US v. Berk & Berk

• Decision Date: 02 May 1991
• Docket Number: Civ. A. No. 89-4577 (JCL).
• Citation: 767 F. Supp. 593
• Parties: UNITED STATES of America, Plaintiff, v. BERK & BERK, Defendant and Third-Party Plaintiff, v. YORK ASSOCIATES, INC., Third-Party Defendant.
• Court: U.S. District Court — District of New Jersey

767 F. Supp. 593

UNITED STATES of America, Plaintiff, v. BERK & BERK, Defendant and Third-Party Plaintiff, v. YORK ASSOCIATES, INC., Third-Party Defendant.

Civ. A. No. 89-4577 (JCL).

United States District Court, D. New Jersey.

May 2, 1991.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

E. Kathleen Shahan, Washington, D.C., for plaintiff.

A. Dennis Terrell, New Vernon, N.J., for Berk & Berk.

Leonard J. Bucki, Philadelphia, Pa., for York Assoc., Inc.

MEMORANDUM AND ORDER

LIFLAND, District Judge.

The United States of America moves for partial summary judgment on its claim for the appointment of a receiver. In addition, the United States moves to dismiss defendant's counterclaims and to strike its jury demand. Third-Party Defendant, York Associates, Inc. ("York"), moves to dismiss the third-party complaint. Defendant Berk & Berk ("Berk") opposes the motions. The court will address all motions on the papers pursuant to Fed.R.Civ.P. 78.

BACKGROUND

In 1985, Berk purchased Hunters Glen Apartments, an apartment project, with funds loaned by DRG Funding Corporation ("DRG"). The loan was coinsured against nonpayment by the United States Department of Housing and Urban Development ("HUD") pursuant to the National Housing Act, 12 U.S.C. §§ 1713, 1715n(f) and 1715z-9. Where the loans are co-insured, the Government National Mortgage Association ("GNMA") has specific authority to purchase, service and sell mortgages in its own name. DRG was responsible for servicing the loan, and for supervising the rehabilitation of the project. To obtain co-insurance from HUD, Berk executed a regulatory agreement with DRG in which Berk agreed to comply with detailed requirements concerning, inter alia, the financial and physical management of the project and the use of project income. See HUD Appendix 18, 20-30.

In September of 1988, GNMA removed DRG as the servicer of the loan "for cause", and appointed third-party defendant York Associates, Inc. ("York") to service the loan. See Appendix 42. GNMA acquired DRG's interest in the mortgage and note by assignment, which was promptly recorded. See Appendix 50. DRG also assigned its interest in the regulatory agreement to GNMA. See Appendix 39, 54.

Berk made its last full mortgage payment in January of 1989. Berk made a partial payment of $65,585 in March of 1989. No further payments have been made to date. Upon Berk's failure to pay full mortgage payments for four months, GNMA instituted this foreclosure action in November of 1989. On May 11, 1990, GNMA assigned its interest in the mortgage and regulatory agreement to HUD. See Exhibit D, Appendix 39-41. HUD made a partial insurance payment to GNMA of $27,658,000.

HUD, as assignee of the mortgage agreement and the regulatory agreement, moves to foreclose based upon Berk's default. In its answer, Berk raises numerous defenses to foreclosure and asserts counterclaims against HUD based upon HUD's alleged liability for actions taken by York.

I. PARTIAL SUMMARY JUDGMENT

To prevail on a motion for summary judgment, the moving party must demonstrate the absence of an issue of material fact and its entitlement to judgment as a matter of law. Fed.R.Civ.Pro 56(c). This burden may be "discharged by showing ... that there is an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The court must view the facts and inferences therefrom in the light most favorable to the non-moving party. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977).

The appointment of a receiver in this foreclosure action is governed by federal law. View Crest Garden Apartments, Inc. v. United States, 281 F.2d 844 (9th Cir.), cert. denied, 364 U.S. 902, 81 S.Ct. 235, 5 L.Ed.2d 195 (1960); United States v. Chester Park Apartments, Inc., 332 F.2d 1, 4 (8th Cir.), cert. denied, 379 U.S. 901, 85 S.Ct. 191, 13 L.Ed.2d 176 (1964); United States v. St. Paul Missionary Public Housing, Inc., 575 F.Supp. 867, 868 (N.D.Ohio 1983). A district court, in its discretion, may appoint a receiver to collect rents and profits and manage the property during the pendency of a foreclosure proceeding. View Crest, 281 F.2d at 847-48. No hearing is necessary where the facts support the appointment of a receiver. United States v. Mansion House Center North Redevelopment Co., 419 F.Supp. 85, 87 (E.D.Mo.1976). Factors that the court may consider include: the property is inadequate security for the loan; the mortgage contract contains a clause granting the mortgagee the right to a receiver; the continued default of the mortgagor; the probability that foreclosure will be delayed in the future; the unstable financial status of the mortgagor; the misuse of project funds by the mortgagor; and furthering the policy of the National Housing Act. Id.; United States v. American National Bank & Trust Co., 573 F.Supp. 1317, 1318 (N.D.Ill. 1983); United States v. Queens Court Apartments, Inc., 296 F.2d 534, 539-40 (9th Cir.1961); Gardon Homes, Inc. v. United States, 207 F.2d 459, 460 (1st Cir. 1953); United States v. Mountain Village Co., 424 F.Supp. 822 (D.Mass.1976); United States v. Chester Park Apartments Inc., 332 F.2d 1, 5 (8th Cir.), cert. denied, 379 U.S. 901, 85 S.Ct. 191, 13 L.Ed.2d 176 (1964); Mansion House Center, 419 F.Supp. at 87; St. Paul Missionary, 575 F.Supp. at 869. The appointment of a receiver serves the policy of the National Housing Act by protecting the treasury and the government's investment, which in turn promotes the policy of funding lower income housing. American National Bank, 573 F.Supp. at 1318; View Crest, 281 F.2d at 848; Queens Court Apartments, 296 F.2d at 540.

