Appendix — Sherman Park Apartments v. United States, 120 S. Ct. 62 (1999) (No. 98-1966)
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APPENDIX A
UNITED STATES COURT OF APPEALS
FEDERAL CIRCUIT
Nos. 97-5126, 97-5134.
CIENEGA GARDENS, ET AL., PLAINTIFFS-
CROSS-APPELLANTS,
. Vv.
UNITED STATES, DEFENDANT-APPELLANT.
[Argued May 6, 1998]
[Decided Dec. 7, 1998]
OPINION
Before: MAYER, Chief Judge, ARCHER, Senior
Circuit Judge, and SCHALL, Circuit Judge.
Opinion for the Court filed by Circuit Judge SCHALL.
Dissenting opinion filed by Senior Circuit
Judge ARCHER.
SCHALL, Circuit Judge.
The United States appeals from the judgment of the
United States Court of Federal Claims in a case arising
out of contracts for the construction, financing, and
regulation of low-income housing. Cienega Gardens v.
United States, No. 94-1 C (Fed. Cl. June 18, 1997). The
court ruled, on summary judgment, that the enactment
2a
of the Emergency Low Income Housing Preservation
Act of 1987, Pub.L. No. 100-242, 101 Stat. 1877 (1987)
(pertinent parts reprinted in 12 U.S.C. § 1715/1 note
(1989) (Preservation of Low Income Housing))
(hereinafter "ELIHPA") and the enactment of the
Low-Income Housing Preservation and Resident
Homeownership Act of 1990, Pub.L. No. 101-625, 104
Stat. 4249 (1990) (codified at 12 U.S.C. § 4101 et seq.)
(hereinafter "LIHPRHA") breached contracts between
the plaintiffs, owners of low-income housing, and the
Department of Housing and Urban Development
("HUD"). See Cienega Gardens v. United States, 33 Fed.
Cl. 196, 202, 210 (1995); Cienega Gardens v. United
States, 37 Fed. Cl. 79, 80, 84 (1996). Following a trial on
damages, the court awarded damages in the total
amount of $3,061,107 to plaintiffs/cross-appellants,
Sherman Park Apartments, Independence Park
Apartments, Pico Plaza Apartments, and St. Andrews
Gardens. See Cienega Gardens v. United States, 38
Fed. Cl. 64, 66 (1997).! Because we conclude that the
requisite privity of contract did not exist between the
Owners and HUD with respect to prepayment of the
! The Court of Federal Claims, on summary judgment, found the
government liable for breach of contract with respect to all of the
plaintiffs listed in the caption (referred to collectively as "Owners’”).
See Cienega Gardens v. United States, 33 Fed. Cl. 196, 210 (1995);
Cienega Gardens v. United States, 37 Fed. Cl. 79, 84 (1996). For
purposes of judicial economy and to conserve the parties’
resources, however, the Owners and the government selected four
"model plaintiffs" for purposes of litigating the damages issue. See
Cienega Gardens, 38 Fed. Cl. at 67 n. 3. After the damages trial,
the court entered judgment with respect to the four model
plaintiffs, Sherman Park Apartments, Independence Park
Apartments, Pico Plaza Apartments, and St. Andrews Gardens.
See Cienega Gardens v. United States, No. 94-1 C (Fed. Cl. June
18, 1997). The court stayed all proceedings with respect to the
remaining thirty-eight Owners listed as plaintiffs in the caption of
this appeal. See Cienega Gardens v. United States, 94-1 C (Fed.Cl.
May 15, 1997).
3a
mortgage loans, so as to make HUD liable to the
owners for breach of contract, we vacate and remand,
with the instruction that the breach of contract claims
be dismissed.
BACKGROUND
I
In the 1950s and 1960s, in an attempt to encourage
private developers to construct, own, and manage low
and moderate-income housing, Congress enacted
legislation that allowed the Federal Housing
Administration, and later HUD,? to provide mortgage
insurance. This insurance enabled private lending
institutions to provide low-interest mortgages to
project developers. See Cienega Gardens, 33 Fed. Cl. at
202. Under two programs instituted under the National
Housing Act of 1934, along with the mortgage
insurance, developers also received certain financial
incentives. See id.
Prior to 1968, owners/developers received
below-market mortgage interest rates through a
program referred to as "Section 221(d)(8)," 12 U.S.C. §
17151(d)(3). See Cienega Gardens, 33 Fed. Cl. at 202
(citing Pub.L. No. 83-560, 68 Stat. 590, 597 (1954),
amended by, Pub.L. No. 87-70, 75 Stat. 149 (1961)).
Owners obtaining mortgages after 1968 received
market-rate mortgages with an interest subsidy
through a program referred to as "Section 236," 12
U.S.C. § 1715z-1. See Cienega Gardens, 33 Fed. Cl. at
202 (citing Pub.L. No. 90-448, § 201(a), 82 Stat. 476, 498,
499 (1968)). Owners were expected to pass the benefits
of the program in which they participated on to their
tenants in the form of lower rents. See id. at 202-03.
2 In 1965, the Federal Housing Administration was subsumed
into the then newly-established Department of Housing and Urban
Development. See 24 C.F.R. §§ 200.1, 200.2 (1994).
4a
Generally, when obtaining a HUD-insured mortgage
under either of the above programs, an owner executed
a deed of trust note payable to a private lending
institution. See id. at 203. The note evidenced a loan
made to the owner pursuant to a loan agreement
between the owner and the lending institution that
contemplated advances to the owner. Payment of the
indebtedness evidenced by the note was secured by a
deed of trust, or a mortgage, on the subject property.
The note and deed of trust were printed on forms
approved by HUD, and HUD endorsed the note as part
of its mortgage insurance. See id. The repayment term
of the loan was generally forty years. See id.
Simultaneously, in exchange for HUD's endorsement
for insurance (pursuant to a commitment for insurance),
the owner entered into a "regulatory agreement" with
HUD, under which the owner agreed, among other
things, to certain "affordability restrictions," including
restrictions on the income levels of tenants, restrictions
_ on allowable rental rates, and restrictions on the rate of
return the owner could receive from the housing
project. See id. The regulatory agreement and the
mortgage insurance provided by HUD were to remain
in effect so long as the loan remained outstanding. See
id
While the regulatory agreement made no mention of
the right to prepay the outstanding loan, a rider to the
deed of trust note permitted the owner to prepay the
loan in full, without HUD approval, after twenty years.
See id. Developers could not prepay their loans prior to
twenty years, except under certain conditions,
including HUD approval. See id. The prepayment
rules in the riders reflected contemporaneous HUD
regulations, see 24 C.F.R. §§ 221.524(a)(ii), 236.30(a)(i)
(1970), governing the Section 221(d)(3) and Section 236
programs. See Cienega Gardens, 33 Fed. Cl. at 208. By
prepaying the outstanding loan, an owner could
5a
terminate HUD's affordability restrictions on the
property. The owner then could convert the property
into a conventional rental property and charge market
rental rates, thereby obtaining a greater return on the
investment.
II.
In the late 1980s, concerned that a large number of
owners might shortly exercise their prepayment
options, thereby reducing the supply of low-income
rental housing, Congress enacted ELIHPA. See id.
ELIHPA took effect on February 5, 1988. See 12
U.S.C. § 17151 note (1989) (Preservation of Low Income
Housing, § 234). It placed a two-year moratorium on
mortgage prepayments to allow Congress time to
devise a permanent solution to the possible shortage of
low-income housing, see 12 U.S.C. § 17151 note (1994)
(Preservation of Low Income Housing, § 221(b)). See
Cienega Gardens, 33 Fed. Cl. at 203-04. ELIHPA did
not prohibit prepayments altogether, however. Rather,
it required HUD approval prior to prepayment, even
after twenty years. See 12 U.S.C. § 1715/ note (1994)
(Preservation of Low Income Housing, §§ 221(a), 222,
225); Cienega Gardens, 33 Fed. Cl. at 204.
In 1990, ELIHPA was replaced by LIHPRHA,
which took effect on November 28, 1990. See 12 U.S.C.
§ 4101 note (1994) (Historical and Statutory Notes:
Effective Dates). LIHPRHA made the moratorium on
prepayment, contained in ELIHPA, permanent and
authorized HUD to provide incentives to owners to
encourage them to maintain the affordability
restrictions on their properties and not prepay their
mortgage loans. See Cienega Gardens, 33 Fed. Cl. at
204-05 (detailing the limited prepayment scheme left
open under LIHPRHA). The key change caused by the
enactment of ELIHPA and LIHPRHA was that
owners could not prepay their mortgage loans after
6a
twenty years without HUD approval, as had been
permitted under the riders to deed of trust notes and 24
C.F.R. §§ 221.524 and 236.30 (1970). This change made
it more difficult for owners to convert their properties
into conventional rental properties and thereafter
charge market-rate rents.
In 1996, Congress enacted the Housing Opportunity
Program Extension Act of 1996 ("HOPE"), Pub.L. No.
104-120, 110 Stat. 834 (March 28, 1996). HOPE allows
owners to prepay their mortgages without prior HUD
approval, so long as the owners agree not to raise rents
for 60 days. See Cienega Gardens, 38 Fed. Cl. at 70;
H.R.Rep. No. 104-34 at 4, 47 (1995) (effecting H.R.2099,
104th Cong. (1995)). HOPE is not before us in this case.
The Owners' claims all arose as a result of ELIHPA and
LIHPRHA.
“III.
Each of the Owners is a general or limited
partnership that owns a low-income housing project in
California and that participates in the Section 221(d)(3)
or Section 236 program. See Cienega Gardens, 33 Fed.
Cl. at 205. On January 3, 1994, a first set of Owners
filed suit against the government in the Court of
Federal Claims, seeking damages for breach of
contract, just compensation under the Fifth
Amendment for alleged takings of property, and
additional compensation based on alleged unlawful
administrative actions.’ See id. at 202. In their breach
3 The original Owners that filed suit were Cienega Gardens,
Cedar Gardens, Claremont Village Commons, Covina West
Apartments, Del Amo Gardens, Del Vista Village, DeSoto
Gardens, Independence Park Apartments, Kittridge Gardens I,
Kittridge Gardens II, Las Lomas Gardens, Oxford Park, Parthenia
Townhomes, Pioneer Gardens, Puente Park Apartments, Rayen
Park Apartments, Reseda Park Apartments, Roscoe Park
Apartments, St. Andrews Gardens, San Jose Gardens, Sherman
Ta
of contract claims, the Owners alleged that the
enactment of ELIHPA and LIHPRHA breached
contracts with HUD which they claimed allowed them
to prepay their mortgage loans after twenty years
without HUD approval. See id. at 205. On March 8,
1994, the government moved to dismiss for lack of
jurisdiction; on the following day, the Owners moved
for summary judgment.
In a March 27, 1995 opinion, the Court of Federal
Claims denied the government's motion to dismiss and
granted the Owners' motion for summary judgment on
the breach of contract claims.‘ First, the court
addressed the government's argument that it lacked
jurisdiction over the breach claims because there was
no privity of contract between HUD and the Owners.
See id. The government argued that the Owners'
claims were based on prepayment provisions contained
in the deed of trust notes between the Owners and their
lenders, not on provisions in the regulatory agreements
between HUD and the Owners. See id. The
government claimed that there was not privity of
contract between HUD and the Owners because HUD
was not a party to the deed of trust notes, which
contained the prepayment provisions that allegedly had
been breached. See id. The court determined that the
fact that HUD was not a named party to the deed of
trust notes, except as an endorser with respect to
insurance, was not dispositive of the privity of contract
Park Apartments, and Sunland Park Apartments. See Cienega
Gardens, 33 Fed. Cl. at 205 n. 8.
. ‘The Court of Federal Claims dismissed the claims for additional
compensation for alleged unlawful administrative actions. See
Cienega Gardens, 33 Fed. Cl. at 202, 223-24. In addition, the court
denied both the Owners' and the government's motions with
respect to the takings claims. See id. at 202, 213-23. Neither of
these rulings is before us. The Owners' takings claims remain
pending in the Court of Federal Claims.
8a
issue. See id. at 210. The court held that all of the
documents at issue had to be analyzed together in
determining whether privity of contract existed:
Thus, contrary to the defendant's
assumptions, the "express contract" upon which
plaintiffs base their claim is not to be found
solely in either the deed of trust note or the
regulatory agreement. The two documents,
which were signed contemporaneously, must be
read together in order to determine the full
intentions of the parties when they initially
entered into their relationship.
Id. The court determined that "when the parties
[fiie., HUD and the Owners] ... entered into the
regulatory agreement they also intended to be mutually
bound by the prepayment rules set forth in the rider to
the contemporaneovs deed of trust note," and,
therefore, privity of contract existed. /d.
The court then concluded that the Owners had
established a breach of contract:
By signing the regulatory agreement and the
deed of trust note to which the regulatory
agreement referred, plaintiffs promised to
construct and maintain housing in accordance
with the HUD's specifications, to accept only low
or moderate-income persons as tenants, to
charge no higher rents than those permitted by
HUD, to distribute profits to shareholders in
accordance with specified limitations, to make
timely payments on their mortgages and to
maintain cash reserves to self-insure against
mortgage default. These promises were made
expressly to and for the benefit of the
government, not third parties. In exchange, the
government agreed to endorse and insure the
mortgages (allowing plaintiffs to obtain either
Poy ome
9a
subsidized commercial loans or loans at favorable
interest rates) and to allow plaintiffs to free
themselves of HUD's regulatory strictures after
the first 20 years. Accordingly, the court finds
that Congress, by enacting ELIHPA and
LIHPRHA, breached the government's
contracts with plaintiffs with respect to their
prepayment rights.
Id. The court rejected the government's arguments
that the sovereign acts doctrine,5 the doctrine of
unmistakability,6 and lack of contracting authority’
prevented liability. See id. at 211-13. Given its decision
that HUD had breached its contracts with the Owners
and the lack of evidence concerning damages, the court
stated that a damages trial would be necessary. See id.
at 213.
On April 10, 1995, the government moved for
reconsideration of the breach of contract issue. See
Cienega Gardens v. United States, No. 94-1C, slip op. at
1 (Fed.Cl. Apr. 13, 1995). The government argued that
the riders to the deed of trust notes could be
interpreted as establishing prepayment terms between
the private lending institution and the Owners rather
than establishing prepayment terms between HUD and
the Owners, as the court had determined. See id. The
5 For an explanation of the sovereign acts doctrine, see Bowen v.
Public Agencies Opposed to Soc. Sec. Entrapment, 477 U.S. 41,
52-53, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986); Atlas Corp. v. United
States, 895 F.2d 745, 754 (Fed.Cir. 1990).
6 For an explanation of the doctrine of unmistakability, see
United States v. Winstar Corp., 518 U.S. 839, 871-87, 116 S.Ct.
2432, 135 L.Ed.2d 964 (1996).
7 The government contended that even if HUD intended to
promise the owners that they could prepay their mortgages
regardless of future legislation restricting them from doing so, the
promise was unenforceable for lack of express authority from
Congress.
10a
government argued that summary judgment was
inappropriate given these two possible interpretations,
which it asserted created an ambiguity. See id. The
court rejected the argument and denied the motion for
reconsideration. See id. at 2, 4.
In an Aprii 1, 1996 order, the Court of Federal
Claims joined twenty-one "new plaintiffs" to the suit.
See Cienega Gardens, 37 Fed. Cl. at 80.8 The new
plaintiffs' complaint raised the same three claims that
had been presented by the original plaintiffs. See id.
The government moved for summary judgment on the
breach of contract and alleged unlawful administrative
action claims, while the new plaintiffs moved for
summary judgment on the breach of contract claims.
See id. Based on its previous decision, the court
granted the new plaintiffs’ motion for summary
judgment on the breach of contract claims.? See id. at
80-81, 84.
