entered an amended judgment in the amount of $ 6,385,305.68 against USGI and three co-defendants, jointly and severally. The Court, with the government's consent, stayed execution pending appeal of that judgment against co-defendants John C. York and First Commonwealth Savings Bank ("First Commonwealth"), who had posted a supersedeas bond in the full amount of the judgment. The Court further ordered that USGI should have until July 24, 1995 to comply with Federal Rules of Appellate Procedure 7 (by posting a bond to ensure payment of costs on appeal) and 8 (by posting a supersedeas bond).
On July 24, 1995, USGI filed with the Court a Stipulation and Order that it would post a $ 1,000.00 bond to comply with Rule 7. Upon approval of that Stipulation by the Court, USGI did post the $ 1,000.00 bond. USGI advised the Court, however, that it did not have sufficient assets to post a bond in the full amount of the judgment, and that it would continue discussions with the government as to whether an accommodation regarding a supersedeas bond could be reached. USGI and the government were unable to reach any agreement for the posting of a bond for less than the entire amount of the judgment.
Since July, USGI has engaged in negotiations with First Commonwealth and Signet Bank to structure an arrangement whereby USGI would be added as a party to the supersedeas bond already posted by John C. York and First Commonwealth. Ultimately, an arrangement was agreed upon whereby USGI could be added to the bond in return for its pledge of certain assets that it owns. A rider to the original bond, adding USGI as a principal, issued on September 27, 1995.
Meanwhile, in July, the government advised USGI that the government intended to execute on the judgment against USGI by pursuing an "administrative offset" with respect to a defaulted Federal Housing Administration ("FHA")-insured, mortgage-backed loan involving a multifamily residential project known as the Lincoln Discovery Park IV Project. USGI previously had submitted, on May 13, 1995, an application to FHA for insurance proceeds on the loan. USGI is the mortgagee-of-record and an issuer of a participation and servicing agreement under which a 100% beneficial interest in the mortgage loan is held by TFINN & Co, a nominee for Lehman Brothers. TFINN is not connected to the litigation underlying the present Motion nor is it otherwise affiliated with USGI. By administrative offset, the government proposed satisfying its judgment against USGI by refusing to pay the FHA insurance claims submitted by USGI on the mortgage loan.
USGI protested the proposed offset, and informed the government that it had no equitable or beneficial interest in the Discovery Park mortgage loan. USGI also informed the government that it was hopeful that it would be added to the supersedeas bond posted by John C. York and First Commonwealth. Nevertheless, on September 12, 1995, FHA notified USGI that it had paid over to the Government National Mortgage Association ("Ginnie Mae") a partial settlement of USGI's insurance claim on the Discovery Park loan in the amount of $ 3,673,617.65 to "satisfy the ruling of the U.S. District Court for the District of Columbia calling for an award to Ginnie Mae of $ 6.3 million." As a result of the final settlement of USGI's insurance claim, FHA paid, in total, $ 3,813,154.64 to Ginnie Mae.
After it obtained the rider to the supersedeas bond, USGI forwarded the rider to the government and requested that the government consent to the posting of the amended supersedeas bond, reverse the offset, and consent to the entry of a stay pending appeal. On October 2, 1995, the government consented to the posting of the bond and entry of the stay, but refused to reverse the offset.
On October 6, 1995, USGI filed the instant Motion to Stay Execution of Judgment and to Quash Attachment. On October 17, 1995, the York parties filed a response, urging the Court to grant USGI's motion. On October 31, 1995, the government filed a partial Opposition, to which USGI replied on November 7, 1995. In its Opposition, the government consents to the approval of the amended bond and the imposition of a prospective stay of execution. The Court shall, therefore, approve of the amended supersedeas bond and shall enter a stay pending appeal of execution of judgment against USGI. The government opposes, however, USGI's Motion to Quash Attachment. Therefore, the Court must herein decide the question whether to grant USGI's Motion to Quash Attachment.
