron v. National R.R. Passenger Corp., 115 S. Ct. 961, 968 (1995).
Congress created the Bank of the United States by the Act of Feb. 25,1791, ch. 10, I
Stat. 191 (1791). Lebron, 115 S. Ct. at 968.
120. Froomkin, supra note 118, at 557-59. The list of federal government
corporations includes, among others, the United State Enrichment Corporation, the
Corporation for National and Community Service (AmeriCorps), the Legal Services
Corporation, the Tennessee Valley Authority, the National Endowment for Democracy,
the Commodity Credit Corporation, and the Student Loan Marketing Association (Sallie
Mae). Froomkin, supra note 118, at 546,550.
121. Ronald J. Krotosxynski, Jr., Back to the Briarpatch: An Argument in Favor
ofConstitutional Meta-Analysis in State Action Determinations, 94 MICH. L. REV. 302,
306 (1995); see, e.g., Morin v. Consolidated Rail Corp., 810 F.2d 720,722-23 (7th Cir.
1987) (Conrail is not a state actor because it is a corporation.); Anderson v. National RR.
Passenger Corp., 754 F.2d 202, 204-05 (7th Cir. 1984) (Amtrak is not a state actor
because ofits corporate form.); Network Project v. Corporation for Pub. Broad., 4 Media
L. Rep. (BNA) 2399, 2403-08 (D.D.C. 1979) (Corporation for Public Broadcasting is not
a state actor.).
122. 115 S. Ct. 961 (1995).
123. [d. Justice Scalia stated:
We hold that where, as here, the Government creates a corporation by special
law, for the furtherance of governmental objectives, and retains for itself
permanent authority to appoint a majority of the directors of that corporation,
the corporation is part of the Government for purposes of the First
Amendment.
[d. at 974-75.
440 MISSOURI LAWREVIEW [Vol. 62
Amtrak,124 only to have Amtrak rescind the contract after reviewing the proposed
billboard. 125 Lebron sued Amtrak for violating his First Amendment rights. 126
The district court held that Amtrak was a government actor and granted
Lebron an injunction. 127 The Second Circuit reversed the district court 128 and
held that Amtrak was not a federal government actor for First Amendment
purposes.129 The United States Supreme Court accepted certiorari on the case, 130
reversed the court of appeals holding on federal action, and remanded for a
determination of the First Amendment claim. l3I
In Lebron, the Supreme Court established a two-prong test for determining
if a federal government corporation is a federal government actor for purposes
of evaluating federal action. The first prong considers the extent to which the
corporation was formed for the furtherance of governmental objectives, which
Amtrak satisfied based upon the purpose given by Congress in the legislation
that created Amtrak. ’32 The second prong involves the extent to which the
federal government retains control over the corporation’s efforts to achieve its
objectives, which Amtrak satisfied because of the structure of its board of
directors. 133
124. [d. at 963. Lebron was a creator of billboards that involved public
commentary. [d. In this particular case, he had rented a particularly large billboard in
Penn Station in New York City. [d. The proposed billboard was a commentary on the
Coors family, of the Coors brewing company, and their involvement with right-wing
political causes. [d. at 964.
125. The vice president of Amtrak disapproved of the advertisement and rejected
the proposed advertisement using the policy of the former owner of Penn Station, which
Amtrak inherited when it purchased the property, “that it will not al10w political
advertising on the [S]pectacular sign.” [d. at 964.
126. [d.
127. [d.
128. Lebron v. National R.R. Passenger Corp., 12 F.3d 388 (2d Cir. 1993).
129. The court of appeals held that Amtrak was not a government entity because
the legislation creating Amtrak specifically said that it was not. [d. at 390. The Court
also held that the federal government was not “so involved in Amtrak that the latter’s
decisions could be considered federal action.” [d. at 391-92.
130.511 U.S. 1105(1994).
131. Lebanon v. National R.R. Passenger Corp., 115 S. Ct. 961, 975 (1995).
132. [d. at 974. Congress established Amtrak in 1970 “in order to avert the
threatened extinction of passenger trains in the United States.” [d. at 967. The act which
established Amtrak stated that “‘the public convenience and necessity require the
continuance and improvement’ of railroad passenger service.” [d. (citing Rail Passenger
Service Act of 1970, § 101, 84 Stat. 1328 (1970)).
133. [d. Six of the eight directors not named by the board itself are appointed by
the President of the United States. [d. at 973. The court also noted that “it is established
and organized under federal law . . . under the direction and control of federal
government appointees.” ld. at 974.
1997] POWER OF SALE FORECLOSURES 441
Following the Supreme Court’s decision in Lebron, several courts have
further defined the requirements for a finding of federal action by a federal
government corporation. 134 The Ninth Circuit, in American Bankers Mortgage
Corporation v. Federal Home Loan Mortgage Corporation,13S applied the
Lebron test in a Fifth Amendment due process analysis. 136 The court held that
while FHLMC qualified under the governmental objectives prong of the Lebron
test,137 it failed the governmental control prong of the test. 138 FHLMC failed the
“control” prong because “[t]he current governance structure of Freddie Mac
affords the government far less control over that corporation’s operations than
it had over Amtrak’s operations in Lebron.”139 Specifically, the court pointed to
the fact that the government appoints fewer than one-third of the FHLMC
