United States v. Mountain Village Co.

• Decision Date: 13 December 1976
• Docket Number: Civ. A. No. 76-2845-F.
• Parties: UNITED STATES of America v. MOUNTAIN VILLAGE COMPANY.
• Court: U.S. District Court — District of Massachusetts

424 F. Supp. 822

UNITED STATES of America v. MOUNTAIN VILLAGE COMPANY.

Civ. A. No. 76-2845-F.

United States District Court, D. Massachusetts.

December 13, 1976.

COPYRIGHT MATERIAL OMITTED

Mary Brennan, Asst. U. S. Atty., Boston, Mass., J. Christopher Kohn, Dept. of Justice, Washington, D. C., for plaintiff.

Marcus E. Cohn, Boston, Mass., for defendant.

MEMORANDUM OF DECISION

FREEDMAN, District Judge.

This matter is before the Court on defendant's motion to vacate the Order of July 30, 1976 appointing a receiver of certain mortgaged property owned by the defendant, directing the defendant to turn over to the receiver the mortgaged property and various property associated with it, and enjoining the defendant from interfering with the receiver's management of the property.¹

Defendant Mountain Village Company, a limited partnership organized under the laws of Massachusetts, is the owner of Mountain Village, a multifamily, low and moderate income housing project located in Worcester, Massachusetts. The mortgage on the property was insured by the Department of Housing and Urban Development (HUD) pursuant to Section 221(d)(3) of the National Housing Act, 12 U.S.C. § 1715l (d)(3). The defendant, acting through its general partner, Max R. Kargman, executed certain notes and mortgages in connection with the financing of this project which have been assigned to and are now held by the Secretary of HUD. On July 28, 1976, the plaintiff instituted a foreclosure action against the defendant and sought the appointment of a receiver to operate the Mountain Village property during the pendency of such action. Application for the receiver was made by the plaintiff mortgagee without notice to the defendant pursuant to the express terms of the mortgage agreement which provides in Paragraph 5:

That upon default hereunder Mortgagee shall be entitled to the appointment of a receiver by any court having jurisdiction, without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom.²

The defendant's objection to this Court's Order of July 30, 1976 is basically two-fold. First, it argues that appointment of the receivership was not warranted in this case. Secondly, it maintains that the Court lacked personal jurisdiction over the defendant to order it to turn over property other than the mortgaged project itself to the receiver since the Order was issued without notice to the defendant. The defendant claims that such an order issued without notice is in violation of Rule 65(a)(1) of the Federal Rules of Civil Procedure.³

This Court holds that the plaintiff is entitled to the appointment of a receiver in accordance with the terms of the mortgage agreement. The Court also holds that the Order directing the defendant to turn over certain property to the receiver does not require personal jurisdiction over the defendant since it is in essence merely an Order enjoining defendant from interfering with the functioning of the receiver. The defendant's motion is thereby denied.

It is undisputed that a default has occurred. Thus, at least under the terms of the mortgage, the plaintiff is thereby entitled to the appointment of a receiver without notice. However, defendant contends that this provision is invalid. It argues that the waiver of its right to notice in the mortgage was not a legitimate waiver and therefore the appointment of a receiver ex parte was a denial of due process.

The Court rejects this argument and concludes that the waiver provision is valid. Due process rights to a hearing and notice may be legitimately waived in a contract. D. H. Overmyer, Inc. of Ohio v. Frick Co., 405 U.S. 174, 185, 92 S.Ct. 775, 31 L.Ed.2d 124 (1972). This may be so even if one of the parties to the contract is the federal government. Cf. United States v. Wynn, 528 F.2d 1048, 1050 (5th Cir. 1976). The validity of any waiver, of course, depends upon the facts of a particular case. D. H. Overmyer, Inc. of Ohio v. Frick Co., supra, 405 U.S. at 188, 92 S.Ct. 775. United States v. Wynn, supra, 528 F.2d at 1050. Factors to consider in determining the validity of a purported contractual waiver include the clarity of the contractual language itself, the relative bargaining power of the parties, and the mortgagor's ability to understand the provisions of the contract. United States v. Wynn, supra, at 1050. The Supreme Court has stated that "a waiver of constitutional rights in any context must at the very least, be clear." Fuentes v. Shevin, 407 U.S. 67, 93, 92 S.Ct. 1983, 2002, 32 L.Ed.2d 556 (1972). The mortgage provision here meets this requirement. The waiver is clear and unambiguous on its face.

