United States v. Queen's Court Apartments, Inc.

• Decision Date: 13 November 1961
• Docket Number: No. 17305.,17305.
• Citation: 296 F.2d 534
• Parties: UNITED STATES of America, Appellant, v. QUEEN'S COURT APARTMENTS, INC., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

296 F.2d 534 (1961)

UNITED STATES of America, Appellant, v. QUEEN'S COURT APARTMENTS, INC., Appellee.

No. 17305.

United States Court of Appeals Ninth Circuit.

November 13, 1961.

William H. Orrick, Jr., Asst. Atty. Gen., John G. Laughlin and Herbert E. Morris, Atty., Dept. of Justice, Washington, D. C., and Warren C. Colver, U. S. Atty., Fairbanks, Alaska, for appellant.

Lycette, Diamond & Sylvester, Herman Howe and Lyle L. Iversen, Seattle, Wash., and Collins & Clasby, by Charles J. Clasby, Fairbanks, Alaska, for appellee.

Before CHAMBERS, HAMLIN and KOELSCH, Circuit Judges.

HAMLIN, Circuit Judge.

United States of America, appellant herein, filed an action in September, 1958, in the District Court for the District of Alaska, Fourth Division, to foreclose a mortgage on property owned by Queen's Court Apartments, Inc., a corporation, appellee herein.

The mortgage was executed by appellee to Federal National Mortgage Association, a corporation organized and existing pursuant to the provisions of the National Housing Act, as amended, to secure payment of a promissory note of even date therewith in the principal sum of $918,352.42. After a default in the payments due on said note, the note and mortgage was assigned to the Federal Housing Commissioner on April 22, 1958, who, pursuant to the terms of the note and mortgage, declared the entire principal sum and accrued interest thereon immediately due and payable. As set out above, an action was thereafter filed to foreclose the mortgage, in which action a receiver was requested by appellant but denied by the district court.

At the time of the execution of the note and mortgage, mortgage insurance was provided by the Federal Housing Commissioner pursuant to Title 6 of the National Housing Act, as amended, 12 U.S.C.A. § 1736 et seq.

When the matter came on for trial in November, 1960, the district judge decreed a foreclosure of the mortgage, conditioned, however, upon the appellant paying over to the appellee certain moneys on deposit in a reserve fund amounting to $27,213.32. The appellant appealed to this court from this conditional judgment. The district court had jurisdiction under 28 U.S.C.A. § 1345, and this court has jurisdiction under 28 U.S. C.A. § 1291.

Appellant relied upon the following statement of points:

"1. The district court erred in conditioning its order of foreclosure in this case on the United States returning to Queen\'s Court Apartments, Inc., prior to foreclosure sale and determination of deficiency, the monies in the replacement reserve fund.

"2. The district court erred in denying the United States the appointment of a receiver pending the proceedings before it."

We shall discuss these points in the above order.

The National Housing Act, 12 U.S. C.A. § 1702 et seq., provides that the Commissioner, upon such terms as he may prescribe, is authorized to make commitments for the insuring of mortgages prior to the date of their execution.¹ Section 1742 provides: "The Commissioner is authorized and directed to make such rules and regulations as may be necessary to carry out the provisions of this subchapter." Under this authority the following regulations, among others, were promulgated:

24 C.F.R. § 232.1 (1959 ed.)

"Information for preliminary examination. (a) Information required for the examination of a Rental Housing Project under section 207 shall be submitted in the form of an application for mortgage insurance by an approved mortgagee and by the sponsors of such project through the local Federal Housing Administration office, on approved FHA Application Form (executed in triplicate). No application will be considered unless the exhibits called for by such form are furnished and a fee of $1.50 per thousand of the face amount of the mortgage loan applied for (referred to as `application fee\') is paid."

24 C.F.R. § 232.2 (1959 ed.)

"Issuance of commitment. (a) Upon approval of an application a commitment will be issued setting forth the terms and conditions upon which the mortgage will be insured, including special requirements applicable to the project and requiring the submission in final form within a time specified of all appropriate documents, drawings, plans, specifications, and other instruments evidencing full compliance satisfactory to the Commissioner with the provisions of this part and with such terms and conditions."

