United States v. Gregory Park, Section II, Inc.

• Decision Date: 26 March 1974
• Docket Number: Civ. A. No. 1310-73.
• Citation: 373 F. Supp. 317
• Parties: UNITED STATES of America, Plaintiff, v. GREGORY PARK, SECTION II, INC., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

373 F. Supp. 317

UNITED STATES of America, Plaintiff, v. GREGORY PARK, SECTION II, INC., et al., Defendants.

Civ. A. No. 1310-73.

United States District Court, D. New Jersey.

March 26, 1974.

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Jonathan L. Goldstein, U. S. Atty., by William A. Carpenter, Jr., Asst. U. S. Atty., Newark, N. J., for plaintiff.

Ravin & Ravin, by David N. Ravin, Newark, N. J., for defendant, Gregory Park, Section II, Inc.

OPINION

LACEY, District Judge:

The United States sues to foreclose upon two mortgages held by the Secretary of Housing and Urban Development (HUD) on two high rise apartment complexes, Gregory Park Section 1 (GP 1) and Gregory Park Section 2 (GP 2), owned by the defendant Gregory Park, Section II, Inc. (GP II). The Government claims that defendant has defaulted on payments due, has made prohibited advances to affiliates, and otherwise breached the mortgages and other agreements between the parties. Defendant resists, stating it is not in default; that if it is, plaintiff is to blame; and that the Government, in regulating the rent levels in the two buildings, would not allow rent increases in an amount sufficient for defendant to meet its payment obligations and to recover a reasonable return on its investment. By way of counterclaim, defendant seeks an affirmative recovery of a reasonable investment return allegedly denied it by reason of the foregoing.

The following constitutes my findings of fact and conclusions of law. Fed.R. Civ.P. 52(a).

This court has jurisdiction by virtue of 28 U.S.C. § 1345.

This is only one of five related actions presently before the court involving the Padula enterprises.¹ The facts developed in the preliminary stages of these various matters have been introduced into this proceeding largely through extensive stipulations between the parties (paragraphs thereof will be hereinafter referred to as (St. ____), and Joint Exhibits (J.E. ____)).

The Government is seeking to foreclose mortgages held by HUD on each of five buildings (including GP 1 and 2) owned by the Padula-controlled and run companies, and constructed or purchased with HUD's assistance. These apartment complexes have all been managed by Arthur H. Padula t/a Arthur H. Padula Management Co., and most have been constructed by Arthur H. Padula Construction Corp. (AHPCC), which Mr. Padula owns. The defendant, which owns GP 1 and GP 2, is the wholly owned subsidiary of Mid-Center Redevelopment Corp. (Mid-Center), which in turn is wholly owned by Arthur H. Padula. Mr. Padula is also the President of Mid-Center and the defendant (St. 25), and, as well, of Gregory Park Section 3, Inc. (GP 3), which owns a high rise apartment house across from GP 1 and GP 2. The three together from the Gregory Park complex in Jersey City, New Jersey. GP 3 is also a wholly owned subsidiary of Mid-Center.² In addition, Mr. Padula owns two apartment houses in Newark known as the Weequahic Park Tower and the Weequahic Park Plaza (J.E. 64); and through Mid-Center and AHPCC, he caused to be constructed two additional apartment houses in Newark, Zion Towers and Carmel Towers (St. 110, J.E. 21). Finally, Mr. Padula, t/a Arthur H. Padula Management Co., manages the Weequahic Park Tower; the Weequahic Park Plaza; the Zion Towers; the Carmel Towers; until September 11, 1973, GP 1 and GP 2 (St. 29); and, until February 25, 1974, GP 3.³ HUD holds the mortgages on all of these buildings, except Zion and Carmel Towers.

BACKGROUND

On June 12, 1961 the Federal Housing Administration (FHA) insured a $5,517,200 loan by the National State Bank of Newark to Gregory Park No. 1, Inc. for the construction of a high rise apartment building located in Jersey City, New Jersey, hereinabove and hereinafter referred to as GP 1. This loan was insured pursuant to Section 220 of the National Housing Act, as amended, 12 U.S.C. § 1715k, to aid in the rehabilitation of blighted areas. See 1955 U.S. Cong. & Admin.News p. 2918.

Thereafter defendant GP II, a limited dividend housing corporation, was formed, pursuant to the New Jersey Limited Dividend Housing Corporations Act, N.J.S.A. 55:16-1 et seq. (St. 2), and its Certificate of Incorporation was approved by the Public Housing and Development Authority, Department of Conservation and Economic Development of the State of New Jersey, and filed on October 30, 1964 (St. 111, J.E. 94). One of defendant's corporate purposes (Certificate of Incorporation, Art. II, ¶¶ b and c) was to obtain financing for the construction and ownership of rental housing with the assistance of mortgage insurance under the National Housing Act.

