In re Adana Mortg. Bankers, Inc., Bankruptcy No. 80-00324A.

Citation12 BR 989
Decision Date14 August 1980
Docket NumberBankruptcy No. 80-00324A.
PartiesIn re ADANA MORTGAGE BANKERS, INC., Debtor.
CourtUnited States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

David Epstein, Kenneth Oestreicher, Attys., Civ. Div., Dept. of Justice, Washington, D.C., for plaintiff.

Carr, Abney, Tabb & Schultz, Benjamin C. Abney, Atlanta, Ga., for defendant.

OPINION

WILLIAM L. NORTON, Jr., Bankruptcy Judge.

This motion for a finding of contempt was brought by the Debtor against the Government National Mortgage Association ("GNMA") and certain of its officers and agents for actions which the Debtor contends violated the automatic stay provisions of the Bankruptcy Code, to wit: Section 362(a)(3), which prohibits acts "to obtain possession of property of the estate or of property from the estate." The three items of property which are the center of the controversy are: (1) certain custodial bank accounts established and maintained by the Debtor, (2) certain mortgages held by the Debtor which back GNMA securities issued by the Debtor, and (3) a contractual agreement between GNMA and the Debtor, granting the Debtor the right to hold and service these mortgages. In particular, the Debtor (sometimes referred to as "Adana") submits that delivery, on February 6, 1980, of a letter terminating the Debtor's issuer status under the contracts between the Debtor and Adana, and the subsequent attempt, on March 3, 1980, to seize, by letter and oral demand to the banks, all of the Debtor's GNMA custodial bank accounts and pooled loan documents, are actions justifying contempt citations from this Court.

FINDINGS OF FACT

Debtor is a mortgage banker primarily engaged in originating or purchasing mortgage loans which it then forms into "pools" of approximately one million dollars in value. Pursuant to agreements (sometimes referred to as the "Guaranty Agreements," as the "servicing agreements" or as the "Agreements") between Debtor and GNMA, these mortgage pools then become the basis for the issuance of mortgage-backed securities issued by the Debtor and guaranteed by GNMA pursuant to authority granted by Section 306(g) of the National Housing Act, codified at 12 U.S.C. Section 1721(g). A separate Guaranty Agreement is executed between Adana and GNMA with respect to each "pool" of mortgages. The securities (sometimes referred to as "Certificates") issued for each pool of mortgages are then sold by Adana to investors in the marketplace, who receive a monthly return from the issuer equivalent in amount to the principal received on the mortgages in the pool, plus a specified rate of interest set forth on the securities. The issuer, Adana, then functions as servicer of the mortgages and securities; it uses the money it receives from the individual mortgagors in each pool to pay the monthly payments to its certificate holders. In the event of a shortfall in receipts from the underlying mortgages, the issuer is, nevertheless, responsible for paying the full amount due to the security holders promptly by the fifteenth day of each month. Although the issuer will recover any payment of its own funds if it eventually recovers the delinquent payments from the underlying mortgagors, there is no assurance that such funds paid out by the issuer will be recovered. The issuer also collects tax and insurance escrows from the individual mortgagors and pays the taxes and insurance on the mortgaged properties as they become due. For all of these services the issuer collects a servicing fee based upon a percentage of the payments received from the mortgagors.

GNMA is a corporation, wholly owned by the United States government,1 under the control and management of the Secretary of HUD.2 GNMA was created in 1968 to take over certain of the secondary mortgage market operations of the Federal National Mortgage Association ("FNMA") and to carry on the mortgage-backed securities program.3 All of the benefits and burdens incident to the administration of GNMA inure to the Secretary of the Treasury, after expenses and reserves.4

One of the numerous documents required to be submitted by the Debtor to GNMA prior to the issuance of GNMA certificates is a Guaranty Agreement, which is the primary document setting forth the relationship between the Debtor, as issuer of the GNMA certificates, and GNMA, as the guarantor of the certificates. The Guaranty Agreement provides that GNMA will pay the amounts due on the certificates, should the issuer fail to do so. Pursuant to the Guaranty Agreement GNMA (a) takes unrecorded assignments of the mortgages, (b) requires the establishment of custodial bank accounts for the receipts of principal, interest, and escrow funds from the individual mortgagors, (c) requires all the mortgage loan documents to be held by an independent custodian, and (d) charges a guaranty fee based upon a percentage of the servicing fee collected by the servicer.

