The opinion of the court was delivered by: Prentice H. Marshall, District Judge.
In this mortgage foreclosure suit, the United States has moved
for immediate possession of the mortgaged property or in the
alternative, for appointment of a receiver to take possession
pending the outcome of this litigation. The Secretary of Housing
and Urban Development is the lawful holder of the mortgage
executed by mortgagor American National Bank, the trustee of the
property. The beneficial owners and Sack Realty, the managing
agent of the property, are also joined as defendants. The
defendants have no objection to HUD taking possession of the real
property and the application of rents later received toward
payment of the indebtedness. Defendants contest, however, the
request by plaintiffs to be granted immediate possession of bank
accounts associated with or derived in any way from the mortgaged
property, tenant's security deposits, and all property of the
mortgagor of any nature in, on, connected with or used in the
operation of the mortgaged property.
The United States asserts that HUD is entitled to possession of
the property by virtue of a clause in the mortgage which reads:
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 the
rents, profits and income therefrom.
Exhibit B to Complaint, Paragraph 5. The courts have consistently
read such clauses to permit the appointment of a receiver. United
States v. Queen's Court Apartments, Inc., 296 F.2d 534 (9th Cir.
1961); Garden Homes v. United States, 207 F.2d 459, 460 (1st Cir.
1953); United States v. Mountain Village Co., 424 F. Supp. 822
Appointment of a receiver is further justified by the special
circumstances of this case. Among these circumstances is that
although the owners of the project claimed lack of funds as the
explanation for failing to make numerous repairs found necessary
by a HUD inspection, Exhibit I to Plaintiff's Motion, the balance
sheet for the project showed large sums of money invested in
United States Treasury Bills. Exhibit B to Plaintiff's Motion.
Such an investment is in direct violation of the Regulatory
Agreement between HUD and defendant Sack Realty, which requires
all rents and receipts of the project to be kept in an FDIC
insured bank.*fn1 Although the defendant Sack Realty was notified in
writing that such an investment violated the Regulatory
Agreement, Exhibit G to Plaintiff's Motion, the funds were not
restored to the use of the project.
A further justification for appointing a receiver is the policy
underlying the Federal Housing Act through which the project was
funded. Government financing promotes the goal of suitable
housing for lower income families. 12 U.S.C. § 1701 et seq.
(1976). If programs for government funding are to continue, the
government must have its investments protected. As the court said
in View Crest Garden Apartments, Inc. v. United States,
281 F.2d 844 (9th Cir. 1960), "good reasons appear for holding that
federal policy requires affording every reasonable protection to
the security of federal investment." Id. at 848.
The United States asserts that giving HUD possession of the
property and imposing strict reporting requirements on HUD is the
equivalent of appointing a receiver. See, Real Estate Finance Law
§§ 4.30-32 (1979 ed.). Because the defendants have no objection
to rendering possession to HUD rather than to a receiver,
possession of the property is granted to the United States during
the pendency of the action.
The only remaining issue then is what property is to be covered
by the order. The defendants agree that HUD is entitled to
receipts after it takes possession, but argue that the
traditional rule that a mortgagee has no rights to rents
collected before it takes possession of the property must apply.
See, In re Matter of Michigan Avenue National Bank, 2 B.R. 171
(Bkrtcy.N.D.Ill. 1980). The United States contends that a
departure from the
general rule is suggested by the policies of the Fair Housing
Act. What actually takes this case out of the general rule,
however, is the language of the HUD mortgage, which defines the
mortgaged property, not only as the real property, but also "the
tenements, hereditaments and appurtenances thereunto belonging,
and the rents, issues, and profits thereof." Exhibit B to
Complaint. Property acquired from the operation of the building
then is within the definition of property in the mortgage and is
subject to the clause entitling the mortgagee to appointment of
a receiver upon the default of the mortgagor.
In Mountain Village, a HUD foreclosure suit, the court was
faced with the identical description of mortgaged property as
well as the same provision for appointment of a receiver. There
the court declined to vacate its order to the defendant in
default "to turn over . . . all of the mortgaged property, real,
personal, and mixed, including the bank accounts associated with
or derived in any way from the mortgaged property, tenants'
security deposits, and all property of any nature in, on, or
connected with or used in the operation of the mortgaged
property." 424 F. Supp. at 829. The United States requests the
same scope of property as the order in Mountain Village. The
court there decided that the property described in its order was
included in the language of the mortgage:
If the terms of the mortgage govern as to the
appointment of a receiver, then the court must also
look to that contract to ascertain the precise powers
bestowed upon the receiver by such appointment. The
mortgage provides for the appointment of a receiver
"to take possession and protect the property
described herein and operate same and collect the
rents, profits and income therefrom." . . . The
mortgage and Regulatory Agreement broadly define the
meaning of such property. I conclude that the
property which defendant was ordered to turn over to
the receiver comes within that definition.
Similarly, the property requested by the United States is
covered by the definition of the mortgaged property. Because
defendants have no objection to HUD taking possession instead of
a receiver, HUD is granted possession ...