United States v. Thompson

• Decision Date: 24 August 1967
• Docket Number: LR-67-C-36.,No. LR-66-C-60,LR-66-C-60
• Citation: 272 F. Supp. 774
• Parties: UNITED STATES of America, Plaintiff, v. Vance M. THOMPSON et al., Defendants. M. D. THOMPSON AND SON CO., Plaintiff, v. J. H. COTTRELL, Receiver, Defendant. United States of America, Intervenor.
• Court: U.S. District Court — Eastern District of Arkansas

272 F. Supp. 774

UNITED STATES of America, Plaintiff, v. Vance M. THOMPSON et al., Defendants.

M. D. THOMPSON AND SON CO., Plaintiff, v. J. H. COTTRELL, Receiver, Defendant. United States of America, Intervenor.

Nos. LR-66-C-60, LR-67-C-36.

United States District Court E. D. Arkansas, W. D.

August 24, 1967.

COPYRIGHT MATERIAL OMITTED

Wayne W. Owen, of Moses, McClellan, Arnold, Owen & McDermott, Little Rock, Ark., for defendants in LR-66-C-60 and for plaintiff in LR-67-C-36.

W. H. McClellan, U. S. Atty., Eastern District of Arkansas, and Winston Bryant, Asst. U. S. Atty., for plaintiff in LR-66-C-60 and for defendant and intervenor in LR-67-C-36.

HENLEY, Chief Judge.

Memorandum Opinion

These two cases, which were consolidated for purposes of trial and tried to the Court without a jury, involve the Summit House Apartments in Little Rock, Arkansas. The litigation arose because of the fact that rental income from the apartments was not sufficient to meet construction mortgage payments and to maintain and operate the premises. The owners defaulted in their mortgage payments as of October 1965, and this litigation began in early April 1966.

The construction money loan, made originally by John Hancock Mutual Life Insurance Company, in the principal sum of $3,100,800, was fully insured by the Federal Housing Administration, and in January 1966 the insurance company assigned its security interests to the Federal Housing Commissioner.

Case No. LR-66-C-60, hereinafter referred to as No. 60, was commenced by the Government as a foreclosure suit, and an operating receiver was appointed. Subsequently, the scope of the suit was expanded considerably by amendments to the complaint. The defendants in that case, hereinafter at times called simply the defendants, were Vance M. Thompson of McCrory, Arkansas, and his adult children, Elizabeth T. Russell, H. Ripley Thompson, John G. Thompson, Ruth T. Trammell, William H. Thompson, and Vance M. Thompson, Jr., partners doing business as The Summit House Apartments. The trustee named in the original deed of trust in favor of John Hancock was also named as a formal defendant, but he has no interest in the case.

In No. 60, as it now stands, the Government seeks to foreclose liens on the Summit House real estate, including certain appliances specifically described in a security instrument separate and distinct from the basic deed of trust, and on the furniture in the apartments. The Government also seeks an injunction to enforce certain alleged easements giving convenient access to the premises. And it seeks a money judgment against the partnership and its members for alleged improper transfers and disbursements of project funds as well as for real estate taxes which the Government has been required to pay since taking over the project.

The defendants concede that the Government is entitled to foreclosure on the real estate and appliances. The defendants deny that the Government is entitled to foreclosure with respect to the furniture, deny that the Government has any easements appurtenant to the premises, as it contends, and deny that the Government is entitled to money judgment against them in any sum.

Case No. LR-67-C-36, hereinafter called No. 36, involves the Summit House furniture. It is an action brought by M. D. Thompson & Son, Inc., an Arkansas corporation, against the receiver appointed in No. 60; plaintiff alleges that it has a valid lien on the furniture superior to any claim of the Government, and the complaint charges that the receiver in No. 60 unlawfully converted the furniture and is liable on account of the alleged conversion. The suit was commenced in the Chancery Court of Pulaski County, Arkansas, and was removed here by the receiver. The Government has intervened as a party defendant. The receiver and the Government deny that M. D. Thompson & Son, Inc., has any claim to the furniture superior to the claim of the Government.

Taken together, the two cases involve the following matters and issues:

1. The conceded right of the Government to foreclose on the real estate and appliances.

2. Whether the deed of trust in favor of John Hancock covers the furniture and, if so, whether the lien of the deed of trust is valid as against M. D. Thompson & Son, Inc., which corporation claims to be a secured creditor with respect to the furniture.

