United States v. Stadium Apartments, Inc.

This case presents the question whether state redemption statutes should apply when the Federal Housing Authority (FHA) forecloses a mortgage which it has guaranteed. We hold that such statutes do not apply.

The federal statute here involved is Title VI of the National Housing Act, 12 U.S.C. §§ 1736-1746a. The stated objective of Title VI is "to assist in relieving the acute shortage of housing * * * available to veterans of World War II at prices within their reasonable ability to pay * * *." 12 U.S.C. § 1738(a). The statute confers authority upon the Secretary (formerly the Commissioner) "to make such rules and regulations as may be necessary to carry out the provisions of this subchapter." 12 U.S.C. § 1742. Such regulations were promulgated, and those that were in force in November 1949, when the mortgage here in question was executed and insured appear in the 1947 Supplement to the Code of Federal Regulations. (24 C.F.R. § 580 (1947 Supp.).) Citations to C.F.R. in this opinion are to the 1947 supplement.

The way in which the Act and regulations operated are well illustrated in this case. In 1949, appellee Stadium Apartments, Inc., desired to construct, under Title VI, an apartment house in Caldwell, Idaho. It applied to Prudential Insurance Company for a loan. Such a loan was eligible for insurance under 12 U.S.C. § 1743(a). The conditions for eligibility are set out in 12 U.S.C. § 1743(b). The mortgagor must be approved by the Secretary, who can impose certain regulations upon both the mortgagor and the property mortgaged. Certain terms of the mortgage are also prescribed. Application for approval was made, as required by 24 C.F.R. §§ 580.1-580.7. The FHA then issued a commitment of insurance, as required by 24 C.F.R. § 580.8. The mortgage was executed upon a form prescribed by FHA, and accepted for insurance. 24 C.F.R. §§ 580.10-580.37. The amount of the insured loan was $130,000. The mortgage contained this provision:

"The Mortgagor, to the extent permitted by law, hereby waives the benefit of any and all homestead and exemption laws and of any right to a stay or redemption and the benefit of any moratorium law or laws."

Stadium Apartments defaulted in 1966, and Prudential assigned the mortgage to the Secretary of Housing and Urban Development, pursuant to 12 U. S.C. § 1743(c). The Secretary paid Prudential the amount then due, as required by 12 U.S.C. § 1743(c). The United States then obtained a default judgment foreclosing the mortgage, 12 U.S.C. §§ 1713(k), 1743(f). The district judge, in spite of the foregoing provision, framed the foreclosure decree to allow for a one-year period of redemption, as provided by 2 Idaho Code § 11-402.1 The question is whether this was error.

Stadium Apartments, Inc., having defaulted, is not represented here. Because the question is of some importance, we were disturbed that the government had chosen to appeal this uncontested case, when hitherto the FHA has at times consented to decrees providing for post-sale redemption rights as required by state laws.2 We therefore determined, following the initial oral argument in which only government counsel appeared, that the Attorneys General of the states within our circuit and of the Territory of Guam should be invited to submit amicus curiae briefs. The State of California has done so, taking a position opposed to that advocated by the government. Washington, Arizona and Guam adopt California's view. We were also unsure that the government's position in this case comported with the policies of various federal lending agencies; hence, we requested information from the government regarding such policies, as well as relevant statistics on past lending practices. Armed with this information, and additional briefs, and having now had the benefit of further oral argument, we are more fully prepared to render our decision.

It is settled that the applicable law is federal. In a decision that has become a leading case on the question, United States v. View Crest Garden Apts., Inc., 9 Cir., 1959, 268 F.2d 380, 381, arising under the National Housing Act, Title II, 12 U.S.C. § 1707 ff. we held:

"But we do find it to be clear that the source of the law governing the relations between the United States and the parties to the mortgage here involved is federal. (Citations omitted) * * * It is therefore equally clear that if the law of the State of Washington is to have any application in the foreclosure proceeding it is not because it applies of its own force, but because either the Congress, the FHA, or the Federal Court adopts the local rule to further federal policy." 268 F.2d at 382.

The first question is whether the Congress adopted state law in its definition of "mortgage" and "first mortgage." California argues that it did. The language relied upon appears in 12 U.S.C. § 1736(a), and reads:

"The term `mortgage' means a first mortgage on real estate, in fee simple, or on a leasehold (1) under a lease for not less than ninety-nine years which is renewable; or (2) under a lease having a period of not less than fifty years to run from the date the mortgage was executed; and the term `first mortgage' means such classes of first liens as are commonly given to secure advances on, or the unpaid purchase price of, real estate, under the laws of the State in which the real estate is located, together with the credit instruments, if any, secured thereby."

