United States v. Livecchi

• Decision Date: 02 April 2013
• Docket Number: Docket No. 09–1979–cv.
• Citation: 711 F.3d 345
• Parties: UNITED STATES of America, Plaintiff–Counter–Defendant–Appellee, v. Charles R. LIVECCHI and C.R.L. Management, Inc., Defendants–Counter–Claimants–Appellants.
• Court: U.S. Court of Appeals — Second Circuit

711 F.3d 345

UNITED STATES of America, Plaintiff–Counter–Defendant–Appellee,

v.Charles R. LIVECCHI and C.R.L. Management, Inc., Defendants–Counter–Claimants–Appellants.^*

Docket No. 09–1979–cv.

United States Court of Appeals,Second Circuit.

Argued: Nov. 1, 2011.

Decided: April 2, 2013.

Herman Kaufman, Law Office of Herman Kaufman, Old Greenwich, CT, for Defendants–Counter–Claimants–Appellants.

Stephan J. Baczynski, Assistant United States Attorney, for William J. Hochul, Jr., United States Attorney for the Western District of New York, Buffalo, NY, for Plaintiff–Counter–Defendant–Appellee.

Before: SACK and HALL, Circuit Judges.^**

PER CURIAM:

Defendants–Appellants, Charles R. Livecchi and his real estate company C.R.L. Management, Inc. (collectively, “Livecchi”),¹ appeal from an amended judgment entered April 29, 2009, in the United States District Court for the Western District of New York (Payson, M.J.), following partial summary judgment in favor of the government's equity-skimming claim, United States v. Livecchi, No. 03–cv–6451P, 2005 WL 2420350, at *22 (W.D.N.Y. Sept. 30, 2005) (“ Livecchi I ”), and a subsequent bench trial rejecting Livecchi's counterclaim for recoupment and granting the government's application for double damages and prejudgment interest, United States v. Livecchi, 605 F.Supp.2d 437, 463 (W.D.N.Y.2009) (“ Livecchi II ”).

On appeal, Livecchi argues that: (1) the government lacked standing to sue under 12 U.S.C. § 1715z–4a(a) because United States Department of Housing and Urban Development (“HUD”) had foreclosed on Livecchi's mortgage; and (2) the action was barred by the statute of limitations provision, § 1715z–4a(d), because the limitations period started to run when Livecchi defaulted on the mortgage, in 1997, and not, as the district court held, when the government discovered Livecchi's equity skimming in 2000.

Livecchi's interpretation of the equity-skimming statute is inconsistent with the statute's clear purpose. The government's authority to foreclose on a HUD-insured mortgage cannot preclude the government from subsequently recovering assets or rental income retained in violation of a related regulatory agreement. As for the limitations period, Livecchi failed to establish that HUD had any knowledge of his equity skimming prior to August 21, 2000, the date HUD first acquired Livecchi's financial records. We therefore affirm the amended judgment in all respects.

I. BACKGROUNDA. The Regulatory Agreement Governing Livecchi's HUD–Insured Mortgage

From 1982 through 1998, Livecchi owned and managed a multifamily housing development in Rochester, New York, known as the Cambridge Court Apartments (the “Apartments” or the “Property”). Livecchi refinanced the Property in August of 1992 by obtaining a $2,390,700 consolidated mortgage from Continental Securities Corporation (“Continental”). Livecchi I, 2005 WL 2420350, at *1. At the time of the refinancing, Livecchi had approximately $700,000 of equity in the Property. Livecchi II, 605 F.Supp.2d at 441. HUD insured the mortgage and agreed to cover the mortgage interest and principal in the event of default. Id., see12 U.S.C. § 1715n(f). HUD also agreed in the event of default to accept assignment of the mortgage from Continental. HUD's insurance relieved Livecchi of personal liability in the event of mortgage default. Livecchi I, 2005 WL 2420350, at *1.

Livecchi, in exchange, entered into a Regulatory Agreement for Multifamily Housing Projects (the “Regulatory Agreement” or “Agreement”) with HUD on August 20, 1992. Under the Agreement, Livecchi did not assume personal liability for payments due under the note and mortgage. Livecchi II, 605 F.Supp.2d at 441 & n. 3.² He did, however, have to make “all payments due under the note and mortgage,” to establish and maintain a “Reserve Fund for Replacements” (“RFR”) and to provide HUD with annual financial statements “prepared in accordance with the requirements of HUD.” Id. at 441 (alterations omitted). Livecchi was prohibited “from retaining any rental income in excess of his reasonable operating and maintenance expenses during any period in which the mortgage was in arrears.” Id. Finally, if Livecchi violated any of these obligations, the Agreement authorized HUD to declare a default, accelerate the loan, and foreclose on the Property. Id.

