In re Zaidi

• Decision Date: 28 September 1987
• Docket Number: Adv. No. 87-0570S.,Bankruptcy No. 87-01120S
• Citation: 78 BR 410
• Parties: In re Syed and Atia ZAIDI Debtors. Syed and Atia ZAIDI, Plaintiffs, v. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; Samuel R. Pierce, Jr., Secretary of the U.S. Department of Housing and Urban Development; Joseph Russell, Chief Loan Management Branch, Philadelphia Area Office; Indiana Mortgage Company and Edward Sparkman, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

78 B.R. 410 (1987)

In re Syed and Atia ZAIDI Debtors.

Syed and Atia ZAIDI, Plaintiffs, v. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; Samuel R. Pierce, Jr., Secretary of the U.S. Department of Housing and Urban Development; Joseph Russell, Chief Loan Management Branch, Philadelphia Area Office; Indiana Mortgage Company and Edward Sparkman, Trustee, Defendants.

Bankruptcy No. 87-01120S, Adv. No. 87-0570S.

United States Bankruptcy Court, E.D. Pennsylvania.

September 28, 1987.

Michael Donahue, Chester, Pa., for plaintiffs/debtors.

Virginia R. Powel, Philadelphia, Pa., for defendant/U.S.A.

Peter M. Campanella, Regional Counsel, HUD, Philadelphia, Pa., for defendant/HUD.

Gary E. McCafferty, Philadelphia, Pa., for defendant/Indiana Mortg. Co.

Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

The Plaintiffs in this proceeding and Debtors in this bankruptcy case, SYED and ATIA ZAIDI, (hereinafter referred to as "the Debtors"), filed the instant adversarial Complaint seeking declaratory and injunctive relief, as well as judicial review of a final decision of the United States Department of Housing and Urban Development (hereinafter referred to as "HUD"), in which HUD refused to accept the assignment of their mortgage on the basis of HUD's conclusion that they did not meet one of the six conditions required by 24 C.F.R. § 203.650(a). The one condition upon which HUD's refusal was premised was that the default was not caused by circumstances beyond the Debtors' control. The question is presented on the cross-motions for summary judgment filed by the Debtors and HUD¹ under Federal Rule of Civil Procedure (hereinafter referred to as "F.R.Civ.P.") 56 which is made applicable to this proceeding by Bankruptcy Rule (hereinafter referred to as "B.R.") 7056. For the reasons stated herein, we will grant the Debtors' Motion for summary judgment and this matter will be remanded for HUD's reconsideration and for further evidence in accordance with this Opinion.

THE HUD MORTGAGE ASSIGNMENT PROGRAM

The HUD mortgage assignment program is set forth in 12 U.S.C. § 1715u, 24 C.F.R. § 203.650 et seq., and HUD Handbook 4330.2. The Debtors' mortgage is insured by HUD pursuant to its Section 221 program, which is designed to provide qualified low and moderate income families with an opportunity to procure FHA-insured loans to purchase homes otherwise unavailable to them. 12 U.S.C. § 1709(a). To further assist eligible mortgagors, Congress enacted the Assignment Program, under which HUD is authorized to acquire the loan and surety on a FHA-insured mortgage in order to avoid foreclosure. 12 U.S.C. § 1715u.

When a mortgagor has missed at least three mortgage payments and requests assistance after the Mortgagee determines not to accept same, HUD must consider whether or not to take an assignment of the mortgage. Taking an assignment prevents further mortgage foreclosure proceedings. 24 C.F.R. § 203.652. If the mortgagor owns only one property, and such property is (1) subject to a FHA-insured mortgage and (2) the mortgagor's principal residence, then the determination of whether or not to take the assignment turns on two basic criteria:

1. The default must have been caused by circumstances beyond the mortgagor\'s control; and

2. There is a reasonable prospect that the mortgagor will, after a period of reduced or suspended payments, not to exceed 36 months, be able to resume normal payments and pay off the mortgage, plus any arrearages, over its remaining life, extending by up to ten years, if at the date of default, the mortgage was more than 10 years old. 24 C.F.R. § 203.654.

Procedurally, the mortgagee must initially consider the mortgagor's eligibility for assignment. "If the criteria are met, the mortgagee shall request that (HUD) accept an assignment of the mortgage." 24 C.F.R. § 203.654.

In the event that a mortgagee refuses to recommend assignment to HUD, it must advise the mortgagor of this fact and its reasons for doing so. 24 C.F.R. § 203.656. The mortgagor may then directly ask HUD to review his/her eligibility for assignment under the same procedural format (first by written submission and then by conference). 24 C.F.R. §§ 203.658, 203.660. If, at any stage of this process, it is determined that the criteria for eligibility are met, HUD must direct the mortgagee to assign, and the mortgagee must assign, the mortgage to HUD, notwithstanding any prior decision by the mortgagee not to recommend an assignment. 24 C.F.R. § 203.654, 203.662(c).

