Hernandez v. Home Sav. Ass'n of Dallas County, s. 76-2794

• Decision Date: 15 November 1979
• Docket Number: 77-1421 and 77-2504,Nos. 76-2794,s. 76-2794
• Citation: 606 F.2d 596
• Parties: Frank HERNANDEZ, Plaintiff-Appellee, v. HOME SAVINGS ASSOCIATION OF DALLAS COUNTY, Defendant and Third-Party Plaintiff-Appellee, v. Moon LANDRIEU, Secretary of the Department of Housing and Urban Development, Third-Party Defendant-Appellant. Frank HERNANDEZ, Plaintiff, v. HOME SAVINGS ASSOCIATION OF DALLAS COUNTY, Defendant and Third-Party Plaintiff-Appellee, v. Moon LANDRIEU, Secretary of the Department of Housing and Urban Development, Third-Party Defendant-Appellant. B. B. ADAMS GENERAL CONTRACTOR, ETC., Plaintiff-Appellee, v. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Defendant-Appellant, v. MODERN AMERICAN MORTGAGE and James A. Pate, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 596

606 F.2d 596

Frank HERNANDEZ, Plaintiff-Appellee, v. HOME SAVINGS ASSOCIATION OF DALLAS COUNTY, Defendant and Third-Party Plaintiff-Appellee, v. Moon LANDRIEU, Secretary of the Department of Housing and Urban Development, Third-Party Defendant-Appellant.

Frank HERNANDEZ, Plaintiff, v. HOME SAVINGS ASSOCIATION OF DALLAS COUNTY, Defendant and Third-Party Plaintiff-Appellee, v. Moon LANDRIEU, Secretary of the Department of Housing and Urban Development, Third-Party Defendant-Appellant.

B. B. ADAMS GENERAL CONTRACTOR, ETC., Plaintiff-Appellee, v. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Defendant-Appellant, v. MODERN AMERICAN MORTGAGE and James A. Pate, Defendants-Appellees.

Nos. 76-2794, 77-1421 and 77-2504.

United States Court of Appeals Fifth Circuit.

Nov. 15, 1979.

Leonard Schaitman, Mark H. Gallant, Michael F. Hertz, Attys., Dept. of Justice, App. Section, Civ. Div., Washington, D. C., for third-party defendant-appellant.

Donald C. Templin, Dallas, Tex., for Home Savings Assn. of Dallas County.

Ronald W. Kessler, Dallas, Tex., for Frank Hernandez.

R. Dale Wootton, Dallas, Tex., for James A. Pate.

Molly Steele, Harry M. Roberts, Jr., Paul M. Thorp, Dallas, Tex., for American Mortgage Corp.

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

Before JONES, CLARK and GEE, Circuit Judges.

JONES, Circuit Judge:

The Hernandez appeals stem from the federal financing of the construction of a mobile home park project which, literally, never got off the ground. Vista Hills Mobile Home Community obtained an $821,000 mortgage loan from Home Savings Association of Dallas County to finance the construction of a mobile home park project. The Department of Housing and Urban Development, herein called HUD, agreed to insure a loan under the National Housing Act, 12 U.S.C.A. § 1701, et seq. The Federal National Mortgage Association, herein referred to as FNMA, made a firm commitment to purchase the mortgage note and undertake permanent financing upon completion of the project.

Several documents accompanied the transaction, including a Building Loan Agreement, a Mortgagor's Certificate, a Mortgagee's Certificate and a Deed of Trust Note. Regulations promulgated by the Secretary of HUD ¹ implement Section 207 of the National Housing Act. 12 U.S.C.A. § 1713.

Vista Hills was required, among other things, to deposit with Home Savings the sum of $35,635.74 for the benefit of FNMA, which was to make the long term mortgage loan. Of that amount, $23,319.24 represented a discount fee, or permanent financing charge, which was placed in an escrow account and earmarked for payment to FNMA at the time of the final disbursement of the loan. The remaining $12,316.50 constituted a "commitment fee-purchase and market fee" which was paid to FNMA at the time the contract was executed. Before construction was completed, Vista Hills defaulted on the loan. Home Savings foreclosed, then filed an insurance claim with and assigned all of its interests in the mortgage to HUD.

The regulations, which were incorporated into the mortgage documents, provide that at the time a mortgagee forecloses and files its insurance claim, HUD shall instruct the mortgagee concerning disposition of cash deposits which it has been holding for the account of the mortgagor. By the regulations, 24 C.F.R. § 207.258(b)(4)(ii), it was provided that HUD should advise the mortgagee whether such cash deposits are to be "retained" or "delivered to the commissioner (of HUD)." HUD did not instruct Home Savings concerning disposition of the FNMA discount fee deposit.

Vista Hills assigned to Frank Hernandez whatever interest it might have in the FNMA escrow funds held by Home Savings. Hernandez made a demand for the funds and payment was refused. He then brought an action against Home Savings in a Texas State Court. Home Savings interpleaded HUD, asserting that Home Savings had no personal stake in the funds but was holding them for the benefit of HUD. HUD removed the case to the United States District Court.