directors, and that the FHLMC has issued much more stock than Amtrak.140
In a later case, the Ninth Circuit utilized the Lebron analysis to determine
if the American National Red Cross (hereinafter “Red Cross”) qualified as an
instrumentality of the United States government under the Religious Freedom
Restoration Act. 141 The court determined that the Red Cross was not a
governmental actor under the Lebron test. 142 The Ninth Circuit, under what it
now refers to as a “structural” analysis or “government entity” test, held that the
Red Cross satisfied the first prong of the Lebron test. 143 The court held,
134. American Bankers Mortgage Corp. v. Federal Home Loan Mortgage Corp.,
75 F.3d 1401 (9th Cir.), cert. denied, 117 S. Ct. 58 (1996); Hall v. American Nat’l Red
Cross, 86 F.3d 919 (9th Cir.), cert. denied, 117 S. Ct. 516 (1996); Clark v. County of
Placer, 923 F. Supp. 1278 (E.D. Cal. 1996).
135. 75 F.3d 1401 (9th Cir. 1996). American Bankers involved a mortgage
banking corporation that had been servicing mortgages for FHLMC. Id. at 1404. After
an audit found that American Bankers Mortgage Corporation (ABM) had failed to
comply with FHLMC’s requirements, FHLMC terminated its relationship with ABM.
Id. at 1405. Following this termination, ABM sued FHLMC alleging a violation of its
Fifth Amendment due process rights and several other state law claims. Id.
136. Id. at 1406.
137. Id. at 1406-07.
138. Id. at 1407-09.
139. Id. at 1408.
140. Id. at 1407.
141. Hall v. American Nat’l Red Cross, 86 F.3d 919 (9th Cir. 1996).
142. Id. at 921-22. Hall involved a challenge to an action by the Red Cross
denying Hall certification as a HIV/AIDS instructor because of his inability to “separate
his religious convictions from his Red Cross duties.” Id. at 920. Hall sued under the
Religious Freedom Restoration Act, which allows suit against “a branch, department,
agency, instrumentality, and official … of the United States ….” Id. at 920-21 (citing
42 U.S.C. § 2000bb-2 (1994)). The act did not define “instrumentality,” so the court was
trying to determine if the Red Cross qualified by using the Lebron test.
143. Hall, 86 F.3d at 921. The Red Cross began as a private corporation, but was
442 MISSOURI LA W REVIEW [Vol. 62
however, that the Red Cross failed the second prong because “the government
has not retained permanent authority to appoint the majority of the Red Cross
governing board.”144
The Lebron test was extended again in Clark v. County of Placer. 14S In
Clark, the district court examined a civil rights claim under 42 U.S.C. § 1983,
which arose against the Placer County Fair Association (PCFAy46 after a female
race car driver was discriminated against at the race track. 147 The PCFA satisfied
the first prong of the Lebron test because of statutory requirements that the
profits be used for maintenance of public property. 148 The second prong, while
more difficult, was also satisfied because of the control the county exerts over
the PCFA, 149 Interestingly, the extent of control of financial matters made up for
the fact that none of the directors were appointed by the county. ISO The court
also noted that policy concerns should resolve “close questions of this nature in
favor of a finding of state action.”ls,
The Lebron test, however, has yet to be applied to an actual power of sale
foreclosure by a federal government corporation. The readiness of the courts to
extend the test to new situations, however, foreshadows a willingness to utilize
the test in foreclosure situations.
IV. INSTANT DECISION
In the instant case, the Missouri Court of Appeals for the Southern District
determined that the Fifth Amendment due process rights of Cross Timbers were
not violated. 152 First, the court determined that the statute itself did not violate
reorganized by the government to serve what were seen as important governmental
objectives. Id.
144. Hall, 86 F.3d at 922.
145. 923 F. Supp. 1278 (E.D. Cal. 1996).
146. Id. at 1280. The PCFA was created to run the county fairgrounds, which are
on land owned by the county. Id. California statutes require that the county of Placer
control the PCFA budget and that the county succeed the PCFA if it was to dissolve. Id.
at 1281. In addition, the county requires that it approve all contracts for racing events.
Id.
147. Id. at 1281.
148. Id. at 1284.
149. Id. The court determined that the restriction on PCFA’s autonomy, combined
with the county oversight over financial matters of the corporation was enough control
to satisfy the second prong. Id.
150. Id.
151. Id.
152. AgriBank FCB v. Cross Timbers Ranch, Inc., 919 S.W. 2d 263, 269 (Mo. Ct.
App.1996).
1997] POWER OF SALE FORECLOSURES 443
Cross Timbers’ due process rights under the Fourteenth Amendment. IS3 The
court held that the parties had the right to enter into a contract that specified
power of sale foreclosure as the remedy and that exercising the power of sale
during foreclosure is not “principally derived from statute nor otherwise granted
by the state.”154
The court further noted that wholly-owned federal entities do not implicate
Fifth Amendment protections when they take advantage of the Missouri
statutes.155 Additionally, the court stated that AgriBank is a Farm Credit Bank,156
and may not be an agent of the federal government for purposes of the Fifth
Amendment.157 Further, the court stated that AgriBank’s status was not
important because the foreclosure involved the power of sale provision of a deed
of trust that is valid under Missouri law and there is no requirement for a hearing
before a foreclosure sale. 15s
Therefore, the court concluded that there was no violation of Cross