On November 18-21, 1996, the Court of Federal
Claims held a trial to quantify damages. See Cienega
Gardens, 38 Fed. Cl. at 66. As noted in footnote 1
8 The "new plaintiffs" were Argonaut Apartments, Beck Park
Apartments, Blossom Hill Apartments, Casa San Pablo, Central
Park Apartments, Drehmoor Apartments, Fairview Green
Apartments, Genessee Park Apartments, Grace & Laughter
Apartments, Green Hotel, Hollywood Knickerbocker Apartments,
Hollywood Plaza, Kings Canyon Apartments, Lawrence Road
Apartments, Livermore Gardens, Palo Alto Gardens, Pico Plaza
Apartments, Placita Garden Apartments, Skyline View Gardens,
Villa Fontana, and Village Green. The new plaintiffs had all
entered into Section 221(d)(3) or Section 236 mortgages. See
Cienega Gardens v. United States, 37 Fed. Cl. 79, 81 (1996).
9 The Court of Federal Claims dismissed the claim for additional
compensation for alleged unlawful administrative actions. See
Cienega Gardens, 37 Fed. Cl. at 80, 85. That ruling is not before
us. Unlike the first set of Owners, the new plaintiffs did not move
for summary judgment on their takings claims. See id. at 85. As is
the case with the original plaintiffs, the new plaintiffs' takings
claims remain pending in the Court of Federal Claims.
lla
above, the parties selected four “model plaintiffs" for
purposes of litigating the damages issue. See id. at 67 n.
3. The model plaintiffs were (1) Sherman Park
Apartments, owned by the Sherman partnership, (2)
Independence Park Apartments, owned by the
Independence partnership, (3) St. Andrews Gardens,
owned by the St. Andrews partnership, and (4) Pico
Plaza Apartments, owned by the Pico partnership. See
id. Each of these projects is located in Los Angeles.
See id. at 69. The court held that the model plaintiffs
were entitled to breach of contract damages in the total
amount of $3,061,107. See id. at 66, 89. In so holding,
the court ruled that the Los Angeles Rent Stabilization
Ordinance ("LARSO"), Ordinance No. 152,120 (codified
at Ch. XV, Los Angeles Municipal Code), was
preempted by LIHPRHA because LARSO conflicted
with the federal scheme enacted through LIHPRHA.
See Cienega Gardens, 38 Fed. Cl. at 82-85. The court
thus determined that LARSO, which limits rental rates
on certain covered properties, did not bar or limit
recovery for the government's breach of contract. See
id. at 85.
On May 15, 1997, the court ordered entry of
judgment based on its decisions and stayed all
proceedings on the claims of the remaining plaintiffs
pending appeal. See Cienega Gardens v. United States,
No. 94-1 C (Fed.Cl. May 15, 1997). Judgment was
entered accordingly on June 18, 1997. See Cienega
Gardens, No. 94-1 C (Fed. Cl. June 18, 1997). The
government appealed on August 20, 1997. On
September 8, 1997, Sherman Park Apartments,
Independence Park Apartments, Pico Plaza
Apartments, and St. Andrews Gardens, the four model
plaintiffs, cross-appealed, challenging the court's
dismissal of their claim for damages based on alleged
12a
unlawful administrative actions.!° We have jurisdiction
pursuant to 28 U.S.C. § 1295(a)(3).
DISCUSSION
I.
Summary judgment is appropriate if "there is no
genuine issue as to any material fact and . . . the moving
party is entitled to a judgment as a matter of law."
RCFC 56(c). We review a grant of summary judgment
by the Court of Federal Claims de novo to determine
whether the summary judgment standard has been
correctly applied. See Winstar Corp. v. United States,
64 F.3d 1531, 1539 (Fed.Cir. 1995) (en banc), aff'd, 518
U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996) (citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106
S.Ct. 2505, 91 L.Ed.2d 202 (1986)); Southfork Sys., Inc.
v. United States, 141 F.3d 1124, 1131 (Fed.Cir. 1998).
On appeal, the government raises three challenges
to the decision of the Court of Federal Claims. First, it
asserts that the court erred in holding that the
enactment of ELIHPA and LIHPRHA breached
contracts between HUD and the Owners!! under which
the Owners enjoyed an unrestricted right to prepay
their HUD-insured mortgage loans twenty years after
HUD's final endorsement of the loans for insurance.
The government argues that HUD was not a party to
10 In their brief.to this court, the model plaintiffs abandoned
their cross-appeal. However, because they failed to file a motion to
voluntarily dismiss the cross-appeal, pursuant to Fed. Cir. R. 42(b),
we must dispose of the cross-appeal. Therefore, the cross-appeal,
No. 97-5134, is DISMISSED with PREJUDICE, and the mandate
shall issue forthwith.
11 Throughout this opinion we use the term "Owners" to refer to
all of the plaintiffs listed in the caption of this appeal. While the
Court of Federal Claims only entered final judgment with respect -
to the four model plaintiffs and only those plaintiffs are before us,
our analysis of the issue of liability applies to all of the plaintiffs,
i.e., "Owners," not just the model plaintiffs.
13a
any agreement that granted the. Owners an
unrestricted prepayment right and that therefore it
was not in privity with the Owners. It contends that
the twenty- year unrestricted prepayment right
appeared in the deed of trust notes, which HUD
endorsed but to which it was not a party, and that
neither the insurance commitments issued by HUD nor
the regulatory agreements between HUD and the
Owners contained or referenced any prepayment terms
or conditions. The government argues that, because
there was no privity of contract between HUD and the
Owners, the court lacked jurisdiction with respect to
the Owners' breach of contract claims. Second, the
government challenges several aspects of the damages
award. Third, it argues that the court erred in holding
that LARSO was preempted by ELIHPA and
LIHPRHA. Accordingly, the government urges,
LARSO would have limited the rents that the Owners
could have charged after prepayment, thereby reducing
the amount of lost profits suffered as a result of any
breach of contract. Because we resolve this appeal in
favor of the government based on the jurisdiction issue,
we do not address the government's second and third
arguments.
II.
Under the Tucker Act, the Court of Federal Claims
has jurisdiction over claims based on "any express or
implied contract with the United States." 28 U.S.C. § -
1491(a)(1) (1994). We have stated that "[t]o maintain a
cause of action pursuant to the Tucker Act that is based
on a contract, the contract must be between the
plaintiff and the government....". Ransom v. United
States, 900 F.2d 242, 244 (Fed.Cir. 1990). In other
words, there must be privity of contract between the
plaintiff and the United States. See Erickson Air
Crane Co. v. United States, 731 F.2d 810, 813
l4a
(Fed.Cir.1984) ( "The government consents to be sued
only by those with whom it has privity of contract.").
The effect of finding privity of contract between a party
and the United States is to find a waiver of sovereign
immunity. See National Leased Hous. Ass'n v. United
States, 105 F.3d 1423, 1436 (Fed.Cir.1997) (National
Leased Housing). Whether a contract exists is a mixed
question of law and fact. See Ransom, 900 F.2d at 244.
Since the parties do not dispute the relevant facts, the
privity issue reduces to a question of law, which we
review de novo. Contract interpretation itself also is a
question of law, which we review de novo. See Winstar,
64 F.3d at 1540; Massachusetts Bay Transp. Auth. v.
United States, 129 F.3d 1226, 1231 (Fed.Cir.1997).
A
We begin our analysis with the documents
underlying the transactions at issue. In doing so, we
focus on the documents relating to the four model
plaintiffs, each of whom developed and operated a
low-income rental housing project with a mortgage loan
insured by HUD pursuant to Section 221(d)(3) or
Section 236. See Cienega Gardens, 38 Fed. Cl. at 67.
The transactions at issue were accomplished as
follows: First, pursuant to 24 C.F.R. § 221.509(a) or §
236.1 (1970), each of the Owners received a
"Commitment for Insurance of Advances" from the
Federal Housing Commissioner, acting on behalf of the
Secretary of HUD. The commitment provided that the
Commissioner would endorse for insurance a mortgage
note in a specified amount. The specified amount
represented the total amount of advances that were to
be made to the Owner by a specified lending institution
pursuant to a loan agreement between the Owner and
the institution. Thus, the commitment stated: "Upon
completion of the project in accordance with the
Drawings and Specifications the mortgage note will be
15a
finally endorsed for insurance to.the extent of the
advances of mortgage proceeds approved by the
Commissioner, subject to reduction as provided in the
Regulations." The commitment further provided that
"[t]he insurance endorsement will be subject to
compliance with the requirements of the Regulations,
[1.¢., the HUD regulations in effect at the time] and the
terms and conditions set forth" in the commitment. The
commitment required that the Owner enter into a
regulatory agreement or other instrument "to permit
the Commissioner's regulation of the Mortgagor as to
rents, charges, and methods of operation." The
regulatory agreement requirement was consistent with
the pertinent regulations, which allowed the
Commissioner to regulate the mortgagor for as long as
HUD insured the mortgage loan. See 24 C.F.R. §§
221.529, 236.1 (1970). The commitment also provided
that "[a]ll certificates, documents and agreements called
for by this commitment shall be on forms approved or
prescribed by the Commissioner."
Pursuant to the commitment that it had received
from HUD, at an initial closing, the Owner executed a
"Deed of Trust Note." The deed of trust note
established a mortgage loan between the Owner and a
specified private lending institution. The deed of trust
note was endorsed by HUD. The endorsement
indicated that the Owner's mortgage loan had been
approved for insurance by HUD. The note also
incorporated an attached rider, referred to as "Rider A."
Rider A to the Sherman Park Apartments note
provided:
This Rider is attached to and made a part of
Deed of Trust Note dated November 2, 1970, by
and between SHERMAN PARK
APARTMENTS, a partnership, Maker [,] and
UNITED CALIFORNIA BANK, Payee.
16a
The debt evidenced by this Deed of Trust
Note may not be prepaid, either in whole or in
part, prior to the final maturity date hereof
without the prior written approval of the
Federal Housing Commissioner, except a maker
which is a limited distribution mortgagor may
prepay without such approval after twenty (20)
years from the date of final endorsement of this
Deed of Trust Note by the Federal Housing
Commissioner.
The riders to the notes of Pico Plaza Apartments,
St. Andrews Gardens, and Independence Park
Apartments contained similar opening paragraphs and
provided:
The debt evidenced by this Deed of Trust
Note may not be prepaid, either in whole or in
part, prior to the final maturity date hereof
without the prior written approval of the
Federal Housing Commissioner, except where:
(1) the prepayment is in connection with the
release of an individual unit for sale to a lower
income, elderly, or handicapped person; or (2)
the Maker is a limited distribution mortgagor
which is not receiving payments from the
Commissioner under a rent supplement contract
pursuant to Section 101 of the Housing and
Urban Development Act of 1965, and the
prepayment occurs after the expiration of
twenty (20) years from the date of final
endorsement of this Deed of Trust Note by the
Commissioner or as a result of a sale of the
project to a cooperative or nonprofit corporation
or association and the purchase is financed with
a mortgage insured pursuant to Section 236(j)(3)
of the National Housing Act as amended.
17a
Simultaneously with the execution of the deed of
trust note, the Owner executed a "Deed of Trust." The
deed of trust secured payment of the indebtedness
evidenced by the deed of trust note by granting the
relevant lending institution a mortgage on the project
property. In the deed of trust, the Owner covenanted
[tJhat the Regulatory Agreement, if any,
executed by the Trustor and the Federal
Housing Commissioner, which is being recorded
simultaneously herewith, is incorporated in and
made a part of this Deed of Trust. Upon default
under the Regulatory Agreement and upon the
request of the Federal Housing Commissioner,
the Beneficiary [i.e, the private lending
institution], at its option, may declare the whole
of the indebtedness secured hereby to be due
and payable.
The quoted language was contained in the Sherman
Park Apartments deed of trust; the other deeds of
trust contained substantially similar language.
Simultaneously with the execution of the deed of
trust and the deed of trust note, the Owner and HUD
entered into the regulatory agreement. The regulatory
agreement stated in the preamble that the Owner was
entering into the agreement "[iJn consideration of the
endorsement for insurance by the Commissioner of the
[deed of trust] note ... and in order to comply with the
requirements of Section 221(d)(3) [or Section 236] of the
National Housing Act, as amended, and the Regulations
adopted by the Commissioner pursuant thereto." In the
regulatory agreement, the Owner agreed to comply
with all "Federal, State, or local law prohibiting
discrimination in housing on the grounds of race, color,
creed, or national origin, including Title VI of the Civil
Rights Act of 1964, [and] "all requirements imposed by
or pursuant to the Regulations of the Department of
18a
Housing and Urban Development (24 CFR, Subtitle A,
Part 1) issued pursuant to that title" for "so long as the
contract of mortgage insurance continues in effect."
Although the regulatory agreement was signed on
behalf of the Owner and HUD, it was the Owner who
assumed obligations under the agreement. By signing
the regulatory agreement, the Owner agreed to timely
make all payments due under the deed of trust note and
to set aside cash reserves to minimize the likelihood of
default on the note. The regulatory agreement also
contained numerous undertakings by the Owner with
respect to management of the covered project. In
addition, in the regulatory agreement, the Owner
agreed to restrictions on the income levels of tenants,
restrictions on allowable rental rates, and restrictions
on the rate of return the Owner could receive from the
project.
The question before us is whether the transaction
framed by the commitment, the deed of trust note, the
deed of trust, the loan agreement, and the regulatory
agreement, each of which was in a form approved by
HUD, gave rise to privity of contract between HUD
and the Owner insofar as the right to prepay the
mortgage loan was concerned. We conclude that it did
not.
B
It has never been argued that HUD failed to
provide mortgage insurance, as required by each
"Commitment for Insurance of Advances." In other
words, it is undisputed that HUD discharged its
obligations to the Owners under the _ various
commitmerts. Thus, as the Court of Federal Claims
recognized, see Cienega Gardens, 33 Fed. Cl. at 208-10,
the question of whether the requirement of privity of
contract was satisfied turns, in the case of each Owner,
on consideration of the deed of trust note and the
19a
regulatory agreement. In approaching this question,
we are mindful that, in order to find privity of contract,
we must find on the part of HUD "the type of direct,
unavoidable contractual liability that is necessary to
trigger a waiver of sovereign immunity, the inevitable
result of finding privity of contract." National Leased
Housing, 105 F.3d at 1426.
We start from the premise that the United States,
ie. HUD, was a named party to only one contract in
connection with each of the relevant projects, that
contract being the regulatory agreement. Moreover, in
that regard, as just seen, it was the Owner, not HUD,
that assumed obligations under the regulatory
agreement. The regulatory agreement did not
incorporate any other agreement, including the deed of
trust note or Rider A to the deed of trust note. Neither
did the regulatory agreement mention prepayment of
the mortgage loan or incorporate any agreement or
provision addressing prepayment.
It is true that Thetford Properties IV Ltd.
Partnership v. U.S. Dep't. of Hous. & Urban Dev., 907
F.2d 445 (4th Cir.1990), states that the regulatory
agreements at issue in that case "expressly allowed the
owners of [the] properties, without HUD's prior
consent, to prepay their mortgages at the end of 20
years, thereby terminating HUD insurance and
withdrawing the properties from the program." 907
F.2d at 446 (citing 24 C.F.R. § 221.524(a)(1989)) We
attach little significance to this statement, however.
Thetford involved a suit by owners of low-income
housing projects with mortgage loans insured pursuant
to section 221(d)(3). The owners sought a declaration
that ELIHPA's restrictions upon prepayment of their
mortgage loans violated their constitutional right to
due process of law. Jd. at 447. The district court
dismissed the complaint after concluding that the
20a
owners had failed to exhaust their administrative
remedies. Jd. The court of appeals affirmed the
dismissal without reaching the merits of the owner's
claims. Jd. at 450. The statement quoted above appears
at the beginning of the opinion in a discussion of the
statutory background. Because privity of contract was
not at issue in Thetford, the quoted statement is
properly viewed as dictum. Most importantly,
however, the regulatory agreements before us contain
no provisions relating to prepayment.
The only document that addressed prepayment was
the deed of trust note, with its attached Rider A.
