A couple who purchased property in Ohio were surprised to find that a subordinate mortgage held by the Department of Housing and Urban Development (HUD) was not satisfied upon closing. The couple sued for quiet title and to equitably estop HUD from asserting a lien on the subordinate mortgage.
A district court in Ohio looked at whether HUD allowed the mortgage servicer to act on its behalf, and whether the agency acted in a proprietary capacity. The court ruled that HUD did not act in a proprietary capacity, and that the plaintiffs did not reach the high standard necessary to prove the government should be equitably estopped.
The case is John C. Beach v. Secretary of Housing and Urban Development (U.S. District Court, S.D. Ohio, 17-cv-240).
John and Chelsea Beach bought property in Zanesville, Ohio. First American Title received a payoff statement from the servicers of the mortgage, Ocwen Loan Servicing, and satisfied the mortgage.
However, Ocwen’s payoff statement did not include the subordinate mortgage, as First American believed it did. First American said it never would have allowed the closing transaction to proceed had it known that the payoff statement was not intended by Ocwen to relate to all of the instruments so as to release all of them as encumbrances on the title of the property.
The couple alleged that HUD was equitably estopped from asserting a lien “as a result of permitting the public record to incorrectly state that Ocwen was both the ‘servicer’ and ‘present holder’ of the subordinate mortgage.”
The first count charged that HUD clothed Ocwen with authority to act, citing Office of Personnel Mgmt. v. Richmond, and thus HUD was bound by the payoff statement. In particular, the plaintiffs cited Richmond saying the government “ ‘could not be bound by the mistaken representations of an agent unless it were clear that the representations were within the scope of the agent’s authority.’ ”
The district court said the arguments “are not well taken.”
First, the court said the Richmond decision never established that equitable estoppel may be asserted against the government. Even if it did, the court said, the Supreme Court would be cautious about applying the doctrine.
“Specifically, Richmond, noting that the Federal Tort Claims Act bars actions for misrepresentation, stated that an attempt to apply the doctrine of estoppel against the government ‘is in practical effect one for misrepresentation, despite the application of the ‘estoppel’ label.’ The Richmond Court therefore concluded that it ‘would be most hesitant to create a judicial doctrine of estoppel that would nullify a congressional decision against authorization of the same class of claims.’ ”
The court said parties have a “heightened burden” when seeking to apply estoppel against the government.
“Under these circumstances, and in the absence of any controlling or persuasive authority, the court is hesitant to adopt plaintiffs’ implied actual authority theory as applied in the present context, thereby expanding the application of estoppel against the government,” the court wrote.
The couple also alleged that HUD was estopped because the agency acted in a proprietary way, contending the government submits to the same rules as its citizens when it enters the marketplace and seeks to enforce a contract.
Once again, the district court said the argument was not well taken. Although HUD has been ruled by some courts to take a proprietary rule when foreclosing on a mortgage, the agency said there remained a question of whether HUD acts in a proprietary or sovereign capacity simply by securing an advance of funds with a subordinate mortgage under the Partial Claim Program.
“Congress created the FHA Single Family Insured Loan program ‘to meet the housing needs’ of low-to-moderate income borrowers and to preserve public funds. Partial claim loans, which are interest free to the borrowers, prevent foreclosure of FHA-insured mortgages, thereby preserving the FHA’s insurance fund,” the district court wrote. “Under these circumstances, despite plaintiffs’ contrary arguments, the court is not persuaded that HUD’s administration of the FHA’s Single Family Insurance Loan Program was undertaken ‘primarily for commercial benefit of the agency’ and proprietary in nature,” the district court wrote.
Thus, HUD was not estopped from enforcing the subordinate mortgage lien, and the district court dismissed all claims against HUD.