US v. York, Civ. No. 93-839 (CRR).

• Decision Date: 18 July 1995
• Docket Number: Civ. No. 93-839 (CRR).
• Parties: UNITED STATES of America, et al., Plaintiffs, v. John C. YORK, et al., Defendants.
• Court: U.S. District Court — District of Columbia

890 F. Supp. 1117

UNITED STATES of America, et al., Plaintiffs, v. John C. YORK, et al., Defendants.

Civ. No. 93-839 (CRR).

United States District Court, District of Columbia.

May 30, 1995.

Opinion Amending Judgment and Denying Reconsideration July 18, 1995.

COPYRIGHT MATERIAL OMITTED

Jeffrey T. Sprung, Hagens & Berman, Seattle, WA, for plaintiffs, along with Sam W. McCahon, Sp. Asst. U.S. Atty., Washington, DC. On briefs were Sally M. Rider, former Asst. U.S. Atty., along with Eric H. Holder, Jr., U.S. Atty., and John D. Bates, Asst. U.S. Atty., Washington, DC. Of counsel were Harold J. Gross, Sr. Tax Atty., U.S. Dept. of Housing and Urban Development, as well as Pamela J. Bethel and Barbara E. Nicastro, Bethel & Nicastro, P.C., Washington, DC.

Carol A. Jamison presented oral argument in support of brief amicus curiae of Participants Trust Co. On brief was Russell E. Brooks, Milbank, Tweed, Hadley & McCloy, New York City.

Louis Cohen, Wilmer, Cutler & Pickering, Washington, DC, for Counterdefendant York Associates, Inc., defendant John C. York, Jr., and defendant First Commonwealth Sav. Bank. With him on briefs were David P. Donovan, Wilmer, Cutler & Pickering, Washington, DC, and John J. Knapp, Powell, Goldstein, Frazer & Murphy, Washington, DC.

Joseph E. Breen, Breen & Bartlett, P.C., Norwalk, CT, and Steven D. Gordon, Michael Martinez, Holland & Knight, Washington, DC., appeared on behalf of defendant USGI, Inc.

MEMORANDUM OPINION

CHARLES R. RICHEY, District Judge.

                                                TABLE OF CONTENTS
                INTRODUCTION .............................................................................. 1120
                PROCEDURAL BACKGROUND ..................................................................... 1121
                FACTS ..................................................................................... 1122
                       A. The Parties ..................................................................... 1122
                       B. The Quail Run Transaction ....................................................... 1122
                          1) York Associates' Agency Relationship with Ginnie Mae ......................... 1122
                          2) The York-USGI Agreement ...................................................... 1123
                          3) The Quail Run Security Purchase and Redemption ............................... 1123
                       C. The Forest Isle Transaction ..................................................... 1124
                DISCUSSION ................................................................................ 1125
                       I. THE COURT FINDS THAT YORK ASSOCIATES VIOLATED ITS
                          FIDUCIARY DUTY OWED TO GINNIE MAE WHEN IT PURCHASED
                          QUAIL RUN, A SECURITY YORK ASSOCIATES SERVICED
                          FOR THE GOVERNMENT .............................................................. 1125
                          A. In Purchasing the Quail Run Security, York Associates Acquired
                             an Interest in Conflict With the Interests of the United States .............. 1125
                          B. A Subservicer's Purchase and Redemption of Securities it Services
                             for Ginnie Mae Frustrates the Statutory Purpose of the GNMA
                

                             Mortgage-Backed Securities Program, Which is to Fund Low-and
                             Middle-Income Housing ........................................................ 1129
                          C. The Proper Remedy for York Associates' Breach of its Fiduciary
                             Duty to Ginnie Mae in Connection with the Quail Run Transaction
                             is Disgorgement of the Profits it Obtained in Said Transaction and
                             Forfeiture of the Agency Fees that GNMA Paid York Associates
                             as Subservicer ............................................................... 1130
                     II.  THE COURT FINDS THAT YORK ASSOCIATES' PURCHASE OF
                          THE FOREST ISLE SECURITY CREATED A CONFLICT OF
                          INTEREST IN VIOLATION OF ITS FIDUCIARY DUTY OWED
                          TO GNMA AS AN APPROVED ISSUER OF GINNIE MAE MORTGAGE-BACKED
                          SECURITIES ...................................................................... 1132
                          A. Issuers are Agents of GNMA for Purposes of Administering
                             GNMA-Guaranteed Mortgage-Backed Securities ................................... 1132
                          B. York Associates Breached its Fiduciary Duty to GNMA When
                             Having Caused a Default on the Forest Isle Loan, it Purchased
                             and Redeemed the Forest Isle Security ........................................ 1134
                    III.  YORK ASSOCIATES' UNCLEAN HANDS WARRANT A COMPLETE
                          DENIAL OF ANY MONETARY RELIEF IN CIVIL ACTION
                          NO. 91-3094 ..................................................................... 1136
                CONCLUSION ................................................................................ 1139
                

