United States v. Gilman

• Citation: 360 F. Supp. 828
• Decision Date: 26 June 1973
• Docket Number: Civ. No. 71-982.
• Parties: UNITED STATES of America v. Marvin S. GILMAN et al.
• Court: U.S. District Court — District of Maryland

360 F. Supp. 828

UNITED STATES of America v. Marvin S. GILMAN et al.

Civ. No. 71-982.

United States District Court, D. Maryland.

June 26, 1973.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

George Beall, U. S. Atty., D.Md., Leonard M. Linton, Jr., Asst. U. S. Atty., Baltimore, Md., Roger C. Wesley, Atty., Dept. of Justice, Washington, D. C., for plaintiff.

M. Peter Moser, Monte Fried, John J. Kenny, Baltimore, Md., for defendants.

HERBERT F. MURRAY, District Judge.

This civil action is brought by the United States of America for the use, benefit and credit of the Secretary of Housing and Urban Development, acting by and through the Assistant Secretary-Commissioner under the provisions of the National Housing Act, as amended. 12 U.S.C. § 1701 et seq.. Defendants, Messrs. Gilman, Rosen and Gozan, were investor-developers involved in the construction of a 16-story apartment building in the City of Baltimore, Maryland, known as Sutton Place. For various reasons, the financial posture of the Sutton Place Project, whose mortgage was insured by the Federal Housing Administration, deteriorated to such an extent that approximately four years after this redevelopment project obtained its initial financing, it fell into receivership and was sold at foreclosure. By this suit the United States contends that the Defendants through their ownership position in Sutton Place are liable for certain payments allegedly made out of the Project's funds in contravention of the provisions of the Federal Housing Administration Regulatory Agreement for Multi-Family Housing Projects hereinafter Regulatory Agreement. Because it is stipulated that the United States Government, through the Federal Housing Administration now H.U.D., contracted with the Defendants to insure the Sutton Place mortgage pursuant to 12 U.S.C. § 1715k, jurisdiction of this Court is properly invoked under 28 U.S. C. § 1345.

Findings of Fact

1. On October 23, 1961, the first step was taken in the development of Sutton Place when the Defendants, Marvin S. Gilman and Abraham A. Rosen, entered into a Joint Venture Agreement for the purpose of erecting a high-rise apartment building in the City of Baltimore, Maryland. On January 16, 1962, land was acquired for the planned project. Financing was obtained on March 16, 1962, when Gilman and Rosen, together with their wives, executed and delivered their Deed of Trust Note in favor of the Union Trust Company of Maryland, as beneficiary, in the sum of $5,952,200.00.¹ In order to secure repayment of this Deed of Trust Note, the Defendants, also executed and delivered, that same day, a Deed of Trust covering the Sutton Place property, to the Union Trust Company.

2. As further security, the Defendants Gilman and Rosen entered into a Regulatory Agreement with the Federal Housing Commissioner on March 16, 1962. By virtue of this agreement the loan obtained from the Union Trust Company in the sum of $5,952,200.00 was insured by the Federal Housing Administration pursuant to Section 220 of Title II of the National Housing Act, as amended 12 U.S.C. § 1715k and the administrative regulations thereunder. Subsequently, the Union Trust Company assigned the Deed of Trust Note obtained from the Defendants, to the Metropolitan Life Insurance Company, who thereby became the owner of the Deed of Trust.

3. Late in 1963, the Project was in need of additional financing. To this end, a loan in the sum of $60,000.00 was obtained from Sterling Capital Corporation on November 12, 1963. It is undisputed that this loan was made payable to Sutton Place Management Corporation by a check dated November 15, 1963. The Government, through its witnesses, contends that the Sterling Capital Corporation loan was, in fact, a loan from Defendant Rosen, and not, as Defendants urge, a loan from Sterling to Sutton Place Management Corporation.² However, in the opinion of the Court, the testimony of David Uhlfelder, a Certified Public Accountant, employed by Sutton Place Management Corporation, resolves the question as to the true lender. This witness acknowledged that an initial accounting mistake had been made in attributing this loan to Mr. Rosen, but at a later date this error was detected and the entry changed to reflect the correct lender, Sterling Capital Corporation. Thus, the Court concludes that this loan of $60,000.00 was made to Sutton Place Management Corporation by Sterling Capital Corporation.

