United States v. Woodland Terrace, Inc.
| Decision Date | 05 August 1961 |
| Docket Number | No. 8244.,8244. |
| Citation | 293 F.2d 505 |
| Parties | UNITED STATES of America, Appellee, v. WOODLAND TERRACE, INC., Appellant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Louis M. Shimel and J. C. Long, Charleston, S. C. (W. Turner Logan, Charleston, S. C., on the brief), for appellant.
George E. Lewis, Asst. U. S. Atty., Columbia, S. C. (N. Welch Morrisette, Jr., U. S. Atty., Columbia, S. C., on the brief), for appellee.
Before SOPER, HAYNSWORTH and BOREMAN, Circuit Judges.
At issue is the right of the United States to foreclose a mortgage on a rental housing project, a mortgage which it had insured through the Federal Housing Administration and later, after the mortgagor's default, acquired by assignment. The Master, to whom the matter was referred, and the District Court found no impediment in the right of foreclosure. We find none.
Woodland Terrace, Inc. was organized in 1949 in South Carolina for the purpose of constructing and operating a rental housing project under § 608 of the National Housing Act.1 Its charter was in the form approved by FHA. That agency was the owner of an entire issue of preferred stock, having an aggregate par value of $100. The project's individual sponsors acquired 259 shares of common stock having an aggregate par value of $25,900 in exchange for the land near Columbia, S. C., upon which the improvements were to be erected.
Woodland Terrace obtained from Wachovia Bank and Trust Company a loan, insured by FHA, of $1,256,100 payable interest only through October 1950 and thereafter in monthly instalments of principal and interest of $5,757.12 over a period of approximately thirty-three years. The loan was evidenced by a note and secured by a mortgage on forms approved by FHA.
Woodland Terrace then constructed "garden type" apartment buildings on the land it had acquired from the holders of its common stock. It operated and managed the project until a receiver was appointed in these proceedings.
The mortgagor defaulted in the payment of the instalment on the loan due April 1, 1957 and of all subsequently accruing instalments. On May 28, 1957 it wrote to the district office of FHA saying it was unable to meet the April instalment. It explained its financial difficulty by reference to a current vacancy rate of twenty per cent which it attributed to an excess, in past years, of new housing starts over the increase of new families in the area. It expressed the hope that its occupancy rate would improve with continued curtailment in the construction of new houses and continued growth in population. It requested a "work-out arrangement."
The State Director of FHA responded on June 13, 1957. He reported that he was informed by the Washington Office of FHA that no consideration could be given the request of Woodland Terrace for a work-out arrangement until the mortgagee elected to assign the mortgage or to acquire the property for tender to FHA. He wrote again on June 27, 1957, however, to inform Woodland Terrace that FHA officials had decided to proceed to foreclosure as soon as the mortgage was assigned.2
The mortgage was assigned to FHA on July 12, 1957. Thereafter, these proceedings to foreclose the mortgage were commenced.
The mortgagor concedes it would have no defense to foreclosure by the mortgagee. The mortgage expressly contemplates foreclosure in the event of default and a deficiency judgment if the mortgaged property brings less than enough to satisfy the debt and costs. It relies upon representations which it construes as a promise by FHA not to exercise its right of foreclosure.
The United States actively promoted the construction of such projects by private business and the use of FHA insured financing. In doing so it promised to be a lenient and understanding creditor, but we agree with the District Court that it did nothing to relinquish its right of foreclosure of a mortgage in default assigned to it if it decided to pursue that course.
In passing the Veterans' Emergency Housing Act of 1946,3 the Congress found that the combination of the return of veterans of World War II and a long-term housing shortage had created an unprecedented emergency. It called upon executive agencies to exercise their emergency and other powers toward the alleviation of the housing problem.
On December 23, 1946, President Truman announced that a vigorous housing program would be continued into 1947. He emphasized particularly the need of rental housing for returning veterans.
On January 2, 1947, the Commissioner of the Federal Housing Administration wrote to the directors of all FHA field offices, outlining a program for the construction of rental housing for veterans. Among other things, he outlined steps which had been taken to simplify procedures in the approval and financing of § 608 projects. He said action was being taken to expedite the handling of requests for prevailing wage determinations by the Department of Labor.4 With respect to the adjustment of the terms of mortgages, he said:
Statements of similar import appeared in press releases and other documents. With the one exception noted below, they all clearly stated that in appropriate cases consideration would be given to the adjustment of mortgage terms, and committed the United States to no specific adjustment of the terms of any mortgage.
On January 7, 1947, the Assistant Commissioner sent to the directors of the field offices a circular which the directors disseminated to builders, realtors and others. This circular referred to President Truman's statement, the Commissioner's letter of January 2, 1947, and it listed a number of steps which had been taken to simplify procedures under § 608. In this list, there was the following paragraph:
This statement was clearly referable to procedures. The record discloses internal provisions for handling requests for the adjustment of mortgage terms in appropriate cases. Announcement of the establishment of such procedures cannot be construed as a general representation that, whenever earnings were adversely affected by low occupancy rates, mortgage terms would be so adjusted as to obviate all defaults. We agree with the District Court that these representations gave assurance of consideration of requests for modification of the terms of mortgages in appropriate cases, but cannot be construed as a relinquishment of the right of foreclosure.
There was also testimony that on January 15, 1947 at an area meeting sponsored by FHA for the information of people interested in considering construction of § 608 projects, representatives of FHA stated that, in the event of a default, FHA would exercise its right as preferred stockholder to take active charge of the management of the corporation and would operate the project, for the benefit of the common stockholders, until the default was remedied. Some of those who, over two years later, became the promoters and stockholders of Woodland Terrace testified they heard and relied upon such statements.
If these statements were made,5 they do not aid the mortgagor here.
FHA's position as preferred stockholder and the charter provisions giving it the right, in specified circumstances, to replace the Board of Directors and assume active management of the company, were among the many things required by FHA as prerequisites to its insurance of the mortgage. These requirements were imposed for the protection of FHA, not for the benefit of the holders of the common stock of the mortgagor. Doubtless, if FHA exercised the right to assume immediate control of the affairs of the mortgagor, it would have a fiduciary duty of conservation and avoidance of waste of the stockholders' equity, if there was one. The naked, unexercised power, however, is...
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