East River Sav. Bank v. Secretary of HUD

• Decision Date: 16 December 1988
• Docket Number: No. 83 Civ. 8031 (RJW).,83 Civ. 8031 (RJW).
• Citation: 702 F. Supp. 448
• Parties: EAST RIVER SAVINGS BANK, Plaintiff, v. SECRETARY OF HOUSING AND URBAN DEVELOPMENT and Vanguard Holding Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

702 F. Supp. 448

EAST RIVER SAVINGS BANK, Plaintiff, v. SECRETARY OF HOUSING AND URBAN DEVELOPMENT and Vanguard Holding Corporation, Defendants.

No. 83 Civ. 8031 (RJW).

United States District Court, S.D. New York.

December 16, 1988.

COPYRIGHT MATERIAL OMITTED

Bleakley Platt Remsen Millham & Curran, New York City, for plaintiff; John T. Curran, of counsel.

Rudolph W. Giuliani, U.S. Atty., S.D. N.Y., New York City, for defendant Secretary of Housing and Urban Development; Jorge Guttlein, William Perricelli, of counsel.

Philip Irwin Aaron, P.C., Jericho, N.Y., for defendant Vanguard Holding Corp.; Philip Irwin Aaron, Andrew C. Morganstern, of counsel.

OPINION

ROBERT J. WARD, District Judge.

Plaintiff, East River Savings Bank ("the Bank"), has brought this action against the Secretary of Housing and Urban Development ("HUD") and against Vanguard Holding Corporation ("Vanguard"), a New York corporation, seeking to recover losses it sustained when HUD refused to honor its application for insurance benefits on a residential mortgage it had purchased from Vanguard. HUD has moved, pursuant to Rules 12(b)(1) and 12(b)(6), Fed.R.Civ.P., to dismiss the claims against it for lack of subject matter jurisdiction and failure to state a claim.¹ In the alternative, HUD seeks summary judgment pursuant to Rule 56, Fed.R.Civ.P. Vanguard has likewise moved, pursuant to Rules 12(b)(6) and 56, Fed.R.Civ.P., to dismiss the claims against it for failure to state a claim, or, in the alternative, summary judgment.

The Bank has cross-moved for summary judgment against HUD and Vanguard. In the alternative, the Bank has moved for leave to amend its complaint pursuant to Rule 15, Fed.R.Civ.P., to add the United States of America and the Department of Housing and Urban Development as defendants; and for an order pursuant to Rule 37, Fed.R.Civ.P., compelling certain discovery from Vanguard.

The case was referred to the Honorable Joel J. Tyler, United States Magistrate, to hear and report pursuant to 28 U.S.C. § 636(b)(1) and Rule 4 of the local rules for proceedings before Magistrates. Thereafter, Magistrate Tyler filed his Report and Recommendation ("the Report"), in which he converted all dispositive motions into motions for summary judgment pursuant to Rule 56, Fed.R.Civ.P. The magistrate recommended that HUD's motion should be granted in part, and that the Bank's first, second and third claims should be dismissed. The magistrate further recommended that Vanguard's motion should be granted in part, and that the sixth claim as well as that portion of the fifth claim that sounded in negligent misrepresentation or constructive fraud should be dismissed. Magistrate Tyler further recommended that the Bank's cross-motion for summary judgment should be denied in its entirety; that the Bank should be permitted to amend its complaint to name the United States as a defendant; and that the Bank's motion to compel discovery should be held in abeyance, pending the Court's action on the Report.

Both the Bank and Vanguard filed timely objections to the Report. The Court has reviewed the Report and considered de novo those portions to which any objection has been filed. For the reasons that follow, HUD's motion to dismiss is granted in part; the Bank's second claim is dismissed with prejudice and the fourth claim is dismissed without prejudice. Vanguard's motion to dismiss is granted in part; claim five is dismissed without prejudice. Plaintiff's cross-motion for summary judgment is denied in its entirety. The Court, pursuant to Rule 15, Fed.R.Civ.P., grants plaintiff's motion to add the United States as a party defendant, and would entertain a motion by plaintiff to amend the complaint to state a negligence claim against the United States, and to state separate claims in fraud and in breach of contract against Vanguard. Plaintiff is directed to renew any outstanding discovery requests it considers appropriate in view of the current posture of the case, and to conduct further discovery as needed. Accordingly, plaintiff's motion seeking an order compelling discovery is denied as moot.

BACKGROUND

On December 20, 1976, Israel and Kathleen Rodriguez obtained a $31,000 mortgage from Vanguard in order to purchase a single family home in Central Islip, New York. Complaint ¶ 5; Exhibit A, annexed to Declaration of Jorge Guttlein, filed September 14, 1984 ("Guttlein Decl."). Vanguard submitted an application for Federal Housing Authority ("FHA") mortgage insurance on or about January 27, 1976. The Rodriguez mortgage was to be FHA-insured under the section 203 program, 12 U.S.C. § 1709.² FHA issued on February 2, 1976, a conditional commitment for mortgage insurance in the amount of $31,150, subject to the successful completion of certain repairs and improvements by August 2, 1976. Affidavit of Joseph Megna, filed September 14, 1984 ¶ 10; Exhibit E annexed to Guttlein Decl. This deadline was later extended to August 7, 1977. Affidavit of Howard Isenberg, filed September 14, 1984 ¶¶ 7-9 ("Isenberg Aff."); Exhibit I, annexed to Guttlein Decl.