However, the agreement represented by each deed of
trust note was between the relevant Owner and its
private lending institution, as evidenced by the recitals
at the beginning of the note. Thus, each deed of trust
note began with the statement "FOR VALUE
RECEIVED, the undersigned promise(s) to pay to
[name of lending institution] ... the principal sum of
[the amount of the loan]....". Although HUD did
provide its insurance endorsement, it was not expressly
made a party to any deed of trust note or its attached
Rider A.
Each deed of trust note was incorporated by
reference into the applicable deed of trust. The deed of
trust too represented a contract between the relevant
Owner and its private lending institution, as evidenced
by the recitals at the beginning of the deed of trust
naming the relevant Owner and the lending institution.
Each deed of trust also incorporated a rider, which was
attached to it. The deed of trust and the rider
incorporated the regulatory agreement by reference.
However, the incorporation of the regulatory
agreement--which set forth obligations on the part of
the Owner--into the rider to the deed of trust did not
make HUD a party to the deed of trust.
2la
While recognizing the above, the Court of Federal
Claims determined that all of the pertinent documents
had to be construed together in order to determine the
intent of the parties:
Because the rider [to the deed of trust note]
specifically allocated certain rights between
HUD and plaintiffs, the fact that HUD was not a
named party (except as an endorser) to the deed
of trust note containing the rider is not
dispositive of the issue of privity of contract
between the parties in this action. The
government's participation as a party to the
deed of trust note is unnecessary to establish
privity of contract with respect to plaintiff's
prepayment rights.
Thus, contrary to the defendant's
assumptions, the "express contract" upon which
plaintiffs base their claim is not to be found
solely in either the deed of trust note or the
regulatory agreement. The two documents,
which were signed contemporaneously, must be
read together in order to determine the full
intentions of the parties when they initially
entered into their relationship.
Cienega Gardens, 33 Fed. Cl. at 210 (footnote omitted).
In support of this statement, the court relied on
Restatement (Second) of Contracts § 202(2) (1981),
which provides, "A writing is interpreted as a whole,
and all writings that are part of the same transaction
are interpreted together." The comment to this section
states that this Rule in Aid of Interpretation does "not
depend upon any determination that there is an
ambiguity, but [is] used in determining what meanings
are reasonably possible as well as in choosing among
possible meanings." Jd. at cmt. b. We agree with the
Court of Federal Claims that all of the agreements
22a
before us are relevant in determining the meaning of
each separate contract. However, we cannot sustain
the court's conclusion that "when the parties in this case
[i.e., the Owners and HUD] entered into the regulatory
agreement they also intended to be mutually bound by
the prepayment rules set forth in the rider to the
contemporaneous deed of trust note." Cienega
Gardens, 33 Fed. Cl. at 210.
While the deed of trust note (and the incorporated
Rider A) and the regulatory agreement were part of
the same transaction, each document stands alone and
is unambiguous on its face. The documents evidence
separate agreements between distinct parties. The
Court of Federal Claims erred in importing
requirements from the deed of trust note and the
accompanying rider into the regulatory agreement.
The regulatory agreement, which was a document
under which the Owner assumed obligations, did not
address prepayment, and the court erroneously read
the prepayment terms contained in the deed of trust
note and Rider A, between the private lending
institutions and the relevant Owner, into the regulatory
agreement between HUD and the Owner. The critical
point is that the contract documents simply do not show
privity of contract between the Owners and HUD with
respect to a right to prepay the mortgage loans after
twenty years without HUD approval.
C.
At the time the various agreements were executed,
the regulation governing prepayment under the Section
221(d)(3) program provided:
(a) Prepayment in full ~—(1) Without prior
Commissioner consent. A mortgage
indebtedness may be prepaid in full and the
Commissioner's controls terminated without the
prior censent of the Commissioner in the
following cases:
*e HK *
(ii) Where the mortgagor is a limited
distribution type, which is not receiving
payments from the Commissioner under a rent
supplement contract executed pursuant to the
provisions of §§ 5.1 et seqg.. of this title, and
where the prepayment occurs after the
expiration of 20 years from the date of final
endorsement of the mortgage.
24 C.F.R. § 221.524 (1970). The regulation governing
prepayment under the Section 236 program provided:
(a) Prepayment in full —(1) Without prior
Commissioner consent. A mortgage
indebtedness may be prepaid in full and the
Commissioner's controls terminated without the
prior consent of the Commissioner where the
mortgagor is a limited distribution type and
either of the following conditions is met:
(i) If the prepayment occurs after the
expiration of 20 years from the date of final
insurance endorsement of the mortgage,
provided the mortgagor is not receiving
payments from the Commissioner under a rent
supplement contract executed pursuant to the
provisions of §§ 5.1 et seq. of this title.
24 C.F.R. § 236.30 (1970). While these regulations
permitted prepayment after twenty years without
HUD approval, the regulations were expressly subject
to amendment:
The regulations in this subpart may be
amended by the Commissioner at any time and
from time to time, in whole or in part, but such
amendments shall not adversely affect the
24a
interest of a mortgagee or lender under the
contract of insurance on any mortgage or loan
already insured and shall not adversely affect
the interests of a mortgagee or lender on any
mortgage or loan to be insured on which the
Commissioner has made a commitment to insure.
24 C.F.R. §§ 221.749, 236.249 (1970).
The regulations governing the Section 221(d)(3) and
Section 236 programs further support our conclusion
that there was no privity of contract between HUD and
the Owners with respect to prepayment of the deed of
trust notes. The Court of Federal Claims concluded
that "when the parties in this case entered into the
regulatory agreement they also intended to be mutually
bound by the prepayment rules set forth in the rider to
the contemporaneous deed of trust note." Cienega
Gardens, 33 Fed. Cl. at 210. However, it would have
been inconsistent for HUD to have entered into the
regulatory agreement if the agreement fixed the
prepayment rights of the Owners, in view of the
express power to amend the Section 221(d)(3) and
Section 236 program regulations at any time that was
reserved to HUD, subject only to the caveat that
mortgagees' interests not be adversely affected. See 24
C.F.R. $§ 221.749, 236.249 (1970).
ITI.
A.
The Owners cite to several portions of the
legislative history of ELIHPA and LIHPRHA, which
they argue support their claim for breach of contract
and show that Congress understood that these
statutory enactments would breach contracts between
HUD and the Owners. We need not address this
argument in detail. It is sufficient to state that the
statements in the legislative histories of ELIHPA and
LIHPRHA cannot alter the content of the documents
25a
on which the Owners attempt to base their contractual
claims. The after-the-fact views of various parties
cannot create a contractual relationship between HUD
and the Owners with respect to prepayment terms,
where the contractual documents themselves fail to
evidence such a relationship.
B
The Owners also argue that HUD's intimate
involvement with the projects at issue created privity
of contract with respect to the prepayment terms in the
riders attached to the deed of trust notes:
The government's contention that the
prepayment provision was a matter of contract
solely between the Owner and _ the
lender/mortgagee also ignores HUD's intimate
involvement with all aspects of the agreement.
HUD conceived the structure of the transaction,
prescribed and approved all of the relevant
documents (including the Note and its rider),
and furnished most of the specific language.
(Appellees' brief at 19-20.) HUD's involvement in the
various transactions underlying this case, however, did
not, as a matter or law, give rise to privity of contract
with respect to the right to prepay the mortgage loans.
In Dana Construction, Inc. v. United States, 229
Ct.Cl. 862 (1982), the court stated that "it is settled that
there is no privity of contract between the U.S. and a
public housing contractor based on the U.S. Housing
Act." Id. at 863. The court also stated: "That the
Federal Government has intimate control over a
project, including prior approval of plans and costs,
does not establish liability here for claims by a
contractor." Id. In Dana Construction, the court held
that a construction contractor who had contracted with
an agency that received federal funding to build a
low-income housing project did not have privity of
26a
contract with, and could not assert a claim for breach of
contract against, HUD. See id. In Housing Corporation
of America v. United States, 199 Ct.Cl. 705, 468 F.2d
922 (Ct.Cl.1972), the court addressed a contract claim
by a contractor that had entered into an agreement
with a state authority, subsidized by HUD. See id. at
924. While HUD and the state authority contracted
that HUD would lend money to the state authority, See
id. at 923, and the contract between the state authority
and the contractor was on a HUD-approved form, See
id., the court ruled that there was no privity of contract
between the contractor and HUD because HUD was
not a party to any contract with the contractor, See id.
at 924, 926. In National Leased Housing, supra, the
owners of rental properties entered into Housing
Assistance Program contracts, some directly with HUD
and some via HUD-approved contracts with public
housing agencies. 105 F.3d at 1425. The court held that
owners who entered into the two-tier contract scheme,
i.e., contracted with public housing agencies rather than
directly with HUD, lacked privity of contract with
HUD, while owners who contracted directly with HUD
had privity of contract. See id. at 1437. In so ruling, the
court noted that HUD's obligations under the two-tier
contract scheme were directed toward the public
housing agencies rather than the owners. The court
determined that, under the two-tier scheme, HUD had
no direct contractual relationship with the owners and
that therefore there was no privity of contract with the
owners. See id. at 1436-37.
In Dana Construction and Housing Corporation of
America, the government was not a party to any
agreement with the contractor who was seeking
recovery from the United States. The same was true
with respect to the project owners who entered into the
two-tier contract scheme in National Leased Housing.
That is different from this case, where HUD entered
27a
into the various regulatory agreements. These cases do
make it clear, however, that in order for the
government to be liable for breach of contract, there
must be privity of contract and that the degree of HUD
involvement with a project does not create privity so as
to allow suit against the government. The Owners'
contention that HUD's involvement with the
transactions at issue resulted in privity of contract thus
fails.
The Owners did have contractual relationships with
HUD via the various regulatory agreements. As seen
above, however, the contract evidenced by each of the
regulatory agreements was limited in scope to
obligations on the part of the Owner that were in
consideration for HUD having endorsed the deed of
trust note which evidenced the loan to the Owner from
its lending institution. Although there was a contract -
the regulatory agreement - between each of the Owners
and HUD, the Owners' claims are based on the
prepayment terms in the deed of trust notes and the
attached riders. HUD and the Owners had no
contractual relationship with respect to prepayment
rights, and HUD's involvement in the contracts
between the private lending institutions and the
Owners could not create such a contractual relationship.
C
Finally, the Owners contend that this case is
controlled by, or analogous to, Winstar Corp. v. United
States, 64 F.3d 1531 (Fed.Cir.1995) (en banc), aff'd, 518
U.S. 839, 116 S.Ct. 2432, 1385 L.Ed.2d 964 (1996). In
Winstar, this court held that the government had
breached its express contracts with various financial
institutions through the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183
(1989) (codified in relevant part at 12 U.S.C. § 1464).
28a
See Winstar, 64 F.3d at 1534. Each of the financial
institutions had contracted with the government for
approval to purchase failing thrifts. At the same time,
each institution also had contracted for approval, in the
process, (i) to use supervisory goodwill toward its
minimum regulatory capital requirements and (ii) to
amortize the goodwill over periods of up to forty years.
See id. at 15386. We held that each financial institution
had entered into an express agreement with the
government and that, by virtue of an integration clause,
each contract incorporated |§ contemporaneous
documents that expressly permitted the accounting
treatment at issue.!* See id. at 1540-44. We then
determined that the enactment of FIRREA breached
these express agreements. See id. at 1544. The
plaintiffs in Winstar had contracts with integration
clauses that expressly incorporated contemporaneous
documents that allowed them to use supervisory
goodwill and the stated amortization periods. The
Owners in the present case can point to no similar
contractual provisions. The regulatory agreements do
not address prepayment and do not contain integration
clauses that incorporate any document addressing
prepayment. In fact, no documents between HUD and
the Owners address prepayment. The deed of trust
notes and the attached Riders A were not incorporated
12 For example, one of the contracts contained an integration
clause that, in relevant part, provided:
This Agreement, together with an interpretation thereof
or understanding agreed to in writing by the parties,
constitutes the entire agreement between the parties
thereto and supersedes all prior agreements and
understandings of the parties in connection herewith,
excepting only the Agreement and Merger and any
resolutions or letters isswed contemporaneously herewith
by the [Bank Board] or the FSLIC....
Winstar, 64 F.3d at 1540 (emphasis added).
29a
into the regulatory agreements by reference, nor was
HUD a party to the deed of trust notes and
incorporated riders. The regulatory agreements, which
set forth obligations on the part of the Owners, merely
referenced HUD's role as endorser for insurance of the
mortgage loans. Winstar provides no support for the
Owners' claims.
IV.
We hold that there was no privity of contract
between HUD and the Owners with respect to
prepayment of the deed of trust notes. Pursuant to
each "Commitment for Insurance of Advances," HUD
contracted to provide mortgage insurance, but did not
agree to any prepayment terms. Neither were there
any prepayment terms in the regulatory agreements
between HUD and the Owners. The only contractual
prepayment terms were contained in the deed of trust
notes and the attached riders, to which HUD was not a
party. Because there was no privity of contract
between HUD and the Owners with respect to
prepayment of the deed of trust notes, HUD could not
be liable to the Owners for breach of contract by reason
of the enactment of ELIHPA and LIHPRHA. Thus,
the Court of Federal Claims erred in granting summary
judgment in favor of the Owners on their breach of
contract claims. The court should have granted
summary judgment in favor of the government on the
breach of contract claims.
CONCLUSION
For the foregoing reasons, we vacate the judgment
in favor of the four model plaintiffs. The case is
remanded to the Court of Federal Claims, which is
directed (i) to enter judgment in favor of the
government on the Owners' breach of contract claims,
(ii) to dismiss the breach of contract claims, and (iii) to
30a
conduct such further proceedings, consistent with this
opinion, as may be necessary.
COSTS
Each party shall bear its own costs.
VACATED and REMANDED with INSTRUCTIONS
ARCHER, Senior Judge, dissenting.
The decision of the Court of Federal Claims holding
that the government breached its contracts with the
plaintiffs (Owners) should, in my view, be affirmed.
The Court of Federal Claims (CFC) correctly held that
the Owners were promised the right, and therefore
entitled, to prepay their mortgages on these low and
moderate-income housing projects without HUD
approval after twenty years, as set forth in Rider A to
the Deed of Trust Notes. This contract right was
breached when Congress enacted statutes, commonly
referred to as ELIHPA and LIHPRHA, that prevented
them from prepaying their mortgages without HUD's
approval.
The majority holds there was no privity of contract
between HUD and the Owners. Even though Rider A
to the Notes expressly provided that the Owners could
elect to prepay the mortgage after twenty years
without HUD approval, the majority reasons that this
does not bind the government because the Notes were
contracts between the lenders and Owners and were
only endorsed for insurance by HUD. The majority also
holds that the Owners cannot rely on the provisions of
the HUD regulations in effect at the time these
transactions took place, which also permitted
prepayment without HUD approval after twenty years,
because the regulations were amendable. I think the
majority has reached the wrong conclusion in each
instance.
endian
3la
In analyzing each of the pertinent agreements
separately, the majority has not considered critical
factors which support the CFC's conclusion that the
government intended and in fact did bind itself to the
prepayment provisions. Principally, these factors are
the overall purpose and nature of the transactions, the
intent of the parties, the terms and conditions of HUD's
Commitments for Insurance of Advances, and the
references in the HUD's Commitments and
endorsements of the Notes to specific, dated HUD
regulations governing these transactions.
A
The purpose of the HUD low and moderate-income
housing programs fully supports the CFC's decision.
At the time these transactions occurred, Congress and
HUD were encouraging private parties to construct low
and moderate-income housing with subsidized or low
interest rate loans guaranteed by the government. See,
e.g.. H. Rep. No. 90-1585 at 2, 21 (1968). In turn, the
Owners were severely restricted as to the rents they
could charge and the income they could earn from these
projects. See 24 C.F.R. § 207.253(a)(2)(1970). These
disincentives were offset, however, by the fact that
after twenty years the Owners would be permitted to
repay the mortgages without prior approval of HUD
and at the same time be relieved from the government's
rent and profit restrictions. Thus, after the twenty
year period, the Owners would be able to charge
market rates for the housing units. It is undisputed
that the Owners, lenders and HUD all entered into
these transactions with the full knowledge and intent
that the Owners would repay the mortgages after the
twenty year period if it was economically advantageous
to them. See Cienega Gardens v. United States, 38 Fed.
