View Crest Garden Apartments, Inc. v. United States

• Decision Date: 02 August 1960
• Docket Number: No. 16761.,16761.
• Citation: 281 F.2d 844
• Parties: VIEW CREST GARDEN APARTMENTS, INC., et al., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

281 F.2d 844 (1960)

VIEW CREST GARDEN APARTMENTS, INC., et al., Appellant, v. UNITED STATES of America, Appellee.

No. 16761.

United States Court of Appeals Ninth Circuit.

August 2, 1960.

Lycette, Diamond & Sylvester, Lyle L. Iversen, Seattle, Wash., for appellants.

Charles P. Moriarty, U. S. Atty., Richard F. Broz, James F. McAteer, Asst. U. S. Attys., Seattle, Wash., for appellee.

Before BARNES, HAMLEY, and HAMLIN, Circuit Judges.

HAMLIN, Circuit Judge.

The Government brought this action to foreclose a mortgage on property known as View Crest Garden Apartments, located in Bremerton, Washington. This appeal involves the power of the District Court to appoint a receiver during the pendency of the foreclosure action.

The mortgage was originally given by appellant View Crest Garden Apartments, Inc., as mortgagor, to the National Bank of Commerce of Seattle, as mortgagee, to secure payment of indebtedness evidenced by a contemporaneous note executed by appellant in favor of the Bank. The Federal Housing Commissioner subsequently became the assignee of the note and mortgage.

Mortgage insurance was provided by the Federal Housing Commissioner pursuant to Title IX of the National Housing Act, as amended, 12 U.S.C.A. § 1750 et seq. Both the note and mortgage were on FHA forms. The mortgage provided that, in any action to foreclose, the holder would be entitled to appointment of a receiver to collect the rents due and becoming due during the pendency of the action, such rents "being hereby expressly assigned and pledged as additional security for the payment of the indebtedness secured by this mortgage * * *."¹

Appellant defaulted and this action was instituted. In its complaint the Government prayed for appointment of a receiver pendente lite to take charge of and manage the premises, collect the rents, and apply the proceeds on the debt. The District Court denied the petition for appointment of a receiver for the reason that Washington law applied and did not permit appointment of a receiver under the facts of the case. The Government took an interlocutory appeal from this order and we reversed, holding that the District Court erred in applying state law rather than federal law as controlling. Accordingly, the case was remanded with instructions to the District Court to make a determination as a matter of federal law whether the facts warrant appointment of a receiver.² United States v. View Crest Garden Apts., Inc., 9 Cir., 1959, 268 F.2d 380, certiorari denied 361 U.S. 884, 80 S.Ct. 156, 4 L.Ed. 2d 120.

On remand the District Court entered an order appointing a receiver with power to collect rents and manage the property.³ In an oral opinion the Court first noted that the property mortgaged was and is inadequate in value to discharge the indebtedness allegedly due and owing, and that appellant will be unable to satisfy any deficiency. After discussing Totten v. Harlowe, 1936, 66 App.D.C. 373, 88 F.2d 755; 1937, 67 App.D.C. 132, 90 F.2d 377, 111 A.L.R. 726; 1939, 71 App.D.C. 141, 108 F.2d 8, and a number of other federal cases,⁴ including diversity cases decided prior to Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1183, the Court concluded that —

* * * the general rule seems to require something more than mere inadequacy of the security and insolvency of the debtor for the appointment of a receiver. The only question is how much more * * *.

Totten v. Harlowe, supra, seems to announce a rule most consonant with justice for all parties concerned. There the court held that if the property is not of sufficient value to insure payment, and the mortgagor is insolvent, and there are superadded conditions which make an immediate foreclosure and sale impractical, courts of equity have power to take charge of the property both for preservation of the corpus and application of the rents and profits upon the mortgaged debt. That is the rule that will be applied here, and the court then looks to the record to see if there are superadded conditions here making an immediate foreclosure impractical.

In looking to the record to determine if such superadded conditions appeared in this case, the Court concluded that past and probable future delays in accomplishing foreclosure, delays for which appellant is at least partially responsible, justified appointment of a receiver.

The Government, of course, believes the action of the District Court in appointing a receiver should be sustained, but contends its right to a receiver must be judged solely by reference to the terms of the mortgage, and irrespective of adequacy of the security, solvency of the debtor, or "superadded conditions." Under this theory the Government would be entitled to a receiver upon default by the debtor and commencement of a foreclosure action.

