Boston Five Cents Sav. Bank v. Pierce, Civ. A. No. 81-34-T.

• Decision Date: 26 October 1984
• Docket Number: Civ. A. No. 81-34-T.
• Citation: 601 F. Supp. 38
• Parties: The BOSTON FIVE CENTS SAVING BANK, Plaintiff, v. Samuel R. PIERCE, Jr., Secretary of the United States Department of Housing and Urban Development, and Kenmore Tower Corporation, Defendants.
• Court: U.S. District Court — District of Massachusetts

601 F. Supp. 38

The BOSTON FIVE CENTS SAVING BANK, Plaintiff, v. Samuel R. PIERCE, Jr., Secretary of the United States Department of Housing and Urban Development, and Kenmore Tower Corporation, Defendants.

Civ. A. No. 81-34-T.

United States District Court, D. Massachusetts.

October 26, 1984.

Harrison & Maguire, Stewart T. Herrick, Boston, Mass., for plaintiff.

Gregory Flynn, Asst. U.S. Atty., Boston, Mass., James G. Bruen, Jr., Civil Div., Dept. of Justice, Washington, D.C., for Secretary of Housing and Urban Development, Elizabeth A. Ritvo, Brown, Rudnick, Freed

& Gesmer, Boston, Mass., for Kenmore Tower Corp.

Anthony M. Feeherry, Goodwin, Procter & Hoar, Boston, Mass., for Nat'l Ass'n.

ORDER

TAURO, District Judge.

This court approves Magistrate DeGiacomo's report and recommendation. In addition to the points made by the Magistrate in his report, this court notes that section 4 of the mortgage agreement, which states that all "rents, profits and income" from the property are assigned to the mortgagee, supports a conclusion that the parties did not intend to limit the subject property to use as rental units. If the parties had indeed contemplated that the property would be so limited, there would have been no need to specify as to the disposition of "profits and income," in addition to "rents."

Accordingly, the defendants' motion for summary judgment is hereby granted.

It is so ORDERED.

The BOSTON FIVE CENTS SAVINGS BANK

v.

SAMUEL R. PIERCE, JR., as Secretary of the United States Department of Housing and Urban Development, and Kenmore Tower Corporation, formerly Harbro, Inc.

Magistrate No. 608-83-D

MEMORANDUM AND RECOMMENDATIONS RE RENEWED MOTIONS FOR SUMMARY JUDGMENT

January 30, 1984

DeGIACOMO, United States Magistrate.

The issue raised by these motions is whether there has been a breach of a Department of Housing and Urban Development insured mortgage by the mortgagor so as to enable the mortgagee bank (the plaintiff) to obtain the insurance benefits. There is no dispute as to the procedural history or any material fact. The action is cast in the form of a complaint seeking declaratory relief pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201. Initially, following extensive discovery, motions for summary judgment brought by the parties, with the exception of the defendant Kenmore Tower Corporation, were denied by the trial judge. Following additional discovery, the matter was then assigned for a master's hearing. At pretrial conferences it became obvious that, on the then state of the record, renewed motions for summary judgment by all parties would be appropriate. It was so suggested and, all parties being in agreement, the instant renewed motions were filed, briefed and argued. For the reasons which follow, I am satisfied that summary judgment should be granted for the defendants.

I. THE MATERIAL FACTS

Following an application in 1963 by the owners of a multi-story apartment building¹, they obtained in January, 1965 a mortgage from the plaintiff bank, insured by the Federal Housing Authority in the principal amount of three million one hundred fourteen thousand six hundred dollars ($3,114,600.00) for a period of 40 years at an interest rate of 5¼% per annum. The property consisted of rental housing. A regulatory agreement between HUD, acting through the Federal Housing Administration, and the owners was incorporated into and made a part of the mortgage. (Exhibit B) A security agreement pledging personalty as collateral was also executed. (Exhibit D) See also Plaintiff's Exhibits 8 and 9 of Volume 1.

In 1980 an application to HUD was made for a transfer of physical assets to Mr. Brown and when a copy of the application was forwarded to the bank, it informed HUD that it would not execute the application nor consent to the transfer. (Exhibit F) The application was subsequently amended and Mr. Brown, as proposed purchaser, was replaced by Harbro, Inc. HUD requested the bank to state its reasons for refusing to consent to the application and the bank declined. (Exhibits I and J) Approval by HUD was granted and the property was conveyed to Harbro, Inc. It executed an assumption agreement. (Exhibit L) Shortly thereafter, the bank was informed by Harbro, Inc. that it intended to change the property from rental residential housing to cooperative residential housing. HUD's opinion was requested on the proposed change and HUD responded that:

... Accordingly, we conclude that there is no legal prohibition, in terms of mortgagor or property eligibility, against the continuation of mortgage insurance on a mortgage which has been assumed by a cooperative corporation in connection with a transfer of physical assets of a rental project.

