U.S. v. Kenealy

• Decision Date: 17 April 1981
• Docket Number: 80-1276,80-1277,Nos. 80-1275,80-1278 and 80-1279,s. 80-1275
• Citation: 646 F.2d 699
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Joseph F. KENEALY, Anna M. Kenealy, Michael F. Kenealy, Manor Mortgage Co., Inc., and Kenco Realty Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 699

646 F.2d 699

UNITED STATES of America, Plaintiff-Appellee, v. Joseph F. KENEALY, Anna M. Kenealy, Michael F. Kenealy Manor Mortgage Co., Inc., and Kenco Realty Company, Defendants-Appellants.

Nos. 80-1275, 80-1276, 80-1277, 80-1278 and 80-1279.

United States Court of Appeals First Circuit.

Argued Nov. 5, 1981.

Decided April 17, 1981.

Robert D. City, Boston, Mass., with whom Robert J. Owens Associates P. C., Boston, Mass., was on brief, for defendants-appellants in Case Nos. 80-1275, 80-1276, and 80-1278.

Charles J. O'Malley, Boston, Mass., for defendant-appellant in No. 80-1279.

William S. Freeman, Atty., Civil Division, Dept. of Justice, Washington, D. C., with whom Alice Daniel, Asst. Atty. Gen., Jane A. Restani, Mark H. Gallant, and Robert L. Ashbaugh, Attys., Civil Division, Dept. of Justice, Washington, D. C., were on brief, for plaintiff, appellee.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

COFFIN, Chief Judge.

Joseph F. Kenealy was a real estate appraiser for the Federal Housing Administration (FHA) in Boston. He also engaged in outside real estate ventures with his wife Anna, his son Michael, and two family-owned corporations: Manor Mortgage Co., Inc., and Kenco Realty Company. The United States brought this civil action against the Kenealys and their two corporations for recovery of monetary benefits gained as a result of Joseph's outside business ventures allegedly conflicting with his fiduciary duties to the United States.

The five defendants appeal from the district court's grant of the United States' motion for summary judgment. They claim that the district court improperly used their involuntary admissions obtained by operation of Fed.R.Civ.Proc. 36 ¹ and that material issues of fact remain as to whether Joseph in fact breached a duty to the government. They further argue that any conceivable breach of Joseph's duty was cured by his disclosure of his activities to the FHA. Additionally, Anna, Michael, Manor, and Kenco assert that Joseph's alleged breach of duty is insufficient to inculpate them. Finally appellants dispute the measure of damages. We affirm.

I

Joseph served as an FHA review appraiser in Boston from 1968 through 1970. He inspected and appraised houses intended for sale to low and moderate income purchasers in order to determine the maximum mortgage that the FHA would insure. He also reviewed and approved appraisals made by subordinate appraisers, modifying these appraisals as he thought appropriate.

The allegations sparking this suit are that Joseph, assisted by his family and their controlled corporations, purchased and sold for personal gain forty-one properties in Dorchester, Massachusetts during this three year period. Although the details of the various transactions differed to a degree, typically either Joseph's wife or son or one of his corporations would buy a property at an average price of about $8400 and would hold it for about ten months. During this period, the Boston FHA office in which Joseph worked would appraise the property. Joseph personally appraised or reviewed appraisals for nine of the forty-one FHA mortgage guarantees; the remainder were handled by other persons in his office. An FHA insured mortgage (at an average value of approximately $17,000) then would be obtained to finance the final sale (from the defendants to others) of the property at an average price of about $17,500. The result was that through inflated FHA insured mortgages and selling prices, which Joseph and others under his supervision had the power to influence, the five defendants realized an alleged $348,511.19 profit.

The history of these proceedings, relevant to the Rule 36 issue, is moribund and discreditable. This civil action, commenced in May of 1973, was stayed pending a criminal investigation till December, 1973. No answer being forthcoming for more than a year, a notice of default issued in early 1975. Defendants then moved, without explanation for their inaction, to have the default removed, and to dismiss the complaint for failure to state a claim. The latter motion was denied after counsel failed to appear at oral argument. Then followed, in June of 1975, a governmental request for admissions under Rule 36, another governmental motion for judgment of default in October of 1975, a defense motion to file answers late, a granting of this motion accompanied by a warning, a governmental motion in June of 1976 for summary judgment based on the unanswered 1975 request for admissions, a defense motion to be relieved of these admissions, and the granting of this motion.

