Court Opinion

ID: 9455555
Source: CourtListenerOpinion
Date Created: 2023-08-04 19:25:55.28478+00
Date Added: 2024-06-11T17:34:38.579747
License: Public Domain

ELY, Circuit Judge
(dissenting):
I respectfully dissent. The majority, with broad strokes, erases highly significant redemptive rights created by statute in the Territory of Guam and eight of the states comprising our Circuit as well as equitable rights of redemption hitherto applied by the courts of Hawaii. These rights are deeply rooted in history, founded on an equitable principle applied through centuries to protect the temporarily disadvantaged without working significant prejudice against his creditor. The approach which I take is made, not only in the interests of local mortgagors involved in the federal housing program, but also in the interests of the federal program itself. I do not dispute the fact that federal abrogation of state-created rights is often necessary for the protection of federal programs, but I have been unable to accept the majority’s proposition that its dramatic result is here warranted by any overpowering motive of federal self defense. Time after time, the Congress of the United States has created programs through which private loans are guaranteed by the federal government. In not one of those programs has Congress ever prescribed that, in connection with those programs, state redemptive rights, either statutory or equitable, are eliminated. To me it is inconceivable that the members of Congress, when they enacted the many federal lending programs now extant, were either ignorant of, or blind to, the existence of state redemptive rights in foreclosure proceedings. When the Country’s legislators have apparently deemed it unnecessary, in protecting the interests of the federal government, to strike down the states’ rights in question, I think it presumptuous that a federal court should substitute its policy judgment to the contrary. My Brother Duniway’s opinion, while written with his characteristic scholarship and technical precision, does not, insofar as I can see, demonstrate the existence of any controlling precedent requiring the conclusion which is reached. In this light, as well as in that of other considerations *368which I shall discuss, I respectfully submit that the majority’s opinion constitutes an unnecessary intrusion into the legitimate local affairs of nine western states, and of the Territory of Guam, and moreover, represents an unwarranted judicial usurpation of federal legislative power.
I can accept the assumption that federal law is controlling. United States v. View Crest Garden Apts., Inc., 268 F.2d 380 (9th Cir. 1959). But my proposition is that we should give effect to the pertinent and equitable state law by incorporating it into the federal program. The Supreme Court did exactly that with respect to a state coverture law in United States v. Yazell, 382 U.S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404 (1966), and our court did the same with respect to a state “bulk sale” statute in Bumb v. United States, 276 F.2d 729 (9th Cir. 1960). The controlling criterion on the question is whether the state law can be given effect without either conflicting with federal policy or destroying needed uniformity in the pertinent federal law in its operation within the various states. United States v. Yazell, supra at 352, 86 S.Ct. 500. Thus, we should first reach an understanding of the purpose and effects of state redemption statutes.
The statutes can best be understood through a brief review of their historical development. The original method of mortgage foreclosure was known as strict foreclosure, a method whereby, on default, the mortgagee obtained a court decree awarding the mortgagor’s interest in the security to the mortgagee. This offensive procedure was subject to severe defects, the most obvious of which was that the mortgagor faced the possibility of forfeiting all his equity in the property in the event that the property was worth more than the unpaid balance on the debt.
The harshness of strict foreclosure led to the concept of foreclosure by sale. Theoretically, the property was to be sold to the highest bidder with the mortgagee having first claim to the proceeds and the mortgagor obtaining his equity in the form of whatever surplus remained. This approach was expected to yield more even results by allowing the competitive market to set the value of the land instead of the “value” being set at the amount of the unpaid debt as was the fact under strict foreclosure. Unfortunately, this expectation was frustrated by reason of the immense advantages favoring the mortgagee at the sale. First, it was unnecessary for the mortgagee to raise and expend any cash up to the amount of the unpaid debt. Secondly, there would not often be an interested outside buyer, or junior lienholder with cash, at the precise time of the sale. Thus, the senior mortgagee was assured of being almost always the only bidder at the sale. The junior lienors, in particular, suffered under this method since their interests were cut off by the judicial sale. Since they had no weapons with which to force the sale price above the amount of the senior’s claim, they often realized nothing on their claims.
The response of many jurisdictions to the unsatisfactory results of the foreclosure-by-sale procedure was the adoption of a statutory redemption period. The basic design of statutory redemption consists of giving the mortgagor and those claiming under him (including junior lienors) the right to redeem the property from the purchaser at the sale within a specified period by paying, not the balance of the debt secured, but the price paid at the sale. The objective of the redemption right is that the mortgagee or other bidders, if any, shall bid not less than the fair market value of the land, since otherwise the purchaser risks being divested of the land by redemption at less than its market value.
