On Appeal from the United States District Court for the District of Delaware
Before GARTH, BECKER, and ROSENN , Circuit Judges
Equity skimming is the practice of diverting revenues generated by mortgaged property in default to purposes other than property maintenance or mortgage payments. This case presents the question whether a federal criminal statute, 12 U.S.C. § 1715z-4(b)(1982), which proscribes equity skimming from federally-assisted multifamily housing projects, applies although the mortgagor did not receive an applies although the mortgagor did not receive an extension of time to cure the default or a modification of the mortgage terms. We hold that it does not, and we therefore will affirm the judgment of the district court which dismissed the indictment on this ground.
This criminal prosecution arose out of the financial difficulties of Golden Acres Apartments, an 88-unit apartment project built in 1973 and 1974 in Claymont, Delaware. The initial financing for the project included a HUD-insured mortgage of approximately $1.4 million. This mortgage went into default in May 1976, and in September 1976, the mortgage was assigned to HUD and thereafter was held by HUD under the provisions of the National Housing Act, 12 U.S.C. § 1713(g)(1982). The indictment alleges that from on or before February 1977, through December 1981, the appellees, Mario and Joseph Capano, owned all stock in Golden Acres, Inc., the developer and sponsor of the project.
the indictment further states, and it is uncontested by the parties, that from may, 1979, through December, 1981, the Capanos took more than $300,000 of rental income derived from Golden Acres and diverted it to themselves and other businesses they controlled. The indictment thus charges appellees, Mario B. Capano and Joseph L. Capano, with 110 substantive counts of equity skimming in violation of 12 U.S.C. § 1715z-4(b), and with one count of conspiracy, 18 U.S.C. § 371 (1982). The indictment does not allege that the Capanos ever requested or received an extension of time to cure the default on the mortgage or a modification of the terms of the mortgage.
The district court dismissed the indictment for two reasons. First, it held that the criminal penalties of 12 U.S.C. § 1715z-4(b) apply only when a multifamily housing project is insured by HUD and held by a third party mortgagee, not when, as alleged in the indictment, the project is security for a mortgage that has been assigned to and is actually held by the Secretary. In the alternative, the court held that, by the terms of the statute, the criminal penalties apply only where the mortgagors had received an extension of time to cure a default or a modification of the terms of their mortgage. Because the indictment for that additional and independent reason.
The United States brought the instant appeal from the dismissal, arguing that the district court's intepretation of 12 U.S.C. § 1715z-4(b) was incorrect, and that that subsection proscribes equity skimming by any mortgagor whose HUD-held or HUD-insured mortgage on a multifamily housing unit is in default regardless of whether he has received a modification or extension. We have appellate jurisdiction by virture of 18 U.S.C. § 3731 (1982). Inasmuch as this undertaking involves solely a question of law, our scope of review is plenary. See Tustin v. Heckler, 749 F.2d 1055, 1060 (3d Cir. 1984).
Because the district court had two independent reasons for its dismissal of the indictment, we will affirm the district court if we agree with either of its reasons. In the discussion that follows, we assume, without deciding, that the statute applies to mortgages held by HUD in additions to those as to which HUD is an insurer.*fn1 We consider only whether 12 U.S.C. § 1715z-4(b) applies to even those who have never received an extension or modification of their mortgages. We look to the language of the statute, its legislative history, and well-accepted canons of the interpretation of criminal statutes.
A. Analysis of the Statute
Because 12 U.S.C. § 1715z-4(b) (hereinafter "subsection (b)") is opaque and convoluted, and because it refers back to 12 U.S.C. § 1715z-4(a) (hereinafter "subsection (a)"), we will set forth forth both subsections in full.
§ 1715z-4 Modifications in terms of insured mortgages covering multifamily projects Requests for extensions to cure defaults or for modification of mortgage terms; regulations (a) The Secretary shall not consent to any request for an extension of the time for curing a default under any mortgage covering multifamily housing, as defined in the regulations of the Secretary, or for a modification of the terms of such mortgage, except in conformity with regulations prescribed by the Secretary in accordance with the provisions of this section. Such regulations shall require, as a condition to the granting of any such request, that, during the period of such extension or modification, any part of the rents or other funds derived by the mortgagor from the property covered by the mortgage which is not required to meet actual and necessary expenses arising in connection with the operation of such property, including amortization charges under the mortgage, be held in trust by the mortgagor and distributed only with the consent of the Secretary; except that the Secretary may provide for the granting of consent to any request for any extension of the time for curing a default under any mortgage covering multifamily housing, or for a modification of the terms of such mortgage, without regard to the foregoing requirement, in any case or class of cases in which an exemption from such requirement does not (as determined by the Secretary) jeopardize the interests of the United States.
