New York Guardian Mortgagee Corp. v. Cleland, 78 Civ. 3649.

Decision Date08 May 1979
Docket NumberNo. 78 Civ. 3649.,78 Civ. 3649.
PartiesThe NEW YORK GUARDIAN MORTGAGEE CORP., Plaintiff, v. Max CLELAND, Administrator of the Veterans Administration, and the Government National Mortgage Association, Defendants.
CourtU.S. District Court — Southern District of New York

Milgrim, Thomajan & Jacobs, New York City, for plaintiff; George L. Graff, New York City, of counsel.

Robert B. Fiske, Jr., U. S. Atty. for the Southern District of New York, New York City, for defendants; David M. Jones, Asst. U. S. Atty., New York City, Jane M. Edmisten, Asst. Gen. Counsel, Finance, Kathleen D. Koch, Atty. Advisor Dept. of Housing and Urban Development, Washington, D. C., of counsel.

LASKER, District Judge.

This action arises on cross motions for summary judgment. The New York Guardian Mortgagee Corp. ("Guardian") seeks to recover from the Veterans Administration ("VA") on eight claims totalling $96,775. plus interest stemming from VA guarantees of home loans. The VA seeks dismissal of these claims.


The case involves the interplay of two closely related federal programs—the Mortgage Backed Securities Program of the Government National Mortgage Association (GNMA) and the Home Loan Guaranty Program of the VA—both of which have as their purpose the encouragement of private investment in residential mortgages. Both programs seek to stimulate such investment by providing investors with the assurance, backed by the full faith and credit of the United States, that their investment will be repaid. Under the VA program, the VA encourages mortgage investors to provide home loans to veterans by guaranteeing some part of qualifying mortgage loans. 38 U.S.C. § 1801 et seq. Under the Mortgage Backed Securities program, discussed at some length in our recent disposition in this same action of cross motions by Guardian and GNMA, see New York Guardian Mortgagee Corp. v. Cleland et al., 473 F.Supp. 409 (S.D.N.Y.1979), a qualifying investor assembles a pool of FHA insured or VA guaranteed mortgages and, after entering into a so-called "Guaranty Agreement" with GNMA, is authorized to issue securities "based on and backed by" the pooled mortgages and guaranteed by GNMA with the full faith and credit of the federal government. 12 U.S.C. § 1721(g). The holders of these securities receive "scheduled" payments of income and principal generated by the pool mortgages and also participate in any "pre-payments" arising either under the terms of the pooled mortgages or due to foreclosures on them. 24 C.F.R. § 390.5. The mortgage investor which has assembled the pool becomes an "issuer" upon entering into the Guaranty Agreement with GNMA and, as such, it assumes certain rights and duties which are discussed at greater length below.

In the present case, Eastern Service Corporation ("Eastern"), during 1971, placed the eight VA guaranteed mortgage loans in question here into three different GNMA pools and entered into three standard form Guaranty Agreements with GNMA (the Guaranty Agreement is set forth at Appendix 19 to the GNMA Mortgage Backed Securities Guide, GNMA 5500.1 Rev. 4 (hereafter "GNMA Guide")) so as to become "issuer" with respect to each pool. Between 1972 and 1975, each of the eight loans at issue here fell into default and foreclosure proceedings were instituted by Eastern. With respect to four of the loans (Pritchard, Brown, Rhett and Jones), the underlying property was conveyed to the VA following foreclosure, and claims were made by Eastern on the outstanding VA guarantees and for conveyance of the property.1 The claimant in each case was stated to be "Eastern Service Corporation, Pool # xxx, GNMA." Although some parts of these claims were paid by VA, others were not and are now claimed by Guardian.

On April 29, 1975, Eastern assigned to Regency Equities Corp. ("Regency"), a subsidiary of Guardian, all of its interest in the mortgages in the three pools involved here as well as all its rights and duties under the corresponding Guaranty Agreements, and on July 12, 1975, GNMA approved the assignment, thereby recognizing Regency as issuer with respect to those pools. In a letter to the VA on August 5, 1975, Regency inquired about the unpaid claims already filed by Eastern as well as two others (Taylor and Jamison), as to which Eastern had made no claim.2 The VA responded, on August 18, 1975, that payment on all these claims was being held up pending certain investigations, but it noted that Regency would not be paid in any event since it "was not a true `holder in due course' on date of assignment of the mortgage." On September 22 and 29, 1975, Regency submitted claims on two loans (Barraclough and Hardy) and on February 24, 1976, two more (Taylor and Jamison). In the case of each claim filed by Regency (whose name by that time had been changed to "Hamptworth Securities Corp."), the claimant was stated to be "GNMA pool # xxx" followed by the address of Hamptworth.3

During the pre-assignment period, Eastern is alleged by the VA to have perpetrated a variety of frauds on the VA in connection with other, unrelated, loans. Indeed, it appears that GNMA required Eastern to divest itself of its issuer status as a result of this alleged misconduct. After Eastern's assignment of its rights and duties as issuer to Regency, and after Regency's letter of August 5, 1975, the VA—on October 1, 1975 and March 1, 1976—notified Eastern that the amounts payable to Eastern on six of the claims involved here (Jones, Taylor, Jamison, Rhett, Pritchard and Brown) had been "set off" against Eastern's asserted indebtedness to the VA on seven other "tainted" loans. In the VA's view, these set-offs constituted a final disposition of the guaranty claims on those six loans.

On June 29, 1976, Regency assigned its rights and duties as issuer with respect to the three pools in question here to its parent Guardian. On March 11, 1977, in an action pending between it and Eastern, the Justice Department asserted counterclaims against Eastern for fraud which included the same fraudulent transactions the losses from which had assertedly been satisfied by the offsets noted above.4 On March 21, 1978, a settlement was reached in this dispute. Under the terms of the settlement, all of Eastern's claims against the United States were compromised for $1 million, all of which was retained by the United States in partial satisfaction of the Government's counterclaims.

Of the eight disputed claims, the VA maintains that six (Jones, Taylor, Jamison, Rhett, Pritchard and Brown) have been satisfied by set-off and that two (Hardy and Barraclough) were extinguished by the settlement agreement.

A. Appropriateness of Summary Judgment: The Issues

At the outset, we must consider whether a "genuine issue as to any material fact" exists. F.R.Civ.P. 56. The VA argues that the guaranty claims here in question cannot be brought by Guardian because the assignments by virtue of which it asserts entitlement to them failed to conform to the Assignment of Claims Act, 31 U.S.C. § 203. Guardian responds that the Assignment of Claims Act is inapplicable here and that the set-offs and the settlement agreement which the VA claims discharged its guaranty obligations with respect to these eight claims, were ineffective. If the Assignment of Claims Act invalidates the assignments through which Guardian asserts its rights, Guardian's present claims against the VA must be dismissed for want of standing.5 Since it is conceded that the assignments did not conform to the Act, no questions of fact exist in connection with this issue.

Even if the Assignment of Claims Act bars Guardian's present claims, however, it will still be necessary to consider whether the VA has discharged its guaranty obligations via "set-off" or "settlement." GNMA recently sought, in this same action, to compel Guardian, as "issuer", to advance to pool security holders an amount equal to the uncollected "prepayments" involved here. Guardian countered seeking a declaration that it had no duty to make such lump sum advances of prepayments from its own funds. On January 8th, we held that during the period within which a GNMA issuer seeks with due diligence to collect on VA guarantees of foreclosed mortgages for the benefit of the pools, its only duty is to advance scheduled payments from its own funds. The New York Guardian Mortgagee Corp. v. Cleland et al., supra, 473 F.Supp. at 409. However, we reserved the question of whether an issuer has a duty to pay from its own funds a lump sum equal in amount to "prepayments" which are judicially determined to have been made by a guarantying agency (e. g. by set-off) but which are never received by the issuer. Id. at 417. This question was reserved because, due to our separate consideration of the dispute between Guardian and GNMA, we had no basis for determining whether a "prepayment" had in fact been made by the VA. Since that question is squarely raised here, we must now consider whether the set-offs and compromises noted above constitute "prepayments." If they do, then we must decide the question previously reserved. If, however, the VA has not made prepayment by way of set-off and compromise, Guardian can have no duty enforceable by GNMA to pay forward any equivalent amount, and the underlying obligation of the VA remains intact. Once again, no issue of fact material to this determination has been raised by either party. Since we conclude that these issues are decisive, it is unnecessary to consider additional factual questions suggested by the parties.6

B. The Merits

1. Discharge by the VA of its Guaranty Obligation. The VA does not dispute that its guarantees on the eight loans in question here were valid obligations which it was required to pay the proper party. It argues, however, that Eastern was the proper payee at the time of foreclosure on the underlying mortgages; that Eastern remained the proper payee since failure to comply with the Assignment...

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