We rejected California's argument in View Crest, supra, where identical language in 12 U.S.C. § 1707 was relied upon. We said:

"The argument is that in adopting the state definition of `first mortgage,' Congress intended to adopt all the incidents of the mortgage relation under state law including remedies on default and the appointment of receivers. That this is not the case is clear from reading section 1713 of the same Act which defines certain acts as being in default (part g) and sets out certain remedies that the FHA can pursue such as institution of foreclosure (part k) proceedings without reference to whether or not there is such a remedy for the default described in the State where the property is located. Moreover, there is no apparent reason for assuming that Congress in incorporating by reference certain duties under state law also meant to restrict the United States to the state remedies for breach of those duties * * *." 268 F.2d at 382.

We then proceeded to point out the convenience inherent in defining "first mortgage" in terms of local law, thus making available local recording acts, and continued:

"A different set of factors come into play when the planning stage and the working stages of the agreement have been terminated. After a default the sole situation presented is one of remedies. Commercial convenience in utilizing local forms and recording devices familiar to the community is no longer a significant factor. Now the federal policy to protect the treasury and to promote the security of federal investment which in turn promotes the prime purpose of the Act — to facilitate the building of homes by the use of federal credit — becomes predominant. Local rules limiting the effectiveness of the remedies available to the United States for breach of a federal duty can not be adopted." 268 F.2d at 383.

We think that the validity of this approach is emphasized by the fact that the definition relied upon does not refer to state law in defining "mortgage"; it does so only in defining "first mortgage." And the statute now before us, like the statute considered in View Crest, defines default without reference to state law (12 U.S.C. §1743(c)) and provides for remedies without reference to state law (12 U.S.C. § 1743(c)) and porating the provisions of § 1713(k)). No other federal statute is relied upon.3

We conclude that the Congress did not adopt state redemption statutes as part of the federal law.

The second question is, did the FHA adopt those statutes? California says that it did, relying on two arguments. First, it points to the regulations. 24 C.F.R. § 580.18 provides:

"The mortgage must contain a provision or provisions, satisfactory to the Commissioner, giving to the mortgagee, in the event of default or foreclosure of the mortgage, such rights and remedies for the protection and preservation of the property covered by the mortgage and the income therefrom, as are available under the law or custom of the jurisdiction."

No similar provision exists for the mortgagor. Instead, 24 C.F.R. § 580.21 merely provides:

"The mortgage may contain such other terms, conditions and provisions with respect to * * * foreclosure proceedings * * * and other matters as the Commissioner may in his discretion prescribe or approve."

To be eligible for insurance the mortgage must be executed on a form approved by the Federal Housing Commissioner. (4 C.F.R. § 580.10.)

We cannot find in this language an adoption of state redemption statutes. If anything can be said for it, it is that § 580.21 permits a provision against such rights.

Second, California points to the waiver language contained in the mortgage, quoted above in our statement of facts, and particularly to the phrase "to the extent permitted by law." This phrase, California says, must refer to Idaho law, because (1) there is no other law to which it can refer and (2) the mortgage form was prepared for use in Idaho. The argument is buttressed by the contention that there are no federal homestead or exemption laws, or rights to a stay, or redemption or moratorium laws. Cf. Madison Properties, Inc. v. United States, supra, n. 2. We agree that such laws are state laws, but the question is, what law is referred to as permitting that their benefits be waived? It must be the law applicable to this mortgage, which is, as we have seen, federal law. And there is no federal law which says that FHA cannot condition its participation upon waiver of the benefit of such state laws. The provision is in general terms, applicable in any state; it is obviously not specifically adapted to Idaho law. We find the waiver provision merely precautionary, and not an adoption of the local law.

Finally, we come to the third question: should the federal courts adopt the local law granting a post-foreclosure sale right of redemption in those states where it exists? Here, both authority and policy convince us that they should not.

