NEW YORK GUARDIAN MORTGAGEE CORP. v. CLELAND No. 78 Civ. 3649.
473 F.Supp. 422 (1979)
The NEW YORK GUARDIAN MORTGAGEE CORP., Plaintiff, v. Max CLELAND, Administrator of the Veterans Administration, and the Government National Mortgage Association, Defendants.
United States District Court, S. D. New York.
May 8, 1979.
Milgrim, Thomajan & Jacobs, New York City, for plaintiff; George L. Graff, New York City, of counsel.
Robert B. Fiske, Jr., U. S. Atty. for the Southern District of New York, New York City, for defendants; David M. Jones, Asst. U. S. Atty., New York City, Jane M. Edmisten, Asst. Gen. Counsel, Finance, Kathleen D. Koch, Atty. Advisor Dept. of Housing and Urban Development, Washington, D. C., of counsel.
LASKER, District Judge.
This action arises on cross motions for summary judgment. The New York Guardian Mortgagee Corp. ("Guardian") seeks to recover from the Veterans Administration ("VA") on eight claims totalling $96,775. plus interest stemming from VA guarantees of home loans. The VA seeks dismissal of these claims.
The case involves the interplay of two closely related federal programs—the Mortgage Backed Securities Program of the Government National Mortgage Association
In the present case, Eastern Service Corporation ("Eastern"), during 1971, placed the eight VA guaranteed mortgage loans in question here into three different GNMA pools and entered into three standard form Guaranty Agreements with GNMA (the Guaranty Agreement is set forth at Appendix 19 to the GNMA Mortgage Backed Securities Guide, GNMA 5500.1 Rev. 4 (hereafter "GNMA Guide")) so as to become "issuer" with respect to each pool. Between 1972 and 1975, each of the eight loans at issue here fell into default and foreclosure proceedings were instituted by Eastern. With respect to four of the loans (Pritchard, Brown, Rhett and Jones), the underlying property was conveyed to the VA following foreclosure, and claims were made by Eastern on the outstanding VA guarantees and for conveyance of the property.
On April 29, 1975, Eastern assigned to Regency Equities Corp. ("Regency"), a subsidiary of Guardian, all of its interest in the mortgages in the three pools involved here as well as all its rights and duties under the corresponding Guaranty Agreements, and on July 12, 1975, GNMA approved the assignment, thereby recognizing Regency as issuer with respect to those pools. In a letter to the VA on August 5, 1975, Regency inquired about the unpaid claims already
During the pre-assignment period, Eastern is alleged by the VA to have perpetrated a variety of frauds on the VA in connection with other, unrelated, loans. Indeed, it appears that GNMA required Eastern to divest itself of its issuer status as a result of this alleged misconduct. After Eastern's assignment of its rights and duties as issuer to Regency, and after Regency's letter of August 5, 1975, the VA—on October 1, 1975 and March 1, 1976—notified Eastern that the amounts payable to Eastern on six of the claims involved here (Jones, Taylor, Jamison, Rhett, Pritchard and Brown) had been "set off" against Eastern's asserted indebtedness to the VA on seven other "tainted" loans. In the VA's view, these set-offs constituted a final disposition of the guaranty claims on those six loans.
On June 29, 1976, Regency assigned its rights and duties as issuer with respect to the three pools in question here to its parent Guardian. On March 11, 1977, in an action pending between it and Eastern, the Justice Department asserted counterclaims against Eastern for fraud which included the same fraudulent transactions the losses from which had assertedly been satisfied by
Of the eight disputed claims, the VA maintains that six (Jones, Taylor, Jamison, Rhett, Pritchard and Brown) have been satisfied by set-off and that two (Hardy and Barraclough) were extinguished by the settlement agreement.
A. Appropriateness of Summary Judgment: The Issues
At the outset, we must consider whether a "genuine issue as to any material fact" exists. F.R.Civ.P. 56. The VA argues that the guaranty claims here in question cannot be brought by Guardian because the assignments by virtue of which it asserts entitlement to them failed to conform to the Assignment of Claims Act, 31 U.S.C. § 203. Guardian responds that the Assignment of Claims Act is inapplicable here and that the set-offs and the settlement agreement which the VA claims discharged its guaranty obligations with respect to these eight claims, were ineffective. If the Assignment of Claims Act invalidates the assignments through which Guardian asserts its rights, Guardian's present claims against the VA must be dismissed for want of standing.