Cl. 64, 75 (1997).
32a
The nature and mechanics of the transactions
required by the HUD programs support the CFC's
decision as well. Projects under these programs were
commenced by applying to HUD for the issuance of a
Commitment for Insurance of Advances to the Owners
and the lenders. In accordance with the regulations,
both the Owners and the lenders had to make
application for the Commitment. The regulations
specifically provided:
An application for issuance of either a
conditional or firm commitment for insurance of
a mortgage on a project shall be submitted by an
approved mortgagee and by the sponsors of such
project.
See 24 C.F.R. § 221.502(a), § 236.5(a)(1970) (emphasis
added).
The Commitments issued by HUD to the Owners, as
well as the lenders, was in the nature of an offer to
provide mortgage insurance when the _ specific
requirements set forth in the Commitments were
completed. HUD was then contractually obligated to
place its insurance endorsement on the Notes.
The Owners were required to provide a number of
documents and agreements, all of which were
prescribed and/or approved by HUD as to form and
content. Among these were the documents relating to
the mortgage loan, including the Deed of Trust (FHA
Form 4104-G) and the Deed of Trust Note (FHA Form
4104-e). In this connection, HUD furnished additional
language to the Notes in the form of Rider A. Rider A
specifically provided that the Owners could prepay the
Notes after twenty years without HUD's consent. The
Rider also contained restrictions on prepayment by the
Owners in the absence of HUD approval, during the
first twenty years of the mortgage.
B.
33a
The CFC carefully examined the nature and
purpose of the low and moderate-income housing
statutes and regulations, the specific documents
executed to carry out the transactions and other
evidence of record. Based on all of the documents and
evidence, the court determined that "when the parties
-.. entered into the regulatory agreement they also
intended to be mutually bound by the prepayment rules
set forth in the rider to the contemporaneous deed of
trust note." Cienega Gardens v. United States, 33 Fed.
Cl. 196, 210 (1995). The court noted the various
promises made by the Owners to HUD and the
government's concurrent promises to the Owners, as
follows:
By signing the regulatory agreement and the
deed of trust note to which the regulatory
agreement referred, plaintiffs promised to
construct and maintain housing in accordance
with the HUD's specifications, to accept only low
or moderate-income persons as tenants, to
charge no higher rents that those permitted by
HUD, to distribute profits to shareholders in
accordance with specified limitations, to make
timely payments on their mortgages and to
maintain cash reserves to self-insure against
mortgage default. These promises were made
expressly to and for the benefit of the
government, not third parties. In exchange, the
government agreed to endorse and insure the
mortgages (allowing plaintiffs to obtain either
subsidized commercial loans or loans at favorable
interest rates) and to allow plaintiffs to free
themselves of HUD's regulatory strictures after
the first 20 years. Accordingly, the court finds
that Congress, by enacting ELIHPA and
LIHPRHA, breached the government's
contracts with plaintiffs with respect to their
34a
prepayment rights.
Id. at 210.
In reaching the conclusion that contracts between
HUD and the Owners had been breached by the
enactment of ELIHPA and LIHPRHA, the Court of
Federal Claims considered whether Rider A to the
Notes created contractual rights between HUD and the
Owners and whether there was privity of contract as to
these provisions. The court expressly found that the
provisions of Rider A were intended to create
contractual rights between these parties, even thought
the named parties to the Notes were the Owners and
the lenders. It reasoned that there was privity of
contract between the Owners and HUD as to the
prepayment provisions because mutual rights and
obligations were set forth in the Rider. The court
stated:
As discussed earlier, the rider gave HUD the
right to approve or disapprove prepayment prior
to the first twenty years following HUD's
endorsement, and the rider allowed prepayment
without HUD approval after the first twenty
years. Despite the fact that HUD was not a
named party the deed or trust note--the fact upon
which defendant's privity argument rests--the
rider gave the lender no right whatsoever to
interfere with an owner's plan to prepay. The
rider gave that power only to HUD, and only
permitted such interference during the first 20
years of the mortgage. Because the rider
specifically allocated certain rights between
HUD and plaintiffs, the fact that HUD was not a
named party (except as an endorser) to the deed
of trust note containing the rider is not
dispositive of the issue of privity of contract
between the parties in this action. The
aaa
35a
government's participation as a party to the
deed of trust note is unnecessary to establish
privity of contract with respect to plaintiff's
prepayment rights.
Id. at 209-210 (emphasis added).
The CFC concluded that the parties, including
HUD, intended to be bound by the prepayment
provision set forth in Rider A. The court's effort to find
the parties’ intent based on all of the documents and the
surrounding facts and circumstances was entirely
appropriate in complex integrated transactions of this
sort, where multiple parties executed multiple
documents at closing. Here, there were two such closing
sessions, the first when HUD gave its initial
endorsement permitting the projects to be constructed
and the second when HUD gave its final endorsement
after the projects were completed.
The fallacy in the majority's analysis is that it has
considered each of the documents necessary to fulfill
the term of the Commitments in virtual isolation. By
narrowly interpreting each agreement in this
stand-alone fashion, I think the majority has come to
the wrong result as to the Owners’ privity with HUD
and as to HUD's intention and contractual obligation at
the time these agreements were executed.
Accordingly, I would accept the Court of Federal
Claim's factual findings that the relevant parties, HUD
and the Owners, intended to bind themselves to the
prepayment provisions as set forth in Rider A.
C.
I am also convinced that the Commitments and
subsequent endorsements by HUD of the Notes in
these transactions establish as a matter of law the
requisite privity between the Owners and HUD to find
an enforceable express contract as to the prepayment
right. As noted above, HUD's Commitment was issued
36a
to the Owners as well as to the lenders. It provided
that if the enumerated conditions were met and the
required documents in the form prescribed or approved
by HUD were furnished and executed to HUD's
satisfaction, HUD would be obligated to insure and
endorse the Notes. One of the HUD approved
provisions was Rider A. In Rider A, HUD obtained
control in a contractual document over any proposed
prepayment by the Owners during the first twenty
years of the mortgage, and because this control was set
forth in the Notes themselves the lenders were put on
notice of HUD's controlling position. Similarly, the
Owners' prepayment rights after twenty years were
made known to the lenders.
When HUD endorsed the Notes with these
provisions, HUD was fulfilling its Commitment
obligations and thereby giving approval to all of the
underlying documents and executed agreements that
were conditions to its endorsements. Because HUD
sought to obtain, and did obtain in the Notes that it
approved, the right from the Owners for this control
over any proposed prepayment until after the 20th
year, it effectively became a party by its endorsements
of the Notes as to the prepayment provisions. In my
view, the privity of contract as to the dominant
Commitment contracts carried over to the underlying
documents HUD required for its endorsements and
insurance of the Notes insofar as those documents
contained provisions benefiting HUD or in which HUD
approved rights beneficial to the Owners.
D.
Finally, the judgment of the Court of Federal
Claims should, in all events, be affirmed because the
Owners were entitled to prepayment rights after
twenty years under the provisions of the HUD
regulations in effect at the time HUD issued its
37a
Commitments and endorsed the Notes. The majority
has rejected this position on the ground that the
regulations contained a section permitting the
regulations to be amended. Because these transactions
were consummated under the provisions of regulations
in effect as of specific dates, I believe the majority has
erred.
In the HUD Commitments accepted by the Owners,
which as noted were the dominant contracts, HUD
expressly stated that the insurance endorsements
would be made under the pertinent provisions of the
National Housing Act and "the Regulations thereunder
now in effect." (Emphasis added.) When HUD
endorsed the Notes the endorsements contained
written or typed in dates, corresponding to the
Commitment dates, showing that the endorsements
were made under the regulations "in effect" on the
Commitment dates. These provisions indicate that
HUD did not intend that any subsequent amendment to
the regulations would be applicable to the particular
Commitment contracts and Note endorsements. It is
undisputed that the regulations referred to in these
documents expressly permitted Owners to prepay their
mortgage notes after twenty years without HUD's
consent and thereby be relieved of restrictions on
rentals and profits.
Contrary the majority's holding, the fact that HUD
reserved the right in 24 C.F.R. §§ 221.749, 236.249
(1970) to amend its regulations respecting prepayment
generally does not permit it to do so when the
Commitments as well as the Note endorsements
provide that the regulations in effect on a specific date
were to be applicable. The judgment of the Court of
Federal Claim is also sustainable on the grounds that
the prepayment provisions of the regulations in effect
38a
on the date of HUD's Commitments were controlling
and binding on the government.
39a
APPENDIX B
UNITED STATES COURT OF FEDERAL CLAIMS
Nos. 94-1C
CIENEGA GARDENS, ET AL., PLAINTIFFS
vz.
UNITED STATES, DEFENDANT.
(Decided March 27, 1995]
OPINION
Before: ROBINSON, Judge:
This case is before the court on defendant's motion
for dismissal and plaintiffs cross-motion for partial
summary judgment. Plaintiffs' compiaint seeks
damages for breach of contract (Count I), just
compensation for a taking under the Fifth Amendment
to the United States Constitution (Count II), and
additional compensation based on allegedly unlawful
administrative actions (Count III). Oral argument was
held on November 30, 1994.
When the court considers matters presented by the
parties outside of the pleadings, as it has in this case
with respect to Counts I and II, it must treat
defendant's motion to dismiss as a motion for summary
judgment. The disposition of a case on a motion for
summary judgment is appropriate where there is no
genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. Rule 56(c) of
40a
the Rules of the United States Court of Federal Claims
("RCFC"). In evaluating a motion for summary
judgment, the court must resolve any doubt about the
existence of a material factual issue in favor of the
nonmoving party. Housing Corp. of America v. United
States, 199 Ct.Cl. 705, 710, 468 F.2d 922, 924 (1972).
Applying these standards, the court now grants
defendant's motion for dismissal only with respect to
Count III, plaintiffs' claim for damages for allegedly
unlawful administrative actions. Plaintiffs' partial
motion for summary judgment is granted with respect
to Count I, plaintiffs' breach of contract claim; the court
agrees with plaintiffs that trial is necessary to
determine the damages, if any, flowing from
defendant's breach. Finally, with regard to Count II,
the taking claim, both parties' motions are denied.
Factual Background
During the 1950s and 1960s, Congress enacted
legislation to encourage private developers to
construct, own and manage housing projects for low and
moderate-income families. To implement the
legislation, Congress authorized first the Federal
Housing Administration and later the Department of
Housing and Urban Development ("HUD" or "the
agency")! to provide mortgage insurance to enable
private lending institutions to provide low-interest
mortgages to housing developers.
Housing developers also received financial
incentives along with mortgage insurance, under either
of two programs. The first, referred to as "Section 221,"
provided for below-market mortgage rates. Pub.L.
83-560, 68 Stat. 590, 597 (1954), amended by Pub.L.
1 In 1965, the Federal Housing Administration, headed by the
Federal Housing Commissioner, was subsumed into the newly
established Department of Housing and Urban Development. See
24 C.F.R. §§ 200.1-200.4 (1994).
4la
87-70, 75 Stat. 149 (1961). Developers who obtained
mortgages after 1968, however, were subject to a new
provision enacted that year known as "Section 236."
Developers who participated in Section 236 received
market-rate mortgages with an interest subsidy.
Pub.L. 90-448, § 201(a), 82 Stat. 476, 498, 499 (1968). In
either case, developers were expected to pass these
financial benefits on to their tenants in the form of
lower rents. Id.
Typically, when a developer received a
HUD-insured mortgage under one of these programs,
the developer signed a long-term deed of trust note2
with a private lender; HUD endorsed the note. The
repayment period on the loan was 40 years.
Simultaneously, the developer entered into a
‘regulatory agreement" with the agency which placed
certain conditions on the mortgages. Most importantly,
the regulatory agreement imposed restrictions on the
income levels of tenants, on the rents that could be
charged, and on the rates of return that the developer
could receive (collectively, "affordability restrictions").
The regulatory agreement imposed upon the owners
several additional obligations, including a requirement
to make all mortgage payments to lenders when due
and to maintain substantial cash reserves—obligations
which were designed to limit the government's financial
exposure under its insurance contract.’ The regulatory
2 This opinion, for the sake of convenience, uses the terms
"mortgage" and "deed of trust note" interchangeably, although the
court is aware of their distinctions, which are rooted in state law.
See Black's Law Dictionary, 5th ed., at 373 (West 1979).
3 Plaintiffs also draw the court's attention to paragraph 12 of the
regulatory agreement, which effectively placed a lien on the
mortgaged property in favor of HUD:
[T]o secure the Commissioner because of his liability under
the endorsement of the note for insurance, and as security
for the other obligations under this Agreement, the
42a
agreement, as well as the mortgage insurance provided
by HUD, was to remain in effect as long as the
mortgage loan remained outstanding.
The regulatory agreement made no mention of the
owner's prepayment rights. However, a rider to the
HUD-endorsed deed of trust notes expressly prohibited
prepayment of the mortgages before 20 years from the
date of endorsement, except under certain conditions
which included HUD approval of the prepayment. The
notes further stated that, after making payments for 20
years, owners could prepay their mortgages in full
without prior HUD approval. The deed of trust notes
were printed on forms approved by HUD.
The prepayment rules as set forth in the notes
reflected contemporaneous HUD regulations governing
the Section 221 and Section 236 programs, specifically
24 C.F.R. §§ 221.524(a)(ii) and 236.30(a)(i) (1970).4
Those regulations also contained language which
Owners respectively assign, pledge and mortgage to the
Commissioner their rights to the rents, profits, income and
charges of whatever sort which they might receive or be
entitled to receive from the operation of the mortgaged
property.... Until a default is declared under this
Agreement, however, permission is granted to Owners to
collect and retain under the provisions of this Agreement
such rents, profits, income, and charges, but upon default
this permission is terminated as to all rents due or
collected thereafter.
4 The language in the Section 221 regulations regarding
mortgage was essentially the same as that in the Section 236
regulations, which in pertinent part stated:
§ 236.30 Prepayment privileges.
(a) Prepayment in full--(1) Without prior
Commissioner consent. A mortgage indebtedness maybe
prepaid in full and the Commissioner's controls terminated
without the prior consent of the Commissioner where. . . .
(ii) [T]he prepayment occurs after the expiration of 20
years from the date of final endorsement of the
mortgage. ...
i i
at _—_-
43a
generally reserved to HUD the right to make future
amendments:
The regulations in this subpart ... may be
amended by the Commissioner at any time, and
from time to time, in whole or in part, but such
amendment will not adversely affect the
interests of a mortgagee or lender under the
contract of insurance on any mortgage or loan
already insured... .
24 C.F.R. §§ 221.749 and 236.30 (1970).
By the late 1980s, Congress became concerned that
a‘large number of owners might take advantage of the
prepayment clauses within a short period of time, thus
drastically reducing the supply of low-income rental
housing throughout the country. See S.Rep. No. 316,
101st Cong., 2d Sess. 105, reprinted in 1990 U.S.Code
Cong. & Admin. News 5763, 5867. As a result,
Congress enacted two pieces of legislation to directly
counter the threat of massive prepayments. The first
bill, the Emergency Low Income Housing Preservation
Act ("ELIHPA") was enacted in 1987. Pub.L. 100-242,
101 Stat. 1877 (reprinted as amended at 12 U.S.C.A. §
17151 (note) (West 1989)). ELIHPA effectively placed a
two-year moratorium on prepayments in order to give
Congress "breathing room" with which to devise a
permanent solution. Jd. at § 221(b). While it did not
prohibit prepayments altogether, ELIHPA did require
owners to apply to HUD for permission to prepay. Jd.
at § 222. ELIHPA authorized HUD to approve a
prepayment only after making written findings that the
prepayment would have minimal effects on the existing
tenants, the local low-income housing market in
44a
general, and the local housing market for minorities.