(b) Whoever, as an owner of a property which is security for a mortgage described in subsection (a) of this section, or as a stockholder of a corporation owning such property, or as a beneficial owner under any business organization or trust owning such property, or as an officer, director, or agent of any such owner, (1) willfully uses or authorizes the use of any part of the rents or other funds derived from property covered by such mortgage in violation of a regulation prescribed by the Secretary under subsection (a) of this section, or (2) if such mortgage is determined, as provided in subsection (a) of this section, to be exempt from the requirement of any such regulation, willfully and knowingly uses or authorizes the use, while such mortgage is in default of any part of the rents or other funds derived from the property covered by such mortgage for any purpose other than to meet actual and necessary expenses arising in connection with such property (including amortization charges under the mortgage), shall be fined not more than $5,000 or imprisoned not more than three years, or both.
Subsection (a) states that the Secretary of HUD cannot extend or modify a mortgage on a multifamily housing unit*fn2 except in conformity with regulations that she or he promulgates, and that those regulations shall, among other things, prohibit equity skimming.*fn3 The regulations can be found at 24 U.S.C. § 207.256b(1985). Not wishing to bind the Secretary unduly, Congress included an "escape clause" in subsection (a): in cases where the regulations would "jeopardize the interests of the United States," the Secretary could extend or modify a mortgage without regard to the regulations.
Subsection (b) provides for criminal sanctions against those who hold "property which is security for a mortgage described in subsection (a)" if the property holder violates "a regulation prescribed by the Secretary under subsection (a);" or, although he is exempt from subsection (a)'s regulations by virtue of the explicit escape clause, or is "not otherwise covered," by the subsection (a) regulations, engages in equity skimming.*fn4 The result of subsection (b)'s classificatory system is that all those whose property is security for a mortgage described in subsection (a) and who equity skim, are culpable under criminal subsection (b).
It is undenied that the defendants equity skimmed. Therefore, the question in this case is what is meant by "mortgage described in subsection (a)." The question is difficult to answer, for subsection (a) does not describe any mortgages; rather, it places certain limitations on the extension or modification of defaulted mortgages on multi-family dwellings in which HUD has a financial interest.*fn5 Allowing for this imprecision, the parties put forth two meanings that strike us as most reasonable. The government argues that the phrase "mortgage described in subsection (a)' refers to all mortgages on multifamily housing in which HUD has a financial interest, i.e. ones for which permission of the Secretary would be required before there could be an extension or modification of the mortgage. This reading of the statute would encompass Golden Acres and thus subject the Capanos to criminal liability for their actions. The Capanos argue that "mortgage described in subsection (a)" refers to all mortgages on multifamily in which HUD has a financial interest and which have received an extension or modification. Under this reading, the Capanos would not be culpable.
Given the imprecision just referred to in the language of subsection (b), the "plaintiff meaning" of the words of the statute does not direct a result. Thus, we must consider other aspects of the statute, in particular its structure. In this regard, two points are of special relevance. First, § 1715z-4 does not purport to deal with all aspects of the behavior of defaulted mortgagors but only with the extension or modification of defaulted mortgages. Section 1715z-4's title states explicitly that it concerns "modifications in terms of insured mortgages." This suggests that subsection (b) is similarly limited to instances of mortgage modification or extension, otherwise the title would be inaccurate. See Brotherhood of Railway Trainmen v. Baltimore & Ohio R. Co., 331 U.S. 519, 521, 91 L. Ed. 1646, 67 S. Ct. 1387 (1947) (court may refer to statute's title as an aid in interpretation of ambiguous statutes).
Second, subsection (a) does not come into play unless a mortgage extension or modification is at issue, for subsection (a) is exclusively concerned with these matters. As subsections (a) and (b) were part of the same legislative enactment and were clearly intended to be read together, it follows that subsection (b) should not have a significantly greater scope than subsection (a). this implies that the Capanos' interpretation of subsection (b) is more convincing, for under the government's interpretation, a person could be criminally liable for actions under subsection (b) even though the civil requirements of subsection (a) are inapplicable.*fn6
While we could rest on this statutory analysis, confident that the Capanos' reading of the statute, while not the only plausible reading, is nonetheless the better one, we go to the legislative history, for it supports that reading.
Section 1715z-4 was enacted as § 303 of the Housing and Urban Development Act of 1968, Pub. L. 90-448, 82 Stat. 506. The provision generated no discussion on the floor of either house of Congress. The only evidence of congressional intent is the House Report. Fortunately, the Report is explicit on the point at issue here.
The Report's discussion of § 1715z-4 reads in its entirety as follows:
Section 303 of the Bill would add a new section 239 to the National Housing Act to require that any request for the extension of time for curing a default on an FHA-insured multifamily mortgage, or a modification of the terms of such a mortgage, be approved by the Secretary of Housing and Urban Development in accordance with regulations prescribed by him. During the period of modification or extension any rents or other funds (such as security deposits) derived from the mortgaged property in excess of that needed to meet operating expenses would be required to be held in trust by the mortgagor and distributed only with the consent of the Secretary.
This section is designed to discourage distribution of rental income of multifamily projects to stockholders of a mortgagor corporation or individual owners where such income should be used to meet mortgage payments. Where it is thought that a mortgaged property probably will not generate enough income to meet mortgage payments, there is a temptation for the owner to divert funds received from rentals to their own use and to allow the mortgage ...