New York Guardian Mortgagee Corp. v. Cleland

ON MOTION TO REARGUE

Government National Mortgage Association (GNMA) moves, pursuant to General Rule 9(m) of the United States District Courts for the Southern and Eastern Districts of New York, for reargument of its motion for summary judgment decided by this court on January 8,1979. GNMA bases its motion on several grounds, all of which, in its view, should lead us to conclude that the “collection period” — i. e. the period within which a GNMA issuer is required to complete its collection efforts — should be deemed to have already ended for Guardian in connection with the mortgage loan guarantees at issue here. At oral argument on its motion, GNMA also urged that, for policy reasons, we reconsider our January 8th decision and hold that GNMA issuers have a duty to pay from their own funds amounts equal to “prepayments” made by government agencies guaranteeing pool mortgages but not received by issuers, and that this duty is triggered solely by the guaranteeing agency’s decision that its guaranty obligation has been discharged.

As this court has recently noted, “the only proper ground for [granting] a motion for reargument is that the court has overlooked ‘matters or controlling decisions’ which, had they been considered, might reasonably have altered the result reached by the court.” United States v. International Business Machines Corp., 79 F.R.D. 412, 414 (S.D.N.Y.1978); United States v. N. V. Nederlandsche Combinatie Voor Chemische Industrie et al., 75 F.R.D. 473 (S.D.N.Y. 1977).

To the extent that GNMA urges us, for policy reasons, to reconsider our decision, we decline. The government, in its assertion that the decision of the guaranteeing agency with respect to whether it has fulfilled its guaranty obligation should be conclusive for purposes of triggering a GNMA issuer’s alleged duty to pay from its own funds an amount equal to that obligation, merely repeats its previous position and asserts we were wrong. This is not a proper basis for the grant of a motion for reargument. See United States v. International Business Machines Corp., supra, 79 F.R.D. at 414. If GNMA is dissatisfied with the “due diligence” standard set forth in our prior opinion, it is free to appeal or, perhaps, to rewrite its own standard form Guaranty Agreement which appears to establish that standard.

GNMA has referred us to no “controlling decisions”, or for that matter, any decision at all, which might alter our prior ruling.

GNMA does, however, assert that we overlooked certain matters which might change our January 8th decision. First, it argues that we overlooked a settlement agreement entered into March 23, 1978 between Eastern Service Corp., Guardian’s predecessor in interest, and the United States Government, in which Eastern is said to have released all its claims against the government. Since this general release is said to have encompassed the VA guaranty obligations at issue here, GNMA argues that the collection period on those guarantees necessarily ended at that point, thereby triggering a duty on Guardian’s part to pay forward the unpaid balances of the defaulted pool loans. We did not, however, over*421look this agreement. Rather we considered the effect of the agreement to be at issue in the two claims in Guardian’s pending action against the VA, which calls on us to determine whether the VA, either by its purported set off or by the settlement agreement, has discharged its guaranty obligations. Since these questions were specifically held apart from the issues presented for our January 8th decision, we intentionally did not consider them at that time. Should it be determined, in the pending dispute between Guardian and the VA, that the March 23, 1978 settlement agreement fully discharged the VA, we will then have to consider whether a GNMA issuer has any duty to pay from its own funds an amount equal to “prepayments” made by a guaranteeing agency but never received by the issuer. The point of our January 8th decision was that, assuming an issuer proceeds with due diligence, the collection period would run at least until an initial judicial determination of whether the guaranteeing agency has in fact satisfied its guaranty obligation and therefore triggered whatever duty an issuer may be found to have to advance its own funds.

GNMA also asserts that we overlooked the fact that Eastern had cancelled and surrendered two VA guaranty certificates which represented the VA’s obligation with respect to two of the eight mortgage loans in question here. From this surrender, GNMA concludes that the collection period must have been concluded with respect to those two loans. We did not “overlook” this information, because it was not presented to us. GNMA, for the first time on this motion to reargue, attaches as “exhibits” to its motion the two cancelled certificates. A motion for reargument is not the place for the introduction of such new factual material “unless directed by the court” (Rule 9(m)). Furthermore, it appears from papers filed in this case that even the VA did not deem its obligation discharged by the mere fact that the certificates here had been surrendered. The certificates were cancelled respectively on April 30, 1975 and June 10, 1974. Yet VA purported to “offset” the obligation, which we may infer that it deemed still to exist, on October 1, 1975. We therefore deny reargument on the basis of these certificates. However, we note that the VA (which is represented in this action by the same counsel as GNMA) is not foreclosed from submitting the certificates to show that it has discharged its guaranty obligations with respect to these two claims in connection with its pending motion for summary judgment against Guardian.

Quoting our remark that GNMA security holders have “no expectation with respect to prepayment stemming from defaults and foreclosure,” GNMA argues that we overlooked the “customary practice of mortgage investors to take prepayments into account in computing probable yields.” It was stated in the January 8th decision that:

“The essence of the ‘modified pass-through’ security (as opposed to the straight pass-through) is the guarantee that scheduled payments will be made whether or not collected, and the purchaser of such securities is entitled to rely on those payments. However, the purchaser has, at any given time, no expectation with respect to prepayments stemming from defaults and foreclosures. Such events, by definition, are unpredictable. Although the security holder has a right to expect generally that his securities will be ‘based on and backed by’ pool mortgages, a certain amount of delay before receipt of his pro rata share of any liquidation payments should not be burdensome to any given holder, since such a ‘prepayment’ is by definition unexpected.” (Emphasis supplied)

Although this language seems clear, it may be helpful to explain it further. A distinction is drawn in the regulations and instruments governing the duties of a GNMA issuer between “prepayments” and “scheduled payments”. The latter provide for a predictable minimum amount payable from month to month. To insure that a GNMA security holder can rely on receiving these minimum “scheduled payments” as they fall due, the issuer is clearly obliged to meet such payments “whether or not collected” *422from the pool mortgages. 24 C.F.R. § 390.-5(a). These scheduled payments are subject to occasional increase by “prepayments” arising from defaults and foreclosures on pool mortgages. These are naturally not predictable “at any given time ” (the language cited above from our decision of January 8, 1979). Therefore, a security holder does not rely on such a payment in any given month at the time of his investment. We do not dispute that he has an actuarial expectation that, over time, a certain incidence of default may occur on a given pool. That expectation is fully protected by our opinion. However, since at any particular moment there is no expectation of or reliance on such payments, it is reasonable that the issuer is not r'equired to advance the payment immediately from his own funds. We believed, and still believe, that this helps to explain the different duties imposed on GNMA issuers by contract and regulation with respect to scheduled payments and prepayments.

The last and most substantial ground advanced by GNMA is that we improperly concluded that Guardian has exerted the “due diligence” required of it in its contract with GNMA in the prosecution of its collection duties in connection with the loans at issue here. GNMA does not argue that we “overlooked” anything, but rather maintains that since neither party had argued a “due diligence” theory, the record on which we rendered our determination was inadequate. GNMA seems also to maintain that the record was inadequate not only with respect to Guardian’s collection efforts but also with respect to those of Eastern Service Corporation — apparently on the theory that Eastern’s delinquencies in collecting on its loans are attributable to Guardian by virtue of the chain of assignments of issuer status running from Eastern to Guardian. Guardian argues, in opposition, that we fully considered this question and that, in any event, any effort to try the question would be futile since our decision on the merits of Guardian’s pending claims against the VA would render the issue academic. Guardian does not respond to whether it may be held for any lack of due diligence which may be shown on Eastern’s part.

We believe that GNMA’s motion for reargument should be granted insofar as GNMA seeks to provide a fuller record as a basis for determining “due diligence” as well as any arguments it wishes to raise in connection with the issue of whether Guardian may be held for Eastern’s failure to exercise due diligence in its collection efforts. The mere fact that Guardian may prevail in its pending claims against the VA does not alter the fact that Guardian has a clear contractual obligation to proceed in its collections on behalf of the pools with due diligence. Guaranty Agreement §§ 4.14, 7.01. Presumably GNMA could recover for any loss caused to security holders by undue delay.

In sum, we adhere to our holding that during the period in which an issuer seeks with due diligence to collect on its mortgage loan and on its guarantees, its only duty is to advance scheduled payments from its own funds. However, GNMA’s motion for reargument is granted to the extent it seeks to provide a more complete record on the question of due diligence.

It is so ordered.