Timbers’ due process rights because the statute did not implicate state action
under the Fourteenth Amendment,159 AgriBank was not sufficiently connected
to the federal government for a violation of the Fifth Amendment, 160 and even
if it had been a federal actor, the foreclosure was a valid exercise of the Missouri
power of sale statute and was therefore constitutional. 161
V. COMMENT
Because of the nature of Farm Credit Banks,162 the Southern District Court
of Appeals’ decision in this case is probably correct. The rationale behind its
holding, however, may no longer be valid.
153. ld. at 268.
154. ld. at 268. Additionally, the fact that the parties may use the courts to enforce
their respective rights does not “involve significant governmental activity” that would
implicate constitutional rights. ld.
155. ld. (citing Warren v. Government Nat’l Mortgage Ass’n, 611 F.2d 1229, 1232
(8th Cir. 1980)). The court noted that there must be a “sufficiently close nexus between
the [government] and the challenged action of the regulated entity so that the action of
the latter may be fairly treated as that of the [government] itself.” ld.
156. For a discussion, see supra notes 93-96 and accompanying text.
157. AgriBank FeB, 919 S.W.2d at 269 (citing Hill v. Farm Credit Bank, 726
F. Supp. 1201, 1208 (E.D. Mo. 1989)).
158. ld.
159. ld. at 268.
160. ld.
161. ld. at 269.
162. See supra notes 93-96 and accompanying text.
444 MISSOURI LA W REVIEW [Vol. 62
It seems apparent from the Supreme Court’s holding in Lebron that the
issue of the constitutionality of non -judicial foreclosures by federal government
corporations is less clear today than ever before. If courts are willing to expand
the holding in Lebron to other constitutional rights, as they appear ready to dO,163
it is only a matter of time before the courts are forced to apply the analysis to
federal government lenders. Applying this new test, which is arguably broader
than prior tests, could certainly change the treatment of a large number of
borrowers in the mortgage market.
The two-part test in Lebronl64 could potentially bring many government
lenders under the auspices of federal government action for Fifth Amendment
purposes. This test is a distinct departure from the “nexus” test that was
followed in Cross Timbers,165 Warren,166 and Northrip.’67 The Lebron test has
little to do with the activity in question and, instead, is concerned with the
relationship of the corporation to the government.
Farm Credit Banks, such as AgriBank, would almost certainly not be
considered federal actors under the Lebron analysis. This is particularly likely
in light of the Ninth Circuit decision in American Bankers, 168 which held that
FHLMC failed the second prong of the test. 169 The first prong, furtherance of
governmental objectives, should be satisfied based on the language of the statute
that establishes the Farm Credit Banks.170
The second prong is decidedly more difficult. The structure of Farm Credit
Banks, being owned by the farmers they serve and with no directors appointed
by the federal government, is almost certainly not enough control to satisfy the
163. See supra notes 135-51 and accompanying text.
164. See supra notes 132-33 and accompanying text.
165. AgriBank FeB, 919 S.W.2d at 268.
166. Warren v. Government Nat’l Mortgage Ass’n, 611 F.2d 1229, 1232 (8th Cir.
1980).
167. Northrip v. Federal Nat’l Mortgage Ass’n, 527 F.2d 23,30-31 (6th Cir. 1975).
168. American Bankers Mortgage Gov’t Corp. v. Federal Home Loan Mortgage
Corp., 75 F.3d 1401 (9th Cir. 1996). For a discussion of American Bankers, see supra
notes 135-40 and accompanying text.
169. Jd. at 1407-09.
170. The statute creating the Farm Credit System states:
(a) It is declared to be the policy of the Congress, recognizing that a
prosperous, productive agriculture is essential to a free nation and recognizing
the growing need for credit in rural areas, that the farmer-owned cooperative
Farm Credit System be designed to accomplish the objective of improving the
income and well-being of American farmers and ranchers by furnishing
sound, adequate, and constructive credit and closely related services to them,
their cooperatives, and to selected farm-related businesses necessary for
efficient farm operations.
12 U.S.C § 200 1(a) (1994) (emphasis added).
1997] POWER OF SALE FORECLOSURES 445
Lebron test. For that reason, as will be the case with many federal government
corporations, Farm Credit Banks will probably not be considered federal actors
for Fifth Amendment purposes.
This reasoning should also hold for FNMA and FHLMC. Both FNMA and
FHLMC will satisfy the first prong of the test, because they were both formed
by the government to further governmental objectives. 171 The second prong,
however, is probably not met by either FNMA or FHLMC. FNMA is entirely
owned by the private sector172 and has only a minority of directors appointed by
the government.173 FHLMC is also owned by the private sectorl74 and also has
only a minority of directors appointed by the government.175 In addition,
FHLMC has already been held not to satisfy the Lebron test in American
Bankers. 176
That does not mean, however, that other governmentally chartered lenders
will escape the constitutional requirements as easily. The Government National
Mortgage Association, for example, may now be subject to Fifth Amendment
scrutiny where it had not been prior to Lebron.177 GNMA’s status as a wholly owned
governmental corporation,178 like Amtrak and the Federal Deposit
Insurance Corporation, makes GNMA a likely candidate for governmental actor
status.
If the Lebron test were used to analyze the facts in Warren, for example, it
