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SUBURBAN MORTGAGE ASSOCIATES, INC. v. UNITED STATES DEPT.

November 14, 2005.

SUBURBAN MORTGAGE ASSOCIATES, INC., Plaintiff,
v.
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, et al., Defendants.



The opinion of the court was delivered by: HENRY KENNEDY JR., District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff, Suburban Mortgage Associates, Inc. ("Suburban"), brings this action against the United States Department of Housing and Urban Development ("HUD"), and one of its subagencies, the Federal Housing Administration ("FHA"). Suburban, a commercial mortgage lender, obtained FHA insurance coverage for a mortgage loan it issued to a nursing home in Providence, Rhode Island. After the borrower defaulted, Suburban elected to assign the mortgage to HUD. After nearly a year of inaction, HUD rejected the assignment on grounds of fraud or material misrepresentation. Suburban now seeks declaratory and injunctive relief that would require HUD to accept the assignment of the mortgage and pay insurance proceeds to Suburban, and also seeks review of HUD's determination that it engaged in fraud or misrepresentation.

Presently before the court are defendants' motions to dismiss for lack of subject matter jurisdiction [#22], or in the alternative to transfer the case to the Court of Federal Claims [#45], and Suburban's motions for a preliminary injunction [#3] and for production of the administrative record [#38].*fn1 Upon consideration of the parties' briefing, the accompanying submissions, and the argument of counsel at a preliminary injunction hearing, the court concludes that defendants' motion to dismiss must be granted in part and denied in part; defendants' motion to transfer must be denied; plaintiff's motion for a preliminary injunction must be denied; and plaintiff's motion to produce the administrative record must be granted.

  I. BACKGROUND

  A. HUD's Mortgage Insurance Program

  The National Housing Act ("NHA"), 12 U.S.C. §§ 1701 et seq., authorizes HUD to insure mortgage loans, and empowers the Secretary of HUD "to insure as hereinafter provided any mortgage offered to him which is eligible for insurance as hereinafter provided, and, upon such terms as the Secretary may prescribe, to make commitments for the insuring of such mortgages prior to the date of their execution and disbursement thereon." Id. § 1709(a). The FHA is the component of HUD responsible for implementing the NHA's mortgage insurance program.*fn2 See id. § 1708. HUD may insure mortgages which, among other purposes, are issued for the development of nursing homes, intermediate care facilities, and "assisted living facilities for the care of frail elderly persons." Id. § 1715w(a).*fn3 To be eligible for mortgage insurance, the mortgage must "[h]ave been made to, and be held by, a mortgagee approved by the Secretary as responsible and able to service the mortgage properly." Id. § 1709(b)(1). In addition, HUD may specify "terms and provisions with respect to insurance, repairs, alterations, payment of taxes, default, reserves, delinquency charges, foreclosure proceedings . . . and other matters as the Secretary may in his discretion prescribe." Id. § 1709(b)(7).

  Once HUD has approved an application for insurance, "a commitment shall be issued by the Commissioner setting forth the terms and conditions upon which the mortgage will be insured." 24 C.F.R. § 200.46. Before HUD issues insurance coverage, the mortgagee "shall certify to the Commissioner that it will conform with terms and conditions established by the Commissioner for the mortgagee's control of project funds." Id. § 200.51. HUD then "indicate[s] the insurance of the mortgage by endorsing the original credit instrument and identifying the section of the [NHA] and the regulations under which the mortgage is insured and the date of insurance." Id. § 200.100(a). This step is referred to as `initial endorsement,' as opposed to `final endorsement,' which occurs only "[w]hen all advances of mortgage proceeds have been made and all the terms and conditions of the commitment to the Commissioner's satisfaction," at which point HUD again endorses the credit instrument. Id. § 200.100(b). Both HUD and the lender are "bound from the date of initial endorsement . . . by the provisions of the Contract Rights and Obligations" set forth in 24 C.F.R. pt. 232. Id. § 200.100(c).

  Mortgage lenders may opt to sell or retain loans they originate. If a lender retains a loan, it must "service or arrange for servicing of the loan." Id. § 202.5(e). Lenders must "service loans in accordance with accepted practices of prudent lending institutions"; must "have adequate facilities for contacting the borrower in the event of default, and shall otherwise exercise diligence in collecting the amount due"; and "remain responsible to [HUD] for proper collection efforts, even though actual loan servicing and collection may be performed by an agent of the lender." Id. § 201.41(a). Additionally, a lender receiving HUD mortgage insurance may also issue securities in the amount of the mortgage and then sell them to investors. Another component of HUD, the Government National Mortgage Association ("GNMA"), 12 U.S.C. § 1717(a)(2)(A), is authorized to "guarantee the timely payment of principal of and interest on such trust certificates or other securities" that the lender may issue. Id. § 1721(g)(1).

