In re Carrington Gardens Associates
| Decision Date | 05 May 2000 |
| Docket Number | Bankruptcy No. 97-28939S. Adversary No. 98-2071-S. |
| Citation | 248 BR 752 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re CARRINGTON GARDENS ASSOCIATES, Debtor. Carrington Gardens Associates, Plaintiff, v. United States of America, Defendant. |
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Gregory Stefan, Assistant United States Attorney, Norfolk, VA.
Gregory L. Sandler, Epstein & Sandler, P.C., Norfolk, VA, for Carrington Gardens Associates.
STEPHEN C. ST. JOHN, Bankruptcy Judge.
This matter comes upon the Motion for Summary Judgment filed by the United States of America (the "United States"). The United States filed this motion pursuant to Federal Rule of Bankruptcy Procedure 7056, incorporating Federal Rule of Civil Procedure 56 and asks this Court to grant summary judgment on the Complaint filed by Carrington Gardens Associates ("Carrington"), which commenced the present adversary proceeding. Pursuant to the federal rules, the Court shall grant summary judgment if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56.
In determining whether a genuine issue of material fact exists in this adversary proceeding, the Court has examined the pleadings, the exhibits, and the affidavits the parties have filed in conjunction with the United States' Statement of Administrative Record and Statement of Material Facts in Support of Motion for Summary Judgment ("United States' Statement of Facts") and the pleading filed by Carrington styled as Carrington Garden's Additions to Administrative Record and Statement of Facts in Opposition to Motion for Summary Judgment ("Carrington's Statement of Facts").1 Having considered the above documents, the parties' briefs, and after hearing the parties at oral argument, the Court makes the following findings as to material facts and resulting conclusions of law.
The Plaintiff is a Virginia limited partnership with its principal office located in Virginia Beach. Mr. Herbert J. Zuckerman ("Zuckerman") is the Debtor's designated representative and is President of CGFA, Inc., the Debtor's general partner. Carrington's principal business activity was the ownership and operation of a multi-family apartment project located in Richmond, Virginia (the "Project").2 The Project consists of a complex of 102 individual residential apartment units located on approximately 4.47 acres of land in Richmond. Plaintiff acquired the Project, then known as Monticello Manor, on May 15, 1985 and, upon acquisition, renamed the project Carrington Gardens.
As part of the Project's acquisition, Carrington assumed a First Deed of Trust on the property. The Federal National Mortgage Association ("Fannie Mae") held a Note which the First Deed of Trust secured with an original principal balance of $1,212,300.00. The United States Department of Housing and Urban Development ("HUD") insured payment to the mortgagee pursuant to Section 236 of the National Housing Act (the loan made by Fannie Mae and insured by HUD is hereinafter referred to as the "236 Loan"). See 12 U.S.C.A. ? 1715z-1 (West 2000). In exchange for the United States' commitment to insure the 236 Loan, the Plaintiff executed a regulatory agreement with HUD dated May 16, 1985 (the "236 Regulatory Agreement"). The 236 Regulatory Agreement is recorded in the land records and is incorporated by reference into the Deed of Trust. The 236 Regulatory Agreement imposes several duties on Carrington and governs the manner in which Carrington must operate the Project. The agreement also regulates the rents Carrington may charge to renters.3
The 236 Loan Note contains an interest rate subsidy that reduces the effective interest rate the Owner must pay on the mortgage from the Note rate of seven percent to one percent. The United States' agreement to pay the interest subsidy on the loan is contained within the Commitment for Insurance of Advances dated March 2, 1971, which the Debtor assumed when it assumed the deed to the Project. That document states:
The Commissioner agrees to make annual interest reduction payments not to exceed the sum of $49,696.00. Such payments will be paid on a monthly basis in accordance with the FHA regulations applicable to the program.
(United States' Exhibit # 102.) Pursuant to statute, interest subsidy payments may be made as long as HUD insures or holds the mortgage. See 12 U.S.C.A. ? 1715z-1(B). By its own regulations, HUD may terminate the interest reduction subsidy at its discretion, provided that the owner does not comply with the terms of a regulatory agreement into which the owner has entered with HUD. See 24 C.F.R. ? 236.510(b)(3) (2000). HUD paid this interest subsidy directly to Carrington until the 236 Loan was assigned to HUD, as detailed infra.
