Unpublished Disposition, 886 F.2d 1319 (9th Cir. 1988)

No. 88-6403.

United States Court of Appeals, Ninth Circuit.

Before FLETCHER and NELSON, Circuit Judges, and PHILIP M. PRO^* .

MEMORANDUM^** 

Plaintiffs-Appellants SHELIA JOHNSON and ROBERT JOHNSON ("Johnsons") appeal from an order of the United States District Court for the Central District of California granting summary judgment in favor of Defendants-Appellees UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT ("HUD"), SAMUEL R. PIERCE, JR., Secretary of the United States Department of Housing and Urban Development; BENJAMIN BOBO, Director, Housing Management Division, United States Department of Housing and Urban Development; MALCOLM FINDLEY, Chief Loan Management Development Branch, United States Department of Housing and Urban Development; and WESTERN CONVEYANCING CORP., a California corporation. We affirm.

FACTS

In May 1985, Shelia Johnson and Robert Johnson purchased a home located at 933 West 53rd Street in Los Angeles, California. The purchase was made with an $82,652.00 trust deed insured under HUD's Section 203(b) of the National Housing Act, 12 U.S.C. § 1709. Robert and Michele Russell, friends of the Johnsons, cosigned the loan for the sole purpose of qualifying the Johnsons for the mortgage. The American City Mortgage Corporation ("American") was the original lender and beneficiary. Thereafter, American assigned the note and trust deed to Appellee Metmor Financial Inc. ("Metmor") and Appellee Western Conveyancing Corporation accepted assignment as trustee.

Subsequent to the purchase of the house, the Johnsons contend that the family income which had enabled them to qualify for the mortgage loan was reduced.

Prior to April 1985, Shelia Johnson was employed under the Los Angeles County Homemaker Chore Program for the care of her disabled husband and his parents. However, on April 25, 1985, Robert Johnson's father passed away, thereby reducing Shelia Johnson's monthly income by $153.00. Though Mr. Johnson's death occurred just a few days prior to the house purchase, at the urging of the broker and American, the Johnsons purchased the home and escrow closed shortly thereafter. The Johnsons also earned an estimated $150.00-$200.00 a month through their operation of a clothing and food sale business from their former residence. However, upon moving the Johnsons lost most of their customers thereby reducing this source of income.

The Johnsons submit that their income was reduced by two other episodes which they insist were circumstances beyond their control. The Johnsons argue that American under-represented to them the extent of their monthly mortgage obligations. The Johnsons claim that American stated that their monthly payments would total only $892.00. However, the actual payment, which included impounds for insurance and taxes, equalled $1,001.00. Furthermore, the Johnsons insist that broken promises by American and the broker to make various home repairs necessitated the expenditure by the Johnsons of $5,600.00. The Johnsons have filed suit in state court against American and the broker for recovery of the aforesaid amount.

Beginning in January 1986, the Johnsons became unable to satisfy the monthly mortgage obligations on the note. On July 21, 1986, the Johnsons were advised by Metmor that they were seven months in arrears and were facing foreclosure. The Johnsons were further advised that, in Metmor's opinion, they did not qualify for HUD's assignment program.¹ 

On October 2, 1986, HUD issued a letter indicating its preliminary conclusion that HUD could not accept assignment of the Johnsons' trust deed. HUD based its decision on Appellants' failure to satisfy two eligibility criteria:

1. Plaintiffs failure to demonstrate that their default was due to circumstances beyond their control; and

2. There was no reasonable prospect that Plaintiffs would be capable of satisfying their mortgage obligations within 36 months.

In the October 2nd letter, the Johnsons were further advised of their right to submit additional financial information to HUD and to have a conference with a HUD representative. Such a conference was in fact held among the Johnsons, cosigner Michele Russell and HUD Loan Specialist Enrique Ramirez. During the meeting, the Johnsons submitted additional financial information on HUD Form 92068F. They also produced a quitclaim deed, recorded March 3, 1986, indicating a reconveyance of the property interest from the Russells back to the Johnsons.

In making its assessment, HUD determined the Johnsons' total net monthly income to be $1,488.00, which consisted of Robert Johnson's social security disability payment ($533.00), Shelia Johnson's homemaker chore income ($380.00), and an unverified rental of two rooms to relatives ($375.00 and $200.00 respectively, for a total of $575.00).