Pursuant to the mortgage insurance application procedure in place during the period in question, FHA would inspect the property to verify the completion of all repairs specified in the conditional commitment and thereafter prepare a HUD Form 2051. Affidavit of Ralph Permahos, filed September 14, 1984 ¶¶ 3-5 ("Permahos Aff."). A mortgage insurance certificate ("MIC") could not be issued absent a completed 2051 form. Id. ¶ 6; Affidavit of Beryl Holder, filed September 14, 1984 ¶ 3. Failure to complete the specified repairs before the expiration date "would automatically void an insurance application." Isenberg Aff. ¶ 8 n.*.

Vanguard has taken the position that "all steps required to cause the issuance of a MIC by HUD were in fact taken; and that for reasons unknown to Vanguard, the ministerial task of issuing the same was not done, or in the alternative, the MIC was lost." Affidavit of Harry James Reese, filed October 10, 1984 ¶ 6 ("Reese Aff."). Vanguard claims that the person who sold the property to the Rodriguezes established an escrow account to pay for the repairs required by the conditional commitment. Vanguard further asserts that the repairs were made, that HUD was notified and that Vanguard requested of HUD that it inspect the property to verify that the repairs were properly made. Id. ¶¶ 10-11.

Vanguard has produced no documents to substantiate its claims. Vanguard revealed the existence of the escrow account during the deposition of its vice president, Harry James Reese. Exhibit 11, annexed to the Affidavit of John T. Curran, filed October 26, 1984. HUD's records reveal that a 2051 form was never completed for the property, an MIC was never issued, and no mortgagee was billed for mortgage insurance premiums. Affidavit of Harold Haynes, filed September 14, 1984 ¶ 2; Affidavit of Thomas F. Tarbell, filed October 26, 1984 ¶¶ 8-9.

By agreement dated May 16, 1977, the Bank committed itself to purchase two million dollars worth of FHA (section 203) and/or Veterans Administration insured loans from Vanguard, including the Rodriguez mortgage. Exhibit M, annexed to Guttlein Decl. In the blanket commitment, Vanguard warranted that:

"as to each loan as of the date of purchase thereof by the Bank: ... (h) ... the annual FHA mortgage insurance premium has been paid to date or that the same is not due and is being currently accrued; that nothing has been done or omitted, the effect of which act or omission would be to invalidate the contract of insurance with the FHA...."

Id. Vanguard further represented in a "Statement Accompanying Assignment" dated August 4, 1977, that "F.H.A. Insurance on the Rodriguez mortgage is now in full force and effect." Exhibit N, annexed to Guttlein Decl. The Rodriguez mortgage was assigned to the Bank and the assignment recorded on July 21, 1977 in Suffolk County. Complaint ¶ 8; Reese Aff. ¶¶ 4, 12.

The MIC was not delivered with the mortgage. In response to an inquiry from the Bank's attorney, Vanguard, by letter dated September 12, 1977, advised the Bank that the original MIC had been misplaced by the FHA and that a duplicate certificate had been ordered. Affidavit of Paul G. Wood, filed October 26, 1984 ¶¶ 4-5 ("Wood Aff."); Exhibit J, annexed to Guttlein Decl. Vanguard, in a separate agreement delivered to the Bank, agreed to repurchase the Rodriguez mortgage in the event that the MIC was not delivered to the Bank within 60 days of the Bank's purchase of the mortgage. Exhibit K, annexed to Guttlein Decl.³ The closing took place on October 4, 1977, at which time the Bank paid Vanguard the consideration for the Rodriguez mortgage. Affidavit of James V. Sorrentino, filed October 26, 1984 ¶ 8 & Exhibit 1, annexed thereto; Wood Aff. ¶¶ 6-10. An MIC was never transmitted to the Bank by Vanguard. See Exhibit P, annexed to Guttlein Decl. The Bank made its first demand to Vanguard to repurchase the Rodriguez mortgage on October 20, 1981, after it had learned from HUD that the mortgage had never obtained FHA-insured status. Exhibit P, annexed to Guttlein Decl. As set forth below, however, the mortgage had at that time been satisfied and the property transferred from HUD to the town of Islip.

HUD requires an applicant for mortgage insurance benefits to submit "full and proper documentation" along with its claim, including the mortgage, note, conditional commitment, firm commitment, MIC, and insurance benefit application form. HUD regulations further require conveyance to HUD of the property secured by the mortgage and satisfaction of the existing mortgage. Affidavit of Robert Swiger, filed October 10, 1984 ¶ 3; Exhibits T, B-1 & U, annexed to Guttlein Decl.; 24 C.F.R. §§ 203.355, 203.357 & 203.358.

After the Rodriguezes defaulted under their mortgage, the Bank commenced a foreclosure action in November 1978. In order to avoid further foreclosure action, the Rodriguezes agreed to...