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July 11, 1997

OCWEN FEDERAL BANK FSB, et al., Defendants.

JAMES ROBERTSON, United States District Judge

The opinion of the court was delivered by: ROBERTSON

Plaintiffs, owners of three multi-family housing projects in Virginia, have sued the U.S. Department of Housing and Urban Development and Ocwen Federal Bank seeking declaratory and equitable relief in connection with HUD's sale to Ocwen of notes executed to refinance the projects. *fn1" HUD and Ocwen move to dismiss for lack of standing and for failure to state a claim upon which relief can be granted. *fn2" For the reasons discussed below, defendants' motions must be granted.


 The facts alleged in the complaint are taken to be true: Plaintiffs are joint ventures that own multi-family housing properties in Prince William County, Virginia. The properties are managed by Southern Management Corporation. In 1986 and 1987, plaintiffs refinanced the properties with loans financed by mortgage-backed securities that were insured by Government National Mortgage Association (Ginnie Mae), a department of HUD. The income from the properties failed to provide sufficient funds to cover plaintiffs' mortgage obligations.

 In January 1993, plaintiffs sought to restructure the financing by purchasing the mortgage-backed securities from the bondholders. Ginnie Mae discouraged that effort and instead advised plaintiffs to default on the loans so that they could be restructured through HUD: under HUD's mortgage insurance program, if a borrower defaults, the holder of the loan is entitled to assign the mortgage to HUD and to collect the mortgage insurance benefits. Plaintiffs did default on the loans, HUD did initiate assignment proceedings, and HUD then became the holder of the mortgage notes.

 Plaintiffs allege that, after the default-and-assignment process, HUD established a "de facto mortgage maintenance plan." Under the "plan," plaintiffs were required to meet HUD's criteria for maintenance and facility improvement, make contributions to reserves and escrows, and remit revenues in excess of expenses. HUD was to withhold enforcement of the specific payment terms of the loans. That "plan" allegedly remained in effect, by mutual agreement, for approximately three years.

 In June 1996, HUD notified plaintiffs that their notes would be sold at auction. Plaintiffs' notes were part of a package of approximately 160 loans offered for sale under HUD's "mortgage sale program," which was initiated in 1994 to sell HUD-owned mortgages to private investors. HUD required that bidders have certain financial qualifications and selected successful bidders through the use of a "computer optimization model" that calculated the combination of bids that yielded the largest return to the government. See Notice, 61 Fed. Reg. 38467-68 (July 24, 1996).

 Plaintiffs did not bid in their own names at the auction. Instead, through Southern Management Corporation, they contracted with an investment banking firm, Donaldson, Lufkin & Jenrette Mortgage Capital, Inc., to place a bid. The investment banking firm bid $ 28,700,000 for all three mortgage loans. That bid was unsuccessful, The successful bidder for plaintiffs' notes was defendant Ocwen Federal Bank, which submitted bids on 47 notes, including plaintiffs' notes. Plaintiffs were advised on August 29, 1996, that their notes had been sold. A month later, on or about September 30, 1996, Ocwen sued the plaintiffs in the United States District Court for the Eastern District of Virginia for an accounting and to enjoin their further use of rents and profits from the properties. *fn3"

 Plaintiffs filed the instant suit on October 3, 1996, seeking relief from HUD's and Ocwen's actions. Later, after receiving notice that foreclosure proceedings would be initiated, plaintiffs moved for a temporary restraining order and preliminary injunction. Those motions were denied on October 30, 1996. On November 19, 1996, the day before the public foreclosure sale was scheduled to take place, plaintiffs all filed petitions for bankruptcy.


 Defendants' motions address all three of plaintiffs' demands: for specific performance of the alleged "de facto mortgage maintenance plan"; for an order setting aside the HUD auction of their notes as unlawful and invalid; and for an accounting. HUD submits that plaintiffs lack standing either to challenge the auction proceedings or to seek specific enforcement of the alleged de facto agreement, and HUD submits further that all of plaintiffs' claims must fail as a matter of law. Ocwen adopts all of HUD's arguments and argues further that an equitable accounting is not warranted where plaintiffs can obtain an accounting in the bankruptcy proceedings now underway.

 1. De facto mortgage modification

 Analysis of the threshold standing question produces a somewhat circular result: Plaintiffs have successfully pleaded the first two of the three necessary elements of standing to assert their claim for specific performance of the alleged de facto mortgage modification: (1) an injury in fact that is (2) fairly traceable to the challenged acts. Lujan v. Defenders of Wildlife, 504 U.S. 555, 119 L. Ed. 2d 351, 112 S. Ct. 2130 (1992). The third required element of "redressability," however, requires a showing that relief is "likely" to follow from a favorable decision. Allen v. Wright, 468 U.S. 737, 750-52, 82 L. Ed. 2d 556, 104 S. Ct. 3315 (1984). Since HUD no longer owns the notes in question, and Ocwen was never a party to the alleged de facto modification agreement, the question of redressability (and thus the standing question) turns on the question whether the alleged de facto agreement is or ever was enforceable.

 The answer to that question is that neither federal law nor Virginia law permits the enforcement of an agreement that was unwritten ...

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