Id. at § 225.5
In 1990, Congress replaced ELIHPA with the Low
Income Housing Preservation and _ Resident
Homeownership Act ("LIHPRHA"). In addition to
making the moratorium described above permanent,
LIHPRHA authorized HUD to provide incentives to
owners to maintain the affordability restrictions on
their properties.6 Pub.L. 101-625, 104 Stat. 4249
(reprinted at 12 U.S.C.A. § 4101 et seg.. (West 1993)).”
> The text of § 225(a), which is specifically applicable to
prepayment, reads in part as follows:
The Secretary may approve a plan of action that involves
termination of the low income affordability restrictions
only upon a written finding that-
(1) implementation of the plan of action will not
materially increase economic hardship for current tenants
... or involuntarily displace current tenants (except for
good cause) where comparable and affordable housing is
not readily available, determined without regard to the
availability of Federal housing assistance that would
address any such hardship or involuntary displacement;
and
(2)(A) the supply of vacant, comparable housing is
sufficient to ensure that such prepayment will not
materially affect--
(i) the availability of decent, safe and sanitary housing
affordable to lower income and very low-income families or
persons in the area that the housing could reasonably be
expected to serve;
(ii) the ability of lower income and very low-income
families or persons to find affordable, decent, safe, and
sanitary housing near employment opportunities; or
(iii) the housing opportunities of minorities in the
community within which the housing is located... .
These limitations on HUD's discretion to approve
prepayments have essentially been preserved at 12 U.S.C.
§ 4108.
6 The incentives authorized by LIHPRHA include authorization
to increase ceilings on rents, an increase in the authorized annual
rate of return from participating properties, financing of capital
45a
Under LIHPRHA, whether a developer wishes to
prepay the mortgage or to apply for incentives, the
Same procedures apply. The process is begun when a
property owner files a Notice of Intent ("N.O.I.") with
HUD, "in the form and manner" prescribed by the
agency, with copies to be sent to state and local housing
authorities, mortgagees and tenants. 12 U.S.C. § 4102.
The property must then be appraised by two
independent appraisers to determine its "preservation
value," which in turn becomes a basis for any incentives
which are ultimately offered to the owners. 12 U.S.C. §
4103, see also §§ 4104(a) and 4110(d). Within nine
months after receiving an N.O.I. (or six months if the
N.O.I. proposes to terminate affordability restrictions),
HUD must send the owner a report containing the
results of the appraisals and other information
necessary for the owner to proceed. 12 U.S.C. § 4106.
The owner must then, within six months, file a Plan of
Action ("P.0.A.") with HUD indicating whether the
owner wishes to prepay the mortgage (terminating the
affordability restrictions), extend the affordability
restrictions by requesting incentives, or sell the
property to a buyer who will agree to maintain the
affordability restrictions. 12 U.S.C. § 4107.
HUD must approve or disapprove a P.O.A. within
180 days of filing, provided the P.O.A. is not deficient.
12 U.S.C. § 4115(b). If a P.O.A. requesting incentives is
improvements, and equity loans, among other things. 12 U.S.C. §
4109.
7 LIHPRHA was passed upon the expiration of ELIHPA.
Under § 203(a) of ELIHPA, the prepayment restrictions were to
expire two years after its enactment, or February 5, 1990. 12
U.S.C. § 17151 (note, § 203(a)). ELIHPA's expiration date was
extended three times, the last time until November 30, 1990, or the
date of the enactment of LIHPRHA, whichever was earlier.
Pub.L. No. 101-494 at § 2. Congress eventually passed LIHPRHA
on November 28, 1990.
46a
approved after the 180 days have passed, LIHPRHA
requires that the incentives be retroactive to 180 days
after the filing of the P.O.A. 12 U.S.C. § 4115(c). To
ensure the timeliness of HUD's P.O.A. approval
process, LIHPRHA allows an owner to seek relief in
federal district court if HUD does not approve the
P.O.A. within the statutory time limit. Jd.
The plaintiffs in this case are general or limited
partnerships who are owner- participants in the Section
221 or Section 236 programs.’ The housing projects
they own are all located in Culver City, California.
Contentions of the Parties
Plaintiffs contend that by enacting ELIHPA and
LIHPRHA, Congress breached a provision of an
express contract which plaintiffs had entered into with
HUD which would have allowed them to prepay their
mortgages after 20 years without HUD approval.
Furthermore, plaintiffs argue that by placing severe
restrictions on the exercise of their prepayment rights,
the government has prevented plaintiffs from putting
their properties to more profitable use, effecting either
a per se or a regulatory taking of private property
without just compensation, in violation of the Fifth
Amendment's Takings Clause. Finally, plaintiffs
contend that HUD has_ unlawfully delayed
implementing those provisions of ELIHPA and
LIHPRHA which would provide plaintiffs with
financial incentives for maintaining the affordability
8 In addition to Cienega Gardens, the plaintiffs include the
following: Cedar Gardens, Claremont Village Commons, Covina
West Apartments, Del Amo Gardens, Del Vista Village, DeSoto
Gardens, Independence Park Apartments, Kittridge Gardens I,
Kittridge Gardens II, Las Lomas Gardens, Oxford Park, Parthenia
Townhomes, Pioneer Gardens, Puente Park Apartments, Rayen
Park Apartments, Reseda Park Apartments, Roscoe Park
Apartments, St. Andrews Gardens, San Jose Gardens, Sherman
Park Apartments, and Sunland Park Apartments
47a
restrictions on their properties. Further, plaintiffs claim
that HUD has unlawfully failed to provide for
retroactive payment of incentives and unlawfully
promulgated appraisal guidelines which result in
valuations of their properties at less than fair market
value.
Defendant counters that this court lacks jurisdiction
to entertain both the contract and taking claims
because plaintiffs have not exhausted administrative
remedies that could ultimately lead to prepayment. At
the same time, defendant contends that all but two
plaintiffs lack standing to challenge the prepayment
restrictions because they have filed N.O.I.'s or P.O.A.'s
with HUD which indicate that they do not intend to
prepay their mortgages but rather to seek the financial
incentives which are available only to owners who
agree to extend the affordability restrictions on their
properties. In addition, defendant argues that the
contract and taking claims are mooted with respect to
the same two plaintiffs, Puente Park and Roscoe Park,
because they have already completed binding
agreements with HUD to maintain the affordability
restrictions. |
As for the merits of plaintiffs' contract claim,
defendant argues that the claim must fail because
plaintiffs have not established privity of contract with
HUD in connection with plaintiffs' alleged prepayment
rights. Alternatively, defendant contends that plaintiffs
contract claims should be barred by the sovereign acts
doctrine or its corollary doctrine of "unmistakability."
Lastly, defendant argues that even if plaintiffs
otherwise establish the existence of an express or
implied contract concerning their prepayment rights,
relief should be denied on the grounds that HUD or its
agents lacked authority to contractually bind the
48a
government to the 20-year prepayment provisions
contained in the deed of trust notes.
With regard to plaintiffs’ taking claim, defendant
contends that plaintiffs have failed to establish that the
prepayment restrictions instituted by ELIHPA and
LIHPRHA effected a per se taking because plaintiffs’
putative prepayment rights did not constitute a
cognizable property right. Moreover, defendant argues,
even if plaintiffs’ rights with respect to prepayment can
be characterized as "property rights," the prepayment
restrictions imposed by ELIHPA and LIHPRHA were
a justified exercise of "police power" intended to
prevent injury to the public. As for plaintiffs’
alternative regulatory taking theory, defendant argues
that the court should reject plaintiffs' claim because it
does not meet the necessary criteria for a regulatory
taking established by case law.
Finally, defendant argues that plaintiffs’ third claim,
seeking damages for HUD's allegedly unlawful
administrative delays and determinations, should be
barred on jurisdictional grounds because ELIHPA and
LIHPRHA do not mandate monetary damages or
retroactive payment of financial benefits for HUD's
allegedly unlawful actions. Consequently, defendant
argues, plaintiffs have failed to identify a statutory,
regulatory or constitutional basis for monetary relief,
which is a prerequisite to jurisdiction under the Tucker
Act, 28 U.S.C. § 1491.
DISCUSSION
A. Exhaustion of administrative remedies; standing;
mootness.
A threshold consideration with regard to plaintiffs'
contract and taking claims is defendant's contention
that jurisdiction should be denied under "the long
settled rule of judicial administration that no one is
entitled to judicial relief for a supposed or threatened
49a
injury until the prescribed administrative remedy has
been exhausted." Myers v. Bethlehem Shipbuilding
Corp., 303 U.S. 41, 50-51, 58 S.Ct. 459, 463, 82 L.Ed. 638,
(1938); Christopher W. v. Portsmouth School
Committee, 877 F.2d 1089, 1093 (lst Cir.1989).
Defendant argues that HUD retains limited authority
under LIHPRHA to approve a P.O.A. seeking
prepayment under 12 U.S.C. § 4114 and, consequently,
plaintiffs' case is fatally flawed because plaintiffs have
never requested HUD approval for prepayment.
To require administrative exhaustion as a
prerequisite to jurisdiction is appropriate in many cases
in order to prevent "interference with agency processes,
so that the agency may function efficiently and so that
it may have an opportunity to correct its own errors, to
afford the parties and the courts the benefit of its
experience and expertise, and to compile a record which
is adequate for judicial review." Weinberger v. Salfi,
422 U.S. 749, 765, 95 S.Ct. 2457, 2467, 45 L.Ed.2d 522
(1975); see also McKart v. United States, 395 U.S. 185,
194, 89 S.Ct. 1657, 1663, 23 L.Ed.2d 194 (1969). Ina
case whose facts were nearly identical to the present
one, the United States Court of Appeals for the Fourth
Circuit ordered that a challenge to the constitutionality
of ELIHPA's prepayment restrictions be dismissed on
the basis of the exhaustion doctrine. The court
observed, "[BJoth the statute and the implementing
regulations make clear. that, under certain
circumstances, HUD has the authority to grant
[plaintiffs] the ultimate economic relief they seek-
prepayment and withdrawal from the program."
Thetford Properties IV Ltd. Partnership v. HUD, 907
F.2d 445, 448 (4th Cir.1990).
In reply, plaintiffs argue that LIHPRHA does not
authorize HUD to adjudicate the particular claims
sought in this case, .e., breach of contract damages and
50a
just compensation for a taking. Moreover, unlike the
plaintiffs in Thetford Properties, who had filed N.O.I.'s
with HUD seeking prepayment approval, the plaintiffs
in the present case are not seeking declaratory or
injunctive relief which would allow them to prepay
their mortgages. The instant plaintiffs have, in fact,
filed N.O.I.'s or P.O.A.'s with HUD seeking whatever
preservation incentives LIHPRHA might afford
them--not prepayment.
Plaintiffs further contend that to actually seek
prepayment via the LIHPRHA administrative process
would serve no_ useful purpose, under the
circumstances. In order to be eligible to prepay,
plaintiffs argue, an owner must be able to demonstrate,
among other things, that prepayment would neither
materially increase economic hardships of current
tenants nor involuntarily displace them and that
prepayment would not materially affect the local supply
of housing for minorities or low-income persons. 12
U.S.C. § 4108; 24 C.F.R. § 248.141 (1994). Plaintiffs
argue that they cannot sustain such a burden because
they cannot truthfully assert that prepayment would
have no material effect on either their tenants or the
low-income housing market in California. In support of
this position, plaintiffs have cited a recent report of the
State of California, "Comprehensive Housing
Affordability Strategy," which outlines the continuing
crisis in the affordable housing market in that state.
Seeking prepayment would thus be futile because,
lacking evidence that prepayment would not materially
affect current tenants or the local housing market,
LIHPRHA and HUD's own regulations would require
HUD to deny a prepayment application from any of the
instant plaintiffs.
At least with respect to plaintiffs's contract claim, it
is not necessary to determine whether plaintiff's
kis
5la
prepayment rights amounted to “contract rights" or
something less binding on the government (though the
court shall analyze that question below) in order to
resolve defendant's exhaustion argument. There is no
dispute that LIHPRHA negated that language in the
deed of trust note which unambiguously permitted
plaintiffs to prepay their mortgages in full without
HUD approval after making payments for 20 years.
The "administrative process" to which defendant would
have the court bind plaintiffs is not one which would
enable plaintiffs to exercise their prepayment rights as
stated in their contracts, since under no circumstances
may plaintiffs prepay their mortgages without HUD
approval. It remains possible under LIHPRHA that
HUD will approve a particular prepayment proposal,
but such approval may only come after plaintiffs make
the significant expenditure of time and money required
to prepare and submit an N.O.I. and undergo possibly
three separate appraisals. The legislation at issue gave
HUD no authority to compensate plaintiffs for these
added costs and delays, which would not be incurred
had plaintiffs been permitted to simply prepay their
mortgages without permission. The court concludes,
then, that exhaustion is not required with respect to
plaintiffs' contract claim, not because HUD is unlikely
to approve prepayment but rather because no
administrative procedure exists by which plaintiffs
might obtain the relief which they seek, i.e., damages
for the alleged loss of an unrestricted prepayment right.
McCarthy v. Madigan, 503 U.S. 140, 155, 112 S.Ct. 1081,
1092, 117 L.Ed.2d 291 (1992) (exhaustion not required
when administrative apparatus could not award remedy
sought by plaintiff); see also Gibson v. Berryhill, 411
U.S. 564, 575 at n. 14, 98 S.Ct. 1689, 1696 at n. 14, 36
L.Ed.2d 488 (1973). The court, therefore, may exercise
its authority under the Tucker Act to adjudicate
plaintiffs' contract claim.
52a
When considering a taking claim, the court's concern
regarding exhaustion of administrative remedies is
more a question of ripeness than _ jurisdiction.
Williamson Planning Comm'n v. Hamilton Bank of
Johnson City, 473 U.S. 172, 192-93, 105 S.Ct. 3108,
3119-120, 87 L.Ed.2d 126 (1985) (holding that a taking
claim is not ripe until the administrative agency has
arrived at a final decision); see also Minority Media of
Pahrump, Inc. v. United States, 27 Fed.Cl. 379, 381-82
(1992). As defendant contends, under LIHPRHA the
government retains limited discretion to approve
P.O.A.'s proposing prepayment. See 12 U.S.C. §§ 4108
and 4114. On the other hand, the court has previously
held that exhaustion is not necessary when pursuit of
administrative remedies would be futile. Conant v.
United States, 12 Cl.Ct. 689, 693 (1987). In the present
case, if there is a realistic possibility that prepayment
would be allowed with regard to a particular plaintiff in
this case, administrative exhaustion may indeed be
appropriate because it would not be futile. See Babbitt
v. United Farm Workers National Union, 442 U.S. 289,
298, 99 S.Ct. 2301, 2308-09, 60 L.Ed.2d 895 (1979) ("A
plaintiff who challenges a statute must demonstrate a
realistic danger of sustaining a direct injury as a result
of the statute's operation or enforcement") (citations
omitted).
Although the instant plaintiffs insist that HUD
would be likely--perhaps even compelled--to disapprove
each of their applications for prepayment, should they
pursue that option, the evidence in the record
supporting their contention is insufficient. Defendant,
moreover, disputes plaintiffs’ assertion that
prepayment disapproval is a foregone conclusion for
any or all plaintiffs in this case. The court is reluctant
to make ffindings of fact respecting the
prepayment-approval prospects of each of the
individual plaintiffs in this case based solely on a
53a
general report of inadequate housing supplies in
California. A material factual issue must therefore be
resolved, i.e, whether any or all plaintiffs could
reasonably expect to be allowed to prepay their
mortgages under the current regulatory regime.
Finally, defendant also argues that the majority of
plaintiffs lack standing because they have filed P.O.A.'s
that seek incentives with HUD but not prepayment,
indicating their acquiescence to the prepayment
restrictions as enacted. And with respect to two
plaintiffs, the Puente Park and Roscoe Park
partnerships, defendant argues that those plaintiffs'
claims are moot because they have already completed
agreements with HUD which explicitly extend the
affordability restrictions on their properties over the
entire original term of the mortgage, regardless of
whether the mortgage remains outstanding.
