Chen v. Equity Fund, III CV-95-377-B 06/13/96

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Beniamin T. Chen and Yu-Yanq Chen

v. Civil No. 95-377-B

Equity Fund, III, et al.

O R D E R

Benjamin and Yu-Yang Chen purchased certain real estate from

the City of Manchester at a public auction. The real estate was

formerly owned by Equity Fund III, a New Hampshire general

partnership. It was also subject to an undischarged mortgage in

favor of First Service Bank for Savings, which was later taken

over by the Federal Deposit Insurance Corporation ("FDIC"). The

Chens now argue in their petition to quiet the title1 that any

interest that Equity Fund III or the FDIC may have had in the

property was extinguished by the tax collector's execution of a

tax deed in favor of the City of Manchester.

1 The petition was filed in state court, but was removed to federal court by the FDIC. The FDIC moves for summary judgment2 on the ground that a

provision of FIRREA,

(b)(2), protected its

mortgage interest in the property. The applicable FIRREA statute

provides:

When acting as a receiver, the following provisions shall apply with respect to the Corporation:

(2) No property of the Corporation shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Corporation, nor shall any involuntary lien attach to the property of the Corporation.

(b)(2). The FDIC does not contest the validity

of the tax lien, but asserts that because it did not consentto

the issuance of the tax deed, the deed did not extinguish the

FDIC's mortgage interest. Conseguently, the FDIC moves for

judgment declaring that the property remains encumbered by the

FDIC's mortgage interest.

The Chens base their opposition to the motion on an FDIC

policy statement on foreclosure consent and redemption rights

which they contend affects the FDIC's eligibility for protection

2 Summary judgment is appropriate if the facts taken in the light most favorable to the nonmoving party show that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); F.D.I.C. v. Anchor Properties,

, 30 (1st Cir. 1994) .

2 under the statute. The applicable section of the cited policy

statement provides that "[i]f the Corporation's interest is not

of record, the Corporation hereby grants its consent under 12

U.S.C. 1825(b)(2) as to any foreclosure by the holder of any bona

fide lien which encumbers such property." Statement of Policy on

Foreclosure Consent and Redemption Rights,

,

29492, § 4 (a)(iii) (July 2, 1992) ("Policy Statement"). The

Policy Statement provides that the FDIC's interest is "of record"

when "such interest appears vested in a financial institution for

which the Corporation has been appointed receiver in the public

land records in accordance with local law and the Corporation has

published notice in the Federal Register that it has been

appointed receiver for that financial institution." Id. In the

case of a nonjudicial foreclosure, such as a tax sale, the FDIC's

notice in the Federal Register must appear before "the date on

which notice of the foreclosure sale has been given to all

persons reguired to be provided with notice in accordance with

applicable law." Id. at 29492-93.

The mortgage at issue in this case was recorded in the

Hillsborough County Registry of Deeds on July 24, 1987, and the

parties have not contested its validity. The First Service Bank

for Savings was placed in FDIC receivership on March 31, 1989,

3 and, as a result, the FDIC succeeded to the bank's rights and

interests in the mortgage. The FDIC published notice in the

Federal Register of its receivership on July 2, 1992, in a list

appended to the Policy Statement. 57 Fed. Reg. at 29494.

The tax collector for the City of Manchester notified the

owner and mortgagee of record, the bank, on April 5, 1991, of the

outstanding tax liability on the property, and that a lien would

be placed on the property if the taxes were not paid by May 10,

1991. See

(1991). The parties

agree that the tax collector executed the tax lien in favor of

the city in May 1991. A statutory two-year redemption period

followed execution of the tax lien. See

(1991). Anticipating the end of the redemption period and

in accordance with the statutory reguirement, the tax collector

sent a "notice of impending deed" to the property owner and

mortgagee on February 12, 1993. See

(1991) .3 The tax collector executed a tax deed in favor of the

3 Although the statute in effect in 1993 did not reguire that notice be given to the mortgagee, the New Hampshire Supreme Court has since held that actual notice to the mortgagee is necessary to comply with the due process reguirements of the New Hampshire Constitution. First N.H. Bank v. Town of Windham,

(1994); see also

-a (Supp. 1995) (effective Jan. 1, 1996).

4 city which was recorded on August 11, 1993.

In summary, the FDIC published notice of its receivership in

the Federal Register in July 1992 before the city tax collector

gave notice in February 1993 of the impending foreclosure4 of the

city's tax lien.5 Therefore, the default provision in the Policy

Statement is inapplicable because the FDIC's mortgage interest

was "of record" before the tax deed was issued.