For the same reasons, we also conclude that there is no legal prohibition against HUD's permitting a rental project covered by a HUD-held mortgage to convert to a cooperative by means of a transfer of physical assets and assumption of the existing mortgage.

II. Your second question concerns the legal requirements that would apply to a cooperative conversion.

The properties under discussion are already insured before the conversion, so they are subject to the Regulatory Agreement requirements....

IV. Your final question involves the use of non-FHA notes for the individual purchase of dwelling unit shares in a cooperative project.

We see no objection to the use of such notes on a noninsured loan as long as the note-holder's security does not amount to an actual or potential lien or encumbrance on the property of the cooperative. The individual borrowing additional monies to purchase a membership in the cooperative may secure the loan by a pledge of the cooperative shares of any other collateral as long as no lien or encumbrance is placed on the real property....

(Pages 3 and 4, Exhibit N) Final approval was given by HUD to the transfer of assets to Harbro, Inc. (Exhibit P) HUD approved the cooperative plan (Exhibit R), and advised counsel for the bank that:

By memorandum dated October 10, 1980 the HUD Office of General Counsel has determined that there is no legal prohibition against HUD permitting a rental project insured under Section 207 to convert to a cooperative by means of a transfer of physical assets and assumption of the existing mortgage. (Please find attached a copy of the October 10, 1980 memorandum.)

(Exhibits Q and R; the October 10, 1980 memorandum is Exhibit N.) Thereafter, the conversion took place, common stock was issued and leases executed. (Exhibit S) Some shareholders obtained financing from the First Federal Savings & Loan Association by pledging shares in the cooperative and executing leasehold mortgages. (Plaintiff's Exhibits 27, 28, 29, Volume 1) This complaint for declaratory relief was filed on January 7, 1981, and was subsequently amended, the plaintiff alleging:

... That the conversion of 566 Commonwealth Avenue from rental apartments to cooperative ownership breaches its mortgage, since it results in a change in use of the property; additional liens being created against the property securing the mortgage; and an assignment of the rents and profits of the property. In addition, ... the conversion of the property violates the National Housing Act since cooperatives are not eligible for mortgage insurance under Section 207 of the National Housing Act.

(Plaintiff's Memorandum in Support of its Motion at (VI).) Both defendants argue inter alia that the mortgage has not been breached in that a cooperative can be insured under Section 207 of the National Housing Act (12 U.S.C. § 1713); HUD may allow rental apartments to be converted to cooperative ownership while maintaining the mortgage insurance; and finally, that the consent of the mortgagee is not required before HUD can allow a conversion.

II. DISCUSSION

A. Standing

As a preliminary matter, the bank argues that an order of the trial judge on August 5, 1982 which provided in relevant part that:

After consideration of the arguments presented by the parties at oral argument and in their written submissions, the court has determined that the plaintiff has standing to maintain this action, that plaintiff has not failed to exhaust its administrative remedies, and that the court is not precluded from reviewing the decision of the Department of Housing and Urban Development under Hahn v. Gottlieb, 430 F.2d 1243 (1st Cir.1970) and Falzarano v. United States, 607 F.2d 506 (1st Cir.1979).

is "the law of the case." I agree, and see no need of further discussion or citation.

B. The Mortgage

The threshold question as recognized by the parties is whether or not the mortgage has been breached. If it has, the bank must prevail. If it has not, pages of argument become superfluous, need not be addressed, and the defendants must prevail.

The mortgage incorporates the regulatory agreement. The bank argues that equal force and effect must be given to both the mortgage and the regulatory agreement:

if it is reasonably possible to do so and it cannot be subsumed that the provisions of one negate the provisions of the other, or are reasonably intended to do so. In addition, both the Mortgage and Regulatory Agreement were drafted by HUD which further emphasizes the proposition that they are to be read as supplementing each other rather than being in the conflict which Defendants' advocated construction would superintend.

(Plaintiff's Memorandum in Support, footnote 1, page 8; emphasis supplied.) This position presupposes both conflict and equality. In my opinion, there is no conflict, and to give each document equal force would be to ignore what the bank admits; namely, that without the Regulatory Agreement there would be no mortgage. In short, the mortgage depends for its life on the Regulatory Agreement. Moreover, it must control, otherwise the authority of the Secretary would be set at naught with control passing to the bank. Nowhere in the frequently amended National Housing Act is...