HUD and Hernandez filed motions for summary judgment. Hernandez relied primarily on paragraph 18 of the Mortgagee's Certificate which provides as follows:

"Until final endorsement for insurance by the commissioner, all funds collected pursuant to items (c), (d) or (e) above (item (d) includes the $35,635.74 Vista Hills had paid to cover the FNMA charges) and not paid over to the permanent lender, . . . shall be held for the account of the mortgagor and shall be subject to your (HUD's) control and direction in the event of claim under the contract of insurance."

Hernandez asserted that because no "final endorsement" had occurred, the mortgagor having defaulted prior to the full disbursement of the loan, the escrow funds were still being "held for the account of the mortgagor" and had to be paid over to Hernandez as the mortgagor's assignee. HUD contended that the same provision of the mortgagee's certificate supported the government's claim to the funds, that after a default the funds become "subject to your (HUD's) control and direction in the event of claim under the contract of insurance." HUD directed attention to the regulation which specifies how cash deposits held by the mortgagee are to be treated when the mortgagor defaults and the mortgagee submits its claim for insurance to HUD. That regulation provides:

"(4) Disposition of Cash Items. The following cash items shall either be retained by the mortgagee or delivered to the commissioner in accordance with instructions to be issued by the commissioner at the time the insurance claim is filed: . . . (ii) any cash held by the mortgagee or its agents or to which it is entitled, including deposits made for the account of the mortgagor, and which have not been applied in reduction of the principal of the mortgage indebtedness." 24 C.F.R. § 207.258(b)(4)(ii).

The district court granted Hernandez motion for summary judgment. Hernandez v. Home Savings Association of Dallas County, 411 F.Supp. 858. The court concluded that under the Mortgagee's Certificate, the discount fee deposit was being "held for the account of the mortgagor" prior to payment over to FNMA at "final endorsement" of the construction loan documents and that if permanent financing by FNMA was not accomplished, the deposit should be refunded to the mortgagor or its assignee. The court also decided that HUD was, in any event, estopped under the terms of 24 C.F.R. § 207.258(b)(4)(ii) from claiming the discount fee deposit since HUD failed, at the time the insurance claim was filed, to instruct Home Savings whether to retain the funds or to transfer them to the commissioner.

After filing notice of appeal, HUD discovered that it had neglected to introduce into evidence the Building Loan Agreement. Paragraph 9 of that document provides that, upon default,

"If the lender so elects to terminate this agreement, it may use and apply any funds deposited with it by the borrower, regardless of the purpose for which such funds were deposited, in such manner and for such purposes as the commissioner may prescribe."

By motion, HUD asked the district court to reconsider its decision in light of the Building Loan Agreement. The appeal was stayed. The district court issued a supplemental opinion, Hernandez v. Home Savings Association of Dallas County, 425 F.Supp. 835, in which it was stated that the language of paragraph 9 was consistent with the court's original interpretation of the contract and regulations, and that the language at most "creates an ambiguity which must be interpreted against HUD." Id. at 836.

In the Adams case, James A. Pate obtained a $698,400 mortgage loan from Modern American Mortgage Corporation to finance the construction of an apartment complex. HUD insured the loan and Modern American obtained a firm commitment from FNMA for permanent financing of the project upon its completion. The documents and regulations involved were the same as those involved in the Hernandez transaction. Pate was required to deposit with Modern American $37,853.28, including a discount fee of $27,377.28, to be paid to FNMA at the time permanent financing was completed. A commitment fee of $10,476, was payable to FNMA immediately. Pate executed a "cost plus" construction contract with B. B. Adams, General Contractor, Inc., herein sometimes called Adams, to build the apartment complex. Adams was to receive monthly payments of 90 per cent of its costs with 10 per cent to be retained and disbursed upon completion and acceptance of the work. Pate defaulted on his mortgage payments to Modern American. It filed an insurance claim with HUD and assigned to HUD its claims against Pate. It does not appear whether HUD instructed Modern American as to the retention or transfer of the FNMA discount fee deposit. Adams brought an action against HUD, Modern American, and Pate seeking to recover, among other things, $30,000 in unreleased retainages. Adams contended that it had substantially completed construction and therefore was entitled to recover the retainages being held by the lender, notwithstanding the mortgagor's default. Pate filed a cross-claim against HUD seeking to recover the discount fee deposit. He asserted that since the purpose of the escrow never had been fulfilled, the funds still belonged to him and should be paid over to him. HUD asserted that Adams had no cognizable claim against the government and urged dismissal of the entire action for lack of subject matter jurisdiction. In opposition to Pate's claim to the discount fee deposit, HUD contended that it was entitled to set off the deposit against its liability to the lender under the lender's insurance claim. The district court entered an order finding jurisdiction over all parties. It awarded Adams the 10 per cent retainages, and denied Pate's claim to the discount fee deposit.

HUD and Pate appealed. This Court dismissed the appeal as interlocutory, but...