The Guaranty Agreement provides that two specified events are automatic events of default by the issuer: (1) failure to make monthly payments on the certificates as they become due and (2) the application by the issuer for an advance from GNMA to pay the certificate holders. The Guaranty Agreement also sets forth numerous other obligations of the issuer which, may, upon written notice from GNMA to the issuer, be declared events of default. Among this latter category of optional defaults are the following: (1) failure to give advance notice of bankruptcy, (2) failure to maintain a specified minimum net worth established by GNMA, and (3) the actual filing of a petition in bankruptcy. Upon the occurrence of a default under the Guaranty Agreement, whether automatic or elective, GNMA is contractually entitled to issue a letter of extinguishment to the issuer. The effect of this letter is to terminate thereafter any rights that the issuer has retained in the pooled mortgages and to substitute GNMA for the debtor as the issuer of the certificates. Upon this occurrence, GNMA, as substituted issuer, is entitled to collect the receipts under the mortgages and becomes responsible for all future payments on the certificates.

The issuer's right to service the mortgages in the Debtor's GNMA pools and to collect the servicing fees allowed under the Guaranty Agreements is a valuable right, which can be sold to another servicer (approved by GNMA) for a substantial amount. The Debtor has stated in its Statement of Financial Affairs that its servicing portfolio has a value of $700,000.00. There is testimony that the value of the portfolio might actually approach $1,000,000.00.

The Debtor filed its voluntary petition under Chapter 11 of the new Bankruptcy Code on Friday, February 1, 1980. On Monday, February 4, 1980 the Debtor notified GNMA of the filing by a telephone call to GNMA's offices in Washington, D.C. On February 6, 1980 the Debtor's president, Ramsey Agan, and the Debtor's attorney, Benjamin C. Abney, flew to Washington, D.C. to meet with GNMA. At that meeting GNMA made the determination that the Debtor was in default under the Guaranty Agreements with GNMA. GNMA's determination was based on a perceived change of business status of the Debtor that materially affected GNMA, the acknowledgment and confirmation of the Debtor's insolvency, the inability of the Debtor to meet GNMA's net worth requirements to act as issuer of securities under the Guaranty Agreements, and the fact that the Debtor had failed to give GNMA advance notice of an impending or actual default as required by section 5.03 of the Guaranty Agreements. Accordingly, at the end of the meeting on February 6, 1980, Mr. R. Frederick Taylor, Executive Vice-President of GNMA, delivered a letter, which GNMA contends terminated all of the Debtor's rights as issuer under the Guaranty Agreements, declaring Adana in default and advising the Debtor that GNMA was exercising its contractual rights to substitute itself for the Debtor as issuer under the Guaranty Agreements. GNMA then offered a substitute contract to the Debtor which among other things, (1) reduced the compensation the Debtor would receive for its servicing of the mortgages, (2) gave GNMA the right to terminate the substitute contract at any time without compensation to the Debtor's estate, (3) transferred control of all of the custodial bank accounts from the Debtor to GNMA, and (4) limited the term of the contract to one (1) year. The Debtor has never executed the proposed interim servicing agreement presented to it by GNMA.

In the early morning of March 3, 1980, GNMA sent one of its officers to each of the three line banks and, without any prior warning to the Debtor or the line banks or approval by the Bankruptcy Court, presented a written demand that the line banks turn over all funds in the Debtor's custodial accounts and all mortgages and other loan documents pertaining to GNMA pools and held by the line banks as custodians. Each custodial bank refused to comply with GNMA's demand without first obtaining direction from this Court.

The Debtor promptly filed a motion for contempt the same day alleging that the letter of February 6, 1980, attempting to terminate the Debtor's issuer status under the Guaranty Agreements, and the attempted seizure of the custodial bank accounts and mortgage documents violated the stay. At 10:50 A.M., that morning the hearing on that motion began before this Court, with attorneys representing the Debtor, GNMA and the three line banks present. After hearing, the court entered an order to preserve the status quo until a full hearing could be held on March 11, 1980.

R. Frederick Taylor signed the February 6, 1980 default letter that allegedly terminated GNMA's contract with the Debtor on the basis of the Debtor's financial condition. Mr. Taylor also ordered the March 3, 1980 demand letters to the three line banks to be delivered. William Linane, Warren Lasco, and Clement Dinsmore delivered...

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