US v. Drexel View II, Ltd.

• Decision Date: 08 June 1987
• Docket Number: No. 86 C 7200.,86 C 7200.
• Citation: 661 F. Supp. 1120
• Court: U.S. District Court — Northern District of Illinois
• Parties: UNITED STATES of America, Plaintiff, v. DREXEL VIEW II, LIMITED, a California Limited Partnership, Johansen Water Heater Company, Peoples Gas, Light & Coke Company, Defendants.

661 F. Supp. 1120

UNITED STATES of America, Plaintiff, v. DREXEL VIEW II, LIMITED, a California Limited Partnership, Johansen Water Heater Company, Peoples Gas, Light & Coke Company, Defendants.

No. 86 C 7200.

United States District Court, N.D. Illinois, E.D.

June 8, 1987.

Anton R. Valukas, U.S. Atty., by Linda A. Wawzenski, Asst. U.S. Atty., Chicago, Ill., for plaintiff.

Clarence J. Crooks, Chicago, Ill., for defendants.

ORDER

BUA, District Judge.

This order concerns plaintiff's motion to secure possession by the Department of Housing and Urban Development (HUD) of property which is the subject of a pending foreclosure suit. For the reasons stated herein, plaintiff's motion is granted.

I. FACTS

The relevant facts do not appear to be in dispute. Defendant Drexel View II, Limited, a California limited partnership (Drexel View), purchased a low and moderate income housing development from HUD in 1980 for $256,500. To finance the acquisition and rehabilitation of the development, Drexel View obtained a loan in April 1981 for $717,500 from a private lender secured by a HUD insured mortgage note on the property. Drexel View first defaulted on the mortgage note in June 1983 and filed for voluntary bankruptcy in September 1984. In February 1984 the private lender assigned the mortgage note and mortgage to HUD and received payment of its insurance claim. Since the assignment to HUD, Drexel View made several unsuccessful attempts to work out its financial problems. However, only nine payments on the mortgage note have been received by HUD as of the date of this order. Moreover, HUD has been forced to advance over $147,000 in funds to satisfy outstanding real estate taxes.

Presently, Drexel View owes HUD over $1.2 million for principal, interest, and late penalties as well as for funds advanced by HUD for payment of real estate taxes. As little doubt exists Drexel View will have sufficient funds to pay the most recent installment of real estate taxes on the property, HUD will soon be forced to advance additional funds. Affidavits submitted by HUD personnel indicate the physical condition of the development is steadily deteriorating and that HUD Housing Quality Standards are not being met. Moreover, the last accounting report submitted by Drexel View to HUD (October 1986) indicates the tenants' security deposit account is underfunded by approximately $19,000.

II. DISCUSSION

In its instant motion, the government seeks to have HUD placed in possession of the mortgaged property subject to the terms of the mortgage allowing for a receiver to be appointed upon default. The government asserts and Drexel View does not dispute that giving HUD possession of the property and imposing strict reporting requirements on HUD is the equivalent of appointing a receiver. See United States v. American Nat'l. Bank & Trust Co. of Chicago, 573 F.Supp. 1317, 1318 (N.D.Ill. 1983); Real Estate Finance Law, §§ 4.30-32 (1979 Ed.). Thus, the issue presented is whether circumstances exist for enforcing the mortgage provision which calls for the appointment of a receiver prior to consummation of foreclosure proceedings.

Paragraph 5 of the mortgage provides that in the event of default the "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 rents, profits and income therefrom." When faced with situations where a mortgagee has defaulted under a HUD insured mortgage containing the above provision, courts have not hesitated to appoint a receiver. See e.g., United States v. Queen's Court Apartments, Inc., 296 F.2d 534 (9th Cir.1961) (receivership directed during pendency of foreclosure action); United States v. View Crest Garden Apartments, Inc., 268 F.2d 380 (9th Cir.1959) (order denying receiver reversed on interlocutory appeal); Garden Homes, Inc. v. United States, 207 F.2d 459 (1st Cir.1953) (order appointing receiver affirmed); United States v. Mountain Village Co., 424 F.Supp. 822, 828 (D.Mass. 1976) (government entitled to appointment of a receiver in accordance with the terms of the mortgage agreement); United States v. American Nat'l. Bank & Trust Co. of Chicago, 573 F.Supp. 1317 and 573 F.Supp. 1319 (N.D.Ill.1983) (government entitled to the appointment of a receiver in accordance with terms of the mortgage agreement, and any income derived from the project after the mortgagor defaulted on the loan belongs to the government).

Enforcing the receivership provision, courts have ruled that whether a receiver should be appointed was a matter of federal and not state law. See e.g., United States v. View Crest Garden Apartments, Inc., 268 F.2d 380, 382-383 (9th Cir.1959). Thus, whether or not HUD makes an appropriate showing for the appointment of a receiver under state law is irrelevant. The issue is simply whether HUD, pursuant to federal law, is entitled to the appointment of a receiver under the circumstances in this case. A review of the facts in the present case leaves little doubt that HUD has met this burden.

First, courts interpreting similar or identical receivership provisions in HUD insured mortgages have found that proof of default was sufficient to warrant the appointment of a receiver. See e.g., United States v. American Nat'l. Bank & Trust, 573 F.Supp. at 1318. The mortgage in the present case has been in default since it was assigned to HUD in February 1984. Had the bankruptcy court not automatically stayed any foreclosure proceedings against the assets of Drexel View, HUD would have initiated this action over three years ago. As such, the fact that the mortgage has been in default for over three years is sufficient to enforce the receivership provision.

Second, special circumstances exist in the present case which strongly support the appointment of a receiver. The mortgagor is insolvent and is currently in the process of pursuing a voluntary petition in bankruptcy. Drexel View's most recent monthly report reveals that the separate tenants' security deposit account is drastically underfunded. Moreover, the condition of the project is deteriorating. The government argues that HUD has already invested substantial sums of money in the property through the acquisition of the mortgage and the provision of rent subsidies to provide decent housing for low and moderate income families. HUD reports indicate that nearly $486,000 in expenditures is required to conduct repairs and maintenance which were deferred by Drexel View. Simply put, Drexel View does not have the funds to pay its ...