U.S. v. Haddon Haciendas Co.

Decision Date25 May 1976
Docket Number74-1188,Nos. 74-1209,s. 74-1209
Citation541 F.2d 777
PartiesUNITED STATES of America, Plaintiff-Appellee, v. HADDON HACIENDAS COMPANY, a limited partnership, et al., Defendants, Arnold G. Rudoff, Defendant-Appellant. UNITED STATES of America, Plaintiff-Appellee, v. HADDON HACIENDAS COMPANY, a limited partnership, et al., Defendants, Alan M. Nahum, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Lawrence M. Schulner and Harland W. Braun, Los Angeles, Cal., for defendants-appellants.

Donald J. Merriman, Asst. U. S. Atty., Los Angeles, Cal., for plaintiff-appellee.

Before WALLACE and KENNEDY, Circuit Judges, and FITZGERALD, * District Judge.

WALLACE, Circuit Judge:

The United States, on behalf of the Secretary of Housing and Urban Development, filed suit against Haddon Haciendas Company (Haddon), a limited partnership, to foreclose a note and deed of trust insured under the National Housing Act (NHA). The district court entered a judgment of foreclosure and order for sale in August 1971. In October 1971, the United States joined certain parties including appellants Rudoff and Nahum, general partners in Haddon, and added a claim for damages for waste and other violations of a regulatory agreement executed in conjunction with the deed of trust. After trial without a jury, judgment was entered for $16,000. Only Rudoff and Nahum appeal the judgment and we affirm.

Haddon acquired title to a housing project in Los Angeles County in November 1966. An outstanding note and deed of trust in favor of the Michigan Public School Employees' Retirement Board had been insured by the Federal Housing Administration (FHA) under section 221(d)(4) of the NHA, 12 U.S.C. § 1715l (d) (4). As a condition of federal insurance, the maker of the note had been required to execute a regulatory agreement in favor of the FHA. As part of the consideration for the purchase from the prior owner, Haddon agreed to assume and be bound by the note, deed of trust and regulatory agreement. Among the various obligations contained in the regulatory agreement, two are relevant to this action: the owners were to "maintain the project in good repair and condition," and books and accounts of operations were to be "kept in accordance with the requirements of the Commissioner." The agreement further required that a specified percentage of rents be set aside as a reserve for the purpose of "effecting replacement of structural elements, and mechanical equipment of the project or for any other purpose." Some $15,430 had accumulated in the reserve during Haddon's ownership of the project. This amount was subsequently applied to the outstanding balance on the note.

Haddon defaulted on the trust deed note by failing to make the monthly payment due in January 1969, and all subsequent payments, to the Michigan Public School Employees' Retirement Board. The FHA paid the note and received an assignment of the replacement fund, trust deed and note in May 1969. The court appointed a receiver who in operating the project accumulated a fund of $10,398 which was eventually turned over to the government and applied to the outstanding balance on the note. The government was granted foreclosure and purchased the property at a judicial sale, bidding $750,000 on a total outstanding debt of $992,027.

The government then amended its complaint to add as defendants Haddon's general partners and to seek damages for waste and for violations of the obligations specified in the regulatory agreement to maintain the premises and to keep satisfactory financial records. The district court found that Haddon and the general partners had failed to maintain the premises in good repair, 1 and had failed to maintain financial records in reasonable condition. He assigned as damages the $13,500 expended in restoring the property to "good repair and condition" and the $2,500 expended in reconstructing Haddon's books.

Rudoff and Nahum do not contest the findings that the regulatory agreement was breached. Rather, they contend that the terms of the deed of trust and the regulatory and assumption agreements prohibit assessment of money damages against them personally. They also argue that if damages can be assessed, the replacement reserve funds and the surplus operating funds accumulated by the court-appointed received should be an offset. We disagree.