24 C.F.R. § 232.3 (1959 ed.)

"Mortgage forms. The mortgage must be executed upon a printed form approved by the Commissioner for use in the jurisdiction in which the property covered by the mortgage is situated, by a mortgagor with the qualifications hereinafter provided in the part. * * * Any changes in the printed form desired by the mortgagor and mortgage must receive prior written approval of the Commissioner."

24 C.F.R. 280.30(d) (1949 ed.)

"A reserve for replacement shall be accumulated and maintained with the mortgagee so long as the mortgage insurance is in force, and the amount and types of such reserves and conditions under which they shall be accumulated, replenished and used, shall be specified in the regulatory agreement or charter. Failure to comply with the terms of this requirement may be considered by the Commissioner as a default under the terms of the regulatory agreement or charter."

The appellee's Articles of Incorporation provided for the replacement fund mentioned in 24 C.F.R. § 280.30(d) by requiring that the sum of $388.92 be deposited in such fund monthly.² At the time of the foreclosure proceedings this replacement fund contained the sum of $27,213.32, and the court had reference to this fund when it decreed that this amount should be paid over to appellee before execution could be had on the judgment of foreclosure.

The appellant contends that the district court was in error when it required the repayment of this replacement fund and makes three contentions in respect thereto. (1) It relies upon the decision of United States v. Pine Hill Apartments, 261 F.2d 667 (5th Cir. 1958); (2) it claims that it was entitled to hold the moneys in the replacement fund pending the foreclosure sale by virtue of its right of set-off; and (3) it contends that the court had no jurisdiction to make an award to appellee of the moneys in the replacement fund.

In the Pine Hill case a mortgage was being foreclosed which had been insured by the Federal Housing Administration. The mortgage contained similar provisions to those we find in the instant case. The charter of the mortgagor provided that certain monthly payments should constitute a reserve fund for replacements, and that the fund would be under the control of the mortgagee. There, as here, it was agreed that withdrawals from such fund could be made only upon receipt of permission from the mortgagee. In the Pine Hill case, when a default was made in the payments, the mortgagee "commenced a strict foreclosure by advertising."³ The mortgagor made a demand on the mortgagee that the indebtedness be brought into a current position by the application of funds from the replacement reserve fund. This demand was rejected by the mortgagee. Later, the mortgagee transferred and assigned the note and mortgage to the FHA Commissioner. The replacement reserve fund was also turned over to the Federal Housing Administration which gave the mortgagor notice that the entire sum was due and payable. The United States then commenced an action to foreclose. While it was admitted that certain installments had not been made by the mortgagor when they were due, the contention was made that the moneys that were in the replacement reserve fund should have been applied to cover the unpaid installments and thus prevent the occurrence of a default. The court in its decision disagreed with this contention and stated as follows:

"There is nothing in the mortgage which requires such application nor is there, so far as we can ascertain, any requirement of the Georgia law that such application be made. Therefore, we conclude, the failure to pay the monthly installments put the mortgage in default, and under its terms, the holder was authorized to declare the entire balance due and payable."⁴

Certain contentions were made by the parties as to whether the mortgagor was or was not insolvent. The court, however, stated:

"The Government is entitled to proceed with the foreclosure irrespective of the insolvency of the Company. Should a deficiency exist after the application of the funds subject to the Government\'s lien, including the reserve fund for replacement, and the application of the net proceeds of the foreclosure sale, and the Company is not insolvent, the Government would be entitled to share ratably as to its deficiency with other creditors, including the intervenors, as to unencumbered funds."⁵

We believe that the Pine Hill case supports the contention of appellant that it was not required to use the replacement fund to make up the payments which were delinquent upon the note, and that it was not required to credit the mortgagor with the funds in this reserve replacement fund prior to the time for determination of whether or not there was a delinquency after the foreclosure sale.

We also agree with the second contention made by the government that the government had a right to hold these funds as a set-off against any possible amount due the government after a foreclosure sale. In fact, appellee concedes that the government has a right of set-off, its contention being that the government has no right to choose the time at which it will apply the funds in its hands as a set-off. We cannot agree with appellee's contention in this regard. The payment of the funds in the replacement fund was a condition upon which the money was originally loaned. If the government was required to use these funds to wipe out any possible monthly delinquent...