After estimating total expenses to be approximately $861.00, HUD determined that the Johnsons had an available balance of $627.00 to pay the monthly note amount of $1,001.00. The mortgage loan amount was scheduled to increase to $1,077.00 if payments were continued for an additional ten years. Thus, Appellants were $374.00 to $450.00 short of the amounts necessary to satisfy their mortgage obligations.

HUD excluded from their calculations income of $150.00-200.00 in projected home sales of food and clothes and $200.00 based on a planned rental of a third room for lack of evidence that the Johnsons would be able to earn such income. HUD also did not include the financial status and capability of the Russells in light of their stipulation that they were unable to assist the Johnsons financially as well as the reconveyance of their property interest back to the Johnsons by quitclaim deed.

On November 3, 1986, HUD issued a final decision letter denying the Johnson's request for assignment of their trust deed. HUD restated the two reasons underlying its denial: First HUD determined that the Johnsons' default was not the result of circumstances beyond the Johnsons' control, but was due to an initial lack of "affordability." Second, HUD found that there was no reasonable prospect that the Johnsons would be able to meet their mortgage obligations within 36 months.

On December 15, 1986, the Johnsons requested HUD to reconsider its decision not to assume the mortgage. Specifically, the Johnsons argued that the reduction in income stemming from Shelia Johnson's homemaker chore income and from the Johnsons' in-home food and clothing sales, as well as from the repair bills and the alleged misrepresentation with respect to the monthly mortgage payments, were circumstances over which the Johnsons had no control. Furthermore, the Johnsons submitted that HUD improperly excluded projected home sales of food and clothes from its income calculation.

On January 14, 1987, HUD rejected the Johnsons' request for reconsideration. Metmor subsequently recorded a notice of default against Plaintiffs' property on March 2, 1987.

On June 15, 1987, the Johnsons filed an action for declaratory and injunctive relief in the United States District Court for the Central District of California. On August 31, 1987, the Court granted the Johnsons' application for a preliminary injunction prohibiting Metmor and Western Conveyancing Corporation from foreclosing on the Johnsons' property. However, the Court ordered that if the Johnsons failed to make their monthly loan payment by October 1, 1987, the preliminary injunction would dissolve. When the Johnsons failed to make the payment by October 1, 1987, Metmor obtained title to the property at a trustees sale conducted on October 15, 1987.

On December 21, 1987, the district court granted Metmor's motion to expunge a lis pendens filed by the Johnsons on October 1, 1987. The Court also denied the Johnsons' motion to file an amended complaint. After unlawful detainer proceedings in state court, the Johnsons vacated the premises on or about March 21, 1988.

On June 30, 1988, the district court granted HUD's motion for summary judgment. The court found that although HUD's determination that the Johnsons' default was the result of circumstances within their control was arbitrary, HUD nonetheless acted reasonably in concluding that there was no reasonable prospect that the Johnsons would be able to resume mortgage payments within 36 months and that HUD therefore properly rejected the Johnsons' application to enter HUD's mortgage assignment program.

STANDARD OF REVIEW

This Court reviews a district court's grant of summary judgment de novo. Ford v. Manufacturers Hanover Mortgage Corp., 831 F.2d 1520, 1523 (9th Cir. 1987). After viewing the evidence in the light most favorable to the party opposing the motion, this Court will affirm if no genuine issue of material fact is found and it is determined that the district court correctly applied the relevant substantive law. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir. 1986).

"The characterization of agency action as adjudicatory, legislative, or an informal agency action is important in determining the appropriate standard of judicial review." In re Zaidi, 78 B.R. 410, 413 (E.D. Pa. 1987); Armstead v. HUD, 815 F.2d 278, 281 (3rd Cir. 1987). A decision by HUD to refuse to accept a mortgage into its assignment program is considered informal agency action and is reviewed under an arbitrary and capricious standard. 5 U.S.C. § 706(2) (A); Anderson v. HUD, 701 F.2d 112 (10th Cir. 1983). The scope of review entrusted to the courts under this standard is narrow. A court is not empowered to substitute its judgment for that of an agency. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S. Ct. 814, 823 (1971).

DISCUSSION

The Johnsons advance several arguments in support of their appeal.

First, the Johnsons insist that HUD failed to consider properly that Shelia Johnson could increase her homemaker chore income. The Johnsons direct the Court's attention to the following provision in the HUD Handbook:

Future ability to pay--not present income or credit history--is the key factor in evaluating this criterion. No applicant for assignment shall be determined ineligible based simply upon lack or type of income at the time the assignment request is processed. All present and prospective sources of income ... must be considered when determining reasonable prospect for repayment.

....

Where a person is presently out of work and is not suffering from any disability that will prevent reemployment, and is seeking work, all doubts as to future employability should be resolved in his/her favor.

HUD Handbook 4330.2, Chapter 2, pp. 2-4, part 2-1(e).

During her conference with HUD officials, Shelia Johnson apparently submitted evidence reflecting her employment under the Los Angeles County Homemaker Chore Program since 1974. For an unspecified length of time, Shelia Johnson cared for three family members, including her now deceased father-in-law, for which she drew a monthly salary. However, when her father-in-law died on April 25, 1985, her monthly income declined by $153.00.

HUD responds that the possibility that Shelia Johnson might find another person to care for under the homemaker chore program was not even mentioned in the Johnsons' financial statement of August 26, 1987, or at the Summary Assignment Conference. Although the possibility of such a potential source of income is mentioned in the Johnson's reconsideration letter of December 15, 1987, the likelihood that Shelia Johnson would succeed in finding another person to care for under the homemaker chore program is doubtful given the fact that she failed to do so during the eighteen-month period between April 25, 1985, and October 27, 1986.

Under the circumstances, the district court correctly concluded that HUD's decision not to include such possible future income was not arbitrary or capricious.

The Johnsons also contend that HUD improperly declined to consider future income which might result from the rental of a third room. Citing HUD Handbook 4330.2,²  the Johnsons argue that HUD failed to substantiate its conclusion that the Johnsons' rental income is unstable as a source of income for future purposes. HUD responds that its refusal is based upon the Johnsons' lack of documentation at their informal conference as well as the uncertainty that accompanies such a prospective rental.

The administrative record supports HUD's contention. In spite of a lack of verification, in recognition of Appellants' current rental of two rooms, HUD credited the Johnsons with $575.00 in monthly income. Given that the Johnsons presented HUD with no documentation with respect to a possible rental of a third room, and that there is no prior history of such a rental, HUD's failure to factor this possible source of income was neither arbitrary nor unreasonable.

The Johnsons next claim that HUD improperly declined to consider alleged income produced from the Johnsons' in-home sales of food and clothing. The Johnsons, citing uncontradicted affidavit testimony of Shelia Johnson, which accompanied a Declaration in Support of TRO and Preliminary Injunction filed in the district court, claim that HUD misled them as to the significance of their informal conference as well as the necessity for providing documentation. More specifically, Shelia Johnson's affidavit indicates that a HUD representative intimated to her that she need not submit to HUD officials any additional information with respect to her in-home sales of food and clothing.

In response, HUD cites language contained in letters dated October 2, 1986, and October 20, 1986, which specifically advised the Johnsons to provide HUD with documentation in regards to all sources of income. The Johnsons thereafter failed to submit the information requested by HUD. Under the circumstances, HUD's refusal to credit the Johnsons with $150.00 to $200.00 per month as prospective income from in-home sales of food and clothing cannot be viewed as arbitrary and capricious.

Finally, the Johnsons contend that HUD improperly refused to consider as income the possible recovery of home repair bills through state court action.

HUD responds that although the Johnsons' first reference to this possible future source of income is contained in their December 15, 1986 letter requesting reconsideration, the Johnsons nonetheless failed to provide HUD with receipts or proof of repairs which HUD had requested. HUD contends that given the fact that resolution of the Johnsons' state court action will be subject to the average sixty-month waiting period for civil trials in Los Angeles County Superior Court, the potentiality for available revenue in the form of recovered home repair bills by the Johnsons is highly speculative.

The Court finds HUD's refusal to consider the possible recovery of home repair bills as income cannot be characterized as arbitrary or capricious.

CONCLUSION

Giving the Johnsons the benefit of every doubt, the record developed before HUD, and presented to the district court, clearly supports the finding that there was no reasonable prospect that the Johnsons would be able to satisfy their future mortgage obligations under the HUD assignment program.

AFFIRMED.