The key to understanding the statutory redemption right lies in the proposition that the statute’s operation is in the nature of a threat. When redemption is exercised, it is thereby evidenced that the mortgagee has not bid adequately at the sale and the statute has not had its intended effect. On the other hand, if the *369threat functions successfully and the mortgagee does bid adequately, then the mortgagor and junior lienors, if any, will have been satisfied to the full value of the property and there will be no reason for exercising the redemption right. If he bids the full market value of the property, then the mortgagee may rest secure in the knowledge that it will not be redeemed. See generally Durfee & Doddridge, Redemption From Foreclosure Sale, 23 Mich.L.Rev. 825, 827-834 (1925); Note, Redemption From Judicial Sales, 5 U.Chi.L.Rev. 625, 626 (1938).
With the foregoing as background, the relation of redemption statutes to the federal housing policies can be more clearly analyzed. The particular program involved here, War Housing Insurance, is only one of many administered under various Acts of Congress. This program, as the majority notes, is designed to stimulate housing for veterans; other programs are designed for rural housing, poverty relief, urban renewal, etc. All of the programs have as their basic goal the stimulation of construction by guaranteeing that lenders, contractors, and suppliers will not suffer losses on extending credit to builders and owners. Of course, some programs are more concerned with the owners and their need for housing than they are with the market for mortgages. This would be true, for instance, of a program designed to supply single-family housing while it would not be as crucial a consideration in the construction of multiple dwelling units. Thus, protection of the mortgagor’s interests takes on greater or less significance depending on the type of program involved. It seems crystal clear to me, however, that the type of balancing involved in deciding what rights the mortgagor should have requires legislative attention to the' entire scope of housing programs. I will deal with the Congress’ role in this question later.
It seems no less clear to me that, disregarding the question of protection of the individual mortgagor, the goals of any federal housing program could not be served by the majority’s decision. From the viewpoint of a mortgagor in a state with redemption provisions, and in the light of the majority’s decision, it would be more desirable to finance privately than to finance through an FHA guaranteed mortgage. Even more important, potential junior lienors, such as contractors and suppliers, will be less willing to extend credit under these circumstances. Nor can junior lienors protect themselves, as the majority suggests, by bidding at the foreclosure sale. I have already explained that one reason for the existence of the redmption statutes is that the enormous leverage of the foreclosing mortgagee is not matched by junior lienors, who typically have very small cash reserves and never have the first “paid up” interest.
Thus one effect of the majority’s decision will be to lower the attractiveness of FHA financing in states that have enacted redemption statutes. Other states have other methods of protecting both mortgagors and junior lienors that will not be matched in the redemption states.1 Therefore, the uniformity among the states for which the Government argues cannot possibly be furthered by the majority’s decision. Instead, uniformity would be furthered by conforming federal programs with state law.
The Government, and also the majority, make several arguments designed to show that redemption statutes are neither important nor necessary. The first is that the statutes do not work because no third party will bid at the sale, knowing that he will be subject to redemption. The statutes, as I have tried to explain, are not the least bit concerned with the actions of third parties since they were necessitated by the observa*370tion that third parties do not ordinarily-bid at foreclosure sales in any event. Instead of trying to stimulate bidding at the sale, they set up the more realistic possibility that the property will be redeemed if the mortgagee’s bid is inadequate.
The majority also asserts that redemption rights are unimportant because most financing in modern times is accomplished through the use of trust deeds, which do not provide for redemption rights. There may be valid reasons for the distinction,2 but we need not be concerned with them here. What is important is that the legislatures of the states have allocated certain rights to each method of financing with the result that a choice is available depending on the nature of the transaction and the needs of the parties. Once the parties have selected either method, they should accept all its consequences. Moreover, if redemption rights truly are of negligible importance, then it could be said that the Government has wasted much valuable time in pursuing a frivolous appeal!
The Government argues at one point that the policies of the redemption right are satisfied by the alleged practice of the FHA carefully to appraise the fair market value of the property and to make its bid accordingly at the foreclosure sale. It is interesting to note that the Government argues elsewhere that the effect of redemption statutes is to depress bidding at the sale. But it is even more interesting, and remarkable, that a federal statute expressly prohibits the agency from bidding more than the unpaid balance on the debt! 12 U.S.C. § 1713 (k), as incorporated by 12 U.S.C. § 1743(f).
