United States v. Golden Acres, Inc.

• Citation: 520 F. Supp. 1073
• Decision Date: 26 August 1981
• Docket Number: Civ. A. No. 80-73.
• Parties: UNITED STATES of America, Plaintiff, v. GOLDEN ACRES, INC., Defendant.
• Court: U.S. District Court — District of Delaware

520 F. Supp. 1073

UNITED STATES of America, Plaintiff, v. GOLDEN ACRES, INC., Defendant.

Civ. A. No. 80-73.

United States District Court, D. Delaware.

August 26, 1981.

Joseph J. Farnan, Jr., U. S. Atty., and Peggy L. Ableman, Asst. U. S. Atty., Dept. of Justice, Wilmington, Del., for plaintiff.

L. Vincent Ramunno, Wilmington, Del., for defendant.

OPINION

MURRAY M. SCHWARTZ, District Judge.

In this action the United States, on behalf of the Secretary of Housing and Urban Development ("the Secretary" or "HUD"), seeks orders of foreclosure on certain real property of which the Secretary is the mortgagee and on chattels in which the Secretary holds a security interest. Now before the Court is the government's motion for summary judgment.

The property at issue is the Golden Acres Apartments, a rental housing project in the Wilmington area operated by the defendant Golden Acres, Inc. ("Golden Acres"). In 1974 Golden Acres executed a commercial mortgage note in the amount of $1,389,100, and conveyed to the lender a mortgage on the apartment project. The mortgage was insured by the Secretary pursuant to section 221 of the National Housing Act, 12 U.S.C. § 1715l, a provision designed to assist private industry in providing rental housing to low and moderate income families. The Secretary, by virtue of a series of assignments, has become the owner of the mortgage and of security interests in appliances in the apartments. According to uncontroverted affidavits submitted by the Secretary,¹ Golden Acres failed to make the mortgage payment due on May 1, 1976, at which time the outstanding principal was $1,374,900.70. Thereafter defendant failed to make sufficient payments to bring the loan current. Because of the continued inadequate payments, the Secretary declared the loan in default and accelerated the principal to become immediately payable. Golden Acres has made no payments on the principal balance of $1,374,900.70 since May 1, 1976, and as of September 1, 1980, the unpaid interest amounted to $364,083.91, and there were unpaid service charges of $13,460.73. In addition, the Secretary, in order to prevent a tax foreclosure, had paid over $40,000 in property taxes on the project as of September 1, 1980.

Defendant Golden Acres does not contest the validity of the mortgage nor dispute the Secretary's affidavits detailing the missed payments. Instead, Golden Acres raises several defenses. First, it argues that HUD has no right to foreclose unless it first establishes that such foreclosure would further the policies embodied in the National Housing Act. Second, defendant argues that it received inadequate notice. Third, Golden Acres asserts that an officer of HUD "impliedly agreed" that Golden Acres could use the money intended for the monthly mortgage payments to repair and improve the apartment complex and that HUD is therefore precluded from foreclosing on account of the missed payments.

I

The government argues that a mortgagor's default, coupled with its statutory authorization to institute foreclosure proceedings,² gives it an unequivocal right to a foreclosure decree. The government's position is supported by several cases which seem to state that the Secretary's decision to foreclose is not subject to challenge by a defaulting mortgagor. See United States v. Sylacauga Properties, Inc., 323 F.2d 487, 491 (5th Cir. 1963); United States v. Woodland Terrace, Inc., 293 F.2d 505, 507 (4th Cir.), cert. denied, 368 U.S. 940, 82 S.Ct. 381, 7 L.Ed.2d 338 (1961). More recently, however, courts have questioned whether the Secretary has unbridled discretion to institute foreclosure proceedings. In Kent Farm Co. v. Hills, 417 F.Supp. 297 (D.D.C. 1976), Judge Gesell preliminarily enjoined institution of foreclosure proceedings because HUD failed to present any "reasoned analysis" of a decision to foreclose which appeared to be at variance with a prevailing HUD policy of not foreclosing on certain classes of HUD held mortgages. The court reasoned that HUD was "required to apply this policy in a reasoned, nonarbitrary manner that is consistent with the underlying Congressional intent." 417 F.Supp. at 301. The Kent Farm opinion, using broad language, stated:

HUD is not simply a banker. Before it acts because of default on a project clearly otherwise meeting housing objectives it must consider national housing policy and decide what further steps authorized by Congress it will take to assure continuity of the decent, safe, sanitary, lowcost housing then being provided.

