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rust-v-johnson-1979

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Rust v. Johnson (1979)

Citation: 597 F.2d 174 · Court: U.S. Court of Appeals, Ninth Circuit · Decided: May 10, 1979 (rehearing denied June 13, 1979) · Author: Templar, D.J. (Senior District Judge for the District of Kansas, sitting by designation), joined by Wallace and Hug, Circuit Judges

Facts

A parcel at 342 East 105th Street in Los Angeles, California was encumbered by a street improvement bond obligation under California’s Improvement Act of 1911. The Federal National Mortgage Association (FNMA) held an FHA-insured purchase money mortgage on the property. When the borrower defaulted, FNMA foreclosed on the mortgage and, in exchange for FHA insurance benefits, conveyed the property to the Secretary of Housing and Urban Development (HUD) on March 3, 1972.

HUD held title until September 21, 1973, when it conveyed the property to Paul and Nora Johnson. During the period of HUD ownership, the street improvement bond fell into arrears — HUD made no payments. The City of Los Angeles, treating the bond as a delinquent assessment, initiated foreclosure proceedings against the parcel and sold it to Pauline Rust on March 18, 1974; a treasurer’s deed issued to Rust on March 31, 1975.

The Johnsons filed a quiet title action asserting that the City lacked constitutional authority to foreclose a lien against property in which the United States held title, and that the resulting sale to Rust was void. The district court agreed, quieted title in the Johnsons, and declared Rust’s deed invalid. Both Rust and the City of Los Angeles appealed.

Holding

The Ninth Circuit affirmed the district court. The court held:

  1. FNMA is a federal instrumentality. Despite the 1968 Housing and Urban Development Act that converted FNMA to a privately-owned stockholder corporation, Congress did not intend to strip FNMA of its federal instrumentality status. FNMA therefore stands in the same position as other federally-chartered instrumentalities (Federal land banks, Federal home loan banks) that retain instrumentality status despite private ownership.

  2. FNMA’s mortgage interest, and HUD’s derivative title, constitute “property of the United States” for Supremacy Clause purposes. The court treated the entire factual pattern as “in substance a supremacy clause question.”

  3. The City’s foreclosure sale was an unconstitutional exercise of state power. Under the Supremacy Clause, “state legislation must yield … to the interests of the federal government when the legislation as applied interferes with the federal purpose or operates to impede or condition the implementation of federal policies and programs.” Sustaining the City’s action would “run the risk of substantially impairing the Government’s participation in the home mortgage market and of defeating the purpose of the National Housing Act.”

  4. The improvement lien could not be enforced without first excluding the federal interest. Because the City failed to do so, the sale to Rust was invalid and conveyed no title.

Reasoning

The court structured the analysis around three issues.

Issue 1 — Exercise of state power. The court held that Los Angeles’s use of California Streets and Highways Code powers (ordering improvements, levying assessments, issuing bonds, collecting payments, and conducting a judicial-style foreclosure) was unambiguously an exercise of state authority, not a private action, and therefore subject to Supremacy Clause scrutiny.

Issue 2 — Federal property interest. The court rejected the argument that only the United States’ direct fee ownership of land triggers Supremacy Clause protection. A federal instrumentality’s mortgage interest is property of the United States within the meaning of federal supremacy principles. When FNMA conveyed to HUD in exchange for FHA insurance benefits, HUD’s resulting fee title was quintessentially federal property immune from state taxation and assessment enforcement during the period HUD held title.

Issue 3 — FNMA’s federal instrumentality status. The 1968 privatization of FNMA removed it from the federal budget and gave it private shareholders, but the court found nothing in the legislative history or the governing statutes to support the conclusion that Congress intended to strip FNMA of instrumentality status. The court observed: “Congress apparently intends that FNMA should be treated in the same fashion” as Federal land banks and Federal home loan banks. FNMA’s public mission — supporting the secondary mortgage market and facilitating access to home financing under the National Housing Act — remained a federal purpose, and allowing a municipality to void a federally-insured mortgage interest through a local assessment foreclosure would substantially impair that purpose.

Outcome on the merits. Because HUD held title when the City commenced enforcement, the assessment lien could not be satisfied by foreclosure against the parcel without first securing the federal government’s consent or excluding the federal interest through a separate proceeding. The City did neither. The treasurer’s deed issued to Rust was therefore void, and the Johnsons (who held title from HUD) prevailed in their quiet title action.

Practical impact

What this means for an owner / investor / surplus-recovery agent:

  • For tax-sale bidders: Before bidding on any parcel at a county tax sale or assessment foreclosure, verify that the current or recent record owner is not a federal agency or instrumentality (HUD, VA, SBA, FDIC, RTC/FDIC successor, etc.). If the United States holds or recently held title, the sale is constitutionally infirm and any deed issued is void — not merely voidable — regardless of how clean the county’s procedure appeared.

  • For investors acquiring post-sale: A title search that reveals the chain of title passed through HUD, the VA, the SBA, or another federal agency after a state or local tax/assessment foreclosure is a serious red flag. A void deed in the chain cannot be cured by subsequent conveyances; the defect runs forward.

  • For former owners and lienholders: Rust establishes a federal supremacy-based ground to challenge and void a completed tax or assessment sale. The claim is constitutional (not merely statutory), and unlike purely statutory challenges it is not subject to most state curative statutes or short limitations periods that are designed to protect bona fide purchasers at state-sanctioned sales.

  • FNMA/Fannie Mae status: Rust confirmed that FNMA’s 1968 privatization did not terminate its federal instrumentality status. A parcel in which FNMA holds (or held at the time of foreclosure) a mortgage interest therefore carries the same federal-interest analysis. This principle was reaffirmed in subsequent Ninth Circuit decisions. See also federal-property-interests for the full taxonomy of federal ownership versus federal lien situations.

  • Narrow but reusable rule: Rust applies specifically where a federal agency or instrumentality owns title or a secured interest at the time of the state/local enforcement action. It is distinct from the IRS lien redemption cases (26 U.S.C. § 7425) and the federal lien joinder statute (28 U.S.C. § 2410), which govern situations where the United States holds only a lien against privately-owned property.

Good-law status

Still good law. The Ninth Circuit cited Rust v. Johnson with approval in a 2016 published decision for the proposition that FNMA is a federal instrumentality for state and local tax purposes. No court has overruled or directly narrowed the holding. The Supremacy Clause principle underlying Rust — that state enforcement actions cannot void federally-held property interests absent congressional consent — is deeply rooted in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), and 31 U.S.C. § 3124(a). Rust is the leading circuit court application of that principle to a tax/assessment foreclosure sale.

Applies in →

california — direct circuit precedent for the Ninth Circuit, which covers AK, AZ, CA, HI, ID, MT, NV, OR, WA, and the territories guam, northern-mariana-islands, and indirectly all jurisdictions through the underlying federal constitutional rule.

See also federal-property-interests for the complete treatment of federal ownership and federal lien situations affecting tax and mortgage foreclosure sales in all jurisdictions.

Sources retrieved

  1. vLex case summary — Rust v. Johnson, 597 F.2d 174, No. 77-886490693 (9th Cir. 1979): https://case-law.vlex.com/vid/rust-v-johnson-77-886490693 (retrieved 2026-06-10)
  2. OpenJurist full-text page — Rust v. Johnson, 597 F.2d 174: https://openjurist.org/597/f2d/174/rust-v-johnson-city-of-los-angeles (previously retrieved 2026-06-02 per edge-cases/federal-property-interests.md)
  3. FindLaw case page: https://caselaw.findlaw.com/court/us-9th-circuit/114740138.html
  4. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819) — foundational Supremacy Clause authority
  5. 31 U.S.C. § 3124(a) — federal obligations exempt from state taxation: https://www.law.cornell.edu/uscode/text/31/3124

Legal information, not legal advice. This page summarizes a court decision for educational purposes and does not create an attorney-client relationship. Verify against the primary opinion and consult a licensed attorney in the relevant jurisdiction before acting. Last verified 2026-06-10.

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