Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 1 of 11

IN THE UNITED STATES COURT OF FEDERAL CLAIMS ________________________________ ) ) ) ) Plaintiff, ) ) v. ) ) THE UNITED STATES, ) ) Defendant. ) ________________________________) BENJAMIN & SHAKI ALLI AND BSA CORPORATION,

01-669C (Judge Allegra)

DEFENDANT'S REPLY TO PLAINTIFFS' RESPONSE TO DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT Pursuant to Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"), defendant, the United States, respectfully submits the following reply to the answer to our motion for partial summary judgment filed by plaintiffs, Benjamin and Shaki Alli and BSA Corporation. Our statement of facts appears in full in our motion for partial summary judgment. Briefly, plaintiffs bring breach of

contract claims against the United States regarding three apartment buildings owned and managed by plaintiffs. 1.1 Def. Mot.

All three buildings were covered by a Housing Assistance Id. at 3-7. HUD

Payment contract ("HAP contract") with HUD.

held a mortgage on two of the buildings, the Pingree apartments and the Collingwood apartments, and each of those buildings were also covered by a regulatory agreement. Id. Plaintiffs claim

Defendant's Motion for Partial Summary Judgment, filed on August 15, 2005, will be cited as "Def. Mot." followed by the specific page reference.

1

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 2 of 11

HUD refused to approve the sale of the Collingwood apartments, and that this alleged refusal breached a sale upon approval clause in the respective HAP and regulatory contracts. On August 15, 2005, we filed a motion for partial summary judgment upon plaintiffs' claim based upon plaintiffs' failure to submit a transfer of physical assets application ("TPA application") and a failure to identify a contractual duty that had been breached by defendant. On September 7, 2005, plaintiffs filed an answer to our motion to dismiss. In their answer, plaintiffs argue that HUD Id. at 2.

had no discretion and was contractually obligated to approve the sale of the Collingwood apartments to Cory Fanning. 6.2 Pl. Br. 5-

Plaintiffs also argue that Mr. Fanning's lender, GMAC

Commercial Mortgage Company ("GMAC"), sought FHA insurance for the proposed loan, and that HUD's alleged denial of that financing constituted a denial of the sale as a whole. Id. at 8.

Although plaintiffs tacitly concede that no party ever submitted to HUD a completed TPA application, plaintiffs appear to argue that it was GMAC's responsibility to submit the TPA application. Id. at 3. Finally, plaintiffs argue that even though a TPA

application was never submitted, HUD "knew about" the proposed sale and that this knowledge should have triggered HUD's TPA

Plaintiffs' answer to our motion for partial summary judgment, filed on September 7, 2005, will be cited as "Pl. Br." followed by the specific page reference. 2

2

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 3 of 11

application review process. I.

Id. at 8.

Neither The HUD Regulations Nor The Collingwood HAP Or Regulatory Contracts Created A Duty Upon HUD To Approve The Sale Of The Collingwood Apartments To Cory Fanning Plaintiffs allege that the Government does not have

discretion to approve or disapprove the sale of a building upon which it holds a mortgage because HUD's regulations list the steps that HUD must take in determining whether to approve a TPA application. Pl. Br. 5. This argument should be rejected.

First, plaintiffs' argument is irrelevant because neither plaintiffs nor the proposed buyer, Cory Fanning, ever submitted a TPA application requesting HUD's approval of the sale. 198-99, 206-08, 217-21, 243-45.3 Def. App.

Plaintiffs do not allege that a

complete TPA application was submitted to HUD for the sale of the Collingwood apartments to Cory Fanning. Pl. Br. 1-10. Therefore,

plaintiffs' argument that if they had submitted a proper TPA application and if that TPA application had met certain criteria, HUD should have approved it, is of no relevance. Plaintiffs have

not raised a genuine issue of material fact that precludes summary judgment in favor of the Government. Secondly, plaintiffs still cannot point to a single provision in either HUD's regulations or in the Collingwood HAP or regulatory contracts that created a duty upon HUD to approve

The appendix to defendant's motion for partial summary judgment will be cited as "App." followed by the specific page reference. 3

3

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 4 of 11

the sale of the Collingwood apartments. the HAP contract states:

Id.