The RFR requirement is central to this case. HUD's goal in mandating it was to ensure that sufficient funds were available to finance capital replacements for the Property, thereby protecting its condition for the benefit of its residents. Id. Thus, the RFR functioned as a sort of maintenance escrow account. Id. Under the Agreement, Livecchi funded the RFR with an initial deposit of $200,000 and thereafterwas supposed to make monthly payments of $2,013 into the fund.³ Perhaps more importantly, Livecchi also was required to apply rental revenues to the mortgage payments and to the RFR payments before retaining or otherwise disposing of “surplus cash,” with an exception for “reasonable operating expenses and necessary repairs.”

Like most escrow accounts, the RFR was not totally under Livecchi's control. According to the terms of the Agreement, improvements to the Property using RFR money had to be approved by HUD. Id. at 441–42 & n. 5. The Agreement further provided that in the event of a mortgage default for which the loan was accelerated, HUD could apply the balance in the RFR to reduce the amount of mortgage indebtedness. Id. at 442.

B. Livecchi's Disputes with HUD

Within months after the Regulatory Agreement was executed, Livecchi and HUD began to disagree over their respective obligations, especially over Livecchi's duty to provide HUD with annual financial statements and HUD's duty to release RFR funds for capital expenditures. Id. Following a 1994 administrative proceeding initiated by HUD, the parties entered into a written settlement agreement which they hoped would resolve their disputes. Livecchi agreed, inter alia, “to comply fully with all rules, regulations and other requirements of HUD, and specifically with respect to HUD's requirement of accrual based financial statements.” Id. (quotation marks omitted).

Despite the settlement agreement, however, disputes continued. See generally id. at 442–45. HUD withheld several RFR disbursement requests Livecchi submitted between March 1994 and February 1996, citing Livecchi's continuing failure to satisfy some of his reporting obligations. See id. at 443–44. In February 1996, however, HUD released funds from the RFR in the amount of $33,154.38, which substantially covered Livecchi's pending RFR requests. Id. at 444. Following that authorization, Livecchi submitted two more RFR requests—one on November 18, 1996, and one on January 15, 1997.⁴ HUD paid neither. Id.

C. Livecchi's Default on the Mortgage

Citing his ongoing disputes with HUD regarding the financial reporting obligations and the release of money from the RFR, Livecchi informed HUD by letter dated January 15, 1997 that he intended to stop paying into the RFR and hold those payments in escrow. Id. at 445. On March 27, 1997, HUD responded with its own letter, stating that Livecchi's November 1996 RFR disbursement request had been denied because of his numerous violations of the Regulatory Agreement, including his failure to submit audited financial statements for 1995, his failure to maintain the Property in a satisfactory condition, and his failure to submit an adequate capital needs budget. Id. HUD further cautioned Livecchi that his failure to correct these violations could result in HUD declaring a default under the Regulatory Agreement and resorting to “any and all rights” set forth in the Agreement.⁵Id.Despite HUD's warning, however, Livecchi continued his self-help, deducting the monthly RFR payment of $2,013 from his February 1997 and March 1997 mortgage payments to Continental. Id.

In April 1997, Livecchi received notification from the IRS that he owed income tax on $5,412.93 of interest earned on the RFR account. Id. In conjunction with the March 1997 and April 1997 mortgage payments, Livecchi directed Continental to apply the $5,412.93 of interest earned on the RFR account to cover any deficiency in his mortgage payments for those months. Continental declined to do so. Accordingly, Livecchi withheld both the RFR payment of $2,013 and the tax deficiency of $5,412.93 from his April 1997 mortgage payment to Continental. Id.

Continental advised Livecchi that his mortgage payments were inadequate and could not be applied in the manner sought. Id. at 446. Continental applied Livecchi's April 1997 mortgage payment to cover the March 1997 arrears, including the delinquent RFR deposit. As a result, Continental declared Livecchi delinquent on his mortgage as of April 1997. Id. On April 15, 1997, Continental sent Livecchi a letter warning him that Continental would be required to file a “Notice of Default” with HUD if he did not pay up his mortgage by the end of the month. Id. Livecchi countered by stopping payment on the April 1997 mortgage check. Id. Notwithstanding Continental's April 15 warning, Livecchi did not forward any more mortgage payments either to HUD or Continental. Livecchi did state that he had deposited a portion of the required payment in a separate bank account. Livecchi I, 2005 WL 2420350, at *4.

D. Assignment of the Mortgage and Foreclosure Proceedings

On May 1, 1997, Continental notified HUD that it was electing to assign the delinquent mortgage to HUD. Livecchi II, 605 F.Supp.2d at 447. Two and a half months later, HUD advised Livecchi of Continental's decision, described Livecchi's numerous alleged violations of the Agreement—including his failure to make the required mortgage and RFR payments—and instructed Livecchi that, to avoid foreclosure, he had to pay all mortgage delinquencies or submit a plan to bring the mortgage current within thirty-six months of assignment. Id. Any such plan, HUD explained, “must...