Even if the Assignment of Claims Act bars Guardian's present claims, however, it will still be necessary to consider whether the VA has discharged its guaranty obligations via "set-off" or "settlement." GNMA recently sought, in this same action, to compel Guardian, as "issuer", to advance to pool security holders an amount equal to the uncollected "prepayments" involved here. Guardian countered seeking a declaration that it had no duty to make such lump sum advances of prepayments from its own funds. On January 8th, we held that during the period within which a GNMA issuer seeks with due diligence to collect on VA guarantees of foreclosed mortgages for the benefit of the pools, its only duty is to advance scheduled payments from its own funds. The New York Guardian Mortgagee Corp. v. Cleland et al., supra, 473 F.Supp. at 409. However, we reserved the question of whether an issuer has a duty to pay from its own funds a lump sum equal in amount to "prepayments" which are judicially determined to have been made by a guarantying agency (e. g. by set-off) but which are never received by the issuer. Id. at 417. This question was reserved because, due to our separate consideration of the dispute between Guardian and GNMA, we had no basis for determining whether a "prepayment" had in fact been made by the VA. Since that question is squarely raised here, we must now consider whether the set-offs and compromises noted above constitute "prepayments." If they do, then we must decide the question previously reserved. If, however, the VA has not made
B. The Merits
1. Discharge by the VA of its Guaranty Obligation. The VA does not dispute that its guarantees on the eight loans in question here were valid obligations which it was required to pay the proper party. It argues, however, that Eastern was the proper payee at the time of foreclosure on the underlying mortgages; that Eastern remained the proper payee since failure to comply with the Assignment of Claims Act prevented it from making any valid assignment of its claims on these guarantees; and that it has "paid" Eastern via set-off and compromise and thereby extinguished its obligations. The last argument is dealt with first.
The VA's arguments that it has discharged its guaranty obligations by set-off and compromise may be considered together since both proceed on the assumption that the guarantees in question were the personal assets of Eastern, which it was free to compromise or which its creditors were free to reach by set-off.
Although the duty of a GNMA issuer to make payments to security holders is neither a "trust" nor a "debt" in the strictest sense, it has attributes of both, and for the purposes of determining whether pool assets should be sheltered from unrelated set-offs by a guarantying agency, these common law concepts provide a helpful framework for analysis.
Traditional characteristics of a trust relationship are that the trustee has a duty to
In light of these principles, the following characteristics of the relationship between GNMA, its issuer, and its security holders seem relevant. The statute authorizing the program provides for issuance of securities "based on and backed by" specified guaranteed mortgages in a "trust or pool." 12 U.S.C. § 1721(g). The issuer, at the time the pool is created, assigns all its rights in the underlying mortgages (including its rights to all interest, principal, and other payments made on or with respect to such mortgages") to GNMA "[t]o provide a base and to back all securities issued . . .." Guaranty Agreement § 3.01. The authority of the issuer to "file, process and receive the proceeds from . . . guaranty claims" is specifically made subject to this assignment. Id. § 4.14. The assignment to GNMA is then delivered "in recordable form but not recorded" to a custodian bank along with the mortgages themselves, the notes endorsed in blank, and the signed VA guarantees. Guaranty Agreement § 3.06. The assignment is to remain unrecorded unless the issuer defaults on payments to security holders and GNMA exercises its option to assume issuer responsibilities. Id. §§ 8.05, 8.08; 21 U.S.C. § 1721(g). Each mortgage backed security certificate states that the holder is "the owner of an undivided beneficial interest in the pool", which is certified to consist of mortgages guaranteed, inter alia, by the VA. A "custodial account" is established, into which the issuer deposits proceeds from the pooled mortgages and from which withdrawals may generally be made only for payments to security holders. Guaranty Agreements §§ 4.14, 7.03.
If the securities at issue here were "straight pass-through" securities (i. e. the issuer's only duty is to pass through payments arising from pool mortgages as it receives them, 24 C.F.R. § 390.5), we would have virtually no reservations in finding a trust relationship. However, with respect to "modified pass-through" securities of the type here involved, the issuer is obliged to meet "scheduled" payments "whether or not collected." 24 C.F.R. § 390.5. Thus when amounts equal to scheduled payments are not collected from the pool mortgages, the issuer has a duty to advance from his own funds amounts equal to the payments which should have been collected. If the delinquent payments are ultimately forthcoming, the issuer may charge advances made against the custodial account. Guaranty Agreement § 4.12. If not the loss falls on the issuer. This aspect of the "modified pass-through" arrangement is clearly inconsistent with the trust model. Generally, a trustee's personal liability to the beneficiary is limited to breaches of his duties as trustee. Restatement (Second) of Trusts § 205. Losses stemming from the failure of trust assets to produce generally fall on the beneficiary. Id. § 204. "A trustee is not a guarantor of the value of the trust property." Scott, supra § 204, at 1662.
