United States v. AMERICAN NAT. BANK, ETC.

• Decision Date: 17 November 1977
• Docket Number: No. 75 C 1514.,75 C 1514.
• Court: U.S. District Court — Northern District of Illinois
• Parties: UNITED STATES of America, Plaintiff, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Trustee under Trust No. 22 XXXXX-XXX and Salem Cross Associates, Curtis-Dodd Group Ltd., Richard Mook, Gordon J. Dicke, Lawrence J. Janota, Riverdale Bank, Calumet City Plumbing Co. and William B. Potts d/b/a B & S Decorating Service, Defendants.

443 F. Supp. 167

UNITED STATES of America, Plaintiff, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Trustee under Trust No. 22 XXXXX-XXX and Salem Cross Associates, Curtis-Dodd Group Ltd., Richard Mook, Gordon J. Dicke, Lawrence J. Janota, Riverdale Bank, Calumet City Plumbing Co. and William B. Potts d/b/a B & S Decorating Service, Defendants.

No. 75 C 1514.

United States District Court, N. D. Illinois, E. D.

November 17, 1977.

COPYRIGHT MATERIAL OMITTED

Samuel K. Skinner, U. S. Atty., F. H. Branding, Asst. U. S. Atty., Chicago, Ill., of Counsel; Dennis S. Brinn, Dept. of Housing and Urban Development, Washington, D. C., for plaintiff.

John B. Simon and Dana H. Freyer, Friedman & Koven, Chicago, Ill., for Defendant Curtis-Dodd Group, Ltd. (All other defendants in default).

MEMORANDUM OPINION

MARSHALL, District Judge.

The United States has brought this action under 28 U.S.C. § 1345 on behalf of the Secretary of Housing and Urban Development (HUD) to foreclose a $3,019,600 mortgage on an apartment complex in Lansing, Illinois. Beneficial ownership of the property was originally vested in Salem-Cross Associates (SCA), a partnership, and its three general partners. SCA entered into a trust agreement on May 1, 1971 with American National Bank & Trust Company of Chicago (American National), by which the bank held legal title to the property. On that same date, American National executed and delivered a note and mortgage on the property for $3,019,600 to Great Lakes Mortgage Corporation, the mortgagee. The note and mortgage were insured by the Federal Housing Administration (FHA), a division of HUD, under section 221(d)(4) of the National Housing Act, 12 U.S.C. § 1715l (d)(4). Section 221 provides for a program of federally-insured mortgages on low cost homes and moderate income projects. 24 C.F.R. § 200.33. As part of the same financing transaction, SCA signed a regulatory agreement with HUD by which it agreed, inter alia, to lease the apartments, collect the rents, apply them to satisfaction of the outstanding mortgage, keep the premises in good repair, and maintain books and accounts of the financial operations of the property. According to the allegations of the amended complaint, on June 1, 1974 SCA and its trustee-bank defaulted on the mortgage payments. Thereafter, the Secretary of HUD acquired ownership of the note and mortgage on the property by virtue of an assignment from an assignee of Great Lakes Mortgage Corporation, the original mortgagee. Although the complaint and record are silent on the matter, the normal procedure in the case of a default on a federally-insured mortgage is for the FHA to pay the insurance funds to the mortgagee in the form of debentures in return for assignment of the defaulted mortgage, with the Secretary of HUD then becoming clothed with all the rights and obligations of the mortgagee. See 24 C.F.R. § 200.153 et seq.; Lindy v. Lynn, 395 F.Supp. 769, 773 (E.D.Pa.1974), affd. 515 F.2d 507 (3d Cir. 1975).

In April, 1975, SCA assigned its beneficial interest in the property to Curtis-Dodd Group, Ltd. (Curtis-Dodd). There is a dispute concerning whether this assignment received the approval or authorization of the Secretary, as was required by the regulatory agreement between SCA and HUD. In any event, it is undisputed that Curtis-Dodd took over the management of the property on April 11, 1975, when it entered into a "Project Management Contract" with HUD. Under this contract, Curtis-Dodd agreed, inter alia, to lease the apartments, collect the rents, deposit them in a special account, and maintain financial records in return for a percentage of the rental income on the property.

On May 12, 1975, the United States filed its complaint seeking to foreclose on the mortgage and naming SCA, its general partners, and American National as defendants. Later the Government added Curtis-Dodd and certain other interested parties as defendants. On October 12, 1976 all defendants except Curtis-Dodd were adjudged to be in default. Curtis-Dodd answered denying certain aspects of the amended complaint and counterclaimed seeking declaratory and equitable relief against the Government.

In an effort to clear this last remaining defendant from the Government's march to the auction block, the United States has filed a motion to voluntarily dismiss Curtis-Dodd as a defendant, to strike and dismiss its counterclaim, and for summary judgment. In its reply brief, the Government withdrew its motion to voluntarily dismiss Curtis-Dodd. Therefore, we will confine our discussion to the legal sufficiency of Curtis-Dodd's counterclaim and the propriety of the entry of a decree of foreclosure on the motion for summary judgment.

Curtis-Dodd's counterclaim raises issues which substantially enlarge the scope of the Government's action. In the amended complaint, the Government only sought a declaration of the amount unpaid on the note and mortgage and a decree of foreclosure on the property. In its counterclaim, Curtis-Dodd attempts to trace the causes of the default on the mortgage and to pin blame or responsibility on HUD for its alleged failure to follow its statutory and regulatory mandate. The thrust of the counterclaim is that HUD, through its failure to supervise and monitor the financial activities of the original parties to the mortgage, allowed SCA to divert the rental income, thereby creating a large delinquency on the mortgage and causing the physical and economic decline of the project. In addition, Curtis-Dodd claims that HUD failed to pursue and recover the misapplied funds by an action for an accounting or by civil and criminal prosecutions against SCA. Finally, Curtis-Dodd alleges that HUD failed to prevent foreclosure by utilizing less drastic financing alternatives which would have allowed Curtis-Dodd to continue its operations of the project on a sound financial basis and which would avoid the fiscal losses to the United States resulting from an expected sale of the property at foreclosure at a price which is insufficient to cover the outstanding indebtedness. Although the counterclaim cites no specific laws, it alleges that these acts and omissions by HUD violate United States statutes, HUD regulations, the mandate of Congress, and the public interest. In its prayer for relief, Curtis-Dodd seeks a declaration that HUD has violated these laws and is not entitled to foreclosure. It also asks the court to order HUD to account for and collect the misapplied funds and to apply its regulatory authority to modify the mortgage, thereby allowing Curtis-Dodd to remain as manager and beneficial owner of the project.

In its motion to dismiss, the Government argues that the counterclaim is barred by principles of sovereign immunity, lacks a jurisdictional basis, and fails to state a claim on which relief can be granted.

It is fundamental that the United States may be sued only to the extent that it has waived its sovereign immunity. This immunity extends to counterclaims and cross-claims. United States v. Shaw, 309 U.S. 495, 60 S.Ct. 659, 84 L.Ed. 888 (1940). The defense is a jurisdictional one but can be waived either by statute or by the government's filing of a suit. Federal Savings & Loan Ins. Corp. v. Quinn, 419 F.2d 1014, 1017 (7th Cir. 1969). Section 1702 of Title 12 authorizes the Secretary of HUD to sue and be sued in his official capacity in actions arising under the National Housing Act. This statute is an effective waiver of sovereign immunity on the part of the Secretary and federal courts have the power to enforce the Act against the federal government. Baker v. F & F Investment Co., 489 F.2d 829 (7th Cir. 1973); Estrada v. Hills, 401 F.Supp. 429 (N.D.Ill.1975); Battles Farm Co. v. Hills, 414 F.Supp. 521 (D.D.C. 1976). However, the counterclaim here is directed against the United States, not the Secretary. The general rule is that where the United States is the real party in interest, statutory authority for the federal official to be sued does not operate as a complete waiver of the sovereign immunity of the United States. Waylyn Corp. v. United States, 231 F.2d 544 (1st Cir. 1956); United States v. Gregory Park, Section II, Inc., 373 F.Supp. 317, 351 (D.N.J.1974). The rule is founded on the principle that the statutory waiver in § 1702 restricts the funds available to satisfy a money judgment to those appropriated under the Act. A complete waiver would exceed the boundaries of this limited consent by permitting execution against any funds or property of the United States. Waylyn, supra, 231 F.2d at 546, quoting Federal Housing Administration, Region No. 4 v. Burr, 309 U.S. 242, 250, 60 S.Ct. 488, 84 L.Ed. 724 (1940). The rule fails its essential purpose here where the counterclaimant is not seeking direct monetary relief against the government, but only asks for declaratory relief, an accounting and collection of misspent funds belonging to HUD, and a modification of the mortgage financing arrangements. In these circumstances, there is no conceivable threat that other United States monies will be subjected to execution if the counterclaimant is successful. Furthermore, this construction of the counterclaim is consistent with the general principle that immunity is not determined by the names of the titular parties but by the practical test of whether a judgment would have to be satisfied from the United States Treasury. Federal Savings & Loan Ins. Corp. v. Quinn, supra. We therefore hold that Section 1702 operates as a waiver of sovereign immunity in this case.

Although Curtis-Dodd's counterclaim hurdles the barrier of sovereign immunity, it must still meet the independent tests of subject matter jurisdiction. The counterclaim does not allege any specific jurisdictional basis, but alleges in general terms that HUD has failed "to follow the laws and statutes of the United States and its own regulations." Amended Counterclaim, ¶ 4. The courts are split as to whether ...