Paragraph 19(a) of

The Owner agrees that it has not made and will not make any sale, assignment, or conveyance or transfer in any fashion, of this Contract, the Agreement . . . or the project or any part of them or any of its interest in them, without the prior written consent of HUD. However, in the case of an assignment as security for the purpose of obtaining financing of the project, HUD shall consent in writing if HUD has approved the terms of the financing. Def. App. at 94. This provision creates no duty upon HUD to

approve the sale of the Collingwood apartments to Cory Fanning. Likewise, paragraph 8(a) of the regulatory contract simply provides that plaintiffs "shall not without the prior written approval of [HUD] . . . convey, transfer, or encumber any of the mortgaged property, or permit the conveyance, transfer, or encumbrance of such property." Id. at 105. The regulatory

contract also imposes no duty upon HUD to consent to plaintiffs' sale of the Collingwood apartments to Mr. Fanning. Indeed, HUD's regulations explicitly prohibited HUD from consenting to plaintiffs' sale of the Collingwood apartments to Mr. Fanning. The regulations provide that HUD shall not review Id. at 145 ("When a

any TPA application that is incomplete.

complete application is obtained, the Field Office [f]orwards the application to the appropriate servicer for review."). In this

case, neither a complete nor partially complete TPA application

4

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 5 of 11

was ever submitted to HUD.

Accordingly, the Government is

entitled to summary judgment upon claim VI of plaintiffs' second amended complaint. II. Requesting HUD's Approval To Transfer Property Upon Which HUD Holds A Mortgage And Requesting FHA Insurance For A Loan Are Two Entirely Different Requests In their answer to our motion for partial summary judgment, plaintiffs argue that HUD's alleged refusal to approve FHA insurance for Mr. Fanning's loan must be deemed to be a refusal to approve the sale of the Collingwood apartments. Plaintiffs' argument is unsupported. As an initial matter, pursuant to 24 C.F.R. § 203, a "HUD approved mortgagee" is a private financial institution that is authorized to process loans that require FHA-insurance. A HUD Id. at 7-8.

approved mortgagee does not process or prepare TPA applications; its sole function is to review mortgage applications and determine whether the proposed mortgagee, in this case, Mr. Fanning, is eligible for FHA insurance. 24 C.F.R. § 203. This

relationship is clearly set forth in the agreement between Mr. Fanning and GMAC. Paragraph 1 of the agreement states,

Cory Fanning, (The "Borrower(s)"), hereby authorizes GMAC Commercial Mortgage Corporation to serve as the mortgagee to prepare and submit the necessary application(s) to the U.S. Department of Housing and Urban Development ("HUD") to obtain a Commitment for Mortgage Insurance for the above captioned project, pursuant to Section 223(f) of the National Housing Act.

5

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 6 of 11

Pl. App. Ex. 1 at 1.4 A section 223(f) loan is simply a refinancing of existing properties, typically at a lowered interest rate, and is not related to a TPA application. In fact, the plain language of the

agreement did not obligate GMAC to submit or prepare a TPA application for Mr. Fanning or plaintiffs. Nor did the agreement

state that GMAC would act as Mr. Fanning's representative with regards to obtaining HUD's approval to sell the property. Indeed, the agreement between Mr. Fanning and GMAC contemplated that a TPA application had already been submitted and approved. Provision 15 of the agreement stated that, by

signing the agreement, Mr. Fanning represented that he was "the Owner of the Project, or the Owner's agent, or contractually in control of the Project by way of a valid, existing contract, or option agreement." Pl. App. Ex. 1 at 4. Plaintiffs' broad

statement that "GMAC was Fanning's representative with regard to obtaining the appropriate approvals from HUD" is misleading. Pursuant to the agreement, GMAC was obligated to secure 223(f) loan insurance for Mr. Fanning and nothing more. Moreover, HUD Form 92266, titled the Application for Transfer of Physical Assets, states that the responsibility for submitting a TPA application rests with the proposed buyer, and a

The appendix to plaintiffs' answer to our motion for partial summary judgment will be cited as "Pl. App." followed by the exhibit number and the specific page reference. 6

4

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 7 of 11

number of documents that comprise a completed TPA application could only be prepared by the proposed buyer. Def. App. 239-49.

In this case, Mr. Fanning testified that he did not even know HUD's approval to transfer the Collingwood apartments was required and that he did not take any steps to obtain that approval. Def. App. 217-18. Therefore, plaintiffs' argument

that Mr. Fanning somehow delegated the responsibility for submitting a TPA application to its lender, GMAC, is contrary to the evidence. irrelevant. In any event, plaintiffs' allegations are As HUD is not permitted to act upon a proposed sale

where no TPA application has been submitted, it hardly matters who was at fault (Mr. Fanning or GMAC) in failing to submit the application. More importantly, plaintiffs' argument that HUD's refusal to award FHA insurance to a proposed buyer is a refusal to approve a sale in general is contrary to the regulations. The process to

obtain FHA insurance is entirely different from the TPA application process, and one does not take the place of the other. FHA insurance can be denied and a TPA application For example, Mr. Fanning could have

approved for the same sale.

found other financing to purchase the Collingwood apartments. The Government had absolutely no obligation to Mr. Fanning to insure any of his loans, and its alleged denial to provide insurance did not constitute a denial of a TPA application that

7

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 8 of 11

was never submitted in the first place. III. The Submission Of An Already-Executed Purchase Agreement Is Not A Substitute For A Proper TPA Application Plaintiffs argue that HUD knew about the sale of the Collingwood apartments to Mr. Fanning, and that mere knowledge, alone, should have triggered the TPA review process. Pl. Br. 8.

