*1 GARTH, and RO- Before BECKER America, STATES UNITED SENN, Judges. Circuit Appellant, THE COURT OPINION OF Joseph L. Mario B. BECKER, Judge. Circuit CAPANO, Appellees. practice of di- Equity skimming is the mortgaged verting generated by No. 84-5645. revenues purposes other than default Appeals, Court United States mortgage pay- maintenance or Third Circuit. question presents the ments. This case statute, 12 whether a federal Argued 1985. Feb. (1982), -pro- U.S.C. § 11, Decided March federally-as- skimming from scribes multifamily housing projects, applies sisted receive an although mortgagor did not or a of time to cure the default extension terms. We modification not, and we therefore will hold that does judgment of the district court affirm the *2 multifamily 4(b) only the indictment on this when which dismissed a housing ground. project by is insured HUD and by held a when, party mortgagee, third as al-

I. leged indictment, the project in is secur- prosecution ity out assigned This criminal arose that has been actually by to and is Secretary, financial difficulties of Golden Acres held In alternative, apartment project 88-unit Apartments, an the court held by the statute, in in Del- Claymont, built 1973 and 1974 terms of the penalties the criminal financing project apply only aware. The initial where the had re- ap- included a HUD-insured ceived an extension of time to a cure proximately million. This $1.4 or a fault modification of the terms of their 1976, May Sep- in in went into default and mortgage. Because the indictment did not 1976, mortgage assigned tember was allege Capanos that the had ever received by was HUD modification, HUD and thereafter held extension an or the dis- Hous- of the National trict court dismissed the indictment Act, (1982). 1713(g) ing 12 U.S.C. independent that additional and § reason. alleges indictment that from on or before brought The United States the instant 1981, February 1977, through December appeal dismissal, arguing from the that the Capano, appellees, Joseph Mario and U.S.C, interpretation court’s district of 12 Inc., Acres, in Golden owned all stock 1715z-4(b) incorrect, and that § n developer sponsor project. and by proscribes equity skimming states, further and it is indictment whose HUD-held or HUD- parties, May, uncontested that from multifamily on a housing December, 1981, through Capa- regardless unit is in default whether he $300,000 in- nos took more than of rental has received modification or extension. come derived from Golden Acres di- appellate jurisdiction We have virtue of verted it to themselves and other (1982). business- 3731 18 U.S.C. Inasmuch as this § es controlled. indictment thus undertaking solely question involves charges appellees, Capano Mario B. law, scope plenary. our of review is See Heckler, Joseph Capano, L. with 110 (3d substantive 749 F.2d Tustin v. 1060 equity skimming counts of of Cir.1984). violation 1715z-4(b),

12 and with count U.S.C. one § conspiracy, U.S.C. 371 18 § II. allege indictment does not that the the district court had two inde- Because requested ever received an extension of pendent reasons for its dismissal time to cure on the the default . indictment, district we will affirm the court modification of terms of the mort- its agree if we with either of reasons. gage. follows, assume, we discussion deciding, applies indict- The district court dismissed the without the statute First, mortgages ment for it held that held HUD two reasons. of 12 is an We consid- the criminal U.S.C. 1715z- for which HUD insurer.1 HUD, Kopecky, assumption only is in John W. to the De- Our accord with Counsel ‘ reported partment which we are that ad of Justice stated that there can be no case of aware Norris, question, an of Section 239 after insured mort- dresses the States violation , —U.S. (4th Cir.1984), assigned secretary.” gage F.2d cert. been to the Re- 1116 has denied —, (1985), Additionally, printed Appendix 85 L.Ed.2d at A53-A54. 105 S.Ct. 10, 1980, penalty provision applies opinion of Tune which held that the letter subject projects Federal HUD Counsel to the General ‘T§ held well as those insured HUD. is in accord: 1715z-4 was] Commissioner itself, although requirement only supports cases HUD as a where instant. intended previously secretary mortgagee.” Reprinted prosecution, appears to have reached is not the A25, opposite Appendix A n. 3. The district conclusion. letter dated Decem at A47-A48 Acting holding that the General these letters in ber Associate court stressed .from ing any request ap- of consent to er whether 12 U.S.C. § curing a have never received extension of the time for default plies to even those who any mortgage covering multifami- modification of their mort- under an extension or language ly housing, or for a modification of the gages. to the We look regard history, well-ac- terms of such without foregoing requirement, case cepted canons of the crim- *3 exemption or class of cases in which an inal statutes. (as requirement from such does not de- Analysis A. the Statute by Secretary) jeopardize termined interests of the United States. 1715z-4(b) (herein- Because U.S.C. § Violations and (b)”) opaque and convo- after “subsection luted, Whoever, it refers back proper- and because as an owner of 1715z-4(a) (hereinafter “subsec- ty security mortgage U.S.C. which is § (a)”), (a) section, forth both subsections tion we will set in scribed subsection of this in full. corporation or as a stockholder of a own- ing property, such or as a beneficial own- in terms 1715z-4