  A default on the mortgage occurs upon the "failure of the mortgagor to make any payment due under or provided to be paid by the terms of a mortgage insured under [the NHA]," Id. § 1713(g); see also 24 C.F.R. § 232.830(a). If the default continues for a period of 30 days, the lender becomes entitled to receive the benefits of the mortgage insurance. 12 U.S.C. § 1713(g); 24 C.F.R. § 232.830(c). If the borrower's default is not cured within the 30-day grace period, the lender must then notify the FHA Commissioner of the default in writing, within an additional 30-day period. Id. § 232.850.

  Upon the continuation of a default for 30 days, the lender has the option of either assigning the mortgage to HUD, or else proceeding to foreclosure. 12 U.S.C. § 1713(g); 24 C.F.R. § 232.865. If electing assignment, "the mortgagee shall be entitled to receive the benefits of the insurance . . . upon assignment, transfer, and delivery to the Secretary" of rights and interests arising out of the mortgage; claims of the lender arising out of the mortgage transactions; "all policies of title or other insurance or surety bonds or other guaranties and any and all claims thereunder"; any remaining balance on the mortgage loan not advanced to the borrower; cash or property held by the lender as deposits made by the borrower; and records relating to the mortgage transactions. 12 U.S.C. § 1713(g). The lender may alternately "proceed to foreclosure on and obtain possession of" the mortgaged property, and receive benefits of the insurance upon the "prompt conveyance to the Secretary of title to the property"; and assignment to the Secretary of all claims of the lender arising out of the mortgage transaction or foreclosure proceedings, "except such claims as may have been released with the consent of the Secretary." Id. If the lender intends to file a claim for the benefits of the loan insurance, it must file a claim "within 45 days after the lender becomes eligible for the benefits of the loan insurance, or within such later time as may be agreed upon by the Commissioner in writing." 24 C.F.R. § 232.875.

  Finally, the NHA provides that once the lender files a claim according to the specified procedures and within the requisite deadlines, HUD in most cases must accept the election of assignment:
any contract of insurance . . . executed by the Secretary under this subchapter shall be conclusive evidence of the eligibility of the loan or mortgage for insurance, and the validity of any contract of insurance so executed shall be incontestable in the hands of an approved financial institution or an approved mortgagee from the date of the execution of such contract, except for fraud or material misrepresentation on the part of such approved financial institution or approved mortgagee.
12 U.S.C. § 1709(e) (emphasis added).

  B. The Hillside Mortgage

  Suburban sought to originate a mortgage loan in the amount of $12,979,300 to Hillside Health Care Associates ("Hillside Associates")*fn4 to fund the purchase and rehabilitation of the former Jewish Home for the Aged in Providence, Rhode Island. Am. Compl. ¶ 12. Suburban applied to HUD for insurance coverage on the loan on December 10, 1997. Defs.' Mot. to Dismiss/Opp'n to Prelim. Inj. ("Mot. to Dismiss"), Ex. D ("Crisafulli Decl.") ¶ 4. HUD committed to insure the loan on June 29, 1998, id., and the loan went to initial endorsement on August 19, 1998. Am. Compl. ¶ 12. Suburban used the loan to issue a GNMA mortgage-backed security, which it then sold to an investor. Id. ¶ 12. Suburban also elected to retain and service the Hillside mortgage. Crisafulli Decl. ¶ 7.

  Prior to the loan closing, Suburban executed a Mortgagee's Certificate setting forth its responsibilities, including a provision that upon amortization of the principal, it would require Hillside Associates to make monthly deposits into a "Reserve Fund for Replacements." Withdrawals from this fund required written permission from HUD, which also mandated "[n]otices of any failure to receive the required deposits" within 60 days. Defs.' Mot. to Dismiss, Ex. G, Attach. 7 ("Mortgagee's Certificate"). In addition to requiring Hillside Associates to make interest and principal payments, HUD also required Suburban to provide for "[e]qual monthly payments as will amortize the ground rents, if any, and the estimated amount of all taxes, water charges, special assessments, and fire and other hazard insurance premiums." 24 C.F.R. § 200.84(b)(3). Under the terms of the mortgage note executed between Suburban and Hillside Associates on August 19, 1998, Hillside would pay interest only from September 1, 1998 through July 1, 1999. On August 1, 1999, Hillside Associates would begin paying installments of both ...


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