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United States v. Livecchi

March 31, 2009

UNITED STATES OF AMERICA, PLAINTIFF,
v.
CHARLES R. LIVECCHI AND C.R.L. MANAGEMENT, INC., DEFENDANTS.



The opinion of the court was delivered by: Marian W. Payson United States Magistrate Judge

DECISION & ORDER

The United States has brought suit against Charles Livecchi ("Livecchi") and his real estate management company, C.R.L. Management, Inc. ("CRL"), under 12 U.S.C. § 1715z-4a(a)(1)(B). Under that statute, the federal government may sue any owner or operator of a multifamily project financed through a mortgage insured by the United States Department of Housing and Urban Development ("HUD") "to recover any assets or income used . . . in violation of a regulatory agreement that applies to [such] project." 12 U.S.C. § 1715z-4a(a)(1)(B). Pursuant to 28 U.S.C. § 636(c), the parties have consented to the disposition of this case by a magistrate judge.

From 1992 through 1998, Livecchi owned and, together with CRL, managed a multifamily project known as Cambridge Court Apartments (the "Project") that was financed through a HUD-insured mortgage. The Project was located on Dodge Street in Rochester, New York (the "Property"). In return for HUD's agreement to insure Livecchi's mortgage, Livecchi executed a regulatory agreement with HUD, dated August 20, 1992, (the "Regulatory Agreement" or "Agreement") governing the operation of the Project. In November 1998, HUD foreclosed on the Property due to Livecchi's failure to make the required mortgage payments, and it was sold to a third party. Five years later, in 2003, the United States initiated this civil action against defendants under 12 U.S.C. § 1715z-4a(a)(1)(B).

Summary judgment has already been awarded to the government on its statutory claim. By Decision and Order dated September 30, 2005, this Court determined that Livecchi had retained income in the amount of $481,438 in violation of the Regulatory Agreement during the period of Livecchi's mortgage default (March 1997 through December 1998). (Docket # 40). As explained more fully in that decision, familiarity with which is assumed, the Court concluded that Livecchi's retention of that income constituted a violation of 12 U.S.C. § 1715z-4a(a)(1)(B). The Court reserved decision on the government's application for double damages under the statute. The Court also dismissed defendants' then pending counterclaims, but granted defendants' motion to add counterclaims for recoupment.

A bench trial was thereafter conducted limited to the following issues:

(1) whether the United States should be awarded double damages under 12 U.S.C. § 1715z-4a(c);

(2) whether the United States should be awarded prejudgment interest and, if so, what methodology should be utilized to calculate it; and (3) whether Livecchi has proved his counterclaim of recoupment, thus entitling him to a reduction in the amount of the judgment. At trial, the government called two witnesses: Rosalinda Lamberty, the Director of Multifamily Housing for HUD's Buffalo Regional Office, and Thomas Egloff, formerly employed by HUD's Office of Inspector General as an agent and auditor. The defense called Livecchi as its sole witness.*fn1

The following constitutes this Court's decision on the pending issues.

FACTUAL BACKGROUND

A. Livecchi's HUD-Insured Mortgage and the Parties' Regulatory Agreement

Livecchi purchased the Property in 1982 and refinanced it in 1992 by obtaining a HUD-insured mortgage from Continental Securities Corporation ("Continental") in the amount of $2,390,000. (Docket # 40 at 2). At the time of the refinancing, Livecchi had approximately $700,000 of equity in the Property. (Tr. 409).*fn2 In consideration for HUD's agreement to insure the mortgage and relieve Livecchi of any personal liability in the event of a mortgage default, Livecchi signed the Regulatory Agreement with HUD.*fn3 (Docket # 40 at 2-3).

The Agreement obligated Livecchi, inter alia , to make "all payments due under the note and mortgage," to establish and maintain a capital reserve fund and to provide HUD with annual financial statements "prepared in accordance with the requirements of [HUD]."

(G. Ex. 4 at ¶¶ 1, 2, 9(e)). The Agreement also restricted Livecchi's use of income derived from the Property by prohibiting him from retaining any rental income in excess of reasonable operating and maintenance expenses during any period in which the mortgage was in arrears.

(G. Ex. 4; Docket # 40 at 3). By the terms of the Agreement, any violation by the owner of his obligations thereunder authorized HUD to declare a default under the Agreement, accelerate the loan and proceed to foreclosure of the Property. (G. Ex. 4 at ¶ 11(a); Tr. 42-43).

The capital reserve fund, which was referred to in the Agreement as the "reserve fund for replacements" (the "RFR"), functioned as an escrow account from which payments could be made for replacement of capital components of the property. (Docket # 40 at 3). Director Lamberty ("Lamberty") testified that the purpose of the RFR was to ensure that sufficient funds were available to finance capital replacements for the Project, thus protecting the condition of the Property for its residents. (Tr. 26-27). The Agreement required Livecchi to fund the RFR with an initial deposit of $200,000, and thereafter to make monthly payments of $2,013 into the fund.*fn4 (G. Ex. 4 at ¶ 2; Docket # 40 at 3). According to the terms of the Agreement:

Disbursements from the [RFR], whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the Secretary [of HUD].*fn5

(G. Ex. 4 at ¶ 2). The Agreement further provided that in the event of a mortgage default for which the loan was accelerated, HUD was authorized to apply the balance in the RFR to reduce the amount of the mortgage indebtedness. ( Id. ).

B. The Disputes that Led to the Parties' September 1994 Settlement Agreement

Within several months of their execution of the Regulatory Agreement, the parties began to dispute their obligations thereunder. Those disputes related principally to Livecchi's obligation to provide HUD with annual financial statements relating to the Property and HUD's obligation to reimburse Livecchi from the RFR for capital expenditures relating to the Property.

(G. Exs. 6, 7, 8, 48, 62; Defendants' Exhibits ("D. Exs.") C, E). As to the former, HUD maintained that Livecchi was required by HUD policy to provide accrual-based, rather than cash-based, financial statements; Livecchi contended that the Regulatory Agreement contained no requirement as to the form of the statements. As to the latter, HUD refused to release funds from the RFR to reimburse Livecchi for his expenditures until he submitted accrual-based statements; Livecchi objected to HUD's withholding of RFR payments on that basis. (Tr. 49-50).

These disputes eventually culminated in a 1994 administrative proceeding by HUD seeking to impose sanctions against Livecchi in the form of a "Limited Denial of Participation" ("LDP"). (G. Ex. 49). Specifically, HUD sought to prohibit Livecchi from conducting any new business with HUD for a twelve-month period. (Tr. 57-61, 415-18; G. Exs. 10, 11). Livecchi opposed HUD's application for the LDP, and the matter was assigned to an administrative law judge for determination. Prior to a hearing, the parties reached a resolution, which was memorialized in a written settlement agreement executed on or about September 12, 1994 (the "Settlement Agreement"). (G. Ex. 12; Tr. 61-64, 418-19).

Pursuant to the terms of the Settlement Agreement, Livecchi agreed "to comply fully with all rules, regulations and other requirements of HUD, and specifically with respect to HUD's requirement of accrual based financial statements." (G. Ex. 12 at ¶ 1; Tr. 62). Livecchi further agreed to provide accrual-based statements for the year 1994 on or before March 1, 1995.

(G. Ex. 12 at ¶ 1; Tr. 63). HUD, in turn, agreed to "process" within ten days of the Agreement all of Livecchi's currently outstanding requests for reimbursement from the RFR. (G. Ex. 12 at ¶ 2). By the express terms of the Agreement, HUD did not agree "to approve" such requests "unless in HUD's sole determination [Livecchi] has satisfied HUD's requirements for such approval." ( Id. ). The final provision of the Agreement stated, "HUD shall have the exclusive right to determine [Livecchi's] compliance with HUD's rules, regulations and requirements."

(G. Ex. 12 at ¶ 6; Tr. 64).

C. The Parties' Continued Disputes Following the Settlement Agreement

Nine days after the execution of the Settlement Agreement, HUD approved a release to Livecchi from the RFR in the amount of $48,755.25. (G. Ex. 13; Tr. 65). That amount represented the full amount of Livecchi's outstanding RFR requests, minus $161.22 for items that HUD determined were normal operating expenses, and adjusted to account for duplicate requests. (G. Exs. 13, 13a, 14; Tr. 66).

In November 1994, Livecchi made his next request for reimbursement from the RFR, this time in the amount of $28,096.27. (G. Ex. 51; Tr. 143). Later that month, HUD approved a release from the RFR in the amount of $27,609.22. (G. Ex. 52; Tr. 143-45). The majority of the $487 disallowance related to a key machine purchased by Livecchi for $371.25.*fn6

(G. Ex. 52; Tr. 145). Livecchi requested HUD to reconsider the disallowance for the key machine. (G. Ex. 16; Tr. 145). Approximately three weeks later, HUD wrote to Livecchi reaffirming the disallowance, noting that "[t]he key machine is not a legitimate replacement item" and enclosing a HUD form listing items for which RFR reimbursement was permitted.

(G. Ex. 17; Tr. 145, 523).

Not satisfied with HUD's decision concerning the key machine, Livecchi wrote to HUD "demanding" the release of the funds within ten days and threatening to "commence legal action against HUD" in the event of HUD's refusal. (G. Ex. 53; Tr. 146-47). Approximately ten days later, Livecchi wrote to the administrative law judge to whom the 1994 LDP proceeding had been assigned and requested that the proceeding be restored to the judge's calendar. (G. Ex. 54; Tr. 420). In his letter to the judge, Livecchi complained that HUD's refusal to pay the full amount of all of his RFR requests constituted a breach of the Settlement Agreement. He stated, "[d]ue to [HUD's] breach of contract, I do not feel responsible to provide the accounting we had agreed upon, and will not do so." ( Id. ). In response, Livecchi received a letter advising him that the administrative proceeding had been closed. (D. Ex. K; Tr. 420).

At the end of February 1995, Livecchi submitted another request for release of RFR funds. This request was in the amount of $16,684.36. (G. Ex. 55; Tr. 422). By letter dated March 20, 1995, HUD denied the request, citing two reasons. (G. Ex. 18). The first was Livecchi's failure to provide a capital needs budget. The letter explained that a capital needs budget was "necessary to determine what a sufficient reserve balance and monthly deposit would be to meet the future capital needs of the property." ( Id. ). The second reason cited was Livecchi's failure to have submitted audited statements in accrual-based format for the year 1994. The letter noted that a thirty-day extension had been granted until March 31, 1995 for the submission of the statements. HUD advised Livecchi, "[w]e need to be certain that the financial statement is in the correct format before we approve any further releases" and assured him, "[o]nce the matters stated above have been resolved, we will review the request for reimbursement from the replacement reserve account." ( Id. ).

The same two reasons were cited by HUD six months later when Livecchi submitted his next request for release of funds from the RFR. (G. Ex. 19). Specifically, on August 21, 1995, Livecchi submitted a request for release in the amount of $15,958.27. (G. Ex. 57). As in March, HUD denied the request in writing and reiterated its refusal to make payments from the fund in the absence of a capital needs budget and financial statements for 1994. (G. Ex. 19; Tr. 153-56, 172).

Livecchi responded to this denial by writing Lamberty, who then served as Asset Management Chief for the Buffalo office, to complain that HUD was unjustly withholding reimbursement from the RFR. (D. Ex. Q). In the letter, Livecchi inquired about a process for appealing the decision; if none existed, the letter continued, Livecchi would "commence legal action in the Federal Courts to sue HUD for abuse of power and breach of the regulatory agreement and hold HUD liable for all of [his] losses . . . and sue for the balance of mortgage for breach of contract." ( Id. ).

On October 5, 1995, Lamberty wrote to Livecchi in response to his letter. (G. Ex. 20). She advised Livecchi that while there was no formal appeal process, the Buffalo HUD office "would be more than willing" to have a meeting with him "to discuss the situation." ( Id. ). The letter reiterated that Livecchi's RFR requests had been denied based upon his failure to submit the capital needs budget and the still outstanding 1994 audited financial statements. ( Id. ). The letter noted that an extension had been granted for submission of the 1994 statements only until April 15, 1995. ( Id. ).

Livecchi testified at trial that he believed the 1994 financial statements had in fact been submitted by no later than September 1995. (Tr. 589, 597). This testimony is not supported, however, by the documentary evidence admitted at trial. On August 14, 1995, HUD issued Livecchi a formal notice that the financial statements had not been submitted and that such failure could subject him to sanctions, including civil money penalties. (D. Ex. N). Livecchi responded to the notice by letter dated August 22, 1995, "to explain what had been going on with HUD," namely, his unsuccessful requests for release of funds from the RFR.

(D. Ex. O). Specifically, Livecchi stated:

First, to let you know that the financial statements are completed for this complex. I asked my accountant not to mail the financial statements because of the difficulties that I am having with the Buffalo HUD office, with hopes that the Buffalo HUD office would put me in a limited denial participation, so that, this would put me before the Administrative Law Judge. . . .

I feel that if I did not give Buffalo [HUD] my financial statements, I would be able to start a new action with them after they put me in the limited denial of participation.

(D. Ex. O; Tr. 424, 597). The subsequent letter by HUD to Livecchi in October 1995 stated that HUD still had not received the 1994 financial statements. (G. Ex. 20; Tr. 590).

Contrary to Livecchi's testimony that the 1994 financial statements were submitted to HUD by September 1995, I find that they were submitted at some point between October 1995 and January 1996. (D. Ex. T; Tr. 430-33). In January 1996, Livecchi also submitted a ten-year budget. In the cover letter to HUD accompanying that submission, Livecchi noted that "you should now have everything that you requested to release the money from the RFR." (D. Ex. U; Tr. 434-35).

Approximately two weeks later, HUD released funds from the RFR in the amount of $33,154.38, covering three pending requests by Livecchi in the aggregate amount of $38,351.80 -- the February and August 1995 requests and a subsequent November 1995 request.

(G. Ex. 59; Tr. 438). The amount disallowed represented the costs of items that HUD considered normal maintenance items or were not listed in Livecchi's capital needs budget. (G. Ex. 59). HUD identified the disallowed items in its explanatory letter to Livecchi. The letter further informed Livecchi that HUD could not accept his capital needs budget because it was incomplete and based upon unrealistic projections and historical expenses. ( Id. ).

On November 18, 1996, Livecchi submitted a final RFR request in the amount of $20,711.53. (G. Ex. 60; Tr. 438). That request was never processed or paid by HUD. (Tr. 438-39).

D. Livecchi's Default, Continental's Mortgage Assignment and HUD's Foreclosure

1. Livecchi's Decision to Cease Making Mortgage Payments

Failing to receive payment on his November 1996 RFR request, Livecchi advised HUD by letter dated January 15, 1997 that he had discussed the matter with "a couple of attorneys" and they had counseled him to discontinue paying that portion of his monthly mortgage payment that represented the monthly RFR deposit. (G. Ex. 61; Tr. 28). According to Livecchi's letter, the attorneys advised him instead to deposit those funds into a bank account with CRL acting as escrow agent "while we are suing HUD." ( Id. ). The letter concluded with the statement:

It seems to be the only way to resolve the issue of the [RFR] is by going to court and suing all parties involved for the damages that you are causing to Cambridge Court Apartments for the games that are being played by HUD.

( Id. ).

On March 27, 1997, HUD responded to Livecchi's January ...


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