4. The Defendants, Gilman and Rosen, failed to make a principal payment which was due on December 1, 1963; prior to the due date of the next maturing installment on the Deed of Trust Note. After negotiation between Defendants Gilman and Rosen, and the noteholder, Metropolitan Life Insurance Company, an arrangement entitled a "Forebearance Agreement", was reached on February 28, 1964 with the written approval of the Federal Housing Commissioner, and with an effective date reaching back to October 1, 1963. In the meantime, on January 2, 1964, Defendant Rosen sold to the Defendant George Gozan, one-half of Rosen's 50% interest in the Project.

5. The Forebearance Agreement, which was signed only by Defendants Rosen and Gilman, provided, inter alia, that the Defendants pay to Metropolitan Life Insurance Company the net income of the Project to be applied to tax, hazard insurance and F.H.A. mortgage insurance, premium accrual accounts, and then to amounts due under the Deed of Trust and Deed of Trust Note and send monthly statements to Metropolitan Life Insurance Company. In return, Metropolitan Life Insurance Company promised in the Forebearance Agreement to defer any demand for payment of principal and interest, due under the Deed of Trust and Deed of Trust Note, to the extent that net income should not be sufficient to cover these items, until termination of the Forebearance Agreement on October 1, 1964. By a subsequent Forebearance Agreement dated October 28, 1964, the October 1, 1964 termination date was extended to October 1, 1965.

6. On December 19, 1964, Defendant Gilman transferred all of his right, title and interest in the Project to Defendant Rosen. Shortly thereafter, Gilman was given an option to repurchase a one-half interest in the Project. That option expired on December 31, 1970 without having been exercised by Defendant Gilman. On January 29, 1965, Defendant Rosen sold to Defendant Gozan one-half of the 50% interest Rosen acquired in his purchase from Gilman. Thus, after January 29, 1965, Defendants Rosen and Gozan each owned 50% of the Sutton Place Project. From the evidence, the Court finds that the F.H.A., through its agents, was aware that Defendant Gilman sold his interest in the Project to Defendant Rosen on December 19, 1964. The evidence further indicates that Defendant Gilman fully surrendered his financial and executive position with the Project on December 19, 1964. Thereafter, Gilman continued his relationship with the Project in an advisory capacity solely for the purpose of acquainting Defendant Gozan with the management duties that Gozan, as a new owner, would be assuming. However, from January, 1965, when Gozan took over actual management of the Project, at his own request, Defendant Gozan was not paid the $1,500.00 per month salary which his predecessor, Gilman, had received as compensation for services rendered to the Project.

7. On July 19, 1965, Defendants Rosen and Gozan, in their individual capacities, borrowed $125,000.00 from the Chemical Bank in New York City. This borrowed money was simultaneously deposited in an account at this bank which these Defendants had opened on July 15, 1965. Both sides agree that the $125,000.00 was subsequently credited to the account of Sutton Place Management Corporation in the Maryland National Bank on July 21, 1965 by means of a check dated July 19, 1965. However, the date of deposit—as distinguished from the date on which this money was credited by the bank to the Sutton Place account—is disputed. The Plaintiff maintains that the deposit in question did not occur until July 21, 1965, while Defendants urge that the deposit was made on July 20, 1965. The Court has examined the check and the relevant monthly account statements from the Maryland National Bank, together with the Government's audit work sheet and the testimony of trial witnesses. Based on this evidence, the Court finds that the $125,000.00 was deposited to the account of Sutton Place Management Corporation on July 20, 1965.

8. The parties are also at odds as to the true character of this $125,000.00 payment made to the account of Sutton Place Management Corporation. It is agreed that in making the $125,000.00 payment, Rosen and Gozan acted in their individual capacities and without any obligation on their part to provide additional funds. The Government argues that although the $125,000.00 was carried on the books of Sutton Place as a loan to the Project, there are no supporting documents to evidence that the $125,000.00 was, in truth, a loan to the Project from Rosen and Gozan. It is thus the Government's theory that the $125,000.00 constituted a cash advance to the Project and was therefore not a loan, as is urged by the Defendants. Since the Court is without the benefit of direct documentary evidence, it is not an easy matter to find, as a matter of fact, that the $125,000.00 in question was either a loan or a cash advance to Sutton Place. Nevertheless, this Court has considered the pertinent secondary evidence, including documents and testimony of witnesses and finds, as a matter of fact, that on July 20, 1965, Defendants Rosen and Gozan made a loan to Sutton Place Management Corporation, in the amount of $125,000.00.

9. It is undisputed that in July, 1965 Sutton Place Management Corporation paid by check, $10,000.00 to Altman Brothers for construction work performed on the Project, and also by check paid $30,000.00 to Sterling Capital Corporation in partial repayment of the loan of November 12,...