In addition, as part of the 236 Regulatory Agreement, Carrington agreed to maintain a reserve fund to be used for the replacement of capital items ("Replacement Reserve Fund"). Pursuant to paragraph two of the agreement, Carrington was to deposit $416.00 per month into this fund, which was to be, at all times, under the control of the mortgagee. Carrington was permitted to make withdrawals from the Replacement Reserve Fund only upon HUD's express written consent. Under the terms of the agreement, in the event of Carrington's default, HUD was authorized to apply the balance of the Replacement Reserve Fund to the accelerated balance of the mortgage due. Beginning in October 28, 1992, HUD denied seven replacement reserve withdrawal requests by Carrington because of purported violations of the 236 Regulatory Agreement.
Carrington and HUD entered into a Housing Assistance Payments (HAP) contract dated September 30, 1987. Pursuant to the contract, HUD agreed to subsidize the rent for fifty units contained within the Project, up to a total of $164,400 per year. These units are sometimes referred to as Loan-Management Set-Aside (LMSA) or Section 8 units. The HAP contract originally ran through September 30, 1992 and was subsequently renewed and its term extended to September 30, 1997. The HAP contract's terms required the Debtor to comply with applicable housing regulations and the 236 Regulatory Agreement.
The HAP contract also provided a mechanism for adjustments of rents in accordance with applicable regulations and administrative procedures on units which the HAP contract governed and also provided for the increase of the annual contract amount based upon HUD-approved rent increases. The amount of a rent increase was based upon Project expenses.
The HAP contract provided a mechanism by which Carrington could apply to HUD for rent increases by submitting an application. HUD would then evaluate the rental increase applications based on whether the owner was in compliance with its regulatory and contractual agreements and whether the increase was financially justified based on audited financial statements of the Project. After Carrington took over the Project, rents were increased on four separate occasions, from March 1986 to June 1994. Five rental increase requests, dated from June 29, 1992 to June 1997 were denied due to the Owner's purported violation of the 236 Regulatory Agreement.
In a letter dated February 11, 1993, Zuckerman wrote to Congressmen Owen Pickett regarding the current status of the Project as of that date. (United States' Exhibit # 503.) Carrington included as an attachment to that letter a Memorandum of Historical Events regarding the operation of the Project since Carrington had assumed it. In that memorandum, Carrington asserted that HUD had approved a $330 per month rental increase, but prevented HUD from implementing the increase in full.
In addition to requesting rental increases, owners of HUD-administered buildings may request that additional LMSA units be approved under a HAP contract. On three occasions from 1991 to 1993, Carrington applied for an increase in the number of LMSA units approved under the HAP contract from 50 to 75. HUD denied all three increases. The first application was denied for being untimely filed and the second two applications were denied on the basis that Carrington was purportedly in violation of the regulatory agreement.
On February 28, 1989, Carrington closed on a credit-line loan and executed a Second Deed of Trust Note secured by the Project. Carrington entered into this loan in order to finance capital improvements to the Project. The second Note was payable to Marble Mortgage Corporation in the amount of $307,200.00. HUD insured the credit-line loan, in this instance, pursuant to Section 241 of the National Housing Act (the "241 Loan"). See 12 U.S.C. ? 1715z-6 (West 2000). The 241 Loan Note accrued interest at the rate of twelve percent per year and required monthly interest payments from March through October 1989 and monthly payments of both interest and principal through October 1, 2011.
Simultaneously with executing the Second Deed of Trust Note, the Plaintiff executed a second regulatory agreement with HUD dated February 28, 1989 (the "241 Regulatory Agreement"). The 241 Regulatory Agreement is similar in all material respects to the 236 Regulatory Agreement. (United States' Exhibit # 168.)
In January of 1989, Carrington entered into a Construction Contract with William A. Simkins Associates for the work to be performed on the Project that the 241 Loan financed. Mr. William Simkins ("Simkins") was both a principal of the general contractor and Carrington's general partner at the time. The construction contract provided that a work write-up was to be...
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