Finally, in September of 1976, the defendants filed tardy responses to the government's requests for admissions. An excerpt reveals their flavor. Defendants were asked to admit the truth of the following statements relating to the property at 32 Rosseter Street:

"(a) On May 4, 1968 (Anna M. Kenealy), using the name Anna M. Hurley, purchased the property at 32 Rosseter Street from J. L. Hastings for $3,089.43.

"(b) On July 5, 1968, (Anna M. Kenealy) sold the property to Willie and Beulah Ellison for $12,900.

"(c) The sale was financed by a $7,900 FHA-insured mortgage from the Boston Five Cents Savings Bank.

"(d) (Joseph F. Kenealy) reviewed the property appraisal for FHA."

Defendants replied:

"31. a) Deny.

b) Deny.

c) Unable to admit or deny based upon information known or readily available.

d) Unable to admit or deny based upon information known or readily available." ²

Over a year later the court denied the government's motion for summary judgment. Directed to stipulate uncontested facts, defendants repeatedly refused to stipulate to any facts beyond those set forth in their answers. In March of 1978 the government once again moved to deem admitted the matters set forth in its June 1975 request for admissions, arguing that defendants' answers were too vague and general and that defendants had refused to enter into a stipulation that would have facilitated resolution of the case. The defendants failed to oppose this motion. It was granted by the court. The government again moved for summary judgment. The defendants again were defaulted when they failed to appear at the hearing on this motion scheduled in January 1980. Once again the district court granted the defendants' motion to remove the default. The court rescheduled the hearing on the government's summary judgment motion, which it granted on March 31, 1980. Defendants appealed.

II

Initially the defendants-appellants dispute the propriety of the district court's decision to attribute the weight that it did to the matters involuntarily admitted against them, pursuant to Rule 36. ³ They do not as they cannot dispute that deeming matters admitted is a proper remedy under appropriate circumstances for intransigence during discovery. Rule 36 requires specificity, detailed explanation when a truthful answer cannot be framed, good faith, and fairness. Given appellants' opaque, generalized, and tardy denials, their failure to oppose the government's request for this relief, and their incredibly cavalier conduct in this litigation, we decline to tamper with the district court's action, which was well within its discretion. ⁴

III

Appellants contend that the district court erred in granting summary judgment because there remained a disputed factual issue as to "whether Kenealy inflated appraisals or caused appraisals to be inflated so that he or one of the other defendants profited." They admit that the involuntary admissions establish that Joseph "reviewed the property appraisal(s) for the FHA" a matter that we note is "conclusively established" as to nine of the properties since the district court has not "on motion permit(ted) withdrawal or amendment of the admission." Fed.R.Civ.Proc. 36(b). Regarding the remaining property transactions, however, appellants object that the record indicates only that Joseph's duties included performing appraisals himself and reviewing and approving appraisals made by subordinate FHA appraisers, and that these transactions were appraised by unidentified persons in his Boston FHA office. Joseph's own affidavit avers that as to the remaining transactions for which his involvement has not previously been "conclusively established" he did not "exercise any influence or authority as to any official determination, judgment, decision or action relating to (the) properties owned either directly or indirectly by" the appellants. Appellants thus argue that material fact issues remain unsettled since the record does not show that Joseph was involved in the remaining FHA evaluations.

We examine appellee's legal theory to determine what facts are material. The appellee argues, and appellants do not dispute, that federal "common law protections against breach of fiduciary duty extend to the principal-agent relationship" arising out of federal employment, United States v. Kearns, 595 F.2d 729, 732 (D.C.Cir.1978), and that statutes and regulations provide evidence of the precise nature of this fiduciary duty. ⁵ See United States v. Podell, 436 F.Supp. 1039, 1042 (S.D.N.Y.1977), aff'd, 572 F.2d 31 (2d Cir. 1978). The government further argues, and again the appellants do not dispute, that the following regulations were in force during the relevant period:

§ 0.735-204 Outside employment and other activity

"(a) An employee shall not engage in outside employment or other outside activity not compatible with the full and proper discharge of the duties and responsibilities of his Government employment. Incompatible activities include but are not limited to:

"(4) Activities that establish relationships or property interests that may result in a conflict between his private interests and his official duties " 24 C.F.R. § 0.735-204(a)(4) (1980) (emphasis added).

§ 0.735-205 Financial interests

"(a) An employee shall not:

(1) Have a direct or indirect financial interest that conflicts substantially ...