Every federal appellate case dealing with the government's foreclosure remedy under insured mortgages applies federal law to assure the protection of the federal program against loss, state law to the contrary notwithstanding. Most of the cases cite and apply the principles of View Crest. Many cases rely upon express provisions in the mortgage that are in conflict with local law, but frequently couch the decision in broader terms. Several of these cases involve appointment of a receiver pending foreclosure: United States v. Chester Park Apts., 8 Cir., 1964, 332 F.2d 1; United States v. Sylacauga Properties, Inc., 5 Cir., 1963, 323 F.2d 487, 491; United States v. Queen's Court Apts., Inc., 9 Cir., 1961, 296 F.2d 534, 539; United States v. View Crest Garden Apts., Inc., supra, cf. Director of Revenue, State of Colo. v. United States, 10 Cir., 1968, 392 F.2d 307, 311 (Small Business Administration mortgage). One such case holds that the government can collect and retain the rents during the period of redemption (consented to by the government), contrary to local Idaho law. Clark Investment Co. v. United States, supra, n. 2. In United States v. Queen's Court Apts., Inc., supra, we also held, relying on 24 C.F.R. 280.30(d) (1949 ed.) and on a comparable provision in the articles of incorporation of the mortgagor, that pending foreclosure the United States could retain a "replacement reserve fund" and need not, upon foreclosure, apply it to reduce the mortgage debt.

Other cases rely on the applicable federal regulation as controlling over local law. See United States v. Shimer, 1961, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908; United States v. Rossi, 9 Cir., 1965, 342 F.2d 505; McKnight v. United States, 9 Cir., 1958, 259 F.2d 540, 543-544, all dealing with loans guaranteed by the Veterans Administration. Each holds that the federal regulation is controlling, state anti-deficiency judgment statutes to the contrary notwithstanding, because the applicable law is federal. See also Penagaricano v. Allen Corp., 1 Cir., 1959, 267 F.2d 550, dealing with the duty to make repairs.

Many cases simply rely on principles of federal law, in the absence of directly applicable federal statutes or regulations. United States v. Wells, 5 Cir., 1968, 403 F.2d 596; United States v. Walker Park Realty, Inc., 2 Cir., 1967, 383 F.2d 732; Herlong-Sierra Homes, Inc. v. United States, 9 Cir., 1966, 358 F.2d 300; and United States v. Flower Manor, Inc., 3 Cir., 1965, 344 F.2d 958. Each holds that the United States is entitled to a deficiency judgment upon foreclosure, although in each case the local law was to the contrary. United States v. Helz, 6 Cir., 1963, 314 F.2d 301, upholds a personal judgment in favor of the United States against a wife who signed a note guaranteed by FHA in spite of the contrary Michigan law of coverture. See also Director of Revenue v. United States, supra, 392 F.2d at 312, holding that the lien of a first mortgage to the Small Business Administration prevails over a subsequent state tax lien, in spite of local state law, and United States v. Carson, 6 Cir., 1967, 372 F.2d 429, applying federal rather than local law to sustain liability to the United States for conversion of property subject to a chattel mortgage to the United States under the Bankhead-Jones Farm Tenant Act. 7 U.S.C. § 1941 ff.

Through all of these cases there runs a dominant rationale, that stated by us in View Crest, supra, — "Now [after default] the federal policy to protect the treasury and to promote the security of federal investment which in turn promotes the prime purpose of the Act — to facilitate the building of homes by the use of federal credit — becomes predominant. Local rules limiting the effectiveness of the remedies available to the United States for breach of a federal duty can not be adopted." (268 F.2d at 383, emphasis added.)

California relies heavily upon two cases, United States v. Yazell, 1966, 382 U. S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404, and Bumb v. United States, 9 Cir., 1960, 276 F.2d 729. We are convinced that the facts of these two cases are distinguishable.

Yazell involved a Small Business Administration disaster loan which was individually negotiated "in painfully particularized detail." The loan contract referred to Texas law in several respects, and nowhere indicated that the Texas law of coverture would not apply. The Texas law, since repealed, provided that a married woman could not bind her separate property without court order. The Supreme Court held that the SBA could not

"voluntarily and deliberately make a negotiated contract with knowledge of the limited capacity and liability of the persons with whom it contracts, and thereafter insist, in disregard of such limitation, upon collecting (a) despite state law to the contrary relating to family property rights and liabilities, and (b) in the absence of federal statute, regulation or even any contract provision indicating that the state law would be disregarded". 382 U.S. at 350-351, 86 S.Ct. at 506.