INTRODUCTION

Before the Court are cross-Motions for Summary Judgment.¹ Broadly speaking, the key question presented in said Motions is whether an issuer or subservicer of Ginnie Mae securities may itself purchase Ginnie Mae securities that it issues or services, thereby profiting from Ginnie Mae on the redemption of the securities. The Plaintiffs contend that, by engaging in such activity in connection with two particular mortgage-backed securities, Counterdefendant York Associates engaged in a conflict of interest in violation of a fiduciary duty it owed to Ginnie Mae as an issuer and subservicer of Ginnie Mae securities. The Plaintiffs further allege that York Associates' breach of fiduciary duty was induced by Defendants John C. York, First Commonwealth, and USGI, Inc.

More specifically, Plaintiffs United States of America and the Government National Mortgage Association ("GNMA" or "Ginnie Mae") (collectively, "the Government") argue that (1) York Associates violated its fiduciary duty owed to GNMA when it purchased a security York Associates serviced for the Government ("Quail Run"); and that (2) in purchasing another security ("Forest Isle"), York Associates violated a Ginnie Mae rule that purportedly prohibits an issuer of GNMA mortgage-backed securities who occupies a fiduciary relationship with GNMA from purchasing from private investors the securities it issues and services.²

As relief, the Government seeks disgorgement of profits earned by York Associates on the Quail Run securities transaction, as well as forfeiture of all fees received by York Associates under the Sub-Contract Servicing Agreement it had with GNMA. Moreover, the Government urges the Court to deny York Associates any monetary relief in a related case, Civil Action No. 91-3094 (which has been consolidated with the instant litigation) or, alternatively, to offset the $795,681.00 in profits gained on the Forest Isle transaction against any damages the Court might otherwise award in that matter because, according to the Government, the York Parties have "unclean hands."

The Defendants,³ on the other hand, assert that York Associates breached no implicit duty of its relationship to Ginnie Mae and that, in any event, the extensive relief sought by the Government in this case is not supportable even if there were such a breach. In particular, Counterdefendant York Associates, Defendant John C. York, Jr., and First Commonwealth Savings Bank ("York Parties," collectively), move for (1) summary judgment dismissing the counterclaim by the Government National Mortgage Association in Civil Action No. 91-3094,⁴ as well as the Complaint filed by GNMA and the United States against John York and First Commonwealth in the above-captioned suit, Civil Action No. 93-839;⁵ (2) summary judgment dismissing the "unclean hands" defenses alleged in Civil Action No. 91-3094; and (3) "further necessary and proper relief," pursuant to 28 U.S.C. § 2202, based on the Court's declaratory judgment entered in Civil Action No. 91-3094. Such further relief, in particular, would be in the form of an Order directing the Department of Housing and Urban Development ("HUD") to pay to York Associates supplemental insurance benefits calculated pursuant to said declaratory judgment.

For the reasons set forth herein, the Court shall grant the Government's Motion for Summary Judgment, and deny the Defendants Motions, which include York Associates' request for "further necessary and proper relief" in Civil Action No. 91-3094. As a remedy for York Associates' breach of fiduciary duty owed Ginnie Mae and its co-Defendants' inducement of the same, the Court shall require disgorgement of the profits York Associates obtained in the purchase and redemption of the Quail Run security, and shall direct York Associates to forfeit all fees it received from GNMA under the Sub-Contract Servicing Agreement.

PROCEDURAL BACKGROUND

York Associates, Inc. was a multifamily mortgage lender that issued mortgage loans insured by HUD pursuant to "contracts of coinsurance" authorized by Section 244 of the National Housing Act, 12 U.S.C. § 1715z-9. In December 1991, York Associates filed Civil Action No. 91-3094, a suit against HUD and the Government National Mortgage Association regarding the calculation of mortgage insurance benefits payable by HUD to York Associates in connection with twenty separate coinsurance loans made by York Associates on which borrower defaults had occurred.

HUD and GNMA filed an Answer alleging "unclean hands" and several other affirmative defenses.⁶ Thereafter, HUD and GNMA filed an amended Answer which added a permissive counterclaim by GNMA against York Associates based on an alleged breach of fiduciary duty by York Associates under a Sub-Contract Servicing Agreement between York Associates and GNMA.

GNMA and the United States also filed a separate action, Civil Action No. 93-839, against John C. York individually, First Commonwealth Savings Bank, and USGI, Inc., alleging that each had "induced" the breach of duty by York Associates and were jointly liable therefor.

The Court on Motions for Summary Judgment found for York Associates on the question of statutory construction, but declined...