Id. In United States v. American National Bank and Trust Co., 443 F.Supp. 167 (N.D. Ill.1977), the court followed the decision in Kent Farm, holding that HUD's statutory authority to foreclose "is tempered by and subservient to HUD's overall responsibilities under the Act to further national housing policy." 443 F.Supp. at 175. The court therefore concluded that the defaulting mortgagor's counterclaim, which alleged that HUD failed to adhere to its duty to consider statutorily authorized alternative financing terms that would avoid foreclosure, stated a claim sufficient to survive a motion for summary judgment on a record that only established the mortgagor's default. Id.

The Seventh Circuit recently faced the issue, and reversed a district court ruling that a HUD decision to foreclose is not subject to judicial review. United States v. Winthrop Towers, 628 F.2d 1028 (7th Cir. 1980).³ Although agreeing that a decision to foreclose is in large part committed to agency discretion, the court held that the Secretary's discretion is not unlimited. Rather, a decision to foreclose "may be reviewed to determine whether it is consistent with national housing objectives." Id. at 1035. The court then determined that foreclosure decisions should be reviewed under the standard laid out in 5 U.S.C. § 706(2)(A), viz., whether that decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law...." The court nonetheless emphasized that HUD's discretion is at its greatest when foreclosing on a mortgage granted by a large commercial developer "because large commercial developers presumably possess the resources and sophistication to make agreements they will be able to live with ... and because the National Housing Act was primarily intended to benefit individuals who live in inadequate housing, not commercial developers...." Id. at 1035-36. In view of the broad discretion granted HUD in deciding whether to foreclose, the court in Winthrop Towers determined that "it should not be required to introduce evidence of procedural regularity when it files suit to foreclose. Rather the mortgagor resisting foreclosure should bear the initial burden of introducing some evidence of HUD's arbitrary or capricious action, abuse of discretion or failure to comply with applicable law." Id. at 1036.

Review of HUD foreclosure decisions, as with other agency action, is governed by the Administrative Procedure Act ("APA"). Judicial review is available under the APA unless such review is precluded by statute, or the agency action in question is "committed to agency discretion by law." 5 U.S.C. § 701(a). As there is no statutory preclusion of review of foreclosure decisions, the threshold question is whether a foreclosure decision is committed by law to agency discretion. The Supreme Court has stated that the provision prohibiting review of discretionary decisions "is a very narrow exception" which "is applicable in those rare instances where `statutes are drawn in such broad terms that in a given case there is no law to apply.'" Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 821, 28 L.Ed.2d 136 (1971), quoting, S.Rep.No.752, 79th Cong., 1st Sess. 26 (1945). In addressing this exception to the normal right to judicial review, the Third Circuit Court of Appeals has indicated that the substance of agency decisions made pursuant to a broad grant of discretion, which are the product of political, economic or managerial choices, and which are based upon an agency's special knowledge or expertise, are ordinarily not subject to judicial review. See Local 2855, AFGE (AFL-CIO) v. United States, 602 F.2d 574, 578-80 (3d Cir. 1979).⁴ Consideration of these factors compels the conclusion that foreclosure decisions should for the most part be free from judicial review. A decision to foreclose is in essence a business decision in an area in which there are no significant statutory or regulatory guidelines, save HUD's obligation to promote national housing objectives.⁵ In making such a decision HUD must weigh a variety of factors in deciding whether to foreclose, including consideration of whether national housing policy would best be served by using foreclosure to preserve the assets of the federal housing insurance fund,⁶ rather than by taking yet further steps to keep in business a defaulting enterprise. In determining whether to foreclose HUD must also call upon its experience and expertise in insuring property and holding mortgages. In short, it is for HUD to choose among rational alternatives that may further national housing policy, and judicial review is ordinarily inappropriate to consider whether a foreclosure decision arrived at through the considered judgment of HUD was necessarily the best or most effective choice.⁷

I do not, however, conclude that a foreclosure decision is completely immune from judicial review. As the Third Circuit Court of Appeals observed in Local 2855, a court may review a decision committed to agency discretion when there are "charges that the agency lacked jurisdiction, that the agency's decision was occasioned by impermissible influences, such as fraud or bribery, or that the decision violates a constitutional, statutory or regulatory command." 602 F.2d at 580. The mortgagor, however, has the initial burden of coming forward with some evidence of irregularity in the decision-making process. Cf...