USGI asserts that the Court should quash the government's attachment of the Discovery Park insurance claim proceeds because the government was not authorized by law to effect an offset under the circumstances of this case. USGI further asserts that, assuming the offset was validly undertaken, the fact that USGI is not a beneficial owner of the proceeds attached and the fact that the government's interests are adequately protected by the supersedeas bond justify the relief sought herein. In response, the government asserts that it had the authority to effect an offset and, further, that this Court lacks the authority to quash the resulting attachment of insurance proceeds. The Court will therefore address, first, the government's authority to effect an administrative offset and, second, the Court's authority to quash the resulting attachment of insurance proceeds.
I. THE GOVERNMENT LACKED THE AUTHORITY TO EFFECT AN OFFSET.
The defendant USGI argues that the offset effected by the government is unauthorized and invalid. Specifically, USGI argues that the Federal Debt Collection Act of 1982 (the "DCA"), 31 U.S.C. §§ 3701-20, which governs administrative offset, and the HUD's regulations implementing that statute do not authorize the use of an administrative offset when, as here, the United States has a judgment against the debtor.
USGI further argues that, in accordance Federal Debt Collection Procedure Act (the "FDCPA"), 28 U.S.C. §§ 3201-06, which governs federal post-judgment remedies, the government cannot attach the insurance proceeds absent the issuance of an appropriate writ of execution or garnishment by the Court.
In response, the government concedes that HUD's offset regulations do not apply to the collection of judgments. Moreover, the government eschews reliance on any statutory authority in support of its action. Rather, the government asserts that it enjoys "comprehensive set-off rights," which are "inherent" and "exist independent of any statutory grant of authority to the executive branch." The government relies solely on its "long-recognized" right at common law to "offset funds to satisfy a judgment." While the Court agrees with the government that the DCA and the FDCPA, which respectively govern federal administrative offset and post-judgment remedies, do not supplant the government's common law rights, the Court does not agree that the government enjoyed the right, at common law, to act as it did with respect to the present case.
a. The government lacked statutory authority to effect an offset.
In general, offset or setoff refers to a procedural device by which a party may seek to reduce the amount owed to an opponent party by the value of the opponent's cross-obligations to that party. See Nashville Lodging Co. v. Resolution Trust Corp., 313 U.S. App. D.C. 240, 59 F.3d 236, 246 (D.C. Cir. 1995). The right of a court to set off one debt or obligation against another is a "principle of long standing in all systems of jurisprudence" and is grounded in the equity power of the court. Blount v. Windley, 95 U.S. 173, 176-77, 24 L. Ed. 424 (1877). See generally 47 Am. Jur. 2d Judgments §§ 1029-32 (1995). Furthermore, a judgment in favor of that party against the opponent is evidence of such a debt or obligation to that party on the part of the opponent. Id. Also well-established at common law, the United States government, as every other creditor, enjoys the right to claim setoff. United States v. Munsey Trust Co., 332 U.S. 234, 239, 91 L. Ed. 2022, 67 S. Ct. 1599 (1947).
The government has attached the funds at issue here by way of the related concept of "administrative offset," that is, an administrative agency, rather than a court, has offset USGI's debt owed to the government under the judgment against the debt owed by the government under the FHA-insured loan. Administrative offset is statutorily authorized and governed by the DCA. See 31 U.S.C. § 3716. However, the parties agree that administrative offset is not statutorily authorized here, since the government has a judgment against USGI. See 24 C.F.R. § 17.100(a) (HUD's procedures for administrative offset will not be used when the United States has a judgment against the debtor). The inapplicability of the DCA notwithstanding, the Court must look to the common law, as the DCA was intended to supplement, not displace, the government's pre-existing rights under the common law. Accord McCall Stock Farms, Inc. v. United States, 14 F.3d 1562, 1566 (Fed. Cir. 1993); Cecile Indus., Inc. v. Cheney, 995 F.2d 1052, 1055 (Fed. Cir. 1993) (DCA does not apply to restrict the common law doctrines governing contractual offsets).
b. The government lacked common law authority to effect an offset.