With respect to plaintiffs' contract claim, the court
must reject defendant's argument both as to standing
and to mootness. The use agreement makes no explicit
reference to plaintiffs' pre-ELIHPA unrestricted
prepayment rights, so there is no basis for the court to
conclude that by entering such an agreement plaintiffs
were waiving any rights and claims they might have
had for breach of contract damages based on the
legislation. More importantly, HUD, under ELIHPA,
has no authority to allow an unapproved prepayment to
take place in accordance with the original contract
provisions. As for whether defendant's standing or
mootness argument should bar plaintiffs' taking claim,
the court must defer reaching any conclusion on that
issue until the court has been presented with the
factual evidence necessary to establish the ripeness of
plaintiffs’ taking claim, as discussed above.
54a
B. Breach of contract claim.
As discussed above, plaintiffs allege that Congress's
enactment of ELIHPA and LIHPRHA effectively
breached the contract into which the parties had ~
entered with HUD because ELIHPA and LIHPRHA
placed restrictions on mortgage prepayments which
would have otherwise been unrestricted after 20 years
of payments.
1. Privity of contract.
Defendant's first defense is that HUD has no
liability with regard to plaintiffs prepayment rights
because there is no privity of contract between HUD
and the owners. The prepayment provisions upon
which plaintiffs base their claims were contained in the
deed of trust notes entered into by plaintiffs and their
lenders, not in the regulatory agreement into which
HUD entered with the owners. Because HUD was not
a party to the deed of trust notes, defendant argues,
plaintiffs' putative prepayment rights are not
enforceable against the government.
Defendant cites precedents from this court and its
predecessor, the United States Court of Claims, which
establish the general rule that there is no privity of
contract between the United States and housing
developers who enter contracts with local housing
authorities for the construction of public housing,
notwithstanding that local housing agencies who enter
such contracts may be doing so under the direct
supervision of HUD or that their activities may be
financed by HUD. "That the Federal Government has
intimate control over a project, including prior approval
of plans and costs, does not establish liability... ."
Marshall N. Dana Construction, Inc. v. United States,
229 Ct.Cl. 862, 863, 1982 WL 26554 (1982) (citing
Correlated Development Corp. v. United States, 214
Ct.Cl. 106, 117-18, 556 F.2d 515, 519 (1977)). See also
55a
Housing Corp. of America, 199 Ct.Cl. at 710, 468 F.2d
at 924; National Leased Housing Assn. v. United
States, 32 Fed.Cl. 454, 456-57 (1994).
The court notes that the putative contractual
arrangements at issue in Dana _ Construction,
Correlated Development, Housing Corp. of America
and National Leased Housing did not contain an
express written agreement similar to the regulatory
agreement into which plaintiffs and the government
have entered into in this case, nor did those cases
involve an express written agreement analogous to the
specific agreement here at issue, i.e., the rider to the
deed of trust note allocating prepayment rights
between HUD and the plaintiffs. By contrast, in Dana
Construction and the other cases, the court was faced
with a two-tiered contracting system under which, in its
first tier, HUD would enter a contract with a local
public housing agency to provide federal funding for
that agency's low-income housing activities. The local
agency, in turn, would distribute that money pursuant
to second-tier contracts which the local agency entered
directly with housing builders or suppliers. Dana
Construction, 229 Ct.Cl. at 862, n. 1. See also
Correlated Development, 214 Ct.Cl. at 108-09, 556 F.2d
at 517-19; Housing Corp. of America, 199 Ct.Cl. at
708-09, 468 F.2d at 923-24; National Leased Housing, 32
Fed.Cl. at 456-57. Although HUD supervised the local
agency's activities, the court found no privity between
the second-tier contractors and HUD. The present case
is distinguishable from Dana Construction and related
cases because of the absence here of a two-tiered
contracting system. Instead, plaintiffs in this case
argue, HUD entered directly into an express
agreement with the plaintiffs, and the terms of that
agreement are embodied in the regulatory agreement
and the deed of trust note to which the regulatory
agreement refers.
56a
In support of their position, plaintiffs contend that
the deed of trust note and the regulatory agreement
must be read together in order to find all the terms of
the contractual arrangement entered into between
plaintiffs and HUD.’ Plaintiffs point out that essential
terms of the regulatory agreement make explicit
reference to terms of the deed of trust note, specifically:
the obligations imposed by the regulatory agreement
were described as being "[iJn consideration of the
endorsement for insurance by [HUD]" of the deed of
trust note; the regulatory agreement required owners
to make all payments due on the deed of trust note in a
9 Appendix One of plaintiffs' reply brief in support of its motion
for partial summary judgment is a declaration from Alan D. Ross,
the attorney who represented Cienega Gardens and some of the
other plaintiffs in this case at the original closings in 1970. His
written description of the closings include the following:
For each project in which I was involved, there was a
closing which typically took place in the HUD offices in
Los Angeles. At each closing, I represented the project
owners, the HUD legal counsel represented HUD, and the
bank or other lender supplying the mortgage loan had its
own counsel or representative present. The contractor,
architect, title insurer and corporate surety were also
present. At each closing, the parties signed and
exchanged the relevant documentation, including the
Regulatory Agreement, the Building Loan Agreement, the
Note and the Deed of Trust. The lawyer representing
HUD presided over each of the closings and approved all
of the documentation. Each closing concluded upon
endorsement of the Note by an authorized agent of HUD.
For each transaction, language was included in the Note
affording the project owner a right to prepay the debt
evidenced by the Note with the prior approval of the
Federal Housing Commissioner, except that after 20 years
from final endorsement by HUD, the project owner had an
unqualified right to prepay the debt evidenced by the Note
without having to obtain the prior approval of the Federal
Housing Commissioner. The language setting forth the
project owner's prepayment right was supplied by HUD at
the request of the Owner.
:
|
;
ee
57a
timely manner (in addition to the identical obligation
imposed by the terms of the note itself); the agreement
required plaintiffs to set aside cash reserves to
minimize the likelihood of a default on the deed of trust
note, for which HUD would be liable to the bank under
its endorsement of the note; and, most importantly, the
regulatory agreement, by its terms, was to remain in
effect as long as the deed of trust note remained
outstanding, so prepaying the note would have the
effect of terminating the regulatory agreement, to
which the named parties are the parties in this case.
Plaintiffs also point out that the rider to the deed of
trust note which contained the terms of prepayment
was logically intended to give rights and obligations to
plaintiffs and to HUD. As discussed earlier, the rider
gave HUD the right to approve or disapprove
prepayment prior to the first twenty years following
HUD's endorsement, and the rider allowed prepayment
without HUD approval after the first twenty years.
Despite the fact that HUD was not a named party to
the deed of trust note—the fact upon which defendant's
privity argument rests-the rider gave the lender no
right whatsoever to interfere with an owner's plan to
prepay.!0 The rider gave that power only to HUD, and
only permitted such interference during the first 20
years of the mortgage. Because the rider specifically
allocated certain rights between HUD and plaintiffs,
the fact that HUD was not a named party (except as an
endorser) to the deed of trust note containing the rider
is not dispositive of the issue of privity of contract
between the parties in this action. The government's
10 The deed of trust note did specify that the lender was entitled
to an “adjusted premium charge," according to applicable housing
regulations, in the event of prepayment, and the rider required
plaintiffs to give the lender 30 days prior written notice of its
intent to prepay.
OT
58a
participation as a party to the deed of trust note is
unnecessary to establish privity of contract with
respect to plaintiff's prepayment righis."!
Thus, contrary to defendant's assumptions, the
"express contract" upon which plaintiffs base their claim
is not to be found solely in either the deed of trust note
or the regulatory agreement. The two documents,
which were signed contemporaneously, must be read
together in order to determine the full intentions of the
parties when they initially entered into their
relationship. The Restatement of Contracts provides
that "all writings that are part of the same transaction
are interpreted together." Restatement (Second) of
Contracts, § 202. See also Resolution Trust Corp. v.
FSLIC, 25 F.3d 1498, 1499 (10th Cir.1994);
Commander Oil Corp. v. Advance Food Serv. Equip.,
991 F.2d 49, 53 (2d Cir.1993) ("instruments executed at
the same time, by the same parties, for the same
purpose and in the course of the same transaction will
be read and interpreted together" (quoting Carvel
Corp. v. Diversified Management Group, Inc., 930 F.2d
228, 233 (2d Cir.1991)). Applying this guidance to the
facts recited above, the court finds that when the
parties in this case entered into the regulatory
agreement they also intended to be mutually bound by
the prepayment rules set forth in the rider to the
contemporaneous deed of trust note.
Having thus found privity of contract between the
parties in this action, the court also finds, based on the
facts now before it, that plaintiffs have established a
11 At oral argument plaintiffs’ counsel stated that its position
was also supported by the court's recent decisions concerning
third-party beneficiaries in Schuerman v. United States, 30 Fed.Cl.
420 (1994) and National Sur. Corp. v. United States, 31 Fed.Cl. 565
(1994). Since the court has not based its conclusion as to the
contract claim on a third- party beneficiary theory, discussion of
the applicability of those cases is unnecessary.
as
59a
breach of contract claim, as follows: By signing the
regulatory agreement and the deed of trust note to
which the regulatory agreement referred, plaintiffs
promised to construct and maintain housing in
accordance with the HUD's specifications, to accept
only low- or moderate- income persons as tenants, to
charge no higher rents than those permitted by HUD,
to distribute profits to shareholders in accordance with
specified limitations, to make timely payments on their
mortgages and to maintain cash reserves to self-insure
against mortgage default. These promises were made
expressly to and for the benefit of the government, not
third parties. In exchange, the government agreed to
endorse and insure the mortgages (allowing plaintiffs to
obtain either subsidized commercial loans or loans at
favorable interest rates) and to allow plaintiffs to free
themselves of HUD's regulatory strictures after the
first 20 years. Accordingly, the court finds that
Congress, by enacting ELIHPA and LIHPRHA,
breached the government's contracts with plaintiffs
with respect to their prepayment rights.
It now remains to be determined whether the
government may escape contract liability via the
remaining defenses it has raised: the sovereign acts
doctrine, the unmistakability doctrine, and lack of
contracting authority.
2. Sovereign Acts and unmistakability.
The next defenses which the government has raised
in its attempt to defeat plaintiffs' breach of contract
claims are the sovereign acts doctrine and its corollary,
the so-called “unmistakability" doctrine. "Under [ihe
sovereign acts] doctrine, the government is not
contractually liable for acts taken in its sovereign
capacity for the public good." Atlas Corp. v. United
States, 895 F.2d 745, 754 (Fed.Cir. 1990) (holding that
the Uranium Mill Tailings Radiation Control Act and its
60a
regulations were sovereign acts undertaken for the
public good and could not be a basis for plaintiff's
breach of contract claim), cert denied, 498 U.S. 811, 111
S.Ct. 46, 112 L.Ed.2d 22 (1990); Hedstrom Lumber Co.
v. United States, 7 Cl.Ct. 16, 25-29 (1984). The rationale
behind this rule has been as follows: "[CJontractual
arrangements, including those to which a sovereign
itself is a party, ‘remain subject to subsequent
legislation' by the sovereign.... (C]ontracts should be
construed, if possible, to avoid foreclosing exercise of
sovereign authority." Bowen v. Public Agencies
Opposed to Social Security Entrapment, 477 U.S. 41,
52-58, 106 S.Ct. 2390, 2397, 91 L.Ed.2d 35 (1986)
(citation omitted) (hereafter, "POSSE").
POSSE is also frequently cited for the
unmistakability doctrine, under which "sovereign power
... Will remain intact unless surrendered in
unmistakable terms." Charter FSB v. Office of Thrift
Supervision, 976 F.2d 208, 211 (4th Cir.1992) (quoting
POSSE ), cert. denied, 507 U.S. 1004, 113 S.Ct. 1643, 123
L.Ed.2d 265 (1993). It was based on the
unmistakability doctrine that the United States Court
of Appeals for the Eighth Circuit refused to declare
that ELIHPA unconstitutionally denied similarly
situated plaintiffs due process of law in Parkridge
Investors Ltd. Partnership v. Farmers Home
Administration, 13 F.3d 1192, 1198 (1994).
In support of its unmistakability argument,
defendant argues that because the contemporaneous
HUD regulations, 24 C.F.R. §§ 221.749 and 236.30
(1970), quoted above, expressly reserved to HUD the
right to amend its regulations in the future, HUD did
not “unmistakably” surrender the government's power
to alter plaintiffs' putative prepayment rights. As
defendant shows, those regulations only provided
assurance to mortgage lenders that their contract
LL
6la
rights would be protected in the event of later
regulatory change. It provided no similar assurances to
mortgage borrowers, such as the instant plaintiffs.
With respect to the sovereign acts doctrine, as
plaintiffs maintain, the general rule is that the
sovereign acts defense is inapplicable when the
"sovereign act" in question is one by which the
government.has sought to excuse itself from existing
contractual liabilities. See Freedman v. United States,
162 Ct.Cl. 390, 402, 320 F.2d 359, 366 (1968) ("The
doctrine ... does not relieve the government from
liability where it has specially undertaken to perform
the very act from which it later seeks to be excused"),
and the cases cited therein. See also Everett Plywood
Corp. v. United States, 227 Ct.Cl. 415, 428-29, 651 F.2d
723, 781 (1981) (holding the government liable for
unilaterally terminating a contract for the removal of
timber after determining that continuing performance
would result in severe environmental damage); Sun Oil
Co. v. United States, 215 Ct.Cl. 716, 768, 572 F.2d 786,
817 (1978) (holding that the doctrine does not insulate
the government from liability when the government
has taken actions which “were not actions of public and
general applicability, but were actions directed
principally and primarily at plaintiffs's contractual
right" under an oil exploration lease).
In the present case, as in Sun Oil and Everett
Plywood, the court is confronted with government
actions undertaken specifically to impede or frustrate
the exercise of contractual rights. Moreover, as in Sun
Oil and Everett Plywood, the government cannot be
excused from liability merely by invoking a laudatory
motivation as the basis for breaching a contract. An act
of the government does not qualify as a sovereign act
merely because it was undertaken for the public good;
the act must also be shown to be generally applicable to
62a
the public, contractors and non-contractors alike. See
also Ottinger v. United States, 116 Ct.Cl. 282, 285, 88
F.Supp. 881, 882-83 (1950). Here, there is no dispute
that the prepayment restrictions contained in ELIHPA
and LIHPRHA were enacted specifically to impede
property owners’ exercise of prepayment rights under
contracts entered into by HUD in the Section 221 and
Section 236 programs.!2 On that basis, the sovereign
acts doctrine is inapplicable in the present case.
The other cases upon which defendant relies are
distinguishable from the facts now before the court. In
Atlas, the court held that the legislation and
regulations at issue (concerning the disposal of uranium
mill tailing piles) were enacted for public safety reasons
and not to modify existing contracts with plaintiffs,
despite the added costs which the legislation and
regulations imposed upon them. 895 F.2d at 754. In
Hedstrom, the plaintiffs sued for breach of contract
after Congress passed legislation ordering the
Secretary of Agriculture to terminate their timber
contracts in the Boundary Waters Canoe Area
Wilderness ("B.W.C.A.W."). The court opined that the
government's explicit breach could be excused on the
grounds that the legislation, as a whole, affected "both
commercial and recreational" users of the B.W.C.A.W.,
thus satisfying the "public and general applicability"
requirement. Significantly, however, the court decided
the case on alternative grounds--a taking theory-—since
the legislation called for the payment of "just
compensation" to parties whose timber contracts were
affected by the legislation. Hedstrom, 7 Cl.Ct. at 26.
As for the unmistakability doctrine, plaintiffs point
out that courts have applied it to block the
government's liability only in cases where the
12 See S.Rep. 101-316 at 105-117, reprinted in 1990 U.S.Code
Cong. & Admin. News 5763 at 5867-79.
eat tn
63a
complainant has sought declaratory or injunctive relief
from the government's exercise of its sovereign powers.