The Chens alternatively argue that the FDIC's interest in

the property should be extinguished even if it did not consent to

the issuance of the tax deed through the procedures set out in

the Policy Statement. First, the Chens contend that the FDIC's

4 The parties do not dispute that the execution of the tax deed to Manchester was a foreclosure within the meaning of both § 1825 and the Policy Statement. Under New Hampshire law, the tax collector's deed to Manchester would extinguish both the tax lien and all other liens or mortgages on the property. First N.H. Bank,

. Other courts have interpreted a foreclosure in the context of § 1825(b)(2) as the event under state law when the FDIC's interest would be extinguished. See, e.g., Matagorda County v. Russell Law,

(5th Cir. 1994); Cambridge Capital Corp. v. Halcon Enterprises, Inc.,

(S. D. Fla. 1993).

5 The Chens' argument that section 1825(b) (2) applies only if the FDIC records its receivership in the registry of deeds is meritless. The bank recorded its mortgage, the FDIC succeeded to the bank's mortgage lien when it was appointed receiver of the bank, and the FDIC published notice of its receivership in the Federal Register. No further record of the FDIC's interest is necessary to invoke the protection of § 1825(b) (2) .

5 failure to assert an interest in the property prior to the

commencement of this litigation qualifies as an "indeterminate

delay" which should be construed as an abandonment of the

property. The cases the Chens cite discuss circumstances in

which the FDIC's failure to pay taxes or consent to foreclosure

of a city's tax lien, combined with a long delay in resolving its

interest in the property, may amount to taking the property.

See, Simon, 53 F.3d at 23-24 ("at some point a delay in the

ability to exercise property rights may constitute a compensable

taking"); Matagorda County,

(accord). In this

case, however, the city has never asserted that the FDIC's delay

unreasonably interfered with the city's interest in the property.

Further, the Chens bought the property in March 1995 with record

notice of the FDIC's mortgage interest in the property and, thus,

cannot now claim that the FDIC has delayed resolution of its

property interest with respect to them.6

Second, the Chens argue that the FDIC should be estopped

from denying its consent to the tax sale based on representations

made by an FDIC credit specialist to a city tax collector. City

The Chens allege that the FDIC recorded its receivership interest at the Hillsborough County Registry of Deeds on March 14, 1994.

6 tax collector Joan Gardner states in an affidavit that she

believed the FDIC had consented to the tax sale based on a series

of telephone calls with FDIC credit specialist, Ray Holubec. She

stated Holubec told her in May 1993 that the FDIC would pay the

overdue taxes and foreclose its mortgage, but in July he told her

that the FDIC would not pay the taxes because the amount of past

due taxes could not be recovered through foreclosure of the

FDIC's interest in the property. As a result, Gardner claims

that she believed in good faith that the FDIC had relinguished

its interest and consented to the city becoming the property's

owner. Gardner acknowledges, however, that she knew at the time

that the FDIC had specific procedures for obtaining consent which

were not followed in this case, and her knowledge belies her

reliance on her conversations with Holubec.7 Moreover, the Chens

7 Holubec stated in his affidavit that he did not consent to the tax deed or abandon the property, that he lacked authority to do so, and that his proposal to abandon the property made to the appropriate FDIC committee was rejected. In addition to knowing the FDIC consent procedures, Gardner stated in her affidavit that she believed Holubec was sending a letter of discharge of the FDIC's interest. Nevertheless, Gardner went forward with the tax deed to the city without receiving the discharge letter she expected from the FDIC. The Chens have not shown a reasonable basis for Gardner to infer that Holubec had authority to consent or to abandon the property through representations in a telephone conversation.

7 have not alleged that their decision to purchase the property was

in any way based on Gardner's alleged misunderstanding about the

FDIC's interest in the property. Accordingly, the circumstances

presented here are not sufficient to estop the FDIC from denying

that it consented to a sale or abandoned the property.

Finally, the Chens contend that the FDIC's consent

procedures should not be enforced because the city's reguest for

consent might have been futile. The Chens point to language in

the Policy Statement that states: "The consent of the Corporation

under 12 U.S.C. 1825(b)(2) may be reguested in accordance with

the procedures . . . with the understanding that consent may be

granted or withheld in the sole and absolute discretion of the

Corporation." Policy Statement, 5 4(a) (iii), 57 Fed. Reg. at

29492. Because the city did not try to obtain consent by the

prescribed procedure, the Chens cannot show that a proper reguest

would have been futile. Further, the Chens have not demonstrated

that the FDIC's prescribed procedures are unenforceable. Cf.

Edmundson v. United States,

(W.D. La. 1995)

(IRS notice regulation held ambiguous and overly burdensome and

therefore unenforceable where plaintiff provided actual, but

noncomplying, notice of sale of property subject to tax lien) . Therefore, through the operation of

(b)(2), the city's sale of the property to the Chens did not

extinguish the FDIC's mortgage interest in the property.

For the foregoing reasons, the FDIC's motion for summary

judgment (document no. 11) is granted.

SO ORDERED.

Paul Barbadoro United States District Judge June 13, 1996

cc: Pauline L. Guay, Esg. Eguity Fund, III Paul J. George Robert F. George Stuart M. Holber, Esg. John L. Allen, Esg.