§ Modifications any organization er under business or mortgages covering multi- owning property, trust such or as an family projects officer, director, agent any or such Requests to cure de- extensions for owner, (1)willfully uses authorizes the or mort- or modification of faults for any part use of of the rents or other terms; gage regulations property by funds derived covered (a) Secretary shall not consent to regula- in such violation of a request of the time any for an extension Secretary prescribed by under any mortgage for a default under (a) section, (2) subsection of this if covering multifamily housing, as defined determined, provid- such Secretary, regulations of the or for (a) section, ined subsection of this to be a modification of the terms of such mort- requirement from the conformity regula- gage, except in with regulation such or is not otherwise cover- prescribed by Secretary tions in ac- by regulation, willfully ed cordance with the of this sec- use, knowingly uses or authorizes regulations require, tion. Such shall as a while such is in default of granting condition to the part of the rents or other funds derived request, during period of such covered such mort- modification, any part extension or gage any purpose for other than to meet rents or other derived the mort- funds arising necessary expenses actual and in gagor covered property (including connection with such required meet which is not charges amortization under the mort- necessary expenses arising actual and in gage), more shall be fined not than operation connection with the of such $5,000 imprisoned more than three property, including charges amortization years, or both. in be held trust Secretary and distributed Subsection states that the Secretary; except modify the consent of the of HUD cannot extend or mort- Secretary provide grant- gage except multifamily housing on a unit2 ing satisfactory penalties mortgages do not under to standards to the Commission- Secretary. Administration, held er of the Federal containing at five units. See 24 least rental Secretary promul- 2. Subsection allows the argues C.F.R. 207.24. As no that Golden § one gate regulations “multifamily housing" to define multifamily housing, Acres is not and as noth- purposes provision, for yet of this but HUD has not ing the definition of in our decision turns on regulations done so. Other HUD define "multifamily housing," gen- we assume that the multifamily housing as accommodations de- signed principally for residential use, conform- conformity regulations multi-family dwellings she or which HUD has a Allowing financial interest.5 promulgates, he and that for this im- those precision, shall, parties put among prohibit forth two things, mean- ings us that strike as most skimming.3 can be found .reasonable. government argues phrase at 24 U.S.C. 207.256b Not wish- “mortgage (a)” described re- unduly, ing Secretary to bind mortgages multifamily fers to all hous- “escape included an clause” ing interest, HUD has which a financial (a): in cases where the would i.e., permission ones for of the Secre- “jeopardize the interests tary required would be before there could States,” extend could or mod- extension or modification of the ify regu- regard without mortgage. This reading of the statute lations. encompass Golden Acres and thus (b) provides Subsection criminal sanc- subject liability to criminal hold against “property tions those who their Capanos argue actions. The *4 security for a is described “mortgage (a)” in described subsection re- (a)” in if subsection the holder mortgages fers to multifamily all on in regulation prescribed by violates “a the which has a HUD financial interest and (a);” or, Secretary under subsection al- which have received an extension or modifi- (a)’s though ishe from subsection cation. reading, Under this the by explicit escape virtue of the culpable. would not be clause, covered,” “not or is otherwise imprecision just Given the to in referred (a) regulations, engages the subsection in (b), the language “plain of the subsection skimming.4 equity of result subsec- meaning” the of words of the statute does (b)’s classificatory tion system is that all Thus, not a result. direct we must consid- security those whose is er aspects particu- in (a) mortgage described in subsection lar regard, points its structure. this two skim, equity culpable are under crimi- First, special are of relevance. 1715z-4 (b). nal subsection purport aspects does not to deal all of equity It undenied that the defendants is of behavior defaulted but Therefore, question skimmed. this only with the extension or modification of by “mortgage case is what is meant mortgages. defaulted Section 1715z-4’s ti- (a).” question scribed in subsection is explicitly tle that it states concerns answer, (a) difficult to for subsection does “[mjodifications in terms of insured mort- rather, not mortgages; describe gages.” suggests (b) it This that subsection places certain limitations on the similarly extension is limited of to instances mort- extension, mortgages gage or modification of defaulted on modification or otherwise housing” “multifamily may eral of definition to decide in cases be courts whether a particular permissible. used here. of use funds was ignores stating complication, seizing 3. The dissent is therefore 5. incorrect The dissent (a) (a) "unequivocally proscribe[s] upon "any that subsection the fact subsection refers to practice equity skimming equity mortgage covering housing,” multifamily mortgaged properties.” concluding Dissent at without discussion that these 130. mort- (a) equity gages Subsection makes restraint must be ones “described subsection But, skimming (a).” a condition of extension or modifica- at 131. Dissent the mere fact that mortgage; says nothing (a) a defaulted it mortgages refers subsection to such does not mortgages about defaulted that have not re- mean that those are the it ones that describes. (a) ceived extensions or modifications. Since subsection is with the ex- concerned tension or modification of defaulted multifamily dwellings, equally the first at least Whereas in situation it is regulations, plausible argue is defined we latter two shall below that it is —and apply; pro- plausible "mortgage situations the do not more described in —that scription against equity skimming (a)” in these situa- subsection means those re- quite general tions is thus and it has been ceive left extensions modifications. Congress. house of would be inaccurate. See Brother- floor of either title Railway only congressional intent is the Trainmen Baltimore evidence of hood of Co., Report R. Report. Fortunately, House & Ohio 331 U.S. S.Ct. (court (1947) explicit point at here. 91 L.Ed. 1646 on the issue in interpre- an aid refer to statute’s title as discussion 1715z-4 Report’s of § statutes). ambiguous tation entirety as follows: reads Second, (a) not does come into the Bill add a Section' 303 of new play unless a extension or modi- Housing Act section to the National issue, (a) for subsection fication is at request for the exten- require these exclusively concerned with matters. sion time for a default on an (b) part were As subsections multifamily mortgage, or a FHA-insured and were clear- enactment same modification of terms of such a mort- together, ly intended be read follows gage, approved (b) have signif- that subsection should Development in ac- and Urban (a). icantly greater scope than subsection prescribed cordance with Capanos’ interpreta- implies This During period him. of modification (b) convincing, more tion of subsection or extension rents other funds interpretation, government’s (such security deposits) derived criminally could liable for ac- person mortgaged property of that excess though even tions under subsection operating expenses meet needed to requirements are civil required to be held in trust would be inapplicable.6 distributed *5 Secretary. the of the statutory we rest on this consent

While could Capanos’ analysis, confident that the read- designed discourage This section is to ing only plau- the not the of while of rental multifam- distribution income of one, reading, is the sible nonetheless better mortga- ily to of a projects stockholders legislative history, turn now to for we the gor or owners corporation individual supports reading. it that to income should be used where such payments. mortgage meet Where it is Legislative History

B. prob- thought mortgaged property that a ably generate enough income to will not 1715z-4 enacted as Section 302 of § mortgage payments, there is Housing Development meet the and Urban Act 90-448, temptation the to divert Pub.L. for owners of 82 Stat. 506. The from their own provision generated discussion the funds rentals to received position, mortgagor government’s cannot an extension On behalf of the the faulted receive mortgage argues Capanos’ interpretation unless he that the or of his dissent modification (a)’’ by "mortgage agrees generated trust all of described in subsection would to hold in monies superfluous language mortgaged property render the the that are not needed (b) referring mortgage regula- operation property. to "a not otherwise cov- the of the Id. argues regulation.” exemption such The dissent provide ered an decision tions also for that the Two facts of FHA. Id. Commissioner particularly important regulations are about the interpretation, majority’s only [u]nder first, present purposes: for distinguish have received extension who of the the’ between Commissioner or modification of their would be mortgagee, are implying that FHA and the penalties. Since liable for criminal mortgagors all such same; second, regula- not one in the subject of are to "Rights Duties the subtitle and (a), tions fall under imagine hard to it is Mortgagee the Contract of Insurance.” of under might category mortgagors fit into lia- facts that It is a inference these fair penalties but "not ble to criminal otherwise mortgag- regulations apply es, to HUD-insured regulations. covered” the subsection mort- Since HUD-held ones. not HUD-held at 132. Dissent specifically exempted gages not are this is is evident from a brief That incorrect however, they be- regulations, must be inspection regulations HUD has issued (a), long “not otherwise class of pursuant to subsection C.F.R. 207.- regulations. 256(b) (1985). regulations state de- covered” that a go Despite evidence, and to allow the use into argues the dissent recoup in order default their invest- language broader in the second project ment even to show a quoted paragraph statute “[the is] — profit the investment. discourage signed to distribution of rental generally proven actions in- Civil have multifamily projects income of to stock- adequate discouraging as a means mortgagor holders of a corporation or indi- recovering such or of actions all diverted vidual owners where such income should be funds. Section 239 would [§ 1715z-U] to meet payments” used —should provide criminal such for precedence guide take interpreta- our mortga- diversion willful funds tion. Dissent at 134. We cannot agree. stockholder, officer, director, gor or a or Although the paragraph second is broadly agent peri- during the worded, paragraphs other three are od in which the a de- time for circumscribed; carefully they deal exclu- or has been extended the terms fault sively extension or modifi- maximum modified. To paragraph cation. read the second liter- penalty would a fine of than not more does, as ally, the dissent contrary $5,000 imprisonment of not more than expressed the intention of years, or both. quoted in the whole of the section of the Secretary in his could Report Committee especially the em- provide granting consent to an exten- portion phasized quoted para- third of a sion or modification graph. regard class of without case or cases requirements of the regulations That the and Ur- he determined such where action would Development ban legislative has read the jeopardize the interests of history strengthens as have posi- we our However, in the States. case of In a tion. letter from John Kopecky, W. mortgages, knowing will- Acting Counsel, General Associate to Wil- use, use, ful authorization Ruckleshaus, D. liam Attorney Assistant any part of the rents or other funds General, dated December the Sec- mortgaged property derived from the retary’s counsel stated that “the any purpose other than to meet actual *6 history pen- indicates the criminal [sic] necessary expenses (including amor- 239(b) (b) under alties Section [subsection ] tization) while the is in default during to willful diversions carry penalty. a similar period in time which the for 1585, H.R.Rep. Cong., Sess., No. 90th 2d default has been extended or the reprinted in Cong. 1968 U.S.Code & Ad. Although is under modification.” the Sec- 2873, (emphasis supplied). News at 2906 retary’s interpretation binding is not no or suggestion There is indication court, surely See, probative. this it is e.g., portion the emphasized para- of the third Rutherford, 544, United States v. 442 U.S. graph intended be merely to illustra- 552, 2470, 2475, 99 S.Ct. 61 L.Ed.2d 68 tive; contrary, to its tone is definitive. (1979); Wilshire Co. v. Oil Texas Board It a implication por- is thus fair from that of Sys Governors the Federal Reserve (b) tion that subsection was intended to of of 732, tem, (3d Cir.1981), 668 prohibit equity F.2d 735-36 only when a de- extended, denied, 1132, 2958, faulted had been cert. 457 U.S. 102 S.Ct. when there had (1982).7,8 been such extension. 73 L.Ed.2d 1349 suggests 7. The dissent inasmuch as HUD interpretation tor General of an of a criminal supports prosecution, case, stipulated it has had, reversed its previous a that he in statute position longer Supreme earlier which is therefore no reach situations. did not certain support posi- entitled tion, deference. In of this the Solicitor not bound held that it was Court States, gov- the dissent cites v. Garcia United interpretation, ‘"a previous for General’s 70, 479, 484-85, 469 U.S. 105 S.Ct. disqualified agency 83 L.Ed.2d is not ernmental (1985). however, misplaced, 472 The reliance is Garcia involved the renunciation the Solici- 128 Principles Interpretation process construing end what

C. for Congress expressed, begin- Criminal Statutes has not at the ning overriding as an consideration of be- statutes, must, construing When courts ” wrongdoers.’ Russello v. ing lenient course, give effect to the will of Con- 29, States, 16, 104 S.Ct. 464 U.S. United honest, than gress. We would be less how- Cal- (1983) 296, 303, (quoting 17 L.Ed.2d 78 ever, if we did not admit that some cases States, 587, 596, lanan v. United 364 U.S. determine that will with we cannot certain- 326, 321, (1961)). 81 5 S.Ct. L.Ed.2d 312 ty, and statutes are therefore sometimes It is This does not stem ambiguity. left with well-settled that rule from a societal compassion potential interpretative effort fails Rath- where court’s criminals. er, ambiguity meaning expresses in the the rule eliminate conviction that uncertainty potential the residual criminal defendants be ac- must See, lenity. proscribed be resolved in favor of corded fair notice of the con- will — States, States, Dowling McBoyle e.g., v. See v. duct. United United U.S. 283 —, 3127, 3131-32, 25, 27, 340, —, 341, 87 U.S. 51 S.Ct. 105 S.Ct. 75 L.Ed. 816 Liparota (1985); (1931) (Holmes, J.). v. United L.Ed.2d 152 It is further intended — States, U.S. —, —, 2084, courts, Congress, 105 to ensure that S.Ct. not the 2087, (1985). See also Lew- scope prohibited defines 85 L.Ed.2d 434 conduct. States, supra, 55, 65, (“Due Dowling, is v. United 445 U.S. 100 105 S.Ct. at 3132 920, 915, (1980) (touch- respect prerogative L.Ed.2d 198 S.Ct. 63 lenity principle statutory defining prompts stone of ambi- federal crimes restraint Williams, 611, area, Smith v. guity); 698 in this where we typically F.2d find a (3d Cir.1983); States Mari United interpretation appropriate.”). narrow Cf — no, States, 449, (3d Cir.1982). —, Garcia v. United F.2d 454 & n. 4 U.S. course, —, 479, 490, the federal courts must not use Of 105 S.Ct. 83 L.Ed.2d 472 (1984) J., statutory (Stevens, dissenting) (“Every this canon construction to de- in congressional purpose creating power crease prosecu feat federal States step v. Turk- a federal crime. tor us a moves closer to a national ette, 10, police 452 U.S. 586-87 & n. 101 S.Ct. force with attendant threats to liberty. reason, n. 2530-31 & 69 L.Ed.2d 246 individual For I be “ operation special The rule ‘comes into at lieve obligation we have to make changing concerning its mind’ fore to our most construction entitled serious consideration. (quoting suggests anything of a statute.” Id. 105 S.Ct. at Garcia holds nor neither States, 212, 223, 96 contrary. Barrett v. United 423 U.S. (1976)). S.Ct. 46 L.Ed.2d 450 letter, por- immediately the same after the upon Court also relied the fact that the Solicitor text, quoted suggested Kopecky Mr. previous General’s had been in (b) might given how "private a broader stipulation: agreements of a the form "However, scope: disowned, litigants, the clause especially [subsection ] between those *7 regulation’ performance ‘or is otherwise covered relieve not cannot this Court of its of function____ '[Tjhe might

judicial proper construed to cover diversion un- administra merely project der a do of the after default." We tion criminal law cannot left to ” stipulation accept suggestion. Kopecky’s parties.’ (quoting not this ob- of Id. Mr. [the] States, Young nothing to do v. United 315 U.S. 62 servation has 511, (b) which, history S.Ct. 86 L.Ed. 832 of subsection as he earlier admitted, shown, suggests as we have and deny change We not can do that HUD its (b). contrary interpretation of There subsection respon- Nor do to mind. we abdicate HUD our is reason to read cover- thus no "not otherwise sibility weigh interpret legis- to the law and indeed, suggested Kopecky; is a ed” as his history. simply We believe lative that an offi- reading phrase. supra rather tortured cial, interpretive contempora- letter from Cf. sugges- reject note 6. A second reason this legislation passage of the neous very difficulty might prevent its is that question, presumably that not was motivated potential having defendants from fair notice strategic or tactical concerns that (b). meaning criminal stat- of subsection A might stipulation parties underlie a between through ute not be extended so tortuous should during prosecution, probative course of is Part a means. See II.C. legislation, meaning of that and is there- infra suasive, Congress however; indeed, sure that intended to authorize a it suffers illogic. jurisdic- novel assertion federal criminal

tion”) We concede that skimming is ob- jectionable regardless of whether an exten- purposes underlying Both the rule of len- sion or granted. modification has been ity are served here our narrow construc- Thus, Capanos’ nothing is we conduct (b). argued tion of subsection We have condone.9 That does not imply that there above that the narrow construction is the anything illogical is about the appli- limited one, plausible supported by more the statu- cability (b). Congress tory language and context. Even those have wished to equity skimming outlaw disagree admit that must broader certain cases because of limited funds for correct, interpretation clearly is not and enforcement, or because it felt that ap- (b)’s ambiguous that ambit is pro propriate quid quo mortgagor’s open Capanos, and to debate. The and benefit from an extension or modification position, others in their were thus without of his would be that he would guidance clear on the contours of the crimi- run the risk of prosecutions criminal if he Moreover, nal law. our case, skimmed equity. In either the limita- courts, Congress, it leaves for the not the illogical. tion is not to extend the federal sanction. Certainly Congress could have pro be, Congress This is as it should is the equity skimming scribed on all multifamily appropriate forum for the extension of the mortgages jurisdiction over which federal Garcia, supra, criminal law. See (Stevens, (it might be exercised could have done so J., dissenting). lenity The rule of thus on all period, for that mat directs us to construe the statute in the ter), consequence. but that is of no We are Capanos’ favor. did, concerned with Congress what might with what Sitkin have done. Cf. Logic The the Limitation D. Smelting Refining Corp., & Co. FMC government’s argument final is that (3d Cir.1978); 575 F.2d Seaboard limiting subsection to extensions and Supply Congoleum Corp., Co. v. 770 F.2d modifications defaulted (3d Cir.1985) (“Although the activi simply illogical equity skimming because ty reprehensible probably was violated objectionable as when there has law, been agree state civil and criminal we that extension or modification as when there the scheme did not scope come within the dissent, have been laws.”). such alterations. of the antitrust It is not for the too, courts to create a crime where up argument. takes line See argument unper- at 132. The has not.10 Dissent note, however, Acres, inc., opera- Capanos

9. We that submit stock of Golden and assumed time, their conduct was not without some project re- tion of the at that the half states, deeming features. Their brief and the apartment project floundering. vacant government deny, Capanos does not money assert that invested more initially became involved with Golden Acres in project attempt protect in an capacities principals Capano, their Inc., of J.L. ultimately recoup Capa- the sum owed to J.L. general project; contractor no, Inc., enough but that their efforts were not at the time of settlement on J.L. to avoid default. Inc., $234,000 Capano, was still owed some Capanos' background rendition of the Acres, Inc.; building contract with Golden part stage this case is not of the record at this settlement, contemporaneous with the J.L. litigation, accordingly we do not relv on Inc., Acres, Inc., Capano, agreed and Golden *8 deciding it in the case. debt, outstanding pay- refinance the with full ment to be made on or before December proscription 10. The lack of a criminal did not 1974; security, attorney and that as for J.L. remedy against Capa- leave HUD without a Inc., Acres, Capano, Inc., held the stock of Golden Indeed, HUD, mortgage nos. was held Capanos in escrow. The also contend that agency seques- and the could have foreclosed or January remaining with the debt Inc., tered the rents at time. unpaid, Capano, possession J.L. took operation

III. which are not needed in the of Thus, 1715z-4(a) property. subsection legis- of 1715z-4 and its The structure § regulations and the enacted in accordance history suggest lative § unequivocally proscribe prac- therewith proscribe equity skim- was not intended tice of equity of mort- ming except multifamily mortgag- in those gaged property. in HUD had a financial interest es which had received some form of ex- and which (b) Subsection of 1715z-4 establishes § We tension or modification. note penalties prop- for owners of such disagreeing those with our assessment of erty guilty equity skimming. are of legislative history and of structure willfully Owners who knowingly use admit, very would have to at the 1715z-4 § funds derived from the property viola- least, , 1715z-4(b) whether does ex- § (a) tion of subsection and who are convicted mortgagor has tend to situations where equity of skimming may impris- be fined or modification is not received extension or oned for not years more than three or both. cases, highly ambiguous. In such the leni- The text of the portions relevant of subsec- ty principle dictates that we find in favor of (a), regulations, tion with its and the text of reading the more restrictive 1715z- § reproduced Appen- are as an 4(b). opinion. dix to this judgment court of the district will dispute do not that the in- affirmed. dictment sets forth the “willful and know- ing” diversion of rents that should have GARTH, Judge, dissenting: Circuit pay mortgage obligations, been used to but I I un- dissent because believe that the pay that were instead used to off construc- ambiguous language 12 U.S.C. 1715z-4(b)(2)(a) tion loans. pro- Section 1715z-4 criminalizes all skim- § vides that the owner of whose ming1 by mortgagors housing whose is mortgage is or was insured even subject a which was or is though he is either from the re- Secretary quirements issued under (HUD) Development Urban is now of that section or is “not regardless default. This is so of whether regulations, otherwise covered” those granted mortgagor or not has HUD subject nevertheless to criminal if modification terms or an ex- willingly knowingly equity. he skims tension of time to cure a default. The (,See Appendix for text of 1715z- § majority ignores unambiguous con- 4(b)(2)(a).) gressional direction. Since indictment facts which recites would establish a crimi- dispute There is no in this case that the violation, nal I would reverse the district Capano mortgage is “not otherwise cover- dismissing court order the indictment. ed” issued under subsec- (a). Those cover

I. mortgages for which an extension of time provides 1715z-4 granted. Subsection or a modification has been Secretary Capano mortgage mortgage, HUD not extend a is not such a mortgagee’s curing mortgage time for rather but is a default for may modify nor he terms of which no extension or modification was Secretary’s unless the requested. By language action ever clear complies regulations prescribed by under subsection prescribed regulations (a), him. require exempted by whether that the hold trust all monies a determination of the or wheth- generated by mortgaged er it “not otherwise covered” because no Equity skimming practice diverting purposes is the than default maintenance or generated by mortgaged property mortgage payments. revenues *9 which have been grant- modification or extension was ever to those extended or mod- ed, purview equity part, noted, within the In comes ified. relevant as we have skimming prohibition (a) Secretary therefore sub- reads: “The shall jects mortgagor penalties to criminal any request not consent to for an extension skimming.2 for any the time for default under mortgage covering multifamily housing, Thus, having demonstrated that the stat- in the as defined of the Secre- in sub- ute covers all described 1715z-4(a) tary.” (emphasis 12 U.S.C. § (a), not, they exempt they or be section added).3 by regulation, be covered or not covered they they in default or be extended or pointed out, As I have it is clear that this modified, we need determine whether statute includes within its definition of Capano mortgage is “a “mortgages” all HUD that are (a)” phrase is scribed in subsection as that request whether or not a for an (b), 1715z-4(b)(2). in subsection used extension of time or a modification of contrast, present analysis, granted. terms has ever been majority’s

Under majority opinion, criminal sub- regards is clear that the triggered only granting are when the section of an extension or modification as mortgagor receives an extension of time trigger for liability, would sub- cure his default or a modification of the ject equity liability skimmer to criminal See mortgage. maj. op. terms of his at skimming only for when he has received an Thus, majority implicitly holds modification, extension or while it would play, that subsection does not come into equity allow the skimmer who never mortgagor defaults re- when without modification, sought an extension or questing a modification or an extension of request whose for extension or modifica- mortgage. play Nor does it come into denied, get tion was off scot-free. There view, majority’s when the logical can be no reason for requested has a modification or an exten- preferred equity have skimmer who sion and has been denied. applied never for an extension or modifica- tion, request for an

According majority, only whose extension or to the a mort- denied, equity gage that modification was over the has been extended or modified (b). request granted. falls within the skimmer whose Yet terms plain language majority opinion, giving Yet the of subsection without rea- therefor, way description limits the explaining of a son and without However, Capanos they 2. The do not claim that have been of the United States. in the case of exempted requirements regula- mortgages, knowing from the However, if, following hypothetical use, use, tions. willful or authorization of such extension or modification of their HUD mort- any part of the funds derived rents or other gage, exempted had been from the mortgaged purpose they place requirement all revenues from necessary to meet other than actual and ex- trust, in a would still be liable amortization) (including penses while the prosecution equity skimming. The stat- carry a is in default would similar regulations clearly proscribe equi- ute and its all penalty. ty skimming provide equity -skimmers Sess., H.R.Rep. Cong., reprint- No. 90th 2d indicted, criminally equity even if the Cong. ed in 1968 U.S.Code & Ad.News at 2906. exempted compliance skimmer has been deposit with the ute, in trust of the stat- 3. Although promulgated regu HUD has not and even if the skimmer is not other- defining "multifamily housing" lations regulations. wise covered This purposes provision, regulations de of this explicitly intent was stated the House Com- multifamily housing accommodations fine Report mittee in its as follows: use, designed principally for residential con pro- in his could forming satisfactory to standards to the Com granting vide for consent to an extension or of the Federal Administra missioner modification of a case or tion, containing at least rental units. five regard require- class of cases without See 24 C.F.R. sec. 207.24. ments of the where he determined jeopardize such action would not the interests *10 132

anomaly, would agreement absolve criminal an as to lia- extension or modifica- bility request the skimmer who made no tion, similarly mortga- not to but situated denied, request whose punishing was while gors seeking who defaulted without such request granted. the skimmer whose agreement. This arbitrary an distinction is illogical when viewed in terms of the

This of the statute would discern, purpose of the superfluous, render I statute. Under this inter- as best can 1715z-4(b)(2)(a) language pretation, Congress of section given equi- re- would have ferring mortgage to “a not otherwise cov- ty perverse skimmers the incentive of by regulation.” ered such Under ma- avoiding all communication with HUD so jority’s interpretation, only mortgagors they escape could then criminal liabili- who have received an extension or modifi- ty. Again, it why is' unclear to me Con- mortgages cation of their would be liable to gress should subject have wished to penalties. mortga- criminal all such Since equity penalties skimmer to criminal when gors subject are of sub- he receives an extension or modification of (a), might imagine section it is hard to terms of his exculpat- while category mortgagors fit into the liable ing equity skimmer who neither re- penalties to criminal “not but otherwise quests granted nor is an extension or modi- by (a) regulations. covered” the subsection Again, fication. majority has failed to majority meaning to find seeks explain possibly what could have motivated category mortgages “not otherwise Congress illogical to make distinc- covered” in the fact tion. view, regulations apply those majority can make sense of the lan- only mortgages, to HUD-insured not to guage 1715z-4(b)(2)only by of section cre- mortgages,4 HUD-held whereas the crimi- ating artificial distinctions which penalties 1715z-4(b) apply nal to both did not see fit to make and which bear no mortgages. HUD-held and HUD-insured Congress’s purpose enacting relation to The “not otherwise category, covered” provision, namely prevention this majority speculates, comprise would thus equity mortgages those HUD-held that had once Maj. op.

been extended to modified. mortgage at HUD has a financial interest as 126 n. 6 mortgagee. Only insurer or as if it is recognized penalties apply that criminal to But the nowhere state that equity skimming mortgages, from all HUD they apply only to HUD-insured request whether or not there has been a mortgages. and not to HUD-held Further- modification, for extension or more, whether or interpretation, under this the crimi- request granted, not such nal has been they those whether are whose were HUD-held HUD-in- sured,5 taken over HUD after had language reached can the of section 1715z- merely temptation 4. A HUD-held is a once in- HUD. The sured that has been defaulted on equity skim from a HUD-held is as subsequently taken over and great temptation as the to skim from a by HUD. held mortgage. HUD-insured The concern of Con- gress upon deterring equity was focused skim- court, In its affirmance of the district ming through penalties, merely criminal majority tentatively disclaims reliance on the upon providing HUD as an insurer with an argument Capanos, accepted by the dis- alternative to civil remedies in case of court, penalties apply only trict (see majority maj. op. theorizes at 18 n. skimming involving mortgages, HUD-insured Second, 10). Norris, States 749 F.2d mortgages. maj. op. not HUD-held See at 123 (4th Cir.1984), denied, — U.S. —, cert. Capanos’ argument rejected n. 1. The should be (1985) S.Ct. 85 L.Ed.2d 496 holds that unequivocally. 1715z-4(b)(2) unambiguously 12 U.S.C. § em argument The short answer mortgag braces within its HUD-held plain language first to be found in the of subsec- Capano’s es such as the defaulted (a). way The statute in no limits the de- Finally, argument accepted, here. if this were scription of a subsection to those 4(b)(2) given appeals content in accordance with other court of decision plain meaning ordinary interpreting statute does not even deign identifying language. to discuss characteris *11 tics of extension or modification that the Because it is obvious focus of that define majority claims a subsection statutory provision equity skim- is on mortgage. Circuit, The Fourth in United ming prevention and its than on rather Cir.1984), Norris, (4th 749 F.2d States v. 1116 mortgag- requests for modification of HUD — denied, U.S. —, rt. 105 S.Ct. ce es, I believe that section 1715z-4 makes 2139, (1985), 496 85 L.Ed.2d construed pri- the diversion income of rental very section under consideration here. payment to obligations of the of a de- held That court that a whose or held faulted insured assigned HUD, was to and who adequate- and that the indictment therefore continued in properly indicted ly charge against states a and for convicted a violation of section they requested or not an extension whether 1715z-4(b). The Fourth Circuit stated: or modification. language and intent of the statute are clear and need no from II. congressional HUD. The pre- intent is to Court, According Supreme money vent of federally housing insured projects being from starting point interpreting for diverted to purposes [T]he than other actual and language necessary is the Absent ex- statute itself. penses when the is in clearly expressed legislative intent to default. 12 enacted U.S.C. 1715z-4 in contrary, language ordinarily § that must stop an effort diversion of funds regarded as conclusive. from other than “actual necessary and Safety Consumer Product v. Commission expenses arising in connection with such 108, Sylvania, 447 GTE U.S. S.Ct. 1715z-4(a) property.” Section addresses 64 L.Ed.2d 766 insured cov- majority points expression to no of a during ers conversion rents default legislative intent which even inti- would “exempt requirement.of cases from the mate section 1715z-4 could regulation any such or is not other- [sic] against be assessed regulation.” wise covered mortgage. defaulted HUD-insured Rather proscribed activity ap- is clear because it majority opinion relies on the lack of an plies property to owners under mort- intent, affirmative statement of gage willfully knowingly use equivocal letter outdated any part of the rents or funds derived general counsel that not entitled HUD’s is a,ny purpose deference, interpretation, to our and on an necessary than to meet the actual and I unsupportable, which believe to expenses, while in de- is scope language of the literal the statute fault. There is no need regula- for HUD support in order to its refusal to tions to describe what is unlawful. by its statute terms. clearly statute states that if is in the loan opinion I have discussed in this earlier default one not use rent for plain meaning pointing purpose other meeting than the actual obviously applies out that to all HUD necessary expenses. This is the ac- mortgages, proscribes skimming and that it tivity charged against the two defend- security is ants in fifteen of the counts the indict- a defaulted language or has ambiguous, ment. The is not insured been HUD. persons and the intent obvious to majority’s already attempt implausible guage entirely. collapse of subsection give content to the “not otherwise covered” lan- congressional were but the intent revealed as defendants who involved with federally projects. history many strictly means so history, believe, The crux of that I limited. given statutes should be their Criminal purpose portion found in the is to be meaning in accord with the fair evident There, Report. House it is stated: Congress. intent of States (2d Cir.1973), 480 F.2d 534 Rothberg, designed This section is discourage denied, 414 U.S. 94 S.Ct. cert. distribution of rental income of multifam- (1973). Congressional in 38 L.Ed.2d ily projects to stockholders of a mort- quite any reading tent is obvious under gage corporation or individual owners 1715z-4(b)(2). of 12 The statute U.S.C. § where such income should be used to prevent is intended mortgage payments. meet Where it is *12 funds while is default. thought mortgaged that a property prob- ly apparent to them. enced in intelligence. housing projects intent of the statute would be immediate- acts are obvious to clear and The s)c requirements dealing unambiguous. ifc The ifc appellants with and the of the statute are anyone 5}! federally The meaning were of normal proscribed experi- ^[*] H.R.Rep. profit in the investment. ment in funds received from rentals to their own default in order to temptation for the owners to divert use and meet ably will mortgage payments, No. to allow the not project 1585, generate 90th and even to show a recoup enough Cong., their invest- there is a income to 2d go Sess., into reprinted Cong. in 1968 U.S.Code & Ad. Norris, United States 749 F.2d at 1120- News at 2906. The other sections of the Report portions and the on which the ma- Thus, Norris sustained the conviction of jority rely explanations are no more than charged a defendant under section 1715z- purpose how the of the new 4(b) where extension or modification of implemented. Under Sylva- GTE sought HUD was ever nia, 447 U.S. 100 S.Ct. obtained. Norris reached its conclusion as 766, only expression L.Ed.2d an of con- I do: the statute under which the Norris legislative trary unambig- intent avoids the charged defendants were and under which Here, uous terms of a statute. the terms Capano charged unambiguous was is clear, speak statute loud and and the my opinion, clear. there is no need to legislative history, contradicting far from interpretations resort to strained in order terms, support these them. explicit to avoid the Congress. command of This court should not embrace inter- provides penalties statute for skim- pretation legislative intent that leads to ming involving mortgages covering multi- an absurd or inconsistent result when a family housing. 12 U.S.C. 1715z-4. No readily appar- consistent is inquiry necessary further as to whether intent, legislative ent. The as described in request a for extension or modification was Report, provide House was to HUD or was not made. If charged a protecting with more effective means of the indictment is suffi- its financial stake in all cases dismissed, where there regardless cient cannot be temptation mortgagor is a request of whether a divert for extension has made, private rental income to This ex- granted. been denied or uses. press intent precisely accords with the liter- observed, As I have earlier majority al terms of section 1715z-4. Under these Congress concludes intended to sub- circumstances, I do appro- not believe it is ject mortgagor to criminal priate displace Congress’s for us to granted if that an exten- policies with our own. sion or modification. The histo- ry reproduced majority which is opin- majority supports also its refusal to concededly situation, ion deals such a section 1715z-4 in accordance with reasoning that, its terms policy position as a literal terms of the statute and the matter, proscription “the lack of taken supporting prosecu- HUD in tion. did not leave without remedy HUD See Garcia v. United States, 469 against Capanos, for the mortgage U.S. was 479, 484-85, 105 S.Ct. 83 L.Ed.2d agency held and the could have sequestered foreclosed or the rents at Maj. op. court, n. 10. A time.” at 129 III. however, may not substitute its own notion majority goes toon hold even if expressed policy Congress. statutory arguments are accepted, not above, As I noted obviously have dismissal of the indictment would still be deterring equity concerned with skim- required “potential because criminal de- ming, just providing HUD with a fendants must be accorded fair notice of proceedings. substitute foreclosure proscribed Maj. op. conduct.” at 128.6 Report congressional House reflects a In a case where the defendants have civil determination that remedies in- were concededly payments diverted rental Thus, very sufficient. civil remedies to Golden Acres to own their use while the majority looks in order to obviate mortgage was in I find it difficult the need for criminal sanctions were ex- to believe were unaware that pressly deemed insufficient the Con- *13 such conduct proscribed. Certainly gress that enacted section 1715z-4. had the Capanos renegotiated their mort- Finally, majority the relies on a 1969 gage argument with HUD such an Kopecky, Acting letter from John W. Asso- given They so, short shrift. did not do ciate General Counsel to William but nevertheless equity continued skim Ruckelshaus, Attorney D. Assistant Gener- property from the that was now the securi- majority al. As the is forced to acknowl- ty mortgage for a defaulted held HUD however, edge, equivocal letter this at Surely, itself. their mere failure to renego- fact, Kopecky’s best. letter admits that tiate the terms of their should 1715z-4(b)(2) “the clause section [in not penalties. insulate them from ‘or is not otherwise covered such reads] As I argued, plain have earlier reading of regulation’ might construed to cover any the statute lay person, would alert any a project mortgage diversion under even one sophistica- without the business appendix after default.” Joint at A-56. Capanos, tion of penal- the the fact that finding portion While the initial of Ko- any ties imposed would be owner who pecky’s “probative” letter to be and enti- person- used the Golden revenues Acres consideration, tled to serious the majority al discharge benefit rather than the own- concluding portion declines to find the mortgage obligations. er’s Kopecky’s letter, which unfavorable to the majority’s argument, pro- to be either

bative or entitled to consideration. Com- IV. pare maj. op. at n. 7 127-28 with id. at 128 Because I believe that section 1715z-4 of perplexed why n. 8. I am as to selected clearly the statute criminalizes skim- segments of the same document are char- ming property security differently. acterized so mortgage regardless HUD of whether or case, opinion

In any not an extension letter does not or a modification of the agency constitute sought, granted, the sort of has been or de- nied, especially given entitled to I judgment would reverse the deference— Although opinion majority appellate brief. disclaims re- These circumstances are not a redeeming liance Capa- on ostensible features part of the record before district court on a conduct, curiously no’s refers to several cir- motion to dismiss an indictment and therefore underlying Joseph Capano’s acquisi- cumstances play any part not our decision of this Acres, ownership tion of of Golden Inc. These case. Capano’s factual assertions are found (a) mortgagee mortgagor and the dismissed indict- district court which may, approval indictments of the Commis- ments and reinstate with against Cápanos. respect- sioner, agreement I therefore enter into an which fully dissent. extends the time for a default pay- under the or modifies the

APPENDIX mortgage. ment terms of pro- Subsection of section 1715z-4 (b) approval The Commissioner’s . vides, pertinent part: agreement specified para- type any Secretary shall consent graph of this section shall not be request for an extension of the time for agrees given mortgagor unless the under curing a default writing during period pay- such housing, covering multifamily as defined mortgagee ments to the are less than the Secretary, or for required amounts under the terms of the of such mort- a modification of the terms original mortgage, it will hold in trust conformity regula- gage, except in disposition as directed the Com- in ac- prescribed tions missioner all rents or other funds derived with the of this sec- cordance required which are not require, shall as a tion. Such necessary expenses to meet actual and granting condition arising in operation connection with the that, during period request, of such property, including of such amortization modification, any part of the extension or charges mortgage. by the mort- rents or other funds derived (c) may exempt The Commissioner gagor from the covered requirement para- required is not to meet graph of this section in case necessary expenses arising in actual and where Commissioner determines that operation connection of such exemption jeopardize does not charges property, including amortization *14 interests the United States. be held in trust 24 C.F.R. 207.256b and distributed Secretary; the consent of the ... 1715z-4(a).

12 U.S.C. §

Section establishes criminal

penalties for: Whoever, as an owner of a (cid:127) security ATLANTA INTERNATIONAL in subsection of this section scribed COMPANY, INSURANCE (2) determined, if ... such Appellant, provided in subsection of this sec-

tion, requirement to be regulation such or is not other- The SCHOOL DISTRICT OF regulation, covered such

wise willful- PHILADELPHIA. knowingly ly and uses or authorizes the No. 85-1041. use, while such is in Appeals, United States Court of part of the rents or other funds Third Circuit. derived from the covered any purpose Argued Sept. 1985. necessary than to meet actual and ex- Decided March 1986. penses arising in connection As Amended March property____ 1715z-4(b). 12 U.S.C. § issued under subsection

(a) read as follows: