U.S. v. Retirement Services Group

• Decision Date: 15 August 2002
• Docket Number: No. 01-10562.,01-10562.
• Citation: 302 F.3d 425
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. RETIREMENT SERVICES GROUP; Johnnie Benson, Individually; Judy Corbeille, Individually; Jacqueline Benson Ungerleider, Individually; Retirement Villages Management Inc., doing business as Heritage Village, doing business as Colonial Southwest Inc.; Colonial Southwest Inc.; Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 425

302 F.3d 425

UNITED STATES of America, Plaintiff-Appellee, v. RETIREMENT SERVICES GROUP; Johnnie Benson, Individually; Judy Corbeille, Individually; Jacqueline Benson Ungerleider, Individually; Retirement Villages Management Inc., doing business as Heritage Village, doing business as Colonial Southwest Inc.; Colonial Southwest Inc.; Defendants-Appellants.

No. 01-10562.

United States Court of Appeals, Fifth Circuit.

August 15, 2002.

Thelma Quince Colbert (argued), Fort Worth, TX, for Plaintiff-Appellee.

Richard Keys Disney (argued), William O. Wuester, Douglas, Wuester & Disney, Fort Worth, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, JOLLY and DAVIS, Circuit Judges.

GARWOOD, Circuit Judge:

Defendants-Appellants Retirement Services Group (RSG), Johnnie Benson (Benson), Judy Corbeille (Corbeille), Jacqueline Benson Ungerleider (Ungerleider), Retirement Villages Management, Inc. (Retirement Villages), and Colonial Southwest, Inc. (Colonial) (collectively the appellants) appeal the district court's entry of summary judgment in favor of Plaintiff-Appellee United States Department of Housing and Urban Development (HUD). We reverse and render judgment in part and vacate and remand in part.

Facts and Proceedings Below

RSG, a Texas general partnership, owned Heritage Village, a retirement community in Fort Worth. The Heritage Village project had been financed with a $6.5 million mortgage loan insured by HUD. Benson owned seventy-six percent of RSG. According to the stipulated facts, the remaining twenty-four percent of RSG was owned by a trust; the trust and Benson were the only partners of RSG. Benson was the sole trustee of the trust; Corbeille and Ungerleider, Benson's adult daughters, and Delvoris Davis were the named beneficiaries of the trust. Benson acted as general manager of RSG. Retirement Villages, doing business as Colonial, was the project manager.

The $6.5 million loan was issued from Carnegie Evans Corporation, a private lender. As a guarantee for the mortgage obligation, Carnegie Evans Corporation secured co-insurance from HUD on or about February 9, 1988, pursuant to Sections 244 and 233(f) of the National Housing Act as amended (12 U.S.C. §§ 1715z-9, 1715n(f)). HUD would provide the lender with insurance coverage for losses up to approximately eighty percent of unpaid principal and interest if the borrower should default, subject to various conditions and limitations. On February 9, 1988, RSG executed a deed of trust note and a deed of trust in favor of the lender. Also on February 9, 1988, RSG entered into a Regulatory Agreement with HUD in consideration of HUD's agreement to co-insure the mortgage loan. The Regulatory Agreement was signed by Benson in her capacity as general manager of the partnership.

Heritage Village was not profitable and, on April 1, 1990, the mortgage went into default. On or about March 19, 1991, the beneficial interest under the note and the deed of trust lien were assigned to the Secretary of HUD. On or about September 30, 1993, HUD foreclosed on the mortgage.

Under HUD regulations then in effect, a mortgagor generally was permitted to expend project funds only for payment of mortgage obligations and payment of reasonable expenses necessary to the proper operation and maintenance of the project. 24 C.F.R. § 255.704(b) (1989). The project owner could make distributions of surplus cash only when all mortgage payments are current and the owner is in compliance with all other conditions. 24 C.F.R. § 255.705(a) (1989). Owners were also required to maintain books and records in reasonable condition for proper audit and in compliance with HUD requirements. 24 C.F.R. § 255.706(e)-(g) (1989). Owners were required to provide monthly accounting reports and year-end financial statements audited by an independent certified public accountant. 24 C.F.R. § 255.706(g) (1989). If the owner makes unauthorized distributions of project funds, HUD can recover double the value of the assets and income of the project that have been used in violations of the regulations or the regulatory agreement, plus costs. 12 U.S.C. § 1715z-4a(c).