In contending that money damages for disrepair may not be assessed against them personally, Rudoff and Nahum rely first on the terms of the deed of trust and the regulatory and assumption agreements. The regulatory agreement clearly imposes on Haddon's predecessor the obligations to maintain the premises in good repair and to keep satisfactory financial records. Haddon clearly agreed to assume these obligations in the assumption agreement. Rudoff and Nahum argue, however, that the regulatory agreement does not envisage an action for damages. The agreement provides that in case of its breach: (1) a default could be declared under the note and deed of trust, making the entire indebtedness due and payable and rendering the property subject to foreclosure; (2) the Federal Housing Commissioner (Commissioner) could collect the rents and apply them to Haddon's obligations; (3) the Commissioner could take possession of the project and operate it in accordance with the regulatory agreement; or (4) the Commissioner could sue for specific performance, for an injunction against violations, for appointment of a receiver, or for "such other relief as may be appropriate since the injury to the Commissioner arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain."

Although a party who proves the breach of a contractual duty is generally entitled to damages, 5 A. Corbin, Contracts § 1001 (1964), unless there is some contractual provision to the contrary, Rudoff and Nahum argue that by providing a comprehensive list of specific remedies the agreement implicitly prohibits a damage action. The agreement cannot be so interpreted. It is clear that the specific remedies are provided because damages are considered inadequate, not because they are prohibited. Here none of the specified remedies are available because the property has been sold and a damage action is the only remedy remaining.

Rudoff and Nahum next contend that even if money damages are allowed, they may not be assessed against them personally. The regulatory agreement provides that the individual partners in Haddon's predecessor are not personally liable for payments under the note or to the replacement reserve "or for matters not under their control" except that they are liable "for their own acts and deeds or acts and deeds of others which they have authorized in violation of the provisions hereof." The assumption agreement limits the liability of Haddon's general partners (including Rudoff and Nahum) in substantially identical terms. Rudoff and Nahum argue that the deterioration of the project was due to general neighborhood dilapidation and social conditions "not under their control." This argument is frivolous. The causes of the deterioration may have been beyond their control, but the decision whether or not to repair and maintain was clearly theirs.

Rudoff and Nahum also argue that they can be held liable only for affirmative acts in violation of the regulatory agreement and not for a failure to act. Again, they misread the agreement. The clause they refer to is not meant to distinguish between affirmative action and inaction; it merely exonerates the individual general partners from liability for the acts of others not authorized by them. The regulatory agreement imposed affirmative duties to maintain the premises in good repair and to keep satisfactory financial records. The district court found that the "defendants," i. e., Haddon and the general partners, violated those duties; the findings are not contested nor are they erroneous. That the various acts of neglect cited by the district court might be characterized as failures to act rather than affirmative misconduct is irrelevant. Nothing in the regulatory or assumption agreements exonerates Rudoff or Nahum from personal liability for violating the duties they assumed.

Further, we find this interpretation of the agreement consistent with the policy of the NHA. 2 The possibility of a post-foreclosure personal damage suit should motivate owners to maintain the premises and thereby serve the government's interests in providing habitable housing, preventing the spread of slums and protecting the public investment. The clause in the deed of trust prohibiting a deficiency judgment encourages private investment by reducing the owners' loss in case of failure; additional encouragement was not meant to be provided at the expense of the surrounding neighborhood and the project's tenants.

Rudoff and Nahum also rely on a provision in the deed of trust prohibiting the United States from seeking "any judgment for a deficiency in any action to foreclose this deed of trust." They note that the regulatory agreement is specifically incorporated into the deed of trust and argue that a post-foreclosure money judgment for breach of the regulatory agreement is tantamount to the deficiency judgment prohibited by the deed of trust.

In support of these contentions, they cite California cases decided under California's anti-deficiency legislation. In the most recent of these cases, Cornelison v. Kornbluth, 15 Cal.3d 590, 125 Cal.Rptr. 557, 542 P.2d 981 (1975), the California Supreme Court held that the policy behind California's anti-deficiency legislation requires that post-foreclosure waste actions be barred unless the plaintiff proves "bad faith" waste.

California statutes prohibit deficiency judgments in two situations: (1) following foreclosure and sale under a purchase money deed of trust or purchase money mortgage, Cal.Code Civ.Pro. § 580b; ...

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