Even if we assumed that the FHA contravened the prohibitory statute and was in some way bound to continue its asserted practice, such unilateral action of the FHA could not satisfy the premise of the redemption statutes. That premise is that the fair market value is realizable only through the interplay of competing economic forces. This premise is not satisfied by judicial sale because of the demonstrated falsity of the assumption, made by the majority, that a third party will come in to force the price up to market value at the sale. The fact that competing economic forces are necessary is amply shown in the case at bar, since the value of the land was set by the court according to the testimony of one Government witness. This value was less than one-half the original purchase price and far below the unpaid balance on the debt. The Government obtained a deficiency judgment for the difference between the set value and the unpaid debt. The Government then proceeded to buy in the property at the sale for an amount less than the market value set by the court.
Remaining unconvinced by the argument that the redemption statutes are unimportant and unnecessary, I can turn to other contentions made by the majority.3 The first is that the Govern*371ment should not be required to maintain the premises during the redemption period. The majority asserts that the FHA does not have the manpower or the funds to place and keep the property in good repair, especially since the expense of improvements made by the purchaser-mortgagee is not recoverable as part of the redemption price. The first answer to this argument is that some redemption statutes specifically include the cost of upkeep and repair in the redemption price. E.g., Cal.Code Civ. Proc. § 702. In addition, this is one element of redemption that could be molded to fit the Government’s legitimate interests, as this court did in Clark Investment Co. v. United States, 364 F.2d 7 (9th Cir. 1966).
I note with some incredulity that the majority cites Clark Investment for the proposition that Idaho law requires deduction of collected rents from the redemption price. In Clark Investment, this court held that the Idaho law could not be applied to the United States when property is redeemed from it. That decision itself clearly shows that the right of redemption can be maintained without any harm to the FHA because the courts can tailor certain elements of redemption to the benefit of the United States.
Clark Investment also demonstrates that the FHA is not necessarily confined to the same risks and burdens that other financers face. For example, during the redemption period, it can actually make a profit on the property with no more burden on its manpower than any other purchaser would have. Moreover, there is no reason why the Government should not accept a large share of the risks mentioned by the majority. The very purpose of the entire federal housing program is to provide badly needed housing that could not otherwise exist. I cannot imagine why the United States would venture into such a program if it were not willing to accept risks, possibly even greater risks than would be accepted by the normal financing institution.
Nor am I persuaded that redemption periods inordinately tie up federal funds. Since the FHA is limited in its bid to the amount of the unpaid debt, it can expect to have property more valuable than that amount redeemed rather promptly. In the case of less valuable property, it will have to live with the fact that it is facing a loss, no matter what happens. One way in which this loss could be ameliorated would be to hold the property during the period of redemption, a period in which the agency can realize a valuable return on its money in the form of rents. If this is deemed to be too severe a burden upon the FHA, then the Congress is best equipped to recognize any such supposed burden and to relieve the agency from it.
Next, the Government argues, albeit weakly, that the issue is foreclosed by prior case law standing for the proposition that remedies under the federal housing programs must be uniform, without regard to the laws of the individual states. The cases cited by the Government do not support such a broad proposition. Principal reliance is on Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), and United States v. View Crest Garden Apartments, 268 F.2d 380 (9th Cir. 1959). Clearfield Trust dealt with the question of what law should be applied to the case of a forged endorsement on a United States check. There, the Court noted that a single piece of commercial paper issued by the United States may easily be involved in several transactions in different states. Therefore, the possible confusions and uncertainty required a uniform rule that could be constructed by the courts. Here, we have a single transaction within a single state and there can be no uncertainty or divergence of results if the state law is applied.
*372View Crest Garden Apartments is much closer to the facts of this case, since it dealt with whether to apply state law in the appointment of a receiver after default on an FHA mortgage. The court relied principally on the distinction between the rights of the parties and the remedies available for the protection of those rights. After pointing out that Congress had adopted state laws for convenience in defining the rights of the parties, the court went on to note that after default the need for convenience had terminated and that the then paramount interest was furtherance of the policies of the act by attempting to insure certainty of return on the investment. In the opinion’s bearing on our case, certain of its language is remarkably significant. That language is,
“It is urged that to hold that federal law applie[d] would result in great hardship to mortgagors who would thereby be deprived of all rights under state law such as the right of redemption. We do not think that such a conclusion necessarily follows. A court confronted with that question could determine it by weighing the federal interest against the particular local policy involved. If the considerations weighed by the court suggest an adoption of local law, such as the local rule on redemption, that could be done.