is likely that the court would reach a different result. The first prong of the test
would easily be satisfied by the declaration of purpose in the statute.179
As for the second prong, when Congress partitioned GNMA and FNMA in
1968, GNMA stayed with the government when FNMA was established as a
private corporation. 180 As part of the government, GNMA is controlled by the
Secretary of Housing and Urban Development.18l Therefore, if the Lebron test
171. Both were formed to support the secondary mortgage market, thereby making
more money available to lend to home buyers. See supra note 85 and accompanying
text.
172. 12 U.S.C. § 1718(a) (1994).
173. Five out of eighteen directors are appointed by the President of the United
States. 12 U.S.C. § 1723(b) (1994).
174. 12 U.S.C. § 1453 (1994).
175. 12 U.S.C. § 1452(a) (1994).
176. See supra notes 135-40 and accompanying text.
177. Warren v. Government Nat’l Mortgage Ass’n, 611 F.2d 1229, 1234 (8th Cir.
1980).
178. See 31 U.S.C § 9101 (1994).
179. 12 U.S.C. § 1716 (1994). See supra note 67. GNMA and FNMA share the
same statutory home, and therefore share the same statement of purpose.
180. 12 U.S.C. § 1716(b) (1994).
181. 12 U.S.C. § 1723(a) (1994). The Secretary of Housing and Urban
Development has all of the power that a board of directors would have, such as the ability
446 MISSOURI LAWREVIEW [Vol. 62
is to be extended beyond the First Amendment,182 GNMA is certain to be
considered a federal actor for Fifth Amendment purposes, thereby invalidating
Warren.
This conclusion would raise many policy problems. Government lenders
are generally either the lenders of last resort or exist to assist private lenders in
making more loans to home buyers. 183
The added expenditures involved in an extended process of foreclosure may
make the process too costly to justify the policy objectives of creating these
lenders. If the government decides that these lenders are no longer cost-effective
and elects to stop using them, its goal of providing access to home ownership
will not be achieved. If government lenders are not in the secondary market
buying mortgages and providing capital to lenders to make more loans, the
availability of home loans will likely decrease.
The added foreclosure requirements will also provide a windfall to
borrowers. When a borrower receives a loan from a private lender who is
allowed to use non-judicial foreclosure, the loan costs less than when the lender
is required to go through the expense of a judicial foreclosure. When this same
loan is purchased by a government lender, the borrower has the advantage of a
judicial-foreclosure requirement without the added cost in the loan.
When acting as lenders of last resort, government lenders handle more
mortgages likely to go into default than do private lenders. 184 If government
lenders were required to go. through the much longer process of judicial
foreclosure, less credit-worthy borrowers would be allowed to retain their
property longer than borrowers that were able to borrow using traditional
lenders. This puts less credit-worthy borrowers in a better position and gives
them more chances to stop the foreclosure process. On the other hand, perhaps
this would help to achieve the goals of government lenders by giving these
borrowers a better chance to remedy their financial problems.
Many of the ramifications, however, depend on what the courts require
federal government lenders to do in an effort to remedy the due process
problems inherent in most power of sale statutes. If courts continue to limit their
holdings to requiring additional noticel85 and an administrative hearing, 186 the
actual effect of the Lebron test could be negligible. If the courts refuse to allow
government lenders to use any form of non-judicial foreclosure, however, the
to adopt bylaws. Id GNMA is run by a president, who is appointed by the President of
the United States with the advice and consent of the Senate. Id
182. As the court seemed willing to do, based upon the decisions in American
Bankers and Hall. See supra notes 134-44 and accompanying text.
183. See supra note 67.
184. See generally NELSON & WHITMAN, supra note 2, § 11.3.
185. See supra notes 103-13.
186. See supra notes 114-17.
1997] POWER OF SALE FORECLOSURES 447
results could be devastating on the mortgage industry. Governmental lenders
would be less able to operate in the secondary market, causing the cash flow in
the primary mortgage market to slow.
VI. CONCLUSION
In its decision in Cross Timbers, the Missouri Court of Appeals for the
Southern District continued to perpetuate the standard for finding federal action
that was likely overruled by the United States Supreme Court in Lebron.
While the decision reached by the court of appeals is arguably the correct
result, it seems clear that the decision was reached on the wrong grounds. The
correct analysis for finding federal action by federal government corporations is
now the Lebron standard. This represents a distinct change in the analysis used
to determine federal government action for Fifth Amendment purposes and a
probable change in the requirements to be employed by federal government
corporations as they foreclose mortgages.
Whether added due process requirements are a change for the better is yet
to be seen. So long as courts continue to allow federal government actors to cure
defects in notice and hearing requirements by added regulation, the end result
should not change policy to a great extent. If courts begin to require that federal
government actors use judicial foreclosure, however, the results could be
devastating to the mortgage industry.
DANIEL E. BLEGEN

