Rust v. Johnson

Decision Date10 May 1979
Docket NumberNos. 77-2493,77-2602,s. 77-2493
Citation597 F.2d 174
PartiesPauline RUST, Appellant, v. Paul JOHNSON and Nora Johnson, Respondents. CITY OF LOS ANGELES, Appellant, v. Paul JOHNSON, Nora Johnson, and the Secretary of Housing and Urban Development, Respondents.
CourtU.S. Court of Appeals — Ninth Circuit

L. Douglas Brown, Los Angeles, Cal., for Pauline Rust.

J. Mark Waxman, Asst. U. S. Atty., Burt Pines, City Atty., Los Angeles, Cal., Andrea Sheridan Ordin, U. S. Atty., Los Angeles, Cal., Patricia R. Harris, Sec. of Housing & Urban Dev., Washington, D. C., for respondents.

Appeal from the United States District Court Central District of California.

Before WALLACE and HUG, Circuit Judges, and TEMPLAR, District Judge. *

TEMPLAR, District Judge.

This case arises out of the foreclosure of a street improvement bond on a parcel of property located at 342 East 105th Street in Los Angeles, California. The foreclosure resulted in two parties claiming title to the property and in a dispute over the power of the City of Los Angeles to foreclose on property in which the United States holds an interest.

FACTS

On August 14, 1971, the City of Los Angeles (City) assessed the property for street improvements in the amount of $158.36 and issued a bond to pay the assessment. At the time of the assessment, the Federal National Mortgage Association ( FNMA ) was in the process of foreclosing on a purchase money mortgage interest which it held in the property under a deed of trust. The deed of trust was insured by the Federal Housing Administration (FHA) and had been previously assigned to FNMA by the Imperial Bank.

FNMA completed its foreclosure and, on March 3, 1972, it conveyed the tract to the Secretary of Housing and Urban Development (HUD) in exchange for FHA insurance benefits. HUD owned the property from March 3, 1972 until September 21, 1973. During the period of its ownership, HUD did not make any payments on the street improvement bond. Consequently, the City commenced foreclosure and, on July 26, 1973, it sent notice to HUD and FNMA that the property would be sold for non-payment of installments due on the bond.

On September 21, 1973, HUD conveyed the tract to Paul and Nora Johnson. The Johnsons mortgaged the property in a deed of trust which they delivered to the California Mortgage Service. The deed secured a promissory note for the purchase price of the property and was insured by FHA. The California Mortgage Service assigned the deed of trust to FNMA on January 10, 1974 and FNMA held the deed until subsequent to the filing of this lawsuit when it assigned its rights to HUD.

The City posted a notice on the property and sent a second notice of sale to HUD and FNMA on February 28, 1974. Pursuant to the notice, the City completed foreclosure and sold the property to Pauline Rust on March 18, 1974. Rust received a treasurer's deed conveying the tract to her on March 31, 1975 and she later brought this action in state court to eject the Johnsons from the property.

The Johnsons filed a cross-complaint naming as cross-defendants Pauline Rust, the City of Los Angeles, and HUD. HUD had the case removed to federal district court where, after a trial on the merits, the court held that the action of the City to collect payment on the bond was an unconstitutional exercise of state power over property of the United States. Accordingly, judgment was entered quieting title in the Johnsons and declaring the sale to Rust invalid. Rust and the City appeal.

DISCUSSION
I.

Appellants challenge the district court's characterization of the non-judicial foreclosure as an "exercise of state power." Foreclosure on a street improvement bond is authorized by Section 6500 of the California Streets and Highways Code which provides:

"Whenever payment upon either the principal or the interest of any bond is not made to the bondholder when the coupon therefor is due, and the holder of the bond demands in writing that the (City) treasurer proceed to advertise and sell the lot or parcel of land described in the bond as being that upon which the assessment represented by the bond was levied, the treasurer shall proceed to advertise and sell the lot or parcel of land as provided in this chapter . . ."

In exercising the powers conferred by the statute, the City contends that the treasurer acts only as the special agent of the bondholder and that the City has no interest in either the bond or the payments. This argument ignores the purpose and operation of the statutory scheme. Under the Code, the City is authorized to order improvements, make assessments, issue bonds, collect payment on the bonds, and to convey delinquent property after foreclosure is completed. Streets & Highways §§ 5240, 5343, 6422, 6500, 6555. These functions are performed pursuant to the taxing power of the state and in furtherance of the governmental purpose of providing for such improvements as the public interest or convenience may require. Bryant v. Commissioner of Internal Revenue, 111 F.2d 9, 13-14 (9th Cir. 1940); City of Baldwin Park v. Stoskus, 8 Cal.3d 563, 105 Cal.Rptr. 325, 503 P.2d 1333, 1335-36 (1972); San Diego County v. Childs, 217 Cal. 109, 17 P.2d 734, 738 (1938); Streets & Highways § 5101.

The entry of the bondholder into the transaction does not make the City any less interested in seeing that its assessments are paid. As this lawsuit demonstrates, the City remains involved in the enforcement of the lien after a bond has been issued and it has exclusive responsibility under the Code for conducting non-judicial foreclosures against delinquent property. Streets & Highways §§ 6500-6555. Therefore, we hold that the City is significantly involved in the process of collecting payments on a street improvement bond and that the action taken in this case was an exercise of state power. See generally Melara v. Kennedy, 541 F.2d 802, 804-05 (9th Cir. 1976); Adams v. Southern California First National Bank, 492 F.2d 324, 330-31 (9th Cir. 1973), Cert. denied 419 U.S. 1006, 95 S.Ct. 325, 42 L.Ed.2d 282 (1974).

II.

Appellants also challenge the district court's determination that the City exercised its power over "property of the United States." Appellants' contention rests in part on the assumption that "property of the United States" includes only property actually owned by the United States and does not include a mortgage interest held by a federal instrumentality. No basis in law exists for treating mortgage interests of federal instrumentalities differently from other property of the United States. City of New Brunswick v. United States, 276 U.S. 547, 48 S.Ct. 371, 72 L.Ed. 693 (1927); United States v. Roessling, 280 F.2d 933, 936 (5th Cir. 1960); Branden v. Driver, 293 F.Supp. 871, 872-73 (N.D.Cal.1968), affirmed 441 F.2d 1171 (9th Cir. 1971); Clark Investment Co. v. United States, 364 F.2d 7, 9 (9th Cir. 1966).

Nevertheless, appellants contend that FNMA should not be treated as a federal instrumentality. The reasons advanced for this contention are: (1) that FNMA is a privately owned corporation and (2) that FNMA engages in certain non-governmental functions. Responding to the argument that FNMA should be treated like a private lending institution, we are persuaded that such a contention is contrary to the intent expressed when the Act creating the present corporate structure of FNMA was enacted by Congress.

FNMA owes its existence to Congressional recognition of the importance of secondary credit in bringing about the National goal of " 'a decent home and a suitable living environment for every American family.' " U.S.Code Service at 2027, 2042 (1950); 12 U.S.C. § 1701t. Congress intended FNMA to operate as a reserve market for mortgage investors and to thereby facilitate the distribution of investment capital available for home mortgage financing. U.S.Code Service at 2041 (1950); 12 U.S.C. § 1716. To assist FNMA in the performance of its secondary market functions, Congress enacted laws granting FNMA special rights and privileges. For example, FNMA is exempt from having to qualify to do business in any state and it has immunity from state taxation (except for taxes on real estate). 12 U.S.C. §§ 1723a(a), 1723a(c)(2).

In 1968, Congress transferred ownership of FNMA to the private sector. 12 U.S.C. § 1718, as amended (Supp.). The change came about as a result of Congressional intent to reduce the impact of FNMA's operations on the budget of the United States. U.S.Code Service at 2041 (1950); U.S.Code Cong. & Admin.News at pp. 2943- 44 (1968). In making the change in FNMA's capital structure, Congress indicated in its legislative history that: "The new FNMA would be a 'Government-sponsored private corporation,' regulated by the Secretary and would have a status analogous to that of the Federal land banks and the Federal home loan banks." Cong. & Admin.News, Supra.

We have been unable to find anything in the legislative history or in the statutes governing the operation of FNMA which supports the conclusion that Congress intended to strip FNMA of its status as a federal instrumentality. A survey of the cases involving the Federal land banks and the Federal home loan banks reveals that they are treated as federal instrumentalities engaged in the performance of governmental functions even though their stock may be privately owned. Federal Land Bank v. Priddy, 295 U.S. 229, 231, 55 S.Ct. 705, 79 L.Ed. 1408 (1935); Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 101-04, 62 S.Ct. 1, 86 L.Ed. 65 (1941); Fahey v. O'Melveny & Myers, 200 F.2d 420, 446, 454 (9th Cir. 1952), cert. denied sub nom. Willhoit v. Fahey, 345 U.S. 952, 73 S.Ct. 866, 97 L.Ed. 1374 (1953); 12 U.S.C. §§ 692, 1426. Congress apparently intends that FNMA should be treated in the same fashion. Cong. & Ad.News, Supra. Further evidence of this intent appears from the fact that FNMA's officers and employees are subject to federal civil service and...

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