The defendant claims that there was tremendous disparity between the bargaining positions of the government and itself and that when the agreement was signed it did not understand the meaning of the mortgage provision appointing a receiver to be as the plaintiff presently maintains. In his affidavit of August 31, 1976, Mr. Max Kargman, the general partner who executed the mortgage on behalf of the defendant, stated that it was his belief "that there was no room for any applicant to negotiate or bargain about the standard clauses" if he wished to obtain the mortgage insurance for Mountain Village. He further stated that "it was not my understanding that the Company was consenting to the irrevocable appointment of a receiver as a matter of right during the pendency of any foreclosure action that might be filed, no matter how baseless."

Mr. Kargman has extensive experience in the real estate field. According to this affidavit, he was involved in urban land development for more than thirty years, and prior to that time practiced real estate law for more than 14 years. On the basis of such experience, Mr. Kargman should not be heard to now complain that he did not understand what he was signing. Nor can it be said that the government has no right to protect its investments by inclusion of such a provision in its contracts. Without federal backing there would probably have been no loan and no mortgage. Consideration was therefore given for this provision's inclusion in the mortgage agreement. I agree with the Ninth Circuit that "good reasons appear for holding that federal policy requires affording every reasonable protection to the security of federal investment." View Crest Garden Apartments, Inc. v. United States, 281 F.2d 844, 848 (9th Cir.), cert. denied, 364 U.S. 902, 81 S.Ct. 235, 5 L.Ed.2d 195 (1960). In view of these facts, the defendant's challenge to the validity of the mortgage provision appointing a receiver is without merit.

The defendant further claims that even if the waiver were proper, the mortgage provision alone could not justify the appointment of a receiver. The defendant maintains that, the mortgage provision notwithstanding, the plaintiff must still show a factual basis to warrant the receiver's appointment. This factual basis, the defendant asserts, is threefold: (1) a showing that the security is inadequate to satisfy the outstanding indebtedness; (2) insolvency of or doubtful financial standing of the mortgagor; and (3) a likelihood of success by the mortgagee in the foreclosure action. I disagree for the reasons set forth below.

In Garden Homes v. United States, 200 F.2d 299 (1st Cir. 1952), the First Circuit considered the effect which should be given to a mortgage provision allowing for the appointment of a receiver to collect rents and profits pending the outcome of the foreclosure suit, a provision significantly narrower than the one in the present case. In Garden Homes the district court had granted the receiver the right to operate and manage the mortgaged property. The Court of Appeals held that the powers given to the receiver were too expansive. It began its opinion by stating the general rules applicable to the appointment of a receiver according to the principles of equity. It noted that although appointment of a receiver is discretionary with the court, it is an extraordinary remedy. Thus,

. . . a receiver, even of rents and profits, will not generally be appointed on the application of a mortgagee in a suit to foreclose except upon a "sufficient showing" of two matters: (1) that the mortgaged property is inadequate security for the debt with interest and costs of suit, and (2) that the mortgagor or other person liable for the debt is insolvent, beyond the jurisdiction "or in such doubtful financial standing that an execution against him for any deficiency would be unavailing." And to warrant the appointment of a receiver to manage and operate mortgaged property pending foreclosure, as well as only to collect its rents and profits during that time, more than the above matters must appear.

Id. at 301.

However, Garden Homes is distinguishable from the present case. In Garden Homes the defendant mortgagor had conceded that the court could appoint a receiver without notice upon default. Its objection was based on granting the receiver powers in excess of those expressly bestowed upon him by the mortgage agreement. The court in Garden Homes was not therefore directly faced with the issue involved in the present case, namely, whether a receiver could be appointed to operate and manage the mortgaged property on the sole basis of a mortgage provision allowing for such appointment. The Court of Appeals agreed with the defendant and on the basis of the showing before it vacated the appointment of the receiver.

There is, nevertheless, some indication that the Court of Appeals in Garden Homes would have come to an affirmative answer to the question presently before this Court. In referring to its decision in Garden Homes in a subsequent opinion, the Court of Appeals stated that it had "pointed out that under the express terms of the mortgage itself the court in the event of default was empowered on the mortgagee's application to appoint...