HUD states that it is entitled to judgment as a matter of law, since it has a contractual right to the appointment of a receiver, and the appointment of a receiver is warranted on equitable grounds. The mortgage contains a clause which affords HUD the absolute right to the appointment of a receiver and the waiver by the owner of all defenses to receivership. See Appendix 16 at ¶ 11. In addition, HUD states that Berk has conceded that it has used project funds to litigate this case, in violation of the regulatory agreement. See Appendix 23, ¶ B.3.b. Harvey Berk, the principal of Berk, admitted that he was informed by his counsel that such use of the funds violated the agreement, but states that only a portion of the funds was spent improperly. See affidavit of Harvey Berk at ¶¶ 34 and 35. Holly Larisch, asset manager for Ervin and Associates, the current mortgage servicer, states that Harvey Berk informed her that he would continue to use mortgage funds to litigate the case until ordered to stop by a court. See Declaration of Larisch, Appendix 60 at ¶ 10. Berk has subsequently repaid a portion of those funds, but over $200,000 of project funds spent on legal expenses remains unreimbursed. See Appendix 59 ¶ 7.

In addition, HUD argues that a receiver is warranted because Berk is voluntarily in arrears in its payments. Berk's operating expenses for June and August of 1990 show a surplus of approximately $1,100,000. See Appendix 84-87 and 89-91. HUD notes that this amount would be sufficient to pay three full mortgage payments. HUD also notes that Berk intends to resist foreclosure, making a prompt resolution unlikely. Finally, HUD asserts that Berk has suffered a net operating loss, leading to a high probability of its insolvency, with no personal liability on the partners of Berk, thus leaving HUD with no recourse for deficiencies after foreclosure.

In opposition, Berk makes six arguments: 1) the appointment of a receiver is a drastic remedy; 2) the legal expenditures are "reasonable operating expenses"; 3) unresolved issues of material fact preclude summary judgment; 4) HUD failed to comply with its own policy by "refusing" to continue with the workout plan; 5) its default is in question, since York, not Berk, created the default by its refusal to pay the mortgage out of escrow funds; and 6) Berk is entitled to set off against the mortgage debt funds it expended to operate the project.

1. The appointment of a receiver. Berk argues that the appointment of a receiver is a drastic remedy, citing Mintzer v. Arthur L Wright Co., 263 F.2d 823, 824 (3d Cir.1959). Berk's reliance on Mintzer is misplaced, as it dealt with state receivership law. As noted supra, federal law governs the appointment of a receiver in an action by HUD to foreclose. Under Federal law, the appointment of a receiver is not a drastic remedy. See supra at p. 597.

2. The legal expenses. Berk argues that its use of project funds for legal fees is a reasonable operating expense, citing In re Garden Manor Assoc., 70 B.R. 477 (N.D.Cal.1987). Garden Manor merely states that legal fees expended to collect rents is a reasonable operating expense, citing Thompson. Legal expenses may be reasonable and necessary to the operation of the project within the meaning of the regulatory agreement in this action, if they are expended to collect rent, evict tenants, or defend lawsuits "growing out of the operation of the project". Mansion House, 419 F.Supp. at 87; United States v. Thompson, 272 F.Supp. 774, 787 (E.D.Ark. 1967), aff'd, 408 F.2d 1075 (8th Cir.1969). Thompson holds that expenses which benefit the owner, not the project, are not permissible expenses. Funds expended on legal fees to defend a foreclosure action do not constitute expenses relating to the operation of the project. In re EES Lambert Assoc., 63 B.R. 174 (N.D.Ill.1986). It is undisputed that Berk employed project funds for legal expenses to litigate this foreclosure action. See Berk affidavit at ¶ 36. Berk attempts to minimize its fault by stating that it returned a portion of the funds upon being informed that such use of the funds did not constitute a project expense. However, it is undisputed that Berk...