United States v. Chelsea Towers, Inc.

• Decision Date: 27 October 1967
• Docket Number: Civ. No. 1083-67.
• Parties: UNITED STATES of America, Plaintiff, v. CHELSEA TOWERS, INC., Defendant.
• Court: U.S. District Court — District of New Jersey

295 F. Supp. 1242

UNITED STATES of America, Plaintiff, v. CHELSEA TOWERS, INC., Defendant.

Civ. No. 1083-67.

United States District Court D. New Jersey.

October 27, 1967.

COPYRIGHT MATERIAL OMITTED

David M. Satz, Jr., U. S. Atty., Newark, N. J., by Donald G. Targan, Asst. U. S. Atty., for the United States of America, plaintiff.

Gorson, Lazarow & Aron, by Joseph Lazarow, Atlantic City, N. J., Harold Finkle, New York City, of counsel, for defendant.

OPINION

COHEN, District Judge:

On October 27, 1967 the plaintiff, United States of America, instituted this mortgage foreclosure action for default of the defendant, Chelsea Towers, Inc. (Chelsea), regarding a 156 unit cooperative apartment building in Atlantic City, New Jersey, constructed under the provisions of Title 2, section 213, of the National Housing Act.¹ Plaintiff moves for summary judgment, pursuant to Rule 56, F.R.Civ.P., 28 U.S.C. Defendant cross moves both for a stay of this action, pending determination of another action referred to hereinafter, and to join, as parties-defendant, others who were not parties to the mortgage in suit.

The record on these motions discloses that on January 23, 1961, defendant Chelsea contracted with the Z. B. M. Corporation, a New Jersey corporation, as the developer, for the purchase of the apartment complex upon its completion. On July 17, 1961, the Z. B. M. Corporation executed construction mortgage notes to the Provident Tradesmens Bank and Trust Company, of Philadelphia (Provident), and construction of the building proceeded. Further construction financing was made March 8, 1963 between the same parties. Shortly thereafter, on April 1, 1963 Provident assigned all its right, title and interest in this open-end construction mortgage to the Commonwealth of Pennsylvania School Employees' Retirement Fund (Retirement Fund). The building was completed on August 1, 1963 and in accordance with its contract, Z. B. M. Corporation delivered title to defendant Chelsea. Thereupon, Chelsea entered into two agreements with the Retirement Fund. The first of these involved a supplemental mortgage of $221,580.92 and the second was an agreement for a mortgage consolidation, modification and assumption agreement by which Chelsea agreed to assume and to pay all previous mortgage obligations on the apartment property and, further, that all prior mortgages were to be merged and consolidated in the supplemental mortgage. Thus consolidated, Chelsea's indebtedness to the Retirement Fund aggregated $2,952,200.00. Thereupon, Chelsea entered into possession and assumed control and management of the apartment project. A little more than a year later, November 1, 1964, Chelsea defaulted in its mortgage payment to the Retirement Fund. The default persisted; whereupon, on July 21, 1965, the Retirement Fund assigned the mortgage to the Federal Housing Commissioner pursuant to its insurance-guaranty agreement with the Federal Housing Administration. Following assignment of the defaulted mortgage, Chelsea initiated negotiations with the Federal Housing Commissioner seeking to work out an agreement rehabilitating the mortgagor. On September 24, 1965, a "provisional workout arrangement" was entered into between Chelsea and the Federal Housing Administration, which was to terminate August 31, 1967. When this expiration date was reached two years later, Chelsea was still in default upon the mortgage. Thereafter, no remedy for the default being in the offing, the Federal Housing Administration referred the matter to the United States Attorney for foreclosure.

The total delinquency at the time this suit was started amounted to $403,659.86. Chelsea answered the complaint in foreclosure and interposed defenses thereto, which in substance denied the right of the plaintiff, United States of America, to foreclosure. Chelsea attacks the validity of the mortgage on the grounds of fraud, undue influence and wrongdoing on the part of the promoters, the developers, the Retirement Fund, the Federal Housing Commissioner and the FHA. In its Fourth Separate Defense, Chelsea specifically charges that the present plaintiff and its assignor, the Retirement Fund, acting in concert with others, provoked a breach of its original agreement of sale with the Z. B. M. Corporation which, in turn, forced it to execute legal instruments known to all others as being impossible of performance, thereby causing its default on the mortgage. Consequently, Chelsea argues, the grant of an equitable right of foreclosure should be denied to the plaintiff under the "unclean hands" doctrine.²

In essence, Chelsea maintains that it, as a non-profit cooperative apartment project, along with its tenants, were deluded and "hood-winked" into an unconscionable, if not impossible, bargain by the purchasing and financing machinations of the promoters, developers, builders, financiers and the FHA. These circumstances, Chelsea urges, require the submission of proofs at plenary trial in resolution of the attendant facts, as well as for the ascertainment of the intentions of the participants at the times in question, thereby precluding the grant of summary judgment on motion. Defenses of waiver and estoppel, arising out of its "workout arrangement" of September 24, 1965, particularly clause 7 thereof,³ have also been asserted by Chelsea. It argues that the effect of the aforesaid provision was to grant a moratorium on its default, pending the disposition of the state court action, since removed to this Court.

At oral argument counsel for the adverse parties conceded that the government's motion, although supported by documents, was unaccompanied by affidavits, thereby converting it to one for judgment on the pleadings under Rule 12(a) F.R.Civ.P. The supporting documents, extraneous to the pleadings, were depositions of certain FHA personnel. Accordingly, either under Rule 12(c) providing for judgment on the pleadings, or under Rule 56(b) for summary judgment, if a judgment is granted, it is essentially on the merits and may be entered only upon a conclusive determination of the legal issues presented. Farbenfabriken Bayer, A G v. Sterling Drug, Inc., 148 F.Supp. 733 (D.N.J.1957). If a genuine issue of material fact is generated in either situation, judgment is precluded. Huntt v. Government of Virgin Islands, 339 F.2d 309 (3 Cir. 1964); United States v. Blumenthal, 315 F.2d 351 (3 Cir. 1963). So that, on this motion for a judgment on the merits, all facts well pleaded in the complaint as well as the averments contained in the answer and separate defenses, but not conclusions of law, must be accepted as true.

Examining these pleadings, the supporting documents and the depositions, the plaintiff United States of America, as the reinsurance-assignee of the realty mortgage on Chelsea's apartment property, is entitled to judgment as a matter of law unless, of course, Chelsea has isolated an issue of material fact requiring plenary trial. This Court is of the opinion that Chelsea has utterly failed in this regard. The most favorable view which can be attributed to its opposition to foreclosure is that, inasmuch as it couldn't meet its mortgage financing commitments, it should be relieved of its bad bargain because of some afterthought of alleged fraud and duress of the plaintiff and others. It asserts these defenses as a shield against the plaintiff and seeks to join others in averting to circumstances involving the initiation of the entire project. However, it seems clear that, if the cooperative tenants have a damage action at all regarding the purchase of the project, which is what they claim in the removed action Civil 640-64, recourse is not against this plaintiff. The plaintiff, acting through the FHA, was not an original party to this mortgage. The subject mortgage was made with the Retirement Fund and, after continuous unremedied default, the plaintiff succeeded to the mortgagee's rights. Yet, in order to avoid the lawful consequences of its default, Chelsea seeks to impose a duty in retrospect upon the plaintiff, through the FHA, which alleged duty did not and does not exist either in fact or law. United States v. Neustadt, 366 U.S. 696, 81 S.Ct. 1294, 6 L.Ed.2d 614 (1961). Significantly, Chelsea has been in continuous default since November, 1964. It even defaulted under the "workout agreement" by which a gratuitous opportunity was extended to it by the plaintiff to place its house in order and bring the mortgage current, thereby making the mortgagee whole. After this "workout agreement" expired by its express terms, the plaintiff, as was its right even during its two year term, commenced foreclosure in evident response to Chelsea's inability to extricate itself from its financial distress. Chelsea overlooks the rights reserved to the FHA in the "workout agreement," which expressly defeat the waiver and estoppel it contends for. Paragraph 5 thereof⁴ specifically provides for its termination on August 31, 1967.

Insofar as Chelsea's allegations are concerned, that FHA misrepresented operating costs and rentals to the detriment of the cooperative, assuming arguendo that such averments are true, nevertheless, they do not go to the inception and validity of the mortgage in suit. On the record presented on this motion the issue is: Is the conduct of the plaintiff, claimed by the defendant to be violative of the National Housing Act, relevant to the Government's right to foreclose its assigned mortgage? This is a legal issue and not a factual question. United States v. Lawrence Towers, Inc., 236 F. Supp. 208, 210 (E.D.N.Y.1964). As aptly stated at page 210:

"We begin with the premise that the Commissioner did not make the loan but he merely insured it. * * * The legislative history of the Act does not disclose or intimate any intent on the part of Congress to benefit or protect anyone but the Government."

This is consonant with the avowed purpose of Congress to relieve a critical national...