After receiving the initial assignment request, HUD requires the mortgagor and the mortgagee to furnish requested information in order to assist it in making a preliminary determination as to whether acceptance of the assignment is warranted. 24 C.F.R. § 203.654. If HUD determines that the defaulting mortgagor has failed to satisfy the Assignment Program's eligibility criteria, it will issue a preliminary rejection letter. 24 C.F.R. § 203.650(a). Failure to satisfy any one of the Program's six criteria will result in a preliminary denial of the mortgagor's application. A mortgagor whose request for assignment has been preliminarily denied by HUD is entitled to ask for further consideration and may submit additional information to the agency in a face-to-face conference. After reviewing all the evidence, HUD will make a final determination as to whether each requirement for acceptance into HUD's Assignment Program has been met. 24 C.F.R. § 203.658.

The Assignment Program is the product of litigation which began in 1973 over HUD's failure to adequately supervise mortgagees in Chicago, Brown v. Lynn, 385 F.Supp. 986 (N.D.Ill.1974). This suit challenged HUD's failure to properly oversee the servicing and foreclosure practices of its approved lenders. The class of plaintiffs ultimately certified was nationwide in scope and consisted of all mortgagors whose mortgages were insured under HUD Sections 203, 221(d)(2) and 235 Programs. In settlement, HUD agreed to implement and continue this program to take assignments of eligible mortgages in order to avoid foreclosure. The court recognized HUD's statutory obligation to maintain an adequate procedure to avoid foreclosures resulting from temporary economic crisis beyond the mortgagors' control.

FACTUAL BACKGROUND

The Debtors, natives of India, purchased their home in December, 1982, and, since then, have used it as their sole family residence for themselves and their four minor children. This purchase was made with a loan secured by a note and mortgage in favor of Alliance Mortgage Corporation.² HUD insured the mortgage pursuant to Section 221 of the National Housing Act.

The Husband-Debtor's employment, with Hahnemann Hospital, ceased on November 21, 1983, resulting in insufficient income to meet his mortgage payments, and resulting in the subsequent default. The Debtors failed to make their mortgage payments in March, April and May, 1984. In May, 1984, Alliance requested that the Debtors fill out a "Request for Financial Information" (hereinafter referred to as "Form # 1") so that Alliance could determine whether the Debtors' situation would meet HUD's standards for assignment. The Debtors completed the information requested on "Form # 1" on May 15, 1984. Thereafter, Alliance decided not to request HUD to accept an assignment and so informed the Debtors.

The Debtors then contacted HUD directly to request assistance under the HUD Assignment Program. On or about June 25, 1984, HUD acknowledged the Debtors' request for a HUD assignment and asked that additional information be submitted to HUD in order to process the Plaintiffs' Application. Pursuant to HUD's request, the Debtors filled out a second "Request for Financial Information" (hereinafter referred to as "Form # 2") dated July 3, 1984.

On November 23, 1984, a preliminary rejection letter was issued by HUD informing the Debtors that they had failed to meet some of the Assignment Program's eligibility criteria. The following reasons were given for HUD's rejection of the Debtors' Assignment request: (1) the Debtors had failed to support their claim that the default was caused by circumstances beyond their control; and (2) there was no reasonable prospect that the Debtors would be able to resume full mortgage payments within thirty-six (36) months. In the same letter, the Debtors were advised of their right to submit additional information to HUD to support their claim and of their right to request a face-to-face conference.

A conference was held on December 4, 1984, at which time the Husband-Debtor met with a HUD representative. He submitted additional information to the agency at this time.³

After reviewing the supplemental information, HUD informed the Debtors by letter dated January 2, 1985, of HUD's final decision to reject the Debtors' assignment request. The sole reason for HUD's refusal to accept assignment of the Debtors' mortgage was HUD's determination that the Debtors failed to meet the Assignment Program's requirement that the mortgagor's default be caused by circumstances beyond the mortgagor's control. 24 C.F.R. § 203.650(a). The final decision states in pertinent part:

The reasons we cannot accept the assignment are:

The default was not caused by a circumstance or set of circumstances beyond your control which temporarily rendered you financially unable to cure the delinquency within a reasonable time or make full mortgage payments.

You were employed in a position that had paid you $20,641.70 for the first eleven months of 1983 and was providing you with ample income for making your mortgage payments. Further, it appears that as a result of a voluntary act by you (leaving your job to go to India) you were terminated by your employer. Hence the loss of employment and subsequent loss of income were not due to circumstances beyond your control. Administrative Record p. 68.

Subsequent to HUD's denial of...