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April 13, 1956

Norman P. MASON, as, and in his official capacity as, Federal Housing Commissioner, and Farragut Gardens No. 1, Inc., Farragut Gardens No. 2, Inc., Farrangut Gardens No. 3, Inc., Farragut Gardens No. 4, Inc., and Farragut Gardens No. 5, Inc., Plaintiffs,
Alexander P. HIRSCH, Henry Hirsch, Morris Kavy, Martin Beneder, Tertram Kavy, Yale Adelsohn Gladys P. Hirsch, Howard A. Hirsch, Faye Kavy, Gilbert Kavy, Louis Benedek and Myrtle G. Hirsch, Leonore Benedek and Janet Benedek, individually and as trustees, Defendants

The opinion of the court was delivered by: ABRUZZO

This is a motion made by the defendants for a dismissal of the complaint on the ground that Norman P. Mason in his official capacity as Federal Housing Commissioner has no right to bring this action and on the further ground that the Court lacks jurisdiction over the subject matter.

The complaint is civil in nature and seeks to recover funds belonging to each of the five Farragut Corporations, the complaint alleging that these funds were wrongfully paid, transferred, or otherwise disposed of by the defendants. It is claimed in the complaint that the defendants illegally disposed of the sum of $ 3,158,000 as dividends on the common stock of these five corporations. (NOTE: There is before me for decision an application by the same plaintiff seeking possession of the 29 houses which comprise this so-called Farragut Gardens development on the ground that the defendants in August, 1955, were in default to the extent of $ 500,000, representing interest and amortization on mortgages amounting to approximately $ 22,000,000. In that particular action it appears that the original investment by these defendants was $ 8,000 and the dividends declared amounted to the sum of $ 3,150,000.)

The complaint is lodged pursuant to the National Housing Act, as amended, Title 12, U.S.C.A. § 1701 et seq., and under Title 28, U.S.C., §§ 1331 and 1345, and other provisions of law. The plaintiff, Norman P. Mason, is a citizen of the District of Columbia and since July 26 1954, has been acting as the duly appointed Federal Housing Commissioner. The complaint alleges that he was authorized by Act of Congress to exercise the powers of the Federal Housing Commissioner and to sue in the state and federal courts on behalf of the Federal Housing Administration under Title 12, United States Code Annotated, § 1701 et seq.

 The five Farragut corporations were organized and are now existing under and by virtue of the laws of the State of New York. Section 608 of the National Housing Act, Title 12, United States Code Annotated, § 1743, was enacted in 1942 in order to relieve the acute housing shortage which then existed. In order to accomplish this, Congress conferred upon the Commissioner power to insure mortgage loans by private lenders to prospective builders. In this particular action approximately $ 22,000,000 was loaned to the Farragut corporations for which mortgages were given, and in turn the payment of these mortgages for guaranteed by the plaintiff. The corporate charters of the five Farragut corporations, pursuant to the rules and regulations of the National Housing Act, contained clauses and directions Not found in any other corporate charters. The clauses contained in the corporate charters at issue were promulgated by the plaintiff and were applicable only to the building of large apartment houses of this type. The plaintiff in this action is directly concerned with the guarantee of these mortgages.

 As a result of the payment of these large dividends, the five Farragut corporations were left without a surplus. In August, as a result of the lack of surplus the defaults took place.

 (NOTE: In the action for possession by the plaintiff, a provisional order was entered when an application for an injunction was made by the plaintiff, which provided that the rents were to be collected under the dual control of the defendants and a Mr. Kerns representing the Federal Housing Administration, the rents so collected to be disbursed solely for the benefit of this housing project. No defaults have occurred since that provisional order.)

 In accordance with the provisions of the National Housing Act, the Farragut corporations were formed on or about January 25, 1949, and the certificates of incorporation contained these provisions:

 'To apply for and obtain * * * from the Federal Housing Commissioner * * * a contract or contracts of mortgage insurance pursuant to the provisions of the National Housing Act as amended, covering bonds, notes and other evidences of indebtedness * * * and any indenture of mortgage * * * securing the same.' (Article Second (d) of the Farragut Corporations' Certificates of Incorporation.)

 'So long as any property of this corporation is encumbered by a mortgage or deed of trust insured by the Commissioner it shall engage in no business other than the construction and operation of a Rental Housing Project or Projects. (Article Second (d)).

 'The total amount of the authorized capital stock of the corporation is five hundred (500) shares, of which one hundred (100) shares having a par value of One Dollar ($ 1.00) per share shall be designated 'preferred stock' and four hundred (400) shares shall be designated 'Common stock' without par value, which shares of capital stock shall have the preference and restrictions as follows:

 * * * * *

 'In the event of any default by the corporation, as hereinafter defined and during the period of such default, the holders of the preferred stock, voting as a class, shall be entitled to remove all existing directors of the corporation and to elect new directions in their stead * * *. (Article Third (E)).'

 Paragraph Twelfth of the complaint alleges that the shares of common stock were issued to the defendants and that preferred shares of stock were issued to the Federal Housing Administrator. Paragraph Sixteenth of the complaint alleges that the cost of construction of the 29 buildings which comprise this development was not in excess of $ 18,113,987.53. The loan amounted, nevertheless, to $ 21,719,300 (Paragraph Sixteenth). The dividends were declared out of this surplus (Paragraph Seventeenth). They were paid on the dates contained in Schedule A annexed to the complaint (Paragraph Eighteenth). The certificates of incorporation of each of the Farragut corporations further contain these provisions:

 '* * * shares of capital stock shall have the preferences and restrictions as follows:

 * * * * *

 '(B) The net earnings of the corporations, after providing therefrom dividends on preferred stock and all reserves hereinafter required, may by applied each year in payment of dividends to common stockholders. (Article Third (B).)

 'The corporation shall not without prior approval of a majority of the shares of preferred stock * * * (a) assign, transfer, dispose of or encumber any real or personal property, including rents, except as specifically permitted by the terms of the mortgage * * *. (Article Fourth.)'

 The complaint alleges that when these payments were made in the form of dividends these corporations did not have net earnings in the amounts so paid, nor was there any earned surplus (Paragraph Twentieth). These payments were made without the approval of the Federal Housing Administration (Paragraph Twenty-first). The defendants are charged with having prepared high appraisals so that a surplus could be created pursuant to these appraisals (Paragraph Twenty-second). It is apparent that the plaintiff is going to make the claim that these appraisals were not in fact true appraisals; that as a result of these appraisals the complaint alleges that the value of the property was increased so that the surplus was created and the payment of dividends thus made (Paragraphs Twenty-Third and Twenty-fourth). The certificates of incorporation provided for a uniform system of accounts which was never complied with (Paragraph Twenty-Seventh). The payment of these purported dividends was illegal and void pursuant to the rules and regulations of the Federal Housing Administration ...

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