Amicus Curiae Brief — Franconia Associates v. United States

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No. 01-455 FEB 19 2972

IN THE

Supreme Court of the United States a

FRANCONIA ASSOCIATES, ET AL.,

Petitioners,

v.

UNITED STATES,

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF OF AMICUS CURIAE

COUNCIL FOR AFFORDABLE AND RURAL

HOUSING IN SUPPORT OF PETITIONERS

Carl A.S. Coan, III

Counsel of Record

Raymond K. James

COAN & LYONS

1100 Connecticut Avenue, N.W.

Washington D.C. 20036

(202) 728-1070

1u PP

THE SECTION 515 PROGRAM

THE PROPERTY RIGHTS OF

SECTION 515 OWNERS PRIOR

THE PROPERTY RIGHTS OF

SECTION 515 OWNERS AFTER

ENACTMENT OF ELIHPA

CONCLUSION

ii

TABLE OF AUTHORITIES

CASES

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Emergency Low Income Housing Preservation Act,

Pub. L. No. 100-242, 101 Stat. 1877 (1988)............. passim

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REGULATIONS AND RELATED AUTHORITY

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No. 01-455

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IN THE

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45 Fed. Reg. 70775, 70798 (Oct. 27, 1980)...... ON WRIT OF CERTIORARI

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Siete FOR THE FEDERAL CIRCUIT

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BRIEF OF AMICUS CURIAE

COUNCIL FOR AFFORDABLE

AND RURAL HOUSING IN

SUPPORT OF PETITIONERS

I ys

2

INTEREST OF THE AMICUS CURIAE'

The Council for Affordable and Rural Housing

(CARH) is a nationwide nonprofit organization whose

members collectively own and manage the majority of the

Section 515 housing in the country. CARH is the leading

industry voice on rural housing issues. As such, CARH

serves as an advocate for its members on all issues that affect

rural housing, including Section 515 housing. In addition,

CARH conducts nationwide training and educational

activities regarding the development and management of

rural housing.

For the owners of Section 515 housing, nothing is

more sacrosanct than the property rights attendant to such

projects. It is the belief of CARH and its members that a

taking of the property rights of Section 515 owners-has been

affected by the application of the Emergency Low Income

Housing Preservation Act (ELIHPA) to such property rights.

Therefore, if the decision below is sustained, CARH’s

members will be precluded from pursuing their claims for

payment of just compensation for the taking of their property

rights. Accordingly, CARH, on behalf of its members, has a

vital interest in seeking the reversal of the decision under

review.

' The parties have consented to the filing of this brief and the consents

were filed with the Clerk of the Court contemporaneously with the filing

of this brief. In accordance with Rule 37.6 of this Court, CARH states

that its counsel as specified herein authored this brief in whole and no

person or entity, other than CARH, or its members, made a monetary

contribution to the preparation or submission of the brief.

3

SUMMARY OF ARGUMENT

Owners of Section 515 projects have a bundle of

property rights. Specifically, Section 515 owners have a fee

simple interest in the projects they own. They had this

interest when they entered the Section 515 Program and they

have retained it throughout their participation in the

Program.

The court below held that Petitioners’ takings claims

are barred by the applicable statute of limitations. The only ”—

property interest recognized by the court below in reaching

this conclusion was the owners’ contractual right to prepay

their mortgages. No recognition was accorded to the fee

simple property rights of Section 515 owners. In fact, the

court below did not even address this fundamental property

right of Section 515 owners. The lower court’s failure to

recognize the fee simple property interest attendant to

Section 515 projects and held by the owners thereof is

inconsistent with the terms of the Section 515 Program.

ARGUMENT

In the decision under review, the lower court ruled

that Petitioners’ taking claims accrued for purposes of 28

U.S.C. § 2501? on February 5, 1988, the date on which the

Emergency Low Income Housing Preservation Act was

enacted. A9.° Accordingly, the lower court held that

? 28 U.S.C. § 2501 states, “Every claim of which the United States Court

of Federal Claims has jurisdiction shall be barred unless the petition

thereon is filed within six years after such claim first accrues.”

>“A ™ refers to the Appendix filed as part of Petitioners’ Petition for

Writ of Certiorari. Although the decision by the lower court under

review is reported at 240 F.3d 1358 (Fed. Cir. 2001), citations to that

opinion are to the opinion as reproduced in the aforementioned

Appendix.

4

Petitioners’ takings claims are barred because they were filed

more than six years after February 5, 1988.* Id.

In holding that Petitioners’ taking claims are barred

by the statute of limitations, the only property interest

recognized and discussed by the court below was the

Petitioners’ contractual night to prepay the mortgages on

their Section 515 projects.* Id. at Al4. The court below

failed to recognize that Petitioners’ taking claims are also

predicated on their State-created fee simple property interests

which are the hallmark of the Section 515 Program. This

failure by the court below is a serious flaw in the court’s

decision that requires reversal of the lower court’s decision.

I. THE SECTION 515 PROGRAM

The Section 515 Program is so named because it is

the program that was administered, at the time Petitioners

became participants therein, by the Farmer’s Home

Administration (“FmHA”),° an agency of the Department of

Agriculture, in accordance with Section 515 of the Housing

Act of 1949, 42 U.S.C. § 1485. Section 515 authorized

FmHA to make direct loans to private entities for the

purposes of developing privately owned rental housing in

“ The Appeals Court also held that Petitioners’ breach of contact claims

are barred by 28 U.S.C. § 2501. Although of importance to its members,

CARH has decided to deal only with the takings issue in its brief because

of CARH'’s belief that it can provide insight to relevant matters on this

issue not fully addressed by the parties.

* Although CARH agrees that Petitioners’ contractual right to prepay is a —

recognizable property interest subject to taking, CARH believes, as

discussed herein, that Petitioners’ property interests are much broader

than the contractual right to prepay.

* FmHA is now known as the Rural Housing Service (RHS).

—

5

rural areas for persons who were of low or moderate income

or who were elderly or handicapped.

The first step in becoming a participant in the Section

515 Program was the filing of a preapplication form, along

with certain required information. 7 C.F.R. § 1822.91(a)

(1979).’ Part of the information required to be submitted

with the preapplication form was information showing that

the proposed development site was owned or under option by

the applicant. Part 1822, Subpart D, Exhibit F-6 (2)c. This

was consistent with the requirement that an applicant had to

own the housing and related land or become the owner when

the loan closed. § 1822.84(a).

If a preapplication was approved, an applicant next

submitted an application along with other required

information. § 1822.92(a). If the application was approved,

the loan docket was processed to the stage where a

construction loan would normally close prior to the start of

construction. § 1822.94(a). During this process: FmHA

would obligate funds for the applicant’s loan, §

1822.94(a)(1); the applicant would execute the required loan

agreement, § 1822.94(a)(2); and the applicant would provide

evidence (1) that it had deposited the required initial

operating and maintenance capital into a general fund

account, § 1822.94(a)(4)° and (2) of the terms and final

arrangements for construction financing.” § 1822.94(a)(5).

” All references to 7 C.F.R. Part 1822 are to the January 1, 1979 edition

of the Code of Federal Regulations.

* A Section 515 loan was limited to 95% of the development cost or of

the security value of the project, whichever was less. 7 CFR §

1822.86(a)(2). The other 5% to be contributed by the applicant could

have been in the form of cash or land or a combination thereof. Id.

However, an applicant was required to contribute initial operating capital

of at least 2% of the total development cost. § 1822.84(a)(5)(i).

6

The next step was the construction of the project. For

all loans greater than $50,000, construction financing was

required to be obtained by an applicant from a private lender

when such a loan was available at reasonable rates and

terms. § 1822.90(d)(2) and § 1822.94(b)(1). The majority of

applicants obtained their construction loans from private

lenders.'°

When private financing was obtained, FmHA would

notify the construction lender of its commitment to make a

loan to an applicant after completion of construction. §

1822.94(b)(1)(ii). The FmHA loan proceeds would then be

used to repay the construction loan. However, FmHA would

also notify the construction lender that FmHA’s commitment

to make the loan on behalf of the applicant was contingent

upon the applicant complying with any approval conditions

imposed by FmHA, acceptable performance by the builder

and payment of all construction bills. Id.

The loan from FmHA to the applicant could be

closed, permanent instruments issued to evidence the

indebtedness to FmHA and the loan proceeds used to repay

the construction lender, only when the project was

substantially completed and all bills paid. §

1822.94(b)(1)(vii). To evidence the indebtedness, prescribed

forms from FmHA were to be used for the mortgage and

promissory note. § 1822.95(b) and § 1822.95(c)(1). The

promissory note was to be dated as of the date of closing. §

1822.95(c)(2).

* The regulations use the term interim financing.

° Applicants that did not obtain their construction loans from private

lenders obtained them from FmHA.

7

The loan was considered closed when the mortgage

was filed of record. § 1822.95(e). However, it was possible

for an applicant to have the loan cancelled, and a completed

project used for non-Section 515 purposes, if the loan was

cancelled before the loan closing. § 1822.94(e).

Il. THE PROPERTY RIGHTS OF SECTION

515 OWNERS PRIOR TO ENACTMENT

OF ELIHPA

As already discussed, developers desiring to build

rental housing projects pursuant to FmHA’s Section 515

Program were required to own the project and land on which

the project was built. This ownership interest of Section 515

owners was a fee simple absolute. A fee simple absolute is

the broadest property interest permitted by law and continues

indefinitely. Black’s Law Dictionary, 7” ed.

During their participation in the Section 515

Program, owners agreed to abide by certain conditions

imposed by FmHA. For example, owners agreed: not to

discriminate or permit discrimination by any of its agents in

the use or occupancy of the housing, 7 C.F.R. § 1822.88(g);

to rent a project’s units to eligible occupants,'’ Id. at §

1822.88(h); if operating on a limited profit basis, to limit

their annual return to 8 percent of an owner’s initial

investment, § 1822.88(k); to comply with the National Flood

Insurance Act of 1968, § 1822.88(0); and to comply with

Section 114 of the Clean Air Act and Section 308 of the

Federal Water Pollution Control Act. § 1822.88(r)(1)(i).

Owners also agreed to: establish, maintain and operate

certain accounts in the manner specified by FmHA, A167-

'' An eligible occupant was defined as a senior citizen with low or

moderate income or any family with low income, or a senior citizen

without regard to income or a family with low or moderate income,

depending on the type of loan from FmHA. 7 C.F.R. § 1822.83(e).

8

170 ($f 5-9); submit an annual audit of a project’s books and

records to FmHA, A171 (¥ 10(c)); and submit annual

budgets and operating plans to FmHA. A172 (4 10(g)(1)).

Despite these limitations agreed to by the owners of

Section 515 projects, the owners retained the right to prepay

their loans. A176 (“Prepayments of scheduled installments,

or any portion thereof, may be made at any time at the option

of the Borrower.”). However, under regulations

promulgated on October 27, 1980, prepayment would not be

accepted unless the owner provided written notice to each

tenant 60 days prior to submitting an offer to prepay. 45 Fed.

Reg. 70775, 70798 (Oct. 27, 1980) (codified at 7 C.F.R. §

1944.250(a)(1) (1981)). The notice had to be posted within

the building and include information about a possible change

in ownership and any resulting changes that would occur as a

result of the prepayment. Id. The District Director of FmHA

reviewed the contents and procedure for tenant notification

prior to approving prepayment. Id. After approval, the owner

was required to provide additional written notices to tenants

describing their priority rights to occupancy in other Section

515 projects if they were displaced. 7 C.F.R. §

1944.250(a)(2).'

Ill. THE PROPERTY RIGHTS OF SECTION

515 OWNERS AFTER ENACTMENT OF

ELIHPA

After enactment of ELIHPA in 1988, the

administrative restrictions on prepayment were increased,

but prepayment without ongoing use restrictions was still

possible, subject to several variables. Therefore, an owner

could not know the effect of ELIHPA on its property until

'? Approval was required if the District Director determined that an

owner had complied with these tenant notification requirements.

SS -<

9

the owner was prepared to prepay and offered to prepay its”

loan at a particular point in time.

Instances where prepayment is permitted without use

restrictions include the following situations:

(1) RHS determines that housing opportunities for

minorities would not be materially affected by the

prepayme::t and there is adequate affordable rental housing

in the area. 7 C.F.R. § 1965.215(c)(1)(iii) (2001).

(2) If the loan is subject to a use restriction and its

subsidy funding is terminated. Id. at § 1965.215(c)(3)(ii).'

(3) The project is offered for sale at market value to

a qualified nonprofit entity and no bona fide offer to buy is

made within 180 days, and RHS has funds to finance such a

sale. § 1965.218(a).

| (4) When no funds to finance a sale to a qualified

nonprofit entity are available for 15 consecutive months. §

1965.218(b).

(5) Owners of Section 515 projects that receive

project-based subsidies under section 8 of the U.S. Housing

Act of 1937, 42 U.S.C. § 1437f, and who have current

section 8 contracts at the time of prepayment may prepay

their loans if RHS determines that prepayment would not

materially affect housing opportunities for minorities.

'? All references to 7 C.F.R. Part 1965 are to the January 1, 2001 edition

of the Code of Federal Regulations. ‘

'* A Section 515 loan made before December 22, 1979 is subject to use

restrictions if a servicing action was taken by FmHA. Loans made after

December 22, 1979 but before December 14, 1989 are all subject to use

restrictions.

10

§1965.215(c)(i) and (ii).'* The section 8 contracts need not

be renewed upon their expiration after prepayment of the

Section 515 loan since the current tenants would be protected

against the adverse impact of higher rents through the section

8 enhanced vouchers that they would receive after project-

based section 8 subsidies are terminated. See 42 U.S.C. §

1437£(t).'°

CONCLUSION

Owners of Section 515 projects have a fee simple

absolute property interest in their projects. They had this

interest before they became participants in the Section 515

Program and they have retained this interest throughout their

participation in the Program, notwithstanding the use

limitations and other restrictions to which the owners agreed.

A fee simple absolute is the most fundamental

property interest. Yet, in the decision under review, the

court below did not acknowledge the existence of such an

interest. Rather, in holding that Petitioners’ takings claims

are barred by the statute of limitations, the court below

focused exclusively on the contractual right of Section 515

owners to prepay their loans.

Any analysis of when Petitioners’ takings claims

accrued must take into account all of the property interests

taken, as alleged by Petitioners. Failure by the court below

to recognize the Petitioners’ fée simple property interests

'S Approximately 10 percent of Section 515 units are in projects with

section 8 subsidies.

'® Enhanced vouchers are used to subsidize an owner’s rents at market

levels. Upon the expiration and nonrenewal of a project-based section 8

contract, there are no limitations on the rents an owner can charge.

11

constitutes an error that requires reversal of the decision

under review.

In several instances the owner of a Section 515

project may prepay a project’s loan. Thus, housing market

conditions and the availability of appropriations for

purchases by nonprofits are the two main factors that

determine whether the application of ELIHPA has affected a

taking of the property rights of Section 515 owners. If

circumstances are such that an owner of a Section 515

project is able to prepay a project’s loan without any residual

restrictions, the owner has not suffered a_ taking.

Accordingly, the takings claim of a Section 515 owner is not

ripe until the owner seeks prepayment and, for whatever

reason, is not permitted to prepay without limitation. The

failure by the court below to recognize this fundamental

concept of takings law in determining when Petitioners’

takings claims accrued also constitutes reversible error. For

this, and the other reasons specified herein, amicus curiae

Council for Affordable and Rural Housing requests that the

Court reverse the decision by the lower court that

Petitioners’ takings claims are barred by the statute of

limitations.

February 19, 2002 Respectfully submitted,

Carl A.S. Coan, III

Counsel of Record

Raymond K. James

COAN & LYONS

1100 Connecticut Avenue, N.W.

Washington, DC 20036

(202) 728-1070

Counsel for Amicus Curiae

Council for Affordable and

Rural Housing