After the foreclosure, if you have not capitulated, comes an unlawful detainer action. If the non judicial foreclosure is unconstitutional under the 5th amendment also known as a Bivens claim, then the unlawful detainer is a malicious abuse of process and a claim under 42 US 1943. The unlawful detainer is a device used by the bank to complete the deprivation of property without due process. It’s use was never intended to complete a violation of procedural due process.

The unlawful detainer could not have been maintained without the non judicial foreclosure. Two events but one transaction.

If you do intend to challenge the constitutionality of the state unlawful detainer action it would be as an “as applied challenge” under 42 US 1983.

1. Get a lawyer
2. pay filing fee’s
3. Join the US Government as defendant with the regulatory agency and the director in the individual capacity
The regulatory agencies have authority to issue cease and desist order to its member banks ordering them to cease using the power of sale provisions.

4 Responses

  1. Rent-to-Buy

    One stunning conclusion emerges from this extraordinary recitation of Missouri law and practice.

    (We should remember that Missouri is “the show me” state.)

    It could be said that the “property owner” never even actually purchased the property.

    It seems more as if the purchaser visited a “rent-to-buy store.

    And it seems to me as if an abusive rental contract could and should be contested on the basis of a whole new series of claims: principally a fraudulent inducement to hand over monthly sums of money in a sham property sale.

    Reading this makes one wonder if any of these complex securitized sales of residential properties were ever “true real property sales” in the first place.

    And I wonder if an action to recoup the fraudulent rental payments might not be in order.

    An action elevated to the US Supreme Court on the basis that no true sale of real property ever took place: and that the “buyer” should receive back all his rental payments . . . that would be some case of first impression.

  2. […] link: Analysis that outlines the unconstitutionality of a power of sale provision in a mortgage contract b…   Tags: bankruptcy, government Posted in: […]

  3. The problem is that it falls on deaf ears.
    Just like Pharoh. We are dealing with the Pharoh’s.

    LET MY PEOPLE GO.

  4. This is an absolutely fascinating analysis. I can see where it would be a vehicle in judicial foreclosure proceedings also.

Leave a Reply

%d bloggers like this: