Thompson v. United States

• Decision Date: 27 February 1969
• Docket Number: No. 19131 and 19132.,19131 and 19132.
• Citation: 408 F.2d 1075
• Parties: Vance M. THOMPSON, Elizabeth T. Russell, H. Ripley Thompson, John G. Thompson, Ruth T. Trammell, Vance M. Thompson, Jr., William H. Thompson, a Partnership, d/b/a The Summit House Apartments, Appellants, v. UNITED STATES of America, Appellee. M. D. THOMPSON AND SON CO., Appellant, v. J. H. COTTRELL, Receiver, and United States of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

408 F.2d 1075 (1969)

Vance M. THOMPSON, Elizabeth T. Russell, H. Ripley Thompson, John G. Thompson, Ruth T. Trammell, Vance M. Thompson, Jr., William H. Thompson, a Partnership, d/b/a The Summit House Apartments, Appellants, v. UNITED STATES of America, Appellee.

M. D. THOMPSON AND SON CO., Appellant, v. J. H. COTTRELL, Receiver, and United States of America, Appellee.

Nos. 19131 and 19132.

United States Court of Appeals Eighth Circuit.

February 27, 1969.

Wayne W. Owen, Little Rock, Ark., filed brief of appellants.

W. H. McClellan, U. S. Atty., Little Rock, Ark., filed brief of appellees; J. Winston Bryant and Walter G. Riddick, Asst. U. S. Attys., were on the brief with W. H. McClellan, Little Rock, Ark.

Before MATTHES, GIBSON and BRIGHT, Circuit Judges.

BRIGHT, Circuit Judge.

These appeals arise from controversies which developed from the financing and operation of The Summit House Apartments in Little Rock, Arkansas. The "Summit House Apartments" is also the name of a partnership made up of Vance M. Thompson of McCrory, Arkansas, and his adult sons (the "Thompsons" or the "Thompson partnership"). The government as holder of security interests in real and personal property of those apartments foreclosed against the Thompsons. In Appeal 19131, the Thompsons as appellants take issue with the rulings of the United States District Court for the Eastern District of Arkansas, reported in part at 272 F.Supp. 774, which (a) dismissed their counterclaim (as defendants below) against the government;¹ (b) awarded the government a judgment in personam for $72,931.78 against the Thompsons for unauthorized appropriation of rental funds of the apartments; and (c) authorized a foreclosure decree to include certain furniture placed in the apartments by the Thompsons. In Appeal 19132, the appellant is M. D. Thompson and Son Co. (the "Thompson corporation" or the "corporation") of which Vance Thompson is an officer and his wife, his adult children and his grandchildren are all stockholders. The corporation as plaintiff below sought unsuccessfully to establish that it held a security interest ahead of the government's in the furniture. The actions were consolidated for trial before the district court. We affirm for the reasons stated herein. The facts are detailed in the reported opinions of the district court and we limit our recitation of the facts to those essentials necessary for consideration of the issues presented.

In 1962, Paul Kapelow and Lester Gross constructed the Summit House Apartments, a high-rise building in Little Rock, with the aid of a one hundred per cent construction loan of $3,100,800.00 from the John Hancock Mutual Life Insurance Company ("John Hancock"). The loan was guaranteed in full by the Federal Housing Administration (FHA) and was secured by a deed of trust² (also referred to as a mortgage) on the property. Kapelow and Gross agreed to be bound by an FHA "regulatory agreement", which included, inter alia, a restriction on their right to disburse funds from the income of the mortgaged property.³ The note, deed of trust, and regulatory agreement were all recorded in the real estate records in the office of the Circuit Clerk and Recorder of Pulaski County (Little Rock), Arkansas.

While the apartments were under construction, Kapelow and Gross conveyed their interest in the premises to the Thompson partnership. On November 4, 1963, the Thompsons assumed the obligations of the deed of trust and regulatory agreement with the written understanding that no personal liability was assumed by them for payments due under the note and deed of trust. But the agreement further provided that the Thompsons would remain liable

"(a) For funds or property of the project coming into its hands which, by the provisions thereof, it is not entitled to retain; and

(b) For its own acts and deeds, or acts and deeds of others which it has authorized in violation of the provisions thereof."

The Thompsons, as of October 1, 1965, defaulted in installment payments called for under the deed of trust note. Thereafter, FHA made good its guarantee to John Hancock and John Hancock assigned its security interests to the Federal Housing Commissioner. On April 4, 1966, the United States, on behalf of the Federal Housing Commissioner, brought a foreclosure action against the Thompson partnership and sought a decree authorizing sale of both real and personal property held as collateral under the deed of trust note. Pursuant to the deed of trust, an operating receiver was appointed. Subsequently, the government amended its complaint in foreclosure to include the allegation that the Thompsons had misappropriated funds of the project. The Thompsons counterclaimed under the provisions of the Federal Tort Claims Act, 28 U.S.C. § 2671 et seq., seeking damages of $494,530.40 and alleging, in substance, that the entire Summit House project was tainted with fraud and deceit upon the Thompsons and that the FHA had been a party to such conduct.

On February 11, 1966, more than four months following the default by the Thompsons, the Thompson partnership executed a security agreement in favor of the Thompson corporation on furniture, such as beds, tables, chairs, sofas, and the like, which was being used in various apartments in the Summit House and which had been purchased during 1964 and 1965 by the Thompsons through the Thompson corporation, a mercantile firm dealing in furniture as well as other merchandise. A financing statement covering such furniture was properly filed under the provisions of the Uniform Commercial Code in effect in Arkansas. While the foreclosure action was pending in federal court, the Thompson corporation commenced an action in the Chancery Court of Pulaski County, Arkansas, against J. H. Cottrell, the federal receiver, and the members of the Thompson partnership to establish a first lien on that furniture. This action was removed to federal court and was consolidated for trial with the FHA foreclosure, with the United States as intervenor.

The trial court's decree foreclosed the government's interest against the real estate and appliances, which appellants concede was proper, and also held the Thompsons personally liable for unauthorized withdrawals from the funds of the project and for use of rental proceeds contrary to the terms of the regulatory agreement. The court further determined that the security interest of the government in the furniture, pursuant to an after-acquired property clause in the deed of trust, was superior and prior to the security interest of the Thompson corporation.

(1) UNAUTHORIZED WITHDRAWALS.

The trial court found the Thompsons, during the months subsequent to default on October 1, 1965, made several unauthorized withdrawals from the rental income of the project as follows:

(a) The partnership transmitted $13,000.00 to a firm of attorneys in Little Rock, Arkansas, to apply on an account owed by the Thompsons for legal services rendered in connection with the original acquisition of the property, the settlement of labor and materialmen lien claims and the final closing of the construction loan. The Thompson partnership attempted to justify such withdrawal as a reasonable operating expense.

(b) The partnership paid $14,931.78 out of the rental proceeds to the Worthen Bank & Trust Company for payment of a loan earlier made to the partnership. The trial court found that the partnership had turned the proceeds of the loan over to the Southwest Leasing Corporation, a lessee of part of the Summit House building. The lessee used these funds to purchase furniture and equipment to equip the leased premises as a private club. The trial court found that the expenditure was in the nature of a capital investment and was not for reasonable operating expenses or for necessary repairs.

(c) On April 11, 1966, a week after the government had filed its complaint for foreclosure and a few days before a receiver had been appointed, the partnership drew a check in the amount of $45,000.00 from the bank account containing the rental proceeds of the project. These funds were personally received and used by Vance Thompson. The Thompsons attempted to justify such withdrawal as a recoupment of part of the funds they had contributed to the project's operating account. The partners claim that, since they were not personally liable for the mortgage indebtedness, they ought to be able to reimburse themselves from the partnership bank account for their prior contributions. The record indicates that, since rentals were not sufficient to cover all expenses, the partners had contributed approximately $118,000.00 in operating funds to the project. Prior to default, the Thompsons had made withdrawals of about $60,000.00. They claim that they were actually entitled to recoup funds in addition to this amount and the later $45,000.00 withdrawal. They do not, however, contest the trial court's specific finding that the account from which the withdrawals had been made "on and after October 1, 1965, had nothing in it except rental income and tenants' deposits". That finding strikes a fatal blow to the efforts of the Thompsons to trace their earlier contributions to that account.

All parties agree that the regulatory agreement governs the Thompsons' right to disburse funds from the rental proceeds. Chief Judge Henley rightly found that the partnership account had no "surplus cash" after default and that only "operating expenses" were authorized to be paid out of that account, the scope of which he construed as follows:

"The contract documents do not define the term `operating expenses,\' and it is a term which probably has no fixed, precise or inflexible meaning. Regard must be had to the context in which the term is used and to the nature of the business under consideration. In present context the Court is convinced that the term must be construed with at least reasonable strictness and that the concept of `operating

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