Rockhill v. United States

In November 1975, Eunice Rockhill and the Flag Harbor Corporation (collectively, the sellers) (plaintiffs) conveyed property to Neil and Mary Beachem. The sellers secured the unpaid balance of the purchase price through a purchase-money deed of trust. In January 1977, a portion of the property was declared a disaster zone. In August, the Beachems informed the sellers that they were applying for a Small Business Association (SBA) disaster loan and that to qualify the sellers’ existing liens had to be subordinated to the SBA’s. The sellers understood that the improvements made to the property with the funds from the SBA loan would increase its value, thereby further protecting their interest. On November 4, the sellers executed an unconditional subordination agreement. On November 14, the Beachems executed a deed of trust with the SBA to secure the disaster-loan funds. The SBA loan required that its proceeds be used for repairs and improvements. However, the SBA did not properly monitor the loan, and the SBA funds were used for the Beachman’s personal interests. The sellers were not party to the SBA loan agreement, and the SBA was not party to the sellers’ subordination agreement. On April 11, 1979, the Beachems defaulted on the SBA loan, and the United States (defendant), on behalf of the SBA, filed a petition to foreclose. The sellers intervened and filed a counterclaim alleging that their purchase-money deed of trust had first-lien status because the loan proceeds of the SBA loan were not used for their intended purpose. The United States moved for dismissal, alleging that the sellers did not state a claim for which relief could be granted. The sellers requested certification of the issue, and the federal district court determined that Maryland law governed and granted the sellers’ request for certification.