Secretary of Housing & Urban Dev. V. Sky Meadow, CV 98-1842 RAP.

• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Central District of California
• Citation: 117 F.Supp.2d 970
• Docket Number: No. CV 98-1842 RAP.,CV 98-1842 RAP.
• Parties: SECRETARY OF HOUSING AND URBAN DEVELOPMENT, Plaintiff, v. SKY MEADOW ASSOCIATION; a California Nonprofit Corp.; Coast Assessment Service Company, a California Corp.; Mark L. Morger; and Shane E. Erwin, Defendants. Shane E. Erwin, Counterclaimant, v. Secretary of Housing and Urban Development, and Does 1 through Does 10, inclusive Counterdefendants.
• Decision Date: 24 July 2000

117 F.Supp.2d 970 SECRETARY OF HOUSING AND URBAN DEVELOPMENT, Plaintiff,
v.
SKY MEADOW ASSOCIATION; a California Nonprofit Corp.; Coast Assessment Service Company, a California Corp.; Mark L. Morger; and Shane E. Erwin, Defendants.
Shane E. Erwin, Counterclaimant,
v.
Secretary of Housing and Urban Development, and Does 1 through Does 10, inclusive Counterdefendants. No. CV 98-1842 RAP. United States District Court, C.D. California. July 24, 2000.

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Leon W. Weidman, Suzanne L. Bell, Asst. U.S. Atty., Office of U.S. Atty., Civ. Div., Los Angeles, CA, for Secretary of Housing and Urban Development.

Kyle Kveton, Kim W. Sellars, Robie & Mattai, Los Angeles, CA, for Sky Meadow Association.

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Michael D. May, Michael May Law Offices, Anaheim, CA, for Coast Assessment Service Co., Mark L. Morger.

Stuart B. Wolfe, Stanley Ratcliffe Escalante, Wolfe & Wyman, Irvine, CA, for Shane E. Erwin.

ORDER GRANTING GOVERNMENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

RICHARD A. PAEZ, Circuit Judge, Sitting by Designation.

I. Introduction

In this case, the Secretary of Housing and Urban Development ("HUD"), seeks to quiet title in property it acquired under the Single Family Mortgage Insurance Program, but that was subsequently sold through a private non-judicial foreclosure sale initiated by defendant Sky Meadow Association ("Sky Meadow") when HUD failed to pay homeowner association assessment fees. HUD maintains that although the foreclosure sale was authorized by Sky Meadow's Declaration of Covenants, Conditions, and Restrictions ("CC & R's") and state law, Sky Meadow is precluded by the Property and Supremacy Clauses of the Constitution from initiating foreclosure proceedings against property owned by the United States. Defendant's argue that because the sale was authorized by the CC & R's, state law and sanctioned by federal law, the trustee's sale terminated HUD's rights to the property.

The Court addressed this issue in Yunis v. United States, 118 F.Supp.2d 1024, in its Order granting the United States' motion for partial summary judgment. Although, the non-judicial foreclosure sale in that case involved property acquired by the VA under its Loan Guaranty Program, the critical legal issues are identical. In Yunis, the Court agreed with the United States that its property could not be sold through a non-judicial foreclosure proceeding to collect homeowner association assessment fees without specific congressional authorization. Finding no such authorization, the Court concluded that such a sale violated the Constitution's Property and Supremacy Clauses and voided the sale. Although the factual context is different and this case involves a subsequent sale to defendant Shane E. Erwin ("Erwin"); the Court, applying the same legal analysis as in Yunis, reaches the same result here.

Because the Court has not consolidated these cases and for the convenience of the parties, the Court repeats its legal analysis here, in full, with minor revisions to reflect the factual context of this case.

Because there are no factual disputes regarding HUD's failure to pay assessment fees and the events leading up to the foreclosure sale, the legal issue raised by HUD, i.e. whether the Supremacy and Property Clauses of the Constitution preclude the use of non-judicial foreclosure by a private party to sell property owned by the United States in order to satisfy a debt it admittedly owes, is ripe for partial summary judgment. Upon consideration of the parties' cross motions for partial summary judgment and summary judgment, the Court has concluded, for the reasons set forth below, that HUD's motion should be granted and that the cross-motions by defendants should be denied.¹

II. Factual Background

In 1987, HUD insured a home loan made by PNC Bank, a private lender, to

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Jerome and Geraldine Gomes to facilitate their purchase of a residence located at 5994 Sky Meadow Street, Riverside, California. The Gomes subsequently defaulted, PNC Bank foreclosed and was the successful bidder at a January 11, 1996 non-judicial foreclosure sale.

On January 22, 1996, PNC Bank recorded a grant deed transferring the property to HUD. Pursuant to HUD regulations, PNC submitted to HUD a Single Family Application for Insurance Benefits claim form dated April 26, 1996. 24 C.F.R. § 203.65. Pursuant to the claim, HUD paid PNC $93,528.04. On July 6, 1996, HUD paid the bank an additional $2,853.80.

On April 12, 1996, Coast Assessment on behalf of Sky Meadow recorded a Notice of Delinquent Assessment against PNC Bank with respect to the HUD Property. Coast Assessment sent a copy of the Assessment to PNC and to the Gomes, but not to HUD.

On May 14, 1996, Coast Assessment recorded a Notice of Default and Election to Sell Under Assessment Lien and mailed copies to both PNC and HUD. The Notice stated that the property was owned previously by PNC and was now owned by HUD. The Notice noted the amounts owed by the respective parties during their periods of ownership.

On June 11, 1996, Coast Assessment faxed a ledger to HUD which sought payment for amounts owed during PNC's ownership of the property.

On September 3, 1996, Coast Assessment recorded a Notice of Trustee's Sale stating that a sale would be held on September 19, 1996. On September 19, 1996, Coast Assessment purported to sell the HUD property to its president, defendant Mark Morger, for $1,500. On September 20, 1996, Coast Assessment recorded a Trustee's Deed Upon Sale transferring the title to Morger. The fair market value of the property as of September 20, 1996 was $63,000.

Subsequently Morger sold the property to defendant Erwin for $63,000. On December 13, 1996, Morger recorded a grant deed transferring the property to Erwin. Defendant Erwin remains in possession of the property.

On September 10, 1997, HUD tendered a check to Sky Meadow for $1,166, the amount of all unpaid assessments during the time that both PNC and HUD owned the property. HUD continues to offer to pay all past due assessments.

HUD failed to pay the assessment fees on the property at issue because PNC failed to file a claim for payment of costs with a copy of the trustee's deed transferring the property to HUD. Because of the lender's delay, HUD was unaware that it owned the property. Once notified that it owns property, it is HUD's policy to investigate any unpaid property assessments. Given its large property inventory, HUD may not become aware that it owns a particular piece of property until an interested party makes an inquiry or files a complaint regarding the property. At the time HUD acquired the subject property its Santa Ana Field Office, which was charged with managing HUD owned property, had a staff of 16. That office sold 14,800 homes between 1996 and 1997. With the overwhelming volume of mail, temporary mail clerks often misdirected it. If HUD received a notice relating to certain property before it became aware that the property had been transferred to it, HUD employees would discard the notice.

Under the Single Family Mortgage Insurance Program, HUD insures mortgages issued by private lenders (commonly known as FHA insurance) on single family homes pursuant to a congressional mandate to make decedent housing available to all citizens. 12 U.S.C. § 1709. By insuring the mortgage, HUD encourages private lenders to make loans to individuals who would not otherwise qualify for a loan. This program substantially increases the number of low to moderate income families who can purchase a home. The regulations

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implementing the program are found at 24 C.F.R. Part 203.

Under the FHA insurance program, if the borrower defaults, the private lender may foreclose and if the successful bidder, may convey the title to HUD. 24 C.F.R. §§ 203.355(a); 203.359(a). The lender (mortgagee) then submits an insurance claim, known as a Single Family Application for Insurance Benefits, for payment of its losses, as PNC did here. 24 C.F.R. § 203.65. HUD then disposes of the property pursuant to its property disposition program. 24 C.F.R. part 291.

HUD must sell and dispose of properties acquired under the Single Family Mortgage Insurance Program pursuant to federal guidelines. 12 U.S.C. § 1710(g); 24 C.F.R. § 291. The properties must be disposed of in a manner that expands home ownership opportunities, strengthens neighborhoods and communities, and ensures a maximum return to the mortgage insurance fund. 24 C.F.R. § 291.1(a)(2). Under the National Housing Act, the Secretary of HUD is authorized to establish a Mutual Mortgage Insurance Fund in order to pay claims to mortgagees (private lenders) who have foreclosed on defaulted FHA-insured loans. HUD's ability to insure loans depends, to some extent, on its ability to sell acquired properties so that it can replenish the fund.

Thus the United States seeks a declaration that the Trustee's Deed upon Sale conveying the subject property to defendant Morger is void, and consequently the Grant Deed from Morger to defendant Erwin is also void. HUD recognizes, however, that were the Court to grant it relief, the United States would be obligated to reimburse Morger for the amount he paid for the property ($1,500) and pay all past due assessment fees to Sky Meadow.

HUD acknowledges that its property is subject to state regulation to the extent that it is not inconsistent with federal law. It asserts, however, that the actions taken by Sky Meadow and its agents were in direct contravention of federal law and federal property rights.

At the outset, the Court recognizes and HUD does not dispute that it was HUD's and the private lender PMC Bank's own negligence in failing to pay the association assessment fees that prompted Sky Meadow to initiate foreclosure proceedings under the CC & R's. HUD employees' negligence, however, does not justify or validate a non-judicial foreclosure sale of property owned by the...