Prior to defendant's incorporation, the FHA, pursuant to 12 U.S.C. § 1715k(d)(3)(A)(i), issued a Project Income Analysis and Appraisal for GP 2 on FHA form 2264, dated August 31, 1964 (St. 113, J.E. 96), revised and reissued on November 23, 1964 (St. 15a, J. E. 9). The amount of mortgage insurance the FHA can issue is limited to a fixed percentage of the estimated replacement cost of the property, which, in the revised form, was set at $7,592,811. The form also included, inter alia, estimates of income, operating expenses (including management fees), and, under the heading "Estimated Replacement Cost", a section for carrying charges, financing, and Builders' and Sponsors' profit and risk.

On February 4, 1965, the FHA agreed to insure all advances to the defendant by the State Bank of Albany for construction of GP 2 (St. 16a); and on that same date the State Bank of Albany loaned $6,790,000 to the defendant, taking defendant's mortgage note (St. 17, J.E. 10) and a mortgage (St. 18, J. E. 11), covering GP 2, and dated February 4, 1965. Also on the same date, defendant entered into a regulatory agreement with the Federal Housing Commissioner (St. 20a, J.E. 15), the defendant agreeing to abide by the restrictions and regulations recited therein in exchange for the FHA's issuance of mortgage insurance to the mortgagee. The mortgagee, the State Bank of Albany, obtained further security for its loan to the defendant in the form of a security agreement and financing statement covering all personal property of GP 2 (St. 19, J. E. 12, 13, 14).

On December 20, 1966 defendant, pursuant to the New Jersey Limited Dividend Housing Corporations Act, entered into an agreement with the City of Jersey City to have GP 2 exempted from all municipal property taxes for 20 years, upon the condition that it pay an annual service charge in lieu of taxes (service charge) within 60 days after the end of each calendar year, which generally equals 15 percent of the gross shelter rents (St. 21a, J.E. 16). This agreement was to result in substantial savings for defendant and relieved it of property taxes equivalent to approximately 30 to 40 percent of gross rents.

On January 19, 1967 defendant received a third Project Income Analysis and Appraisal on FHA form 2264 covering GP 2 (St. 115, J.E. 97) but listing no replacement value because it was issued as part of a rental increase authorization, authorized on or about July 21, 1967. In June 1968 the mortgage covering GP2 was assigned to the Comptroller of the State of New York as Trustee of the Common Retirement Fund, and pursuant to an option exercised by that mortgagee in January 1971, it is now held by HUD (St. 22-24).

Approximately nine months after defendant gave its mortgage note and mortgage for GP 2, the FHA, on November 2, 1965, issued a Project Income Analysis and Appraisal on form 2264 for GP 1, estimating the replacement cost, before rehabilitation, at $7,061,043 (St. 5a, J.E. 1). Then, on December 30, 1966, defendant entered into an agreement to buy GP 1 from the FHA for $100,000 and a note and mortgage for $6,625,000 (St. 6, J.E. 2). The contract of sale required Mr. Padula to guarantee personally any operating deficits of both GP 1 and GP 2 for a period of two years from the closing, to pledge the stock of GP II and GP 3⁴ as security, and to assign to the FHA all dividends from GP 3 for a three-year period for this purpose. FHA, as the seller, disclaimed all representations as to the physical condition or valuation of the building.

On February 10, 1967 defendant took title to GP 1 from HUD pursuant to the aforesaid terms and conditions (St. 8), and gave to HUD its mortgage note, mortgage, and security agreement covering GP 1 (St. 9, 10, 11, J.E. 4-7). On the same date, defendant entered into a regulatory agreement for GP 1 with the Federal Housing Commissioner (St. 12a, J.E. 8) and entered into an agreement with Jersey City to have GP 1 exempt from all property taxation for 20 years upon the condition that it pay within 60 days after the end of each calendar year an annual service charge, again amounting to approximately 15 percent of the gross shelter rent (St. 7a, J.E. 3).

On September 18, 1970 Mid-Center, AHPCC, and Arthur H. Padula, individually, filed a Petition for Arrangement under Chapter XI of the Bankruptcy Act and Leo Neiwirth, Esq. was appointed receiver (St. 26, 27).⁵ The defendant itself was not made a debtor in the Chapter XI proceeding; however, because of the estate's ownership of the defendant's stock, Mr. Neiwirth immediately commenced overseeing defendant's operations, and those of GP 3, and continued to do so until December 18, 1972, when the Plan of Arrangement was confirmed by the bankruptcy court and the debtors were revested with their assets.⁶ Mr. Padula continued to act for defendant in a managerial capacity during the term of the Receivership (T. 94) and no action was taken by the Receiver without Mr. Padula's knowledge and consent. As of the filing of the Chapter XI proceeding, defendant and GP 3 had outstanding and unpaid bills to general creditors of approximately $500,000 (St. 71). Moreover from September 18, 1970 until April 10, 1971 defendant defaulted on the mortgage notes and mortgages held by HUD covering GP 1 and GP 2 by not...