Daily Development for Monday, October 19, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
MORTGAGE FORECLOSURE; ASSIGNMENTS OF RENTS; FEDERAL GOVERNMENT LESSEES: United States Government cannot be made a party defendant in a receivership action in connection with a mortgage foreclosure when it holds a leasehold interest in the foreclosure property but will not be subject to the foreclosure, and insists on paying rent into court under an interpleader rather than paying to the lender under the Assignment of Rents.
United International Bank v. RedstoneUSA Corp., 2009 Westlaw 2525132 ) (D.E.D.N.Y. 8/17/09)
Bank held a mortgage and assignment rent on some commercial property in Brooklyn. Under a prior stipulation, the tenants were to be instructed to remit the rent directly to the tenant. One of the tenants was the United States Government, which apparently held a senior lease that would not be foreclosed in Bank’s foreclosure action. (The court does not say why.)
It appears (again only by inference) that the United States Government did not remit the rents to the Bank, and Bank brought an action to foreclose and also sought a receiver to implement the assignment of rents It named the United States as a defendant under the "Quiet Title Act,” 28 U.S.S. 2409a(a)a. Apparently the United States offerred to pay rents into court pending the outcome of the dispute.
The United States District Court for the Eastern District of New York, on motion of the fee owner, dismissed the action for lack of subject matter jurisdiction based. The Quiet Title Act states that "[t]he United States may be named as a party defendant in a civil action under this section to adjudicate a disputed title to real property in which the United States claims an interest, other than a security interest or water rights…" According to the Court, however, the United States claimed no interest adverse to the Bank here, as it was not being foreclosed upon and stipulated to payment of rents into court under an interpleader.
"B]ecause the Quiet Title Act does not waive the sovereign immunity of the United States unless the United States holds an interest in real property adverse to the plaintiff, this action must be dismissed for lack of subject matter jurisdiction."
Comment 1: This pithy little case, which the editor drew from the First American Title Insurance New York current developments, prepared by Michael Berry, is a bit puzzling to the Editor. Surely payment of rents into court as an interpleader is far different from paying directly to a receiver who could use the funds (pursuant to court order) to maintain the property and pay expenses. Perhaps, since the court also will supervise the receivership, the court intended to release the funds from the interpleader account to permit their expenditure. Otherwise, it would appear that the Government’s refusal to honor the receivership does put it adverse to the foreclosing Bank.
Comment 2: The editor sees no distinction based upon the fact that the Bank is not getting foreclosed. Assuming that the Government is senior to the mortgage, the Bank’s rights would still include collecting the rents from the property under the assignment, as these are current receivables of the tenant and have been assigned for security under the Assignment.
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