Appellant, on the other hand, contends the Government is not entitled to a receiver except upon a showing of insolvency, inadequacy of the security, and danger that the property will be wasted or deteriorated.

In Garden Homes, Inc. v. United States, 1 Cir., 1952, 200 F.2d 299, 301, as here, the District Court appointed a receiver with broad general powers to manage and operate the mortgaged property pending foreclosure, including power to collect its rents and profits during that time. The mortgage provided and the mortgagor apparently conceded that appointment of a receiver to collect the rents and profits was proper, but contended that the District Court erred in giving the receiver power to manage and operate the property in addition to power to collect rents and profits during pendency of the foreclosure action. Faced with this contention, the Court suggested a distinction between (1) a situation justifying appointment of a receiver with power only to collect rents, issues and profits due and becoming due during the pendency of a suit to foreclose, and (2) a situation justifying appointment of a receiver with power to manage the mortgaged property pending foreclosure, as well as to collect rents and profits during that time.

The Court indicated approval of the rule that a receiver with power only to collect rents and profits will not be appointed except upon a showing that (1) the mortgaged property is inadequate security, and (2) that the mortgagor or other person liable for the debt is insolvent; and that "to warrant the appointment of a receiver to manage and operate, as well as only to collect rents and profits, there must be at least a `sufficient showing' of something more than the inadequacy of the security and the doubtful financial standing of the debtor." The Court concluded that there had not been a sufficient showing of something more, and that the District Court had "acted improvidently in giving the receiver general powers of operation and management in addition to power to collect rents and profits."⁵

In Central Trust Co. of New York v. Chattanooga, R. & C. C. R. Co., 5 Cir., 1899, 94 F. 275, 281, it is stated:

"When the mortgaged property is not of value sufficient to secure the payment of the mortgage debt, or when its sufficiency becomes substantially doubtful, and the mortgagor is insolvent, accruing interest matured and unpaid, like accruing taxes due and unpaid, takes the character of waste as clearly and distinctively as deteriorations by the cutting of timber, suffering dilapidation, etc. * * *."

We hold that in an action brought to foreclose a mortgage insured under Title IX of the National Housing Act a District Court is empowered, under the terms of the mortgage and on application by the holder thereof, to appoint a receiver to collect the rents, issues and profits during the pendency of the foreclosure action, at least when he is satisfied the security is inadequate, or its adequacy is substantially doubtful, and the mortgagor is insolvent or of doubtful financial standing.

Even if inadequacy of the security and insolvency of the debtor did not appear, consideration of other circumstances discloses impressive reasons for appointing such a receiver in this case.

Mortgage insurance was provided pursuant to § 908 of Title IX of the National Housing Act, 12 U.S.C.A. § 1750g, which authorized the Federal Housing Commissioner to insure mortgages on multi-family rental projects. The House Report (U.S.Code Cong. and Adm. Service 1951, p. 1720) discloses that Title IX was enacted "to provide special mortgage insurance aids to private industry for the production of housing needed in defense areas", and that the FHA would be permitted to "underwrite projects which might not meet the long-term normal criteria of economic soundness, especially as to location and continued marketability, which are required under the regular FHA program." Appellant's Articles of Incorporation show that one of the principal objectives of the corporation was to secure financing under § 908.⁶

Without federal backing there would have been no loan, no mortgage, and probably no corporation. Congress, in order to obtain necessary rental accommodations for essential defense workers, authorized the Federal Housing Commissioner to provide financial insurance for risky, commercially unacceptable projects. It is not unnatural that the mortgage contains a provision entitling the holder to a receiver of rents and profits in the event of foreclosure. Having in mind the stipulation in the mortgage and the nature of the transaction, we perceive no good reason for saying that federal law denies to the government a remedy calculated to advance "the federal policy to protect the treasury and to promote the security of federal investment which in turn promotes the prime purpose of the Act — to facilitate the building of homes by the use of federal credit * * *." United States v. View Crest Garden Apts., 9 Cir., 1959, 268 F.2d 380, 383. To the contrary, we think good reasons appear for holding that federal policy requires affording every reasonable protection to the security of federal investment....