Id. at 383 (emphasis added).
Although the court in View Crest evidently believed that redemption is more in the nature of a right than a remedy (or means of cutting off a remedy), I prefer not to rest on a conclusionary use of labels. Accepting the court’s guidance that the involved interests should be weighed, I fail to see in what way the state interest conflicts with the true and most praiseworthy interests of the federal government. Certainly the minor inconveniences suffered by the FHA in managing the property is outweighed by the benefit to the national program in protecting the interests of contractors and suppliers. Therefore, we need not balance national interest against state interest but could simply give effect to all the policy considerations underlying both federal and state law.
Finally, I come to the Government’s lame contention that the failure of Congress to provide for redemption rights is the equivalent of an express provision that state redemption laws should not be recognized. The logical absurdity of this argument is, of itself, sufficient to subvert the contention. But the abundant statutory and regulatory language apparently adopting state law in this context should not be overlooked. For example, the statutory definition of the rights of the United States itself provides that “the term ‘first mortgage’ means such classes of first liens as are commonly given to secure advances on, or the unpaid purchase price of, real estate, under the laws of the State, in which the real estate is located, * * 12 U.S.C. § 1707(a) (emphasis added). The regulations provide, “The mortgage must contain a provision or provisions, satisfactory to the Commissioner, giving to the mortgagee, in the event of default or foreclosure of the mortgage, such rights and remedies for the protection and preservation of the property covered by the mortgage and the income therefrom, as are available under the law or custom of the jurisdiction.” 24 C.F.R. § 580.18 (1968) (emphasis added). Even the waiver in the present mortgage, on which the Government relied so strongly in the court below, provides that it is effective “to the extent permitted by law.” Surely, we must presume that this language refers to the law of Idaho, for the federal law contains no such corresponding provisions to be waived or to which the waiver could be applicable.
At the very least, it seems unusual for the Government to argue that congressional silence can be equated with express abrogation of state-created rights. It is especially significant that, as we were informed on oral argument, the FHA has introduced several bills to achieve the result reached here, but Con*373gress has consistently refused to adopt this approach. The Supreme Court has stated on more than one occasion that rights should not be displaced or eliminated without the clearest legislative mandate. United States v. Shimer, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961); Mitchell v. Robert De Mario Jewelry, Inc., 361 U.S. 288, 80 S.Ct. 332, 4 L.Ed.2d 323 (1960). I could not hold that silence on the part of Congress can be taken to effect an abrogation of time-honored state rights, derived from the most exalted principles of equity and so carefully designed, not only for the protection of debtors and creditors alike, but also for the promotion of the general economic welfare of the public at large.
I would affirm.

. Some states provide for a statutory appraisal and prohibit foreclosure for less than a certain percentage of that value, while other states depend on anti-deficiency legislation and upset prices. See Jones, Mortgages § 1611(a).

. Originally, the distinction lay in the conceptualistie notion that the grantor conveyed all his interest through the trust deed, so that, unlike a mortgagor, he had nothing on which to base a right of redemption. More recently, the distinction has been based on such facts as that creditors cannot obtain deficiency judgments when property is sold under a trust deed and that notice requirements are more extensive under trust deeds. See, e. g., Comment, Comparison of California Mortgages, Trust Deeds and Land Sale Contracts, 7 U.C.L.A.L.Rev. 83, 88 (1959) ; Comment, Trust Deeds: Suit Upon Note Before Security Has Been Exhausted, 20 Calif.L.Rev. 318, 321 (1932).

. One Government contention not passed upon by the majority is that the mortgagor waived all redemption rights “to the extent permitted by law.” If what I have said of the policy of the statutes were accepted, then a purported waiver would necessarily be rejected as contrary to public policy. This is the result reached by many courts. See Elson Development Co. v. Arizona Savings and Loan Assn., 99 Ariz. 217, 407 P.2d 930 (1965); Beverly v. Davis, 79 Wash. 537, 140 P. 696 (1914). In addition, such a waiver is expressly prohibited by statute in some states. E. g., Cal.Civil Code § 2889. The reasons for this result are particularly compelling in the present situation be*371cause of the vastly unequal bargaining positions of the parties. It would indeed be a rare mortgagor who could effectively bargain against the FHA for deletion of the waiver provision from the form contract.