In 1991, HUD contracted with Ervin and Associates (Ervin) to monitor the Heritage Village project's finances and report back to HUD. Holly Larisch was the asset manager for Ervin with the primary responsibility for monitoring Heritage Village and reporting back to HUD. In a quarterly update dated September 27, 1991, Larisch included a reference to equity skimming, noting that "receivables are due from affiliates of the general partner and manager." In an update dated December 31, 1991, Larisch stated that reports received for the period from the date of the default through November 1991 "show a significant amount of equity skimming." In a memorandum dated January 6, 1992, Larisch indicated that she had talked about equity skimming with Ray Carson, the director of HUD's Fort Worth Multifamily Program Center. There appears in the record a draft letter from Larisch to Marshall Day, Benson's attorney, dated April 20, 1992, in which Larisch explicitly accuses Benson of equity skimming. The draft letter is attached to a fax cover page, which indicates that the draft letter was faxed from Larisch to Carson on April 21, 1992. A handwritten notation on the cover page solicits Carson's comments on the letter. Another notation on the page, in what appears to be different handwriting, states "Don't think this was sent." ("This" appears to refer to the draft letter to Day rather than the fax to Carson. The machine-printed header of the cover page indicates that the fax was transmitted from Ervin on April 21, 1992.)

Throughout 1991 and 1992, Ervin and HUD made repeated requests for RSG to submit properly prepared audited financial statements and monthly accounting reports. On August 3, 1992, HUD sent a letter to RSG requesting additional documentation and explanation of questionable project expenditures. Because RSG failed to respond properly, on August 11, 1992, HUD requested the HUD Office of Inspector General for Audit (the HUD OIG) to perform an audit of the project because HUD suspected that equity skimming had occurred before and after the mortgage went into default. In December 1992, HUD conferred with Benson and, according to HUD in a confirming letter dated December 23, RSG agreed to respond to HUD's August 3 letter and to reimburse the project for all monies used that were not for reasonable and necessary operating expenses of the project. RSG's response was supposed to include invoices and other supporting information. RSG never responded except by providing the same annual financial statements that HUD had previously deemed unacceptable.

On December 9, 1992, the HUD OIG authorized an audit. The HUD OIG began the audit in January 1993. A draft audit was prepared and forwarded to HUD on or about June 17, 1993.¹ A final audit report was dated August 13, 1993. The audit concluded that Benson used $841,106 of project funds for unauthorized disbursements to herself, her partners, and for other improper or unsupported costs. The final audit report's footnote 1 explains that the actual amount of unauthorized costs was $864,521 and that this figure was adjusted by $23,417 because Benson had reimbursed Heritage Village up to that amount. The figures included in the final audit report were apparently unchanged from those in the draft audit report.²

The audit covered transactions related to the Heritage Village project for the period February 9, 1988 through December 31, 1992. The audit report states that the field work for the audit was completed during December 1992 through April 30, 1993.

HUD filed suit against the appellants on June 17, 1999 in the United States District Court for the Northern District of Texas, seeking double damages for misused assets pursuant to 12 U.S.C. § 1715z-4a or, alternatively, relief for alleged violations of 31 U.S.C. § 3713 (pertaining to priority of government claims). On January 31, 2000, the appellants filed a motion for summary judgment alleging that HUD's case was barred by the applicable six year statute of limitations contained in 12 U.S.C. § 1715z-4a(d). The district court denied this motion on March 24, 2000. In December 2000, HUD filed a motion for summary judgment and the appellants filed a second motion asserting the limitations defense, this time relying on newly obtained documents. On February 26, 2001, the district court denied the appellants' second motion for summary judgment and granted HUD's motion for summary judgment. The district court held that the limitations period did not begin to accrue until August 17, 1993, the date the final audit report was submitted.³ Final judgment was entered in favor of HUD on February 26, 2001, ordering the appellants to pay $1,682,212 plus interest. (Pursuant to 12 U.S.C. § 1715z-4a(c), the total of $841,106 in improper expenditures indicated by the audit was doubled to arrive at the final judgment figure of $1,682,212.) The district court held that all the appellants, including Corbeille and Ungerleider, were jointly and severally liable for the entire amount of the judgment.

On appeal, the appellants assign as error the district court's holding on the statute of limitations issue. The appellants argue that HUD discovered the equity skimming prior to June 17, 1993, six years before HUD filed suit. Before this court, HUD concedes that it discovered improper expenditures no later than the date of the draft audit report, rather than the date of the final audit report as the district court held. HUD also concedes that the draft audit report was prepared no later than June 17, 1993. The appellants also argue, in the alternative, that Corbeille and Ungerleider should not be held liable for the entire amount of the judgment because they were not general partners in RSG.

Discussion

1. ...