This arrangement, however, does not defeat the trust analogy. Most importantly, even in the case of modified pass-through securities the issuer is not personally liable either to security holders or to GNMA for payments due but not collected provided it diligently performs its duties as issuer. Guaranty Agreement § 7.01. The mortgage backed security certificates expressly state:
The issuer's only obligation runs to GNMA, see Guaranty Agreement § 4.03, and GNMA's only sanction is to terminate an issuer's status if payment is not made. Guaranty Agreement Article VIII. Thus unlike the conventional debtor or obligor on a third party beneficiary contract, the personal assets of the issuer cannot be reached. The consequence of default is transfer of legal title in the pool mortgages to GNMA and loss of issuer status. It seems anomalous that those who have become creditors of an issuer from unrelated transactions should be given an access to these guaranty claims superior to that of those in whose behalf the claims are asserted.
Moreover, we recently held that although a GNMA issuer has a clear duty (albeit enforceable only by loss of status) to advance scheduled payments to security holders "whether or not collected", that duty does not extend to prepayments, which need not be advanced at least during the collection period. We left open the question of whether, once the collection period has ended and it is determined that a prepayment has been made, the issuer has any duty to make such prepayments from its own funds. The VA now asserts that there is such a duty and argues that this makes the issuer the "real party in interest" with respect to prepayments from pooled mortgages. The VA argues that since a GNMA issuer asserting a guaranty claim simply asserts that claim in order to free itself of a duty to pay which will arise if it does not collect, the proceeds of that claim must be deemed assets of the issuer.
This argument suffers from several defects. First, assuming without deciding that the issuer is ultimately responsible to security holders for "prepayments" made but not received, it has already been noted that this responsibility would not constitute a conventional debt obligation, because the property of the issuer cannot be directly reached by either GNMA or the security holders. Moreover, the analysis proposed by the VA would enable guarantying agencies unilaterally to substitute for their own credit (which is presented to prospective GNMA investors as enhancing the safety of their investment, see Prospectus, GNMA Guide, Appendix 20, p. 4) that of the issuer. If it were not for the fact that GNMA also guarantees the investment of its security holders with the full faith and credit of the United States, this argument would be dispositive. Even considering the GNMA guaranty, however, it is by no means clear why the happenstance that the security holder is insured against loss by one government agency should affect his rights, as asserted by the issuer, against another. The Guaranty Agreement plainly states, § 6.04, that the GNMA guaranty shall not detract from the rights of security holders as set forth in the mortgage-backed security certificates. Those rights, of course, include a beneficial interest in the pool of guaranteed mortgages.
A more basic defect with the VA's argument, however, is that it proves too much. If an issuer stands in a simple debt relationship with security holders, there is no logical reason why pool mortgages themselves should not be subject to attachment by the general creditors of the issuer. Also a general creditor of an issuer could attach the issuer's right to collect on scheduled pool mortgage payments. In the latter case it is clear that the issuer has a duty to pay security holders "whether or not" the issuer collects (on pain of loss of issuer status). Yet it seems likely that such broad exposure of pool assets would substantially disrupt the GNMA program.
We conclude that claims plainly asserted on behalf of GNMA pools should not be subject to set-offs arising from claims asserted by VA against the issuer personally. Prompt payment by the VA will insure that payments due to security holders will be quickly passed through to them. The VA is at all times free to bring an action against the issuer personally. Except perhaps for some litigation costs, this will generally not prove more expensive to the Government. If the issuer is solvent and the claim against it is valid, the VA will be reimbursed. If the issuer is insolvent, the burden will fall on the VA. However, if the VA were allowed to set off and the issuer were insolvent, the burden would simply be transferred to GNMA. The only difference, at least generally, is which pocket the Government pays out of.
In sum, we find that GNMA security holders are the beneficial owners of the proceeds of pool mortgages, and the VA is not free to treat claims made upon it by issuers on behalf of the GNMA pools as the personal assets of the issuer. To work an offset, the debts must be due and owing to and from the same persons in the same capacity. See Nedd v. United Mine Workers of America, 556 F.2d 190, 214 (3d Cir. 1977) (dictum); Bulasky v. FDIC, 442 F.2d 341 (9th Cir. 1971); Restatement (Second) of Trusts § 266. For the same reason Eastern had no power to compromise the United States' counterclaims against it personally by relinquishing claims which it was empowered to assert only in behalf of the pools. Therefore, neither the purported set-off nor the Settlement Agreement satisfied the VA's guaranty obligations.