The doctrine provides no defense to a claim for breach
of contract damages. Hughes Communications Galaxy,
Inc. v. United States, 998 F.2d 953 (Fed.Cir.1993);
American Satellite Co. v. United States, 998 F.2d 950
(Fed.Cir.1993). Thus, defendant's reliance on Parkridge
to support its unmistakability argument is misplaced.
In Parkridge, the plaintiffs sought relief, on
constitutional grounds, from the implementation of
ELIHPA's prepayment restrictions. Unlike the
plaintiffs in Parkridge, the plaintiffs at bar do not seek
to enjoin enforcement of ELIHPA or LIHPRHA's
prepayment restrictions, but merely seek monetary
compensation for the loss of their substantially
unfettered contractual right to prepay. The
unmistakability doctrine, therefore, has no application
to their case. That result is not changed by the
regulatory language of reservation discussed above,
from 24 C.F.R. §§ 221.749 and 236.30 (1970) ("The
regulations in this subpart ... may be amended by
[HUD] at any time, and from time to time, in whole or
in part....") since that language merely expresses the
truism that the government is always free to change
applicable laws. While the regulations cited by
defendant also provide express assurances to the
primary beneficiaries of HUD mortgage insurance-i.e.,
mortgage lenders-in the event of regulatory
amendments, those rules do not disclaim any potential
contract liability vis-a-vis mortgagors.
3. Lack of authority.
Defendant's final argument with respect to
plaintiffs' contract claim is that even if HUD intended
to promise plaintiffs that they could repay their
mortgages regardless of future legislation restricting
them from doing so, this promise would be
64a
unenforceable for lack of express authority from
Congress. In support of this argument, defendant has
cited Federal Crop Insurance Corp. v. Merrill, 332 U.S.
380, 68 S.Ct. 1, 92 L.Ed. 10 (1947); Office of Personnel
Management v. Richmond, 496 U.S. 414, 110 S.Ct. 2465,
110 L.Ed.2d 387 (1990); and Transohio Sav. Bank v.
Director, Office of Thrift Supervision, 967 F.2d 598
(D.C.Cir.1992). The court has examined each of these
authorities and found them to be inapplicable to the
present case, for the reasons discussed below. Finding
no other persuasive authority to support defendant's
position concerning HUD's lack of contracting
authority, the court concludes it is without merit.
Federal Crop Insurance stands for the proposition
that one who deals with a government agent bears the
burden of determining that the agent is authorized to
bind the government. 332 U.S. at 384, 68 S.Ct. at 3.
The court does not now dispute this principle, but finds
it inapposite to the present case because there is no
information in the record suggesting that the HUD
agents who entered agreements concerning the 20-year
prepayment rule were not authorized to do so. As
discussed earlier, contemporaneous HUD regulations at
24 C.F.R. §§ 221.749 and 236.30 (1970) expressly
permitted a 20-year prepayment rule as described in
the riders to plaintiffs' deed of trust notes. Moreover,
while it does not appear that HUD was ever required
by statute to permit mortgagors to prepay after 20
years, the legislation enacting the Section 221 and
Section 236 programs nonetheless gave HUD broad
discretion "to make such rules and regulations, to enter
into such agreements, and to adopt such procedures as
[it] may deem necessary or desirable to carry out the
provisions of [Section 236]." 82 Stat. at 499-500; see
also 68 Stat. 600-01 (concerning Section 221). In giving
HUD such discretion, therefore, Congress authorized
the 20-year prepayment rule at issue in this case.
65a
Richmond, on the other hand, conveys the general
rule that a person claiming entitlement to a government
benefit cannot use erroneous or unauthorized
information given by a government employee to estop
the government from disputing the entitlement. 496
U.S. at 430-34, 110 S.Ct. at 2474-76. Richmond is
inapplicable simply because plaintiffs are not relying on
an estoppel theory to advance their cause.
The third case which defendant cites, Transohio, is a
nonbinding precedent which states that "An agency ...
cannot contract away Congress's sovereign power to
regulate unless Congress has clearly and unmistakably
empowered the agency to do so." 967 F.2d at 622. To
the extent that the D.C. Circuit meant that an agency
could not, by regulation, preempt the effect of future
legislation, this court does not disagree; the principle is
essentially the same one enunciated by the Supreme
Court in POSSE. As with POSSE and Parkridge,
however, the plaintiffs in Transohio were seeking
injunctive relief from the application of statutes which
frustrated an agreement into which plaintiffs had
previously entered with a government agency. As
discussed above, the plaintiffs at bar seek breach of
contract damages, not injunctive relief, and on that
basis Transohio is inapplicable.
Although the court has found a contractual breach,
the factual record now before the court contains no
evidence on which the court could assess damages. For
that reason, trial is necessary with regard to the
contract claim for the purpose of determining damages.
C. Taking claim.
The Takings Clause of the Fifth Amendment
guarantees that private property shall not be taken for
public use without just compensation. This provision
was “designed to bar [the] Government from forcing
some people alone to bear the public burdens which, in
66a
all fairness and justice, should be borne by the public as
a whole." Armstrong v. United States, 364 U.S. 40, 49,
80 S.Ct. 1563, 1569, 4 L.Ed.2d 1554 (1960). In support of
their taking claim, plaintiffs argue that they have
suffered either a per se taking of their property or,
alternatively, a regulatory taking without just
compensation. Both theories are based on the fact that
ELIHPA and later LIHPRHA took away plaintiffs’
previously unfettered right to prepay their mortgages
and withdraw their properties from the federal housing
programs.
1. Prepayment as a property. right.
Before proceeding with a detailed analysis of
plaintiffs' alternative taking claims--and assuming that
plaintiffs prove their cause is ripe for adjudication at
trial--the court must next determine whether the
prepayment restrictions which aggrieve plaintiffs affect
a "property right." Since the court has already found
that plaintiffs' right to prepay their mortgages was a
contractual right, and since that contractual right
directly concerned plaintiffs' interests in their property,
it is logical also to find that when the government
imposed restrictions on plaintiffs’ ability to prepay their —
mortgages and to liberate their properties from federal
regulations connected to their mortgages, those
restrictions affected a "property right." "In the bundle
of rights we call property, one of the most valued is the
right to sole and exclusive possession-—the right to
exclude strangers, or for that matter friends, but
especially the Government." Hendler v. United States,
952 F.2d 1364, 1374 (Fed.Cir.1991) (emphasis in
original) (citations omitted).
Hendler makes clear that the property right of
"exclusive possession" can be implicated both in the
context of a per se taking and in the context of a
regulatory taking. Jd. at 1374-75. In the present case,
ied
— ee ee ee
67a
plaintiffs' exclusive possessory interest in their
property has been implicated by the continuing
presence of low-income tenants, and that is the basis of
plaintiffs' per se taking claim.
Again assuming that plaintiffs establish ripeness at
trial, the prepayment restrictions also appear to
interfere with plaintiffs' exclusive possessory rights in a
regulatory taking sense. If, as applied, the prepayment
restrictions compel any plaintiff to extend the
regulatory agreement beyond the first 20 years of the
mortgage (i.e, longer than plaintiffs could have
expected under the terms of their agreement with the
government), then that plaintiff has been denied
exclusive possession of his property because HUD has
retained a substantial, controlling interest in the
property, by virtue of the regulatory agreement. As
earlier, the regulatory agreement severely
limits the uses to which a plaintiff may put his property.
The court thus finds that plaintiffs have identified a
property right sufficient for analysis in the regulatory
taking context; as discussed later, it remains to be seen
whether the government's regulatory imposition on
plaintiffs’ property is of the type which, under
applicable case law, requires compensation.
2. Per se taking.
In characterizing their injury as a per se taking,
plaintiffs argue that the continued tenancy by
government-approved persons, on
government-approved terms, constitutes the kind of
"permanent, physical occupation" which is tantamount
to a physical, or per se, taking of their property. Loretto
v. Teleprompter Manhattan CATV Corp., 458 U.S. 419,
434-35, 102 S.Ct. 3164, 3175, 73 L.Ed.2d 868 (1982). Ifa
plaintiff can establish that government action is a per se
taking, there is no need to balance the public benefit of
the government action against the private burden
68a
borne by the plaintiff, since a per se taking interferes
with the owner's fundamental possessory rights with
respect to the property. Loretto, 458 U.S. at 434-35, 102
S.Ct. at 3175 (a per se taking "occurs without regard to
whether the action achieves an important public benefit
or has only minimal economic impact on the owner");
Hendler, 952 F.2d at 1374.
In light of the authorities cited by plaintiffs,
however, their contention that the continued presence
of low-income tenants on their properties constitutes a
“permanent, physical occupation" is unpersuasive. In
both Loretto and Hendler the alleged "physical
occupation" resulted directly from a physical invasion of
the plaintiffs’ property, either at the behest of the
government (in Loretto) or by government officials (in
Hendler). In both cases, property owners were
prohibited from interfering with the invasion and from
disturbing equipment which the invaders had left
behind on the plaintiffs' property. In both cases, the
court found a resulting per se taking for which the
Constitution mandated just compensation,
notwithstanding the degree of actual damage.
The facts in the instant case are sufficiently
distinguishable from those in Loretto and Hendler, such
that the court must view those cases as inapposite. In
the present case plaintiffs have not demonstrated any
physical invasion analogous to the undisputed invasions
which occurred in Loretto and Hendler. Instead,
13 The Supreme Court has made clear that, in the per se taking
context, it is irrelevant that the act of “taking” at issue be done by
the government "or instead by a party authorized by the
(government)]." Loretto, 458 U.S. at 432, n. 9, 102 S.Ct. at 3174, n. 9;
see aiso Kaiser Aetna v. United States, 444 U.S. 164, 179-80, 100
S.Ct. 383, 392- 98, 62 L.Ed.2d 332 (1979); Nollan v. California
Coastal Comm'n, 483 U.S. 825, 831-32, 107 S.Ct. 3141, 3145, 97
L.Ed.2d 677 (1987); Lucas v. South Carolina Coastal Council, 505
U.S. 1008, 1015-16, 112 S.Ct. 2886, 2898, 120 L.Ed.2d 798 (1992).
69a
plaintiffs have complained only of the "continued
presence" of low-income tenants past the date on which
plaintiffs, exercising their prepayment rights, ought to
have been able to evict low-income tenants, either by
increasing rents above HUD-mandated ceilings or by
converting their apartments to some other more
lucrative use.
Plaintiffs' taking th: ory is substantively similar to
the one espoused by the appellants in Hall v. City of
Santa Barbara, 833 F.2d 1270 (9th Cir.1987), cert.
denied, 485 U.S. 940, 108 S.Ct. 1120, 99 L.Ed.2d 281
(1988). In that case the appellants, owners of mobile
home parks, claimed that a local ordinance imposing
rent controls on mobile home pads transferred a
perpetual, possessory interest in the property from
landlord to tenant while allowing only below-market
rents. 833 F.2d at 1276. The offending ordinance
required the owners of the parks to offer tenants leases
of unlimited duration, which could be terminated at will
by the tenant but only for cause by the landlord. Jd. at
1273. In practice, the ordinance allowed a tenant to
transfer his right to use the pad at the regulated rental
rates to a future tenant when selling the mobile home
as installed on the pad, a practice which the landlord
could do little to prevent. Jd. at 1276-77. The Ninth
Circuit concluded that the ordinance authorized a
permanent, physical occupation of the landlord's
property because it deprived the landlord of any
meaningful power to exclude others and because it
prohibited the landlord from making any
“nonpossessory use of the property." Jd. at 1277.
Consequently the court held the ordinance to be an
70a
unconstitutional taking without just compensation, in
violation of the Fourteenth Amendment.!4
The Supreme Court explicitly overruled Hall in a
later case, Yee v. City of Escondido, 503 U.S. 519, 112
S.Ct. 1522, 118 L.Ed.2d 153 (1992). In Yee, the Court
was faced with a city rent control ordinance which was
similar to the one at issue in Hall. The petitioners in
Yee argued that the rent control ordinance--viewed
against the backdrop of California's Mobilehome
Residency Law, which limited the ability of the owner
of a mobile home pad to interfere with the sale of the
mobile home in place upon the pad--effected a
permanent physical occupation of their property. 503
U.S. at 521-24, 112 S.Ct. at 1526. The combined effect of
the two laws, the petitioners argued, was to require the
mobile home park owners to rent their pads to
strangers--in other words, a _ state-authorized
deprivation of the petitioners' "right to exclude," which
is protected by the Fifth and Fourteenth
Amendments.'5 Kaiser Aetna v. United States, 444 U.S.
164, 176, 100 S.Ct. 383, 391, 62 L.Ed.2d 332 (1979). The
Court held that the ordinance was not a taking, finding
that neither the ordinance nor the Mobilehome
Residency Law compelled petitioners to rent their
property. In fact, the court noted, the Mobilehome
Residency Law allowed owners to evict their tenants
with either six or 12 months notice. Yee, 508 U.S. at
526-28, 112 S.Ct. at 1528.
Notwithstanding the Court's finding that mobile
home park owners had not suffered a permanent, -
14 The Fifth Amendment's Takings Clause applies to the states
via the Fourteenth Amendment. Chicago, B. & Q. R. Co. v.
Chicago, 166 U.S. 226, 17 S.Ct. 581, 41 L.Ed. 979 (1897).
15 Only the local ordinance, and not California's Mobilehome
Residency Law, was challenged in Yee, 505 U.S. at 531 n. 1, 112
S.Ct. at 1530, n. 1.
Tla
physical occupation in Yee, plaintiffs in the case at bar
now call the court's attention to a dictum in Justice
O'Connor's majority opinion in which the Court
suggested that "[a] different case would be presented
were the statute, on its face or applied, to compel a
landowner over objection to rent his property or to
refrain in perpetuity from terminating a tenancy." Yee,
503 U.S. at 528, 112 S.Ct. at 1529 (citations omitted).
Plaintiffs argue that their situation presents just such a
case
Plaintiffs have also drawn an analogy between the
dictum in Yee and Seawall Associates v. City of New
York, 74 N.Y.2d 92, 544 N.Y.S.2d 542, 542 N.E.2d 1059
(1989), cert. denied, 498 U.S. 976, 110 S.Ct. 500, 107
L.Ed.2d 503 (1989). In Seawall, the New York Court of
Appeals examined a New York City ordinance enacted
to prevent the destruction, conversion or neglect of
single-room occupancy buildings ("S.R.O.'s"), and the
court found the ordinance to be a per se taking.
Intended as a measure to prevent homelessness, the
New York City ordinance placed a moratorium on the
"conversion, alteration or demolition" of S.R.O.
buildings. The ordinance further required owners to
‘rehabilitate and make habitable" every S.R.O. unit and
to lease each unit to a bona fide tenant (the court
referred to the latter requirement as a "rent-up"
obligation). Stiff penalties were to be assessed in the
event that an owner illegally demolished an S.R.O.
building, converted it to non-S.R.O. use, or allowed an
individual unit in an S.R.O. building to remain vacant
for more than 80 days. 74 N.Y.2d at 100-01, 544
N.Y.S.2d at 544, 542 N.E.2d at 1061. Owners could
escape these penalties only by paying the New York
City housing commissioner a fee which represented the
cost of replacing the S.R.O. units lost by the conversion
or demolition; the fee could be reduced somewhat, at
the commissioner's discretion, upon a showing by the
72a
owner that preservation of an S.R.O. unit could not be
achieved with a reasonable rate of return to the owner.
74 N.Y.2d at 101, 544 N.Y.S.2d at 544-45, 542 N.E.2d at
1061-62.
The New York Court of Appeals agreed with
Seawall Associates that the ordinance's requirements
that they rehabilitate and "rent-up" their buildings and
not convert them to more profitable use constituted a
per se taking. As the court observed:
(The ordinance] requires the owners to rent
their rooms or be subject to severe penalties; it
compels them to admit persons as tenants with
all of the possessory and other rights that that
status entails; it compels them to surrender the
most basic attributes of private property, the
rights of possession and exclusion.
Seawall, 74 N.Y.2d at 102, 544 N.Y.S.2d at 546, 542
N.E.2d at 1063, citing Loretto, 458 U.S. at 435, 102 S.Ct.
at 3175-76; Kaiser Aetna, 444 U.S. at 179-80, 100 S.Ct.
at 392-93. Plaintiffs in the present action analogize
their cause to the plight facing the plaintiffs in Seawall,
arguing that because ELIHPA and LIHPRHA make it
impossible for them to prepay their mortgages and
escape their regulatory agreements without HUD
approval, they are forced to maintain their properties
as low-income housing and, thus, forced "to rent their
properties to strangers." Seawall, 74 N.Y.2d at 105, 544
N.Y.S.2d at 547, 542 N.E.2d at 1064.
Precedents of the New York Court of Appeals, of
course, are not binding on the Court of Federal Claims.
At the same time, however, this court cannot ignore the
New York court's vast experience with landlord-tenant
law. Accordingly, the court finds instructive the careful
distinctions drawn in the court's opinion between the
Seawall case and those cases in which either the New
York Court of Appeals or the Supreme Court has
73a
upheld--against challenge on takings grounds--"the
government's power to adjust landlord-tenant
relationships." Jd.
The Seawall court observed that the typical rent
control and landlord- tenant regulations which it and
the Supreme Court had upheld "merely involved
restrictions imposed on existing tenancies where the
landlords had voluntarily put their properties to use for
residential housing. Unlike [the New York City
ordinance] however, those regulations did not force
owners ... to subject their properties to a use which
they neither planned nor desired." Seawall, 74 N.Y.2d
at 105, 544 N.Y.S.2d at 547-48, 542 N.E.2d at 1064-65
(emphasis added) For example, the court noted that in
Loab Estates, Inc. v. Druhe, 300 N.Y. 176, 179, 90
N.E.2d 25 (1949), the ordinance in question prohibited
the eviction of tenants unless provisions had been made
for their relocation. And in Bowles v. Willingham, 321
U.S. 503, 517, 64 S.Ct. 641, 648, 88 L.Ed. 892 (1944), the
Supreme Court upheld a federal rent control statute
against a taking challenge because the statute did not
force an owner to offer his or her property as rental
accommodations. The Seawall court observed, "By
sharp contrast to the statutes in Loab Estates and
Bowles, (the S.R.O. ordinance] compell[ed] owners to be
residential landlords [and required them to] rehabilitate
and offer their properties for rent, as S.R.O. units, to
persons with whom they have no_ evzisting
landlord-tenant relationship." 74 N.Y.2d at 106, 544
N.Y.S.2d at 548, 542 N.E.2d at 1065 (emphasis added).
The essential distinction drawn by the Seawall court
between the regulation of existing landlord-tenant
relationships and a requirement, such as the one
imposed by the New York City ordinance, that a
landlord rehabilitate and "rent-up" vacant property
against his will, is applicable to plaintiffs' claim for a per
74a
se taking in the case at bar. The prepayment
restrictions under ELIHPA and LIHPRHA have the
effect of providing existing tenants with added
protections against losing their homes than they
presumably had when owners had an unfettered right
to prepay their mortgages. Furthermore, unlike the
"rent-up" obligations imposed by the local ordinance at
issue in Seawall, the prepayment restrictions imposed
by ELIHPA and LIHPRHA cannot fairly be
characterized as forcing landlords to accept unwelcome
tenants on previously vacant properties. Plaintiffs in
the present case entered the landlord business
voluntarily, more than 20 years ago, and low-income
tenants--the "strangers" whose presence now offends
their sense of justice-have been occupying their
properties since they were built. Consequently, the
court must find ELIHPA and LIHPRHA to be more
analogous to the rent control ordinances upheld in such
cases as Yee than to the S.R.O. ordinance struck down
by Seawall.
It should also be noted that the plaintiffs in the
Seawall case were situated somewhat differently from
the plaintiffs in the present case. The Seawall plaintiffs
were real estate developers who had purchased S.R.O.
buildings with the specific intent of demolishing them
or converting them to higher uses. Many of the )
plaintiffs had apparently acquired their properties |
before 1985, when the first version of the demolition
moratorium was imposed. Before 1982, New York City
actually granted tax abatements to encowrage the
demolition or redevelopment of S.R.O.'s, which were
then considered substandard housing. The city
underwent a change of heart, however, when
confronted with a rising homeless population during the
early-to-mid 1980's; the city council attributed the
rising homelessness at least in part to the loss of S.R.O.
units. 74 N.Y.2d at 99-100, 544 N.Y.S.2d at 544, 542
75a
N.E.2d at 1061; see also 74 N.Y.2d at 119-20, 544
N.Y.S.2d at 556-57, 542 N.E.2d at 1073-74 (Bellacosa, J.,
dissenting). Thus, unlike the plaintiffs in the case at
bar, the Seawall plaintiffs did not purchase their
properties primarily to earn rents from S.R.O. tenants,
but rather to see those tenancies through to
termination so that the units could demolished or
converted to non-S.R.O. purposes. As the New York
court explained, above, the city ordinance forced S.R.O.
owners into the role of landlord on a permanent basis.
The prepayment restrictions of ELIHPA and
LIHPRHA, however, do no such thing, since the
plaintiffs at bar entered the landlord business
deliberately and long ago.
The court finds, therefore, that the case at bar is not
the type to which the Supreme Court referred in its Yee
dictum because the prepayment restrictions do not, on
their face or as applied, "compel a landowner over
objection to rent his property or to refrain in perpetuity
from terminating a tenancy." Yee, 503 U.S. at 531, 112
S.Ct. at 1529. As Yee made clear, a landlord-tenant
regulation may transfer some degree of interest from
the landlord to the tenant without such a transfer rising
to the level of a "permanent, physical occupation," just
as it does in the rent control context. Since the effect of
the prepayment restrictions in the present case is
merely to enhance an existing tenant's possessory
interest, the court must conclude that the prepayment
restrictions do not rise to the level of authorizing a
“permanent, physical occupation" within the meaning of
Seawall, Loretto or Hendler. Consequently, plaintiffs
have failed to show that they have suffered a per se
taking within the meaning of the Fifth Amendment.
3. Regulatory taking.
Plaintiffs argue, in the alternative, that even if the
prepayment restrictions do not amount to a per se
76a
taking, then the court should view them as a regulatory
taking. A taking by regulation (or, as appropriate,
legislation) may occur if the government, by placing
burdens on property owners, goes "too far" in
interfering with rights incident to property ownership.
Pennsylvania Coal Co. v. Mahon, 260 U.S. 398, 415, 48
S.Ct. 158, 160, 67 L.Ed. 322 (1922).
Plaintiffs have correctly identified the basic
elements which must be considered when determining
whether a regulation goes "too far": (1) the character of
the governmental action, (2) the economic impact of the
government's action, and (3) the extent to which the
government's action interferes with plaintiffs’ distinct
investment-backed expectations. Penn Central
Transp. Co. v. New York City, 4388 U.S. 104, 124, 98
S.Ct. 2646, 2659, 57 L.Ed.2d 631 (1978).
The courts have provided ample guidance for
applying the three Penn Central factors in other cases.
The first factor--the character of the governmental
action—-is a requirement that the alleged regulatory
imposition be one which seriously interferes with a
property right, but which is not otherwise authorized
by constitutional or common law. Accordingly, actions
which can be characterized as an exercise of "police
power" have been distinguished from takings under the
Fifth Amendment, not because such actions do not
restrict the use of property but rather because its
unrestricted use would be injurious to the public.
Allied-General Nuclear Services v. United States, 839
F.2d 1572, 1576 (Fed.Cir.1988) (citation omitted), cert.
denied, 488 U.S. 819, 109 S.Ct. 61, 102 L.Ed.2d 39
(1988); see also Penn Central, 438 U.S. at 125, 98 S.Ct.
at 2659-60 and B & F Trawilers, Inc. v. United States, 27
Fed.Cl. 299, 304-05 (1992) (citations omitted). Similarly,
the Fifth Amendment has been held not to limit the
exercise of the government's power to abate a nuisance.
icici
77a
Lucas v. South Carolina Coastal Council, 505 U.S.
1003, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992); see also
Loveladies Harbor, Inc. v. United States, 28 F.3d 1171,
1178-79 (Fed.Cir.1994). And a local government's
power to enact zoning regulations has usually withstood
a Takings Clause challenge, even when such regulations
prohibit the most profitable use of private property.
Euclid v. Ambler Realty Co., 272 U.S. 365, 47 S.Ct. 114,
71 L.Ed. 303 (1926) (upholding a zoning ordinance
barring industrial use); Gorieb v. Fox, 274 U.S. 603,
608, 47 S.Ct. 675, 677, 71 L.Ed. 1228 (1927) (upholding a
requirement that portions of land parcels be left
unbuilt); Welch v. Swasey, 214 U.S. 91, 29 S.Ct. 567, 53
L.Ed. 923 (1909) (upholding height restrictions); see
also Florida Rock Indus. Inc. v. United States, 791 F.2d
893, 901 (Fed.Cir.1986) ("The regulation may allowably
have some adverse effect on the market value, as of
course is almost inevitable if the most profitable use is
prohibited."), cert. denied, 479 U.S. 1058, 107 S.Ct. 926,
93 L.Ed.2d 978 (1987) (citations omitted) (hereafter
"Florida Rock I").
The second Penn Central factor, the economic
impact of the regulation on the claimant, has been
restated as "a threshold requirement that the plaintiff
Show a serious financial loss from the regulatory
imposition," to the extent that the plaintiff has been
denied "economically viable use" of his or her property.
Loveladies Harbor, 28 F.3d at 1177; see also Lucas, 505
USS. at 1015-16, 112 S.Ct. at 2898; Agins v. Tiburon, 447
U.S. 255, 260, 100 S.Ct. 2138, 2141, 65 L.Ed2d 106
(1980); Nollan, 483 U.S. at 834, 107 S.Ct. at 3147. The
Federal Circuit, whose precedents are binding on this
court, has also rejected the view that the "loss of
economically viable use" criterion requires a plaintiff, in
a regulatory taking case, to show that he or she has
suffered a total loss of economic value in the property at
issue. Loveladies Harbor, Inc. v. United States, 28 F.3d
78a
at 1180-81; see also Florida Rock Indus. Inc. v. United
States, 18 F.3d 1560, 1567-71 (Fed.Cir.1994), cert.
denied, 513 U.S. 1109, 115 S.Ct. 898, 180 L.Ed.2d 783
(1995) (hereafter "Florida Rock II"). In this regard, the
Federal Circuit has held that it is necessary and
relevant for the court to consider whether the
government, in imposing a regulation on a property
owner, "acted fairly and reasonably, so that private
parties can pursue their interests." Florida Rock II, 18
F.3d at 1571. The Federal Circuit further instructed:
[W]Jhen the Government acts as_ the
intermediary between private interests to
provide a mutually beneficial environment from
which all benefit and in which all can thrive, the
shared diminution of free choice that results may )
not rise to the level of constitutionally required
compensation.
In addition, then, to a demonstration of loss
of economic use to the property owner as a result
of the regulatory imposition ... the trial court
must consider: are there direct compensating
benefits accruing to the property, and others
similarly situated, flowing from the regulatory
environment? Or are benefits, if any, general
and widely shared through the community and
the society, while the costs are focused on a few?
Are alternative permitted activities
economically realistic in light of the setting and
circumstances, and are they realistically
available? In short, has the Government acted in
a responsible way, limiting the constraints on
property ownership to those necessary to
achieve the public purpose, and not allocating to
some number of individuals, less than all, a
burden that should be borne by all?
Florida Rock II, 18 F.3d at 1571.
79a —
With regard to the third factor—the extent to which
the regulation interferes with distinct
investment-backed expectations, the Supreme Court
has concluded that, to enjoy the protection of the Fifth
Amendment, investment- backed expectations must be
reasonable. Ruckelshaus v. Monsanto Co., 467 U.S.
986, 1005, 104 S.Ct. 2862, 2874, 81 L.Ed.2d 815 (1984).
As applied in Monsanto, the reasonableness limitation
meant that a plaintiff's claim may not be based on an
expectation that a government agency will, in its
particular case, fail to comply with applicable statutes
and regulations. See-also Golden Pacific Bancorp v.
United States, 15 F.3d 1066, 1074 (Fed.Cir.1994);
American Continental Corp. v. United States, 22 Cl.Ct.
692, 696 (1991).
Although both parties have invoked the appropriate
Penn Central test for a regulatory taking, neither
plaintiffs nor defendant has briefed the court on the
facts or the reasoning upon which Justice Brennan
based his majority opinion; in applying the Penn
Central test to the controversy now before the court,
however, it is helpful to revisit that opinion in detail.
In Penn Central, the court was faced with a
challenge to the New York City Landmarks
Preservation Law, under which Grand Central
Terminal in midtown Manhattan was designated an
historic landmark worthy of preservation for its historic
and cultural value. As the court observed:
The New York City law is typical of many
urban landmark laws in that its primary method
of achieving its goals is not by acquisitions of
historic properties, but rather by involving
public entities in land-use decisions affecting
these properties and providing services,
standards, controls, and incentives that will
encourage preservation by private owners and
80a
users. While the law does place special
restrictions on landmark properties as a
necessary feature to the attainment of its larger
objectives, the major theme of the law is to
ensure the owners of any such properties both a
"reasonable return" on their investments and
maximum latitude to use their parcels for
purposes not inconsistent with the preservation
goals.
438 U.S. at 109-10, 98 S.Ct. at 2652 (footnotes omitted).
The owners of Grand Central Terminal challenged the
preservation law under the Takings Clause after
municipal authorities refused to grant them a permit to
construct a 53-story skyscraper in the space above the
station. Jd. at 117- 19, 98 S.Ct. at 2655-57.
The court rejected the appellants’ basic theory,
finding that "the submission that appellants may
establish a ‘taking’ simply by showing that they have
been denied the ability to exploit a property interest
that they heretofore had believed was available for
development is quite simply untenable." Jd. at 130, 98
S.Ct. at 2662. Instead, the court used the tripartite
analysis discussed above.
With regard to the character of the regulation--the
first Penn Central factor-the court disagreed with
appellant's efforts to distinguish the landmarks
preservation law from (among other things) zoning
ordinances. Appellants argued that unlike zoning .
ordinances, which affected property owners within
whole geographic areas, the landmark preservation law
targeted selected buildings for special treatment. The
court found the distinction unpersuasive. As the court
reasoned, "Legislation designed to promote the general
welfare commonly burdens some more than others... .
[Z)oning laws often affect some property owners more
severely than others but have not been held to be
8la
invalid on that account. For example, the property
owner in Euclid who wished to use its property for
industrial purposes was affected far more severely by
the ordinance than its neighbors who wished to use
their land for residences." Jd. at 123-34, 98 S.Ct. at
2664.
In the present case, the record before the court with
respect to the character of the government-action does
not weigh sufficiently in plaintiffs' favor to sustain a
motion for summary judgment. It is undisputed, of
course, that the prepayment restrictions imposed by
ELIHPA and LIHPRHA substantially interfered with
plaintiffs' ability to exercise whatever prepayment
rights they might have had under their original deed of
trust notes. And both parties also agree that the
critical advantage that plaintiffs could obtain by
prepaying their mortgages was that they would be able
to charge market-rate rents or convert their properties
to even more profitable uses-in other words,
prepayment would allow plaintiffs to terminate their
regulatory agreements and use their properties for
purposes other than low-income housing. Furthermore,
it is undisputed that Congress's avowed intention in
restricting prepayment rights was to preserve existing
low-income housing for its original purpose. As such,
however, the prepayment restrictions appear to bear a
striking resemblance to the New York City landmarks
preservation law at issue in Penn Central. Like the
landmarks preservation law, the prepayment
restrