# Amicus Curiae Brief — Franconia Associates v. United States

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0505%3A11

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2002
- **Citation:** 536 U.S. 129

## Text

“yee Cout,US. |

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
Franconia Associates v. United States, 240 F.3d 1358
(Fed. Cir. 2001), AI-A14 oo... ..ccccccccccecececeeeseceseeee 3,4
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Emergency Low Income Housing Preservation Act,
Pub. L. No. 100-242, 101 Stat. 1877 (1988)............. passim

Section 515 of Housing Act of 1949, 42 U.S.C. § 1485.... 4

REGULATIONS AND RELATED AUTHORITY

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No. 01-455
7 CFR Part 1822, Subpart D, Exhibit F-6 (2)c ............ :
IN THE
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7 CFR § 1965.218(a) (2001) ooo oooocccececececeeeceecsee 9 meagre.
7 CFR. § 1965.218(b) (2001)... oooooccccccscccececececesee 9
45 Fed. Reg. 70775, 70798 (Oct. 27, 1980)...... ON WRIT OF CERTIORARI
MAG. FOTTS, POTTS COU. S7, ITBD).............--0i 0 . TO THE UNITED STATES COURT OF APPEALS
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0505%3A11. Public record. Not legal advice.