This argument is contrary to reason and HUD regulations. Section 4350.1, chapter 13, of the HUD handbook states that the TPA review process shall only begin upon HUD's receipt of a completed TPA application. Def. App. 145. The regulations

provide that HUD may return a seriously deficient TPA application. Id. If an application is not seriously deficient,

the regulations provide that HUD should alert the applicant as to the missing documents. Id.

In this case, no TPA application was ever submitted for the sale of the Collingwood apartments to Mr. Fanning. The only

document sent to HUD was a copy of an already-executed purchase agreement between plaintiffs and Mr. Fanning. The claim that HUD

should have realized it was being asked to approve a transaction that had already been entered is contrary to reason. At that

point, plaintiffs had already breached the HAP and regulatory agreements by contractually obligating itself to sell the Collingwood apartments prior to requesting HUD's approval.

8

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 9 of 11

IV.

HUD Did Not Violate Its Own Handbook Provisions In their brief, plaintiffs raise, for the first time, a

claim that HUD violated section 4335.2 of the HUD handbook, which, plaintiffs argue, required HUD to encourage the plaintiffs to sell the Collingwood apartments in light of imminent foreclosure by HUD. Pl. App. Ex. 5 at 2. Specifically,

plaintiffs cite to the provision of the handbook which states that, before recommending foreclosure, HUD should "encourage sale, by the mortgagor, as an alternative to foreclosure." Plaintiffs, however, fail to cite to the rest of that provision, which states that HUD should "not delay foreclosure for this reason." Id. Moreover, plaintiffs had already entered Id.

into a purchase agreement to sell the Collingwood apartments to Mr. Fanning three months before HUD issued a notice of intent to foreclose; thus, plaintiffs apparently needed no encouragement from HUD to induce them to try to sell the building. Pursuant to HUD regulations, HUD will halt the foreclosure process and allow the sale of a property to proceed even after a notice of intent to foreclose a property is issued if the mortgagor has entered into a contract with a purchaser which will result in one of the following within 60 days: (1) payment in full of the HUD-insured mortgage; (2) full reinstatement through assumption; (3) assumption without full reinstatement if it is acceptable to HUD; or (4) if the mortgage is being assumed by a

9

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 10 of 11

mortgagor who is not an owner-occupant, the mortgage must be brought current. See Exhibit 1, attached hereto at 3. The terms

of the purchase agreement between Mr. Fanning and plaintiffs did not meet any of these four conditions. Finally, even if HUD had violated its regulations regarding foreclosure, which it did not, that is irrelevant to plaintiffs' claim that HUD breached the HAP and regulatory contract by allegedly refusing to approve the sale of the Collingwood apartments to Mr. Fanning. As stated in our motion, HUD neither

approved nor denied the sale of the Collingwood apartments to Mr. Fanning because a TPA application was never submitted for review. Accordingly, the Government is entitled to judgment, as a matter of law, upon count VI of plaintiffs' second amended complaint. CONCLUSION For these reasons, the United States respectfully requests that the Court enter judgment in favor of the Government as a matter of law as to count VI of plaintiffs' second amended complaint. Respectfully submitted, PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director s/Mark A. Melnick by Frank E. White, Jr. MARK A. MELNICK Assistant Director 10

Case 1:01-cv-00669-FMA

Document 68

Filed 09/14/2005

Page 11 of 11

OF COUNSEL: Thomas G. Massouras Sol T. Kim Office of General Counsel U.S. Department of Housing & Urban Development 77 West Jackson Boulevard Suite 2629 Chicago, Illinois 60604

s/Marla T. Conneely MARLA T. CONNEELY Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street Washington, D.C. 20530 Tel. (202) 307-1011 Fax. (202) 307-0972 Attorneys for Defendant

September 14, 2005

11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 1 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 2 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 3 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 4 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 5 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 6 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 7 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 8 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 9 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 10 of 11

Case 1:01-cv-00669-FMA

Document 68-2

Filed 09/14/2005

Page 11 of 11