Resolution Trust v. FOUNTAIN CIRCLE ASSOCIATES

• Decision Date: 23 May 1992
• Docket Number: No. 91CV-7417.,91CV-7417.
• Citation: 799 F. Supp. 48
• Parties: RESOLUTION TRUST CORPORATION, as Receiver for First Federal Savings Association of Toledo, Plaintiff, v. FOUNTAIN CIRCLE ASSOCIATES LIMITED PARTNERSHIP, et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

799 F. Supp. 48

RESOLUTION TRUST CORPORATION, as Receiver for First Federal Savings Association of Toledo, Plaintiff, v. FOUNTAIN CIRCLE ASSOCIATES LIMITED PARTNERSHIP, et al., Defendants.

No. 91CV-7417.

United States District Court, N.D. Ohio, W.D.

May 23, 1992.

David C. Tryon, Hugh E. McKay, Porter, Wright, Morris & Arthur, Cleveland, Ohio, for plaintiff.

Martin D. Carrigan, Fuller & Henry, Toledo, Ohio, for defendants.

MEMORANDUM AND ORDER

DON J. YOUNG, Senior District Judge:

This cause is before the Court on plaintiff, Resolution Trust Corporation's (as Receiver for First Federal Savings Association) ("RTC"), motion for appointment of a Federal Equity Receiver pursuant to Fed. R.Civ.P. 66, to collect rent payments and manage real estate during the pendency of this foreclosure action. For the reasons that follow, the motion is granted.

On July 19, 1991, RTC filed a complaint for money damages, foreclosure, and demand for receiver against defendants, Fountain Circle Limited Partnership, et al. ("FCLP"). RTC holds mortgages on real property located at 3101 Navarre Avenue, Oregon, Ohio, which were entered into by FCLP with First Federal Savings of Toledo. These mortgages secure payment of certain promissory notes in the aggregate principal amount of $2,962,669.54, the total amount alleged due and owing on these notes including interest and late charges is $3,855,168.31.

On May 6, 1992, this Court found service was effected on April 21, 1992, as to defendants FCLP and David Finkel. Although, as FCLP's counsel note in their answer, service was outside of the 120 days required by Fed.R.Civ.P. 4(j), this Court nevertheless found service effective. The Court found good cause under the rule for the delay, namely, the defendant's apparent attempts at evading service. FCLP, through counsel, seem to take every opportunity for delay in this matter. Presumably this is zealous representation of their client's interests, and not "... interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation." Fed.R.Civ.P. 11.

FCLP moved for an oral hearing on this motion. The Court denied the motion in its previous order. A district court is not required to conduct a hearing on an appointment of receiver where the record discloses sufficient facts for the court to render a decision. Bookout v. Atlas Financial Corp., 395 F.Supp. 1338 (N.D.Ga. 1974), aff'd, 514 F.2d 757 (5th Cir.1975); Haase v. Chapman, 308 F.Supp. 399 (W.D.Mo.1969).

I.

Although it is clear that a receivership is not an end in itself, there is no doubt that a court of equity has the power to appoint a receiver when the appointment is "ancillary to some form of final relief which is appropriate for equity." Gordon v. Washington, 295 U.S. 30, 38, 55 S.Ct. 584, 588, 79 L.Ed. 1282 (1935).

"The appointment of a receiver is considered to be an extraordinary remedy that should be employed only in cases of clear necessity to protect plaintiff's interests in the property." 12 Charles A. Wright & Arthur P. Miller, Federal Practice and Procedure § 2983, at 21 (1973); Commodity Futures Trading Com. v. Comvest Trading Corp., 481 F.Supp. 438, 441 (D.Mass.1979).

Both parties have cited to state law in their memoranda in support of their respective positions. While the proposition is correct that a federal court will look to state law for guidance in a case where there is an absence of substantial federal precedent, the Court finds in the present case, federal law is sufficient to resolve the issue. See 12 Wright & Miller, Federal Practice and Procedure § 2983, at 29 (1973). Appointment of a Federal Equity Receiver is governed by federal law. Congress has specifically provided that a Federal Equity Receiver, once appointed, is to manage and operate the property according to the laws of the state where the property is located.¹ However, the appointment is to be measured by federal standards. Midwest Sav. Ass'n v. Riversbend Associates Partnership, 724 F.Supp. 661 (D.Minn. 1989). Federal courts are not bound by state law in determining whether such an equitable remedy is to be given. Mintzer v. Arthur L. Wright & Co., 263 F.2d 823 (3d Cir.1959).

Federal Rule 66 provides that the practice is to be in accordance with past practices in the United States Courts.² Courts contemplating appointment of a receiver have considered a number of factors. Most important of these factors are the adequacy of the security and the financial position of the mortgagor.

The Ninth Circuit in View Crest Garden Apartments Inc. v. United States, 281 F.2d 844 (9th Cir.1960), cert. denied, 364 U.S. 902, 81 S.Ct. 235, 5 L.Ed.2d 195 (1960), held that a receiver could be appointed to collect rents pending foreclosure if the district court was satisfied that the security was inadequate or adequacy was substantially doubtful, and that the mortgagor was insolvent or of doubtful financial standing.

The First Circuit has stated that:

... A receiver, even of rents and profits, will not generally be appointed on the application of a mortgagee in a suit to foreclose except upon a "sufficient showing" of two matters: (1) that the mortgaged property is inadequate security for the debt with interest and costs of suit, and (2) that the mortgagor or other person liable for the debt is insolvent, beyond the jurisdiction "or in such doubtful financial standing that an execution against him for any deficiency would be unavailing." And to warrant the appointment of a receiver to manage and operate mortgaged property pending foreclosure, as well as only to collect its rents and profits during that time, more than the above matters must appear.

Garden Homes Inc. v. United States, 200 F.2d 299, 301 (1st Cir.1952) (quoting 4 Pomeroy's Equity Jurisprudence and Equitable Remedies § 1514 (2d ed. 1919)).

In addition to the two factors that View Crest and Garden Homes suggest, Wright and Miller note that courts have also considered: (A) Fraudulent conduct on the part of the defendant; (B) an imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; (C) an inadequacy of legal remedies; (D) a probability that harm to the plaintiff by denial of appointment would outweigh injury to parties opposing appointment; (E) the plaintiff's probable success in the action and the possibility of irreparable injury to the plaintiff's interest in the property; and, (F) whether plaintiff's interests sought to be protected will in fact be well-served by receivership. See 12 Wright & Miller, Federal Practice and Procedure § 2983 at 22-24 (1973).

In the Garden Homes case, the First Circuit indicated that there was a distinction between a situation justifying appointment of a receiver with power only to collect rents due during the pendency of a suit to foreclose, and a situation justifying appointment of a receiver with the power to manage the property pending foreclosure, as well as to collect rents. Garden Homes Inc., 200 F.2d at 301.

It would appear that something more than mere inadequacy of the security and insolvency of the debtor are required for a court to bestow upon the receiver the power to manage the property in addition to the collection of rent. This something more has been described as a "superadded" condition making an immediate foreclosure and sale impractical. Totten v. Harlowe, 90 F.2d 377 (C.A.D.C.1937); Garden Homes Inc., 200 F.2d 299. "It may be any circumstance which commends itself to a court of equity as a reason for granting the relief sought." View Crest Garden Apartments, Inc., 281 F.2d at 849.

II.

RTC has offered evidence in support of their motion for appointment in the form of affidavits as well as other documents which have been properly authenticated. In response, FCLP argues: that defendants have not been properly served; that RTC has failed to prove inadequacy of the security; that RTC's exhibits are unreliable; and, that because the loan documents do not specify that a receiver can be appointed, this Court is without authority to do so.

As previously stated defendants have been served. Even if service had failed, case law indicates that a receiver may be appointed regardless. See Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct. 142, 77 L.Ed. 355 (1932); Arkansas Louisiana Gas Co. v. Kroeger, 303 F.2d 129, 132 (5th Cir.1962) ("The power to make an ex parte appointment is properly exercised when the receivership is required by some urgent necessity....").

While arguing that RTC has failed to prove the inadequacy of the security, FCLP has submitted no evidence to contradict the affidavits and documents of RTC, nor have they submitted evidence supporting their belief that the security is adequate. Nothing in Rule 66 suggests that the burden on plaintiff in a motion for appointment of receiver need meet the standards of summary judgment. In fact, the form and quantum of evidence required is a matter of judicial discretion. See U.S. v. O'Connor, 291 F.2d 520 (2d Cir.1961); Haase v. Chapman, 308 F.Supp. 399 (W.D.Mo.1969). However, using the summary judgment standard as analogous, the Court is convinced that the movant here has met their burden.

The party moving for summary judgment bears the initial burden of production under Rule 56. That burden may be satisfied by either adducing affirmative evidence that negates an element of the non-movants's claim, or by "`showing'— that is, pointing out to the district court— that there is an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). If the movant meets this burden, the nonmovant must "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e).

Applying the summary judgment analogy to this...