U.S. v. Scholnick, 77-1594

• Decision Date: 02 October 1979
• Docket Number: No. 77-1594,77-1594
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: UNITED STATES of America, Plaintiff-Appellee, Huron Towers, Inc., Defendant-Appellee, v. Morton L. SCHOLNICK and Seymour Dunitz, Third Party Defendants-Appellants.

Page 160

606 F.2d 160

UNITED STATES of America, Plaintiff-Appellee, Huron Towers, Inc., Defendant-Appellee, v. Morton L. SCHOLNICK and Seymour Dunitz, Third Party

Defendants-Appellants.

No. 77-1594.

United States Court of Appeals, Sixth Circuit.

Argued June 11, 1978.

Decided Oct. 2, 1979.

Robert V. Seymour, Southfield, Mich., for Scholnick.

James K. Robinson, U. S. Atty., Samuel J. Behringer, Jr., Asst. U. S. Atty., Detroit, Mich., Richard M. Selik, Levin, Levin, Garvett & Dill, Southfield, Mich., for the U. S.

Before WEICK and MERRITT, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

HARRY PHILLIPS, Senior Circuit Judge.

Appellants Morton L. Scholnick and Seymour Dunitz appeal from the judgment of the district court ordering foreclosure on mortgages held by the Department of Housing and Urban Development (HUD) on certain property located in Ann Arbor, Michigan, known as Huron Towers. The district court ordered foreclosure by judicial sale. It was further ordered that all other claims are deemed foreclosed and subordinate and "that no party . . . (shall enjoy) any right . . . of redemption. . . . " The effect of the court's judgment was to extinguish a mortgage that appellants held on the property.

We affirm.

I

The history of this protracted litigation spans many years and, as the Government has characterized, "although at first blush . . . (it involves) nothing more than a simple judicial foreclosure, this lawsuit developed into a bitter contest on the issue and fostered many side issues."

In 1959, appellants and a third party, James E. Brophy, formed a corporation called Huron Towers, Inc. (Huron Towers) for the purpose of constructing a thirteen story, twin tower, 360 unit apartment complex to be known as Huron Towers (the property). Huron Towers negotiated loans from Manufacturers National Bank of Detroit to finance the construction of the apartment complex.

Pursuant to § 207 of the National Housing Act, as amended, 12 U.S.C. § 1713, and the applicable regulations promulgated thereunder, 24 C.F.R. §§ 207 Et seq., HUD agreed to insure the loans from Manufacturers National to Huron Towers. Accordingly, mortgage documents were prepared (on HUD forms) in favor of the bank. The mortgages were recorded in Michigan on May 1, 1959.

Manufacturers National subsequently assigned its entire interest in the property to the Michigan State Administration Board, trustee of the Michigan State Employees' Retirement Fund, which, in turn, loaned additional funds to Huron Towers. In 1966, the State Board assigned its interest in the property to HUD. It became apparent by 1966 that Huron Towers was unable to operate the property at a profit, in spite of the fact that efforts had been made by the lenders to relieve Huron Towers from some of the burden of the debt service by modification and adjustment of the terms of the mortgages.

In September 1967, Huron Towers acknowledged that it was in arrears on the mortgages. In an effort to put the property on a sound financial footing, HUD and Huron Towers entered into a Forebearance Agreement, in which HUD agreed not to pursue its legal remedies and Huron Towers agreed to a modified mortgage payment schedule. By the terms of the agreement, appellant Scholnick was prohibited from selling his controlling interest in the common stock of Huron Towers without approval from HUD.

In 1968, after obtaining HUD's approval, appellants agreed to sell the common stock they held in Huron Towers to the Michigan Education Home Association (MEHA). The purchase agreement provided, Inter alia, that MEHA and Huron Towers, under the ownership of MEHA, would execute joint promissory notes in favor of appellants to be secured by a mortgage on the property. Appellants also were to be paid a portion of the purchase price in cash. The purchase agreement was consummated and, on January 30, 1969, Huron Towers executed the mortgage, which was recorded in Michigan on February 4, 1969.

HUD commenced the present action on December 6, 1973, averring that the mortgages it held on the property had been in default since 1971, and seeking judgment against Huron Towers together with an order foreclosing the mortgages. Huron Towers and appellants were named as defendants in the action.

All parties appeared and answered the complaint. A number of defenses, cross-claims and counterclaims were asserted. Thereafter, the district court granted HUD's request for appointment of a receiver to manage and preserve the property pending outcome of the proceeding. ¹ With the consent of the parties, the district court also established a discovery cutoff date of December 30, 1974.

In 1976 HUD and Huron Towers agreed to settle their dispute over the property. Accordingly, they filed a joint motion for entry of a consent decree of foreclosure. Accompanying this motion was a document entitled Consent Decree of Foreclosure and Sale signed by counsel for both the Government and Huron Towers. The decree provided, Inter alia, that the property should be sold at public auction, that the United States would relinquish any claims it may have had against MEHA, its officers, and agents of Huron Towers, including the right to sue for a deficiency judgment after sale of the property, and that Huron Towers also would relinquish any claims it may have had against HUD.

Appellants filed a brief in opposition to the consent decree, arguing that the decree was defective under Michigan law, that it denied appellants due process, that it had the effect of extinguishing and releasing the HUD mortgages, thereby precluding foreclosure by HUD, and that it had the further effect of extinguishing the HUD mortgages, leaving appellants as the only mortgagees on the property. The district court heard argument on the motion and then took the entire matter under advisement.

On December 28, 1976, the district court granted the motion for entry of a consent decree, and ordered that "the Consent Decree of Foreclosure and Sale shall be forthwith presented to this Court with notice to all parties." Pursuant to the terms of the court's order, HUD presented the consent decree and again moved for judgment. Appellants filed a brief in opposition to the decree; rebuttal briefs were filed by appellees. Appellants also filed a motion requesting a rehearing on the district court's order of December 28, 1976.

On January 27, 1977, the motion for entry of the consent decree was argued before the district court. Appellants reiterated their previous objections to the consent decree. Appellants further alleged that although their mortgage was second in time to that of HUD, there had been an agreement between HUD and appellants whereby HUD was to protect the interests of appellants in the event of foreclosure. Appellants offered no evidence in support of this position, but suggested that witnesses could be produced who would be able to support this allegation. In response to this "new argument," the district court adjourned the hearing in order to allow appellants time to produce any evidence that they had concerning the priorities to be accorded the mortgages in question.

On March 15, 1977, the district court entertained further argument on the issue of the consent decree. During that hearing, appellants were invited to produce whatever evidence they had concerning the alleged agreement with HUD and the priorities to be accorded the mortgages. Appellants offered no evidence in support of their allegation and, at the conclusion of argument, the district court again took the matter under advisement. ²

On May 19, 1977, the district court entered a Judgment of Foreclosure and Sale in which it found (1) that HUD had a prior and subsisting lien against the property; (2) that all other claims were subordinate and foreclosed; (3) that HUD was due $7,844,841.60, together with interest; and (4) that there was no right of redemption. The judgment further confirmed the details of the consent decree between HUD and Huron Towers and ordered the United States Marshall to place the property for sale by public auction, pursuant to the provisions of 28 U.S.C. §§ 2001 Et seq. HUD was the sole bidder at that auction and purchased the property for approximately 90 per cent of the value of its mortgages. There is no issue that the sale price was unfair or inequitable. The district court confirmed the sale on September 13, 1977. This appeal followed.

II

We note, initially, that federal law, not Michigan law, governs the rights and liabilities of the parties. United States v. Helz, 314 F.2d 301, 303 (6th Cir. 1963). See also United States v. Kimball Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457-58, 59 L.Ed.2d 711 (1979). If the law of Michigan is to have any application in this appeal, it is only because the National Housing Act or the mortgage documents require it, or because this court finds that applying local law will further federal policy and interests. United States v. View Crest Garden Apts., Inc., 268 F.2d 380, 382 (9th Cir.), cert. denied, 361 U.S. 884, 80 S.Ct. 156, 4 L.Ed.2d 120 (1959). Where there is no federal law in point, this court may adopt state law or may fashion the governing rule of law, whichever will serve best to protect the security of federal investments. Helz, 314 F.2d at 303; United States v. Stadium Apts., Inc., 425 F.2d 358, 360 (9th Cir.), cert. denied sub nom., Lynch v. United States, 400 U.S. 926, 91 S.Ct. 187, 27 L.Ed.2d 185 (1970).

Moreover, in any consideration of remedies available upon default of a federally held or insured loan, federal interest predominates over state interest. Oglethorpe Co. v. United States, 558 F.2d 590, 594-95 (Ct.Cl.1977); Helz, supra, 314 F.2d at 303; View Crest Garden Apts., Inc., supra, 268 F.2d at 383. This rule obtains because of an overriding federal interest in protecting the funds of the United States and in securing federal investments, thereby promoting the purposes of the National Housing Act....