2. Assignment of Claims Act. Having concluded that the VA has not discharged its guaranty obligations, it must be determined whether Guardian is the proper party to assert the corresponding guaranty claims. The VA maintains that Guardian is barred from recovery by the Assignment of Claims Act, 31 U.S.C. § 203.
The VA argues first that Eastern, as a GNMA issuer, was the proper payee at the time of default and foreclosure on the underlying mortgages. There seems to be little doubt but that a GNMA issuer is the proper payee on VA guarantees underlying pool mortgage loans. The VA is required by statute to pay the "holder" of the guaranteed obligation, 38 U.S.C. § 1816(a), and the VA asserts that its consistent administrative practice in connection with claims made on guaranteed mortgages backing issues of GNMA securities is to treat the GNMA issuer as "holder." Brodie Affidavit
The VA next argues that Eastern must have remained the proper payee because the Assignment of Claims Act (the Act) prevented it from making any valid assignment. The Act provides in pertinent part:
The Act goes on to list certain formalities which, if complied with, preserve such assignments. It is conceded that those formalities were not observed here. The VA argues that its mortgage guarantees, although freely assignable up to a point, see 38 U.S.C. § 1802(c), become "claim[s] upon the United States" once the underlying mortgage is foreclosed and a demand for reimbursement is made.
In the present case, Eastern foreclosed on all eight of the underlying mortgages prior to its April 29, 1975 assignment of its interests as issuer to Regency. It had also filed guaranty claims on four of those mortgages, but had not received full payment. Regency, after GNMA's July, 1975 approval of the April assignment, filed the remaining claims, and then, on June 29, 1976, assigned its interests as issuer to its parent Guardian. The VA maintains that both these assignments fell within the Act and that, since they did not comply with its formalities, were "null and void".
As already noted, see note 8 supra, the VA does not maintain that the assignments here were ineffective to convey issuer status to Guardian. To do so would be highly incongruous since GNMA, which is represented in this matter by the same attorney as the VA, has sought to enforce issuer duties against Guardian in connection with these very claims. See The New York Guardian Mortgagee Corp. v. Max Cleland, et al., supra. The Government argues that the assignments here were invalid only to the extent that they purported to convey "claims" already made against the United States at the time of the assignments. Thus the VA argues that Eastern remained "holder" of the claims at issue here even after it had ceased to be issuer with respect to the pools on behalf of which the claims were made.
This last point calls attention to the problematical aspects of the VA's argument. If Eastern can retain a "holder's" right to receive payment after having divested itself of an issuer's duty to pass that payment on to security holders, this anomaly seems to strike at two important foundations of the GNMA mortgage-backed securities program —first, that the issuer is entitled to receive proceeds from the pools for the purpose of passing them on to security holders; and second that pool mortgages be insured or guaranteed, inter alia, by the VA.
In view of this apparent conflict between the Assignment of Claims Act as the VA would apply it here and these aspects of the GNMA program,
As this large number of exceptions suggests, there must be some congruence between the Act and its purposes before it is applied. In the present case, there seems little danger that "persons of influence" might buy up VA mortgage guaranty claims held by GNMA issuers. An issuer's right to collect is limited under the Guaranty Agreement to collections made on behalf of the pools. See §§ 4.14, 3.01, 411.
The possibility that the government may be faced with multiple claimants is somewhat more troublesome,
We conclude that the Assignment of Claims Act should not be applied in connection with assignments of issuer status done in accordance with GNMA requirements even when such an assignment has the effect of incidentally passing along a "claim" already filed by the assignor issuer on behalf of the pools. This seems consistent with the rule, applied in a somewhat analogous situation, that absent a change in beneficial ownership, the Act should not bar a shift in formal title to a claim. See Mitchell Canneries, Inc. v. U. S., 77 F.Supp. 498, 504, 111 Ct.Cl. 228 (1948) (partnership assigns claim to corporate successor to partnership); Wells Fargo Bank & Union Trust Co. v. United States, 115 F.Supp. 655, 658 (N.D.Cal.1953), aff'd, 225 F.2d 298 (9th Cir. 1955) (transfer by corporation to sole stockholder); Roomberg v. United States, 40 F.Supp. 621 (E.D.Pa.1941). See also Comment, supra, note 20, 68 Yale L.J. at 521 n.31. This rule has been applied in this circuit, where it has been held that a liquidating distribution by a close corporation to its stockholders of a claim against the government is not subject to the Act. Novo Trading Co. v. Commissioner, 113 F.2d 320, 322 (2d Cir. 1940). There, the court noted that since the assignment merely passed legal title to parties who already owned the entire beneficial interest in the claim, it was not within the evils at which the Act is directed. Id. See also Consolidated Paper Co. v. United States, 59 F.2d 281, 288 (Ct.Cl.1932); Kingan & Co. v. United States, 44 F.2d 447, 450-51, 71 Ct.Cl. 19 (1930); United States v. Improved Premises, 204 F.Supp. 868, 871 (S.D.N.Y.1962). We conclude that here, where the beneficial interest also remained unchanged throughout, the result should be the same.
Guardian's motion is granted; the VA's motion is denied.
ON AWARD OF INTEREST
On May 8, 1979 this Court concluded by summary judgment (1) that the Veterans Administration had not discharged its obligations as guarantor of the home mortgage loans involved in this suit, either by "setoff" or by settlement of fraud claims the government asserted against the party who through mesne assignments assigned the loans to the New York Guardian Mortgagee Corp. (Guardian); and (2) that Guardian was the proper party to assert the claims against the undischarged guaranty obligations, even though the assignments by which Guardian had asserted its entitlement to the claims did not conform to the Assignment of Claims Act, 31 U.S.C. § 203.
Guardian has submitted for the Court's approval and signature a proposed judgment and certification pursuant to Rule 54(b), Fed.R.Civ.P., awarding it $96,779.37 plus interest on eight of the claims it sued upon, and the VA has submitted a counter-proposed judgment which, however, makes no award of interest. The government claims that the general rule that the doctrine of sovereign immunity bars an award of interest against the United States unless it is expressly authorized by statute or contract, e.g., United States v. Alcea Band of Tillamooks, 341 U.S. 48, 49, 71 S.Ct. 552, 95 L.Ed. 738 (1951), bars an award of interest against the VA in this case, too.
The government's position is mistaken.
First, Congress in 38 U.S.C. § 1820(a)(1) (1976), as amended by the Veterans Disability Compensation and Survivor Benefits Act of 1977, Pub.L.No. 95-117, § 403, 91 Stat. 1066, has empowered the Administrator to "sue and be sued" in his official capacity with respect to matters arising, inter alia, by reason of his guaranteeing home mortgage loans like those involved here, pursuant to 38 U.S.C. § 1801 et seq.
Finally, the cases the government has cited are inapposite. In two, May Department Stores Co. v. Smith, 572 F.2d 1275 (8th Cir.), cert. denied, 439 U.S. 837, 99 S.Ct. 122, 58 L.Ed.2d 134 (1978), and DePaul Community Health Center v. Campbell, 445 F.Supp. 484 (E.D.Mo.1977), the courts held that the Administrator was immune to garnishment procedures to effectuate judgments against VA employees in state courts. In May Department Stores Co. v. Smith, supra, 572 F.2d at 1277-78, the court included in its discussion of the legislative history of the 1977 amendment to 38 U.S.C. § 1820(a)(1) (not applicable to that case) language reaffirming Congress' intent that the "waiver of sovereign immunity in section 1820 extends only to home-loan guaranty matters." S.Rep.No. 412, 95th Cong., 1st Sess., 22-23 reprinted  U.S. Code Cong. & Admin. News pp. 2636, 2652-53.
Neither the garnishment cases the government has cited nor the amendment to 38 U.S.C. § 1820(a)(1) suggests that Congress or the courts have limited the extent of the waiver of sovereign immunity in suits relating to home-loan guarantees to exclude an award of interest where appropriate. Indeed, Congress' continued failure to prohibit the award of interest in such suits suggests at least Congressional acquiescence in such awards.
A third case the government has cited, Fischer v. Department of Transportation, 430 F.Supp. 1349 (D.Mass.1977), mod. on other grounds sub nom. Fischer v. Adams, 572 F.2d 406 (1st Cir. 1978), involved a claim for prejudgment interest on a back-pay award in a Title VII action. In this case, the Administrator was of course not sued in a matter related to home-loan guarantees.
For the above reasons the doctrine of sovereign immunity does not bar the award of interest on sums recoverable from the Administrator on home-loan mortgages the VA has guaranteed and accordingly the judgment will include such interest.
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