The court contrasted the individually negotiated Yazell loan with the mortgage in United States v. Helz, supra. In Helz, the court refused to apply the Michigan law of coverture to a mortgage under the National Housing Act, foreclosed by an agency "which issues separate forms for each State but does not negotiate with individual applicants." United States v. View Crest Garden Apts., Inc., supra, is also cited in Yazell, 382 U.S. at 348 n. 15, 86 S.Ct. with apparent approval. The Yazell Court also emphasized that the Yazell loan involved the "intensely local interests of family property and the protection (whether or not it is up-to-date or even welcome) of married women." 382 U.S. at 349, 86 S.Ct. at 505.

In Bumb this court held that the Small Business Administration should have complied with a California "bulk sales" statute in perfecting its chattel mortgage, but noted that:

"it must be kept in mind that Section 3440.1 [the California Act] regulates only the manner of acquisition of a valid security interest, and does not purport to regulate the remedy of the mortgagee after default by the mortgagor * * *. This distinction was clearly recognized in United States v. View Crest Garden Apartments, Inc., supra. * * *" 276 F.2d at 737.

Here, too, we deal with the remedy, and as we have seen, in every such case involving federally insured mortgages, the courts have applied federal law "for the protection of the treasury and to promote the security of the federal investment."

Reasons of policy dictate the same result. In the first place, only 26 of the states provide for post-foreclosure redemption. The periods of redemption vary widely.4 So do other conditions to redemption and the rules governing right to possession, right to rents, making repairs, and other matters arising during the redemption period. See, e.g., Clark Investment Co. v. United States, supra, n. 2, right to rents. There is a split of authority as to whether the right of redemption can be waived.5 Similarly, there is a split of authority as to the right of the mortgagee to recover the value of improvements made during the redemption period.6 It would be contrary to the teaching of every case that we have cited to hold that there is a different federal policy in each state, thus making FHA "subject to the vagaries of the laws of the several states." Clearfield Trust Co. v. United States, 1943, 318 U.S. 363, 367, 63 S.Ct. 573, 575, 87 L.Ed. 838. Which policy is to be the federal policy, that of the states which do not provide for a period of redemption, or that of those which do? And if the policy is to be the latter, is it to embrace, in each state, all of the special rules applicable in that state alone? Is it to be expanded to establish a federal right of redemption in each state where none exists under local law?

In response to our request, the government has informed us of the views of federal agencies involved in the lending or insuring of funds for private housing purposes. These include, in addition to the Federal Housing Administration, the Farmers Home Administration of the Department of Agriculture, acting under 42 U.S.C. § 1471 ff., and the Veterans Administration, acting under 38 U.S.C. § 1800 ff. We quote the government's response:

"The Farmers Home Administration, the Federal Housing Administration, and the Veterans Administration have informed us that their experience has indicated that the imposition of post-foreclosure-sale redemption periods makes the foreclosure remedy more costly and administratively time-consuming in those states whose local law so provides. Generally, the reasons given in support of this conclusion are * * * that existence of a post-sale period for redemption chills bidding at the foreclosure sale, forcing the United States to buy the property at the sale and to hold it (paying meanwhile the costs of maintenance) until the expiration of the period, when it finally can give good title to a purchaser."

Additional reasons stated by the government are quoted in the margin.7

We do not find the policy arguments presented by California convincing. First, it is argued that the purpose of the redemption statutes is to force the mortgagee and others to bid the full market price at the sale. We assume that this is the purpose; we are not convinced that the statutes accomplish it. What third party would bid and pay the full market value, knowing that he cannot have the property to do with as he wishes until a set period has gone by, and that at the end of the period he may not get it, but instead may be forced to accept a payment which may or may not fully reimburse him for his outlays? In some states he cannot get possession. E.g., California Code Civ.Proc. § 703, Mau, Sadler & Co. v. Kearney, 143 Cal. 506, 77 P. 411; Haynes v. Tredway, 133 Cal. 400, 65 P. 892. In some states if he does get possession and collects rents, they will be deducted from his reimbursement, e.g., Idaho, Clark Investment Co. v. United States, supra. In some states, if he makes repairs, he will not be repaid for his outlays. These are precisely the problems which the federal government should not have to face. It is not in the real estate business. It should not have to hold and manage properties for any period longer than is absolutely necessary for it to get back its money. It should not be subjected to the risk that the property will deteriorate, and it should not be left with no means to protect itself against such losses.

Our doubts as to whether the statutes accomplish the purpose is reinforced by the fact that in many states, partly because of those statutes, real estate financing is almost exclusively secured by trust deeds with power of sale. This is certainly true in California, and the statutory right of redemption does not apply to such sales. Py v. Pleitner, 1945, 70 Cal.App.2d 576, 161 P.2d 393; Roberts v. True, 1908, 7 Cal.App. 379, 94 P. 392. See also, as to Idaho, n. 5, supra. One is tempted to inquire why, if public policy so strongly favors a post-sale period of redemption, the legislature has not applied it to sales under trust deeds? Perhaps it is because the redemption statute has, in some states, made the use of mortgages almost a dead letter.

Moreover, the policy of FHA is to bid the fair market value at the foreclosure sale. For this purpose, it has the property carefully appraised before bidding. See Book 2, Volume VII, Sec. 72926 of the FHA Manual. It is authorized by 12 U.S.C. § 1713(k) to "bid any sum up to but not in excess of the total unpaid indebtedness secured by the mortgage, plus taxes, insurance, foreclosure costs, fees, and other expenses * * *." It bids fair market value for its own protection as well as that of the mortgagor and other lienors. It is limited to the amount specified because the objective is to recover its loss on the mortgage insurance, not to put the government in the business of buying and speculating in real property. Presumably, if the property is worth more, others will increase the bid, the government will be paid in full, and the excess will go to junior lien holders and, if there be sufficient funds, to the mortgagor.

It is also suggested that a purpose of the redemption statutes is to protect junior lienors. Perhaps. But if the objective of the statutes is to obtain bids equal to market value, and if as is argued, the bidding would be lower in the absence of the statutes, then junior lienors could more easily protect themselves in the latter situation. They could buy the property at the sale for less. It is always open to the junior lienors to protect themselves by bidding. They take with notice of the senior lien. Here, the government's judgment was for $93,804.97; its bid was $55,100. The court found the value of the property to be $58,000. The deficiency judgment is for $37,728.88. This is a singularly inappropriate case in which to be concerned about junior lien holders. They simply have no equity in the property. There is no evidence that second mortgagees or contractors are less willing to extend credit on the security of junior liens in the states that have no redemption statutes than they are in the states that do, or in California when the first lien is almost always secured by a trust deed rather than by a mortgage.

Nor is it accurate to say that the application of state redemption rights does not tie up government funds; as this case illustrates, it does do so. Under 12 U.S.C. § 1743(c) the mortgagee has the option of assigning the mortgage to the Secretary and being paid the full amount of the guarantee, instead of itself foreclosing. As might be expected, that is what Prudential did in this case. Why would any mortgagee do otherwise, when by so assigning it can receive the full benefit of the insurance without having to incur the expense and risk attendant upon foreclosure? Under the statute, Prudential received the full benefit of the insurance — government obligations equal to the then total value of the mortgage, in this case more than $90,000. If the redemption period applies, the government must wait a year to get its money back — and it may not then get it all, or even as much as it bid.

We conclude that the Idaho statute providing for right of redemption is not here applicable.

Finally, we note that the district court's decision did not purport to balance state and federal policies in allowing the period of redemption. Instead, it reasoned that Prudential (the original mortgagee) would have been subject to the redemption rights provided by state law, and that the United States could have no more rights than Prudential. Even assuming arguendo that Prudential would have been subject to state law, it does not follow that the federal government is limited to the remedies of the private mortgagee. Cf. Small Business Administration v. McClellan, 1960, 364 U.S. 446, 451-453, 81 S.Ct. 191, 5 L.Ed.2d 200; United States v. Summerlin, 1940, 310 U.S. 414, 416, 60 S.Ct. 1019, 84 L.Ed. 1283; United States v. Anderson, 5 Cir., 1964, 334 F.2d 111; Korman v. Federal Housing Administrator, D.C.Cir., 1940, 72 App.D.C. 245, 113 F.2d 743; Wagner v. McDonald, 8 Cir., 1938, 96 F.2d 273. In none of the federal mortgage cases cited in this opinion was it suggested that state law might control the rights of the United States because it was the assignee of a private insured lender.

That portion of the judgment providing for a right and period of redemption is reversed and the matter is remanded to the district court with directions to modify the judgment in a manner consistent with this opinion.