3. Whether the Government owns easement rights as claimed by it.

4. Whether and to what extent the defendants are personally liable to the Government for alleged diversions and improper expenditures of project funds and for taxes.

The materials before the Court consist of the pleadings and exhibits, oral testimony, documentary evidence, and memorandum briefs. There is very little dispute about the facts in the case, although some of the facts are not entirely clear.

The Summit House is a "high rise" apartment building located on North University Avenue in the City of Little Rock. It is bounded on the north by certain land owned by Vance M. Thompson personally.¹ The project is bounded on the south by the properties of the Park Plaza Shopping Center. The Shopping Center is a partnership made up of Stephens Co., Inc., which owns 50 percent of the enterprise, Vance M. Thompson, who owns 12.5 percent, and Thompson Brothers Investment Co., which owns 37.5 percent of the enterprise.²

The Summit House was built entirely on borrowed money with the borrowers not being subject to any personal liability for the payments called for by the note and deed of trust. John Hancock was willing to make the loan on the sole security of the properties and their projected earning capacity because of the fact that the Federal Housing Administration was willing to insure the loan to the extent of 100 percent.

Construction of the project was undertaken originally by Paul Kapelow and Lester Gross, and the basic contract documents are a note and deed of trust in favor of the insurance company executed by Gross and Kapelow, and a regulatory agreement entered into between the Federal Housing Commissioner, on the one hand, and Gross and Kapelow, on the other hand. All of those instruments are dated October 8, 1962; the deed of trust and the regulatory agreement were duly filed for record among the land records of Pulaski County.

Construction of the project began in 1962 and continued throughout 1963 and possibly into 1964. Occupancy of the apartments began in early 1964. The John Hancock loan was finally approved for insurance and was disbursed in March 1965.

In 1963 the Thompson partnership, with the consent of the Federal Housing Administration, acquired the interest of Kapelow and Gross for a consideration of $490,000. The partnership assumed the deed of trust in favor of John Hancock and also assumed the obligations of the regulatory agreement which has been mentioned. On November 4, 1963, the defendants and the Federal Housing Commissioner executed a "Modification Of Mortgage And Assumption Of Regulatory Agreement." In substance, that agreement provided, among other things, that the defendants assumed the obligations of Kapelow and Gross but were not personally liable for the payments due under the note and deed of trust or for the payments into the reserve for replacements called for by the original regulatory agreement, or for matters not under their control. However, it was agreed that the defendants, like Kapelow and Gross before them, would be liable personally for funds or property of the project coming into their hands which they were not entitled to retain.

Defendants' articles of co-partnership and the books of the partnership were not made of record here, and it is not possible for the Court to determine the initial capitalization of the partnership. The evidence does reflect that the partnership or its individual members, particularly Mr. Thompson, advanced to the project sums totalling $118,863.80 in addition to the $490,000 paid Kapelow and Gross for their interest.

The partnership at an early stage employed the Little Rock real estate concern of Farris & Co., Inc., hereinafter Farris, as managing agent for the project. Farris administered the project, collected the rents and disbursed funds coming into its hands by way of rentals and by way of advances from the partnership. Project funds handled by Farris were deposited in the Union National Bank at Little Rock; Farris maintained two project accounts, one known as the escrow account, and the other known as the expense account. There was probably some difference between the two accounts, but that difference is not significant here; the auditor for the defendants, who testified at the trial, treated the two accounts as one, and the Court will so treat them.

Of the $118,863.80 advanced to the project by the partnership $25,894.12 was deposited initially in the Farris account and was disbursed by Farris; the other sums advanced did not go into the Farris account.

Tenants of the Summit House paid rent on their apartments and those who rented furnished apartments paid additional rent on their furniture. All rentals were paid into the Farris account. Prior to the receivership Farris collected $602,716.52 as apartment rentals and $18,396.03 as furniture rental.

Farris did not keep the books of the partnership. Those books were maintained at McCrory, Arkansas, which City is the headquarters for the widely diversified operations of Mr. Thompson, and the partnership maintained a bank account in the Bank of McCrory. As stated, the partnership books were not brought into the record, nor were the records of the partnership's McCrory bank account introduced.

As legal counsel the partnership retained the Little Rock law firm of Moses, McClellan, Owen and McDermott. That firm performed substantial services for the partnership in acquiring the properties, settling a number of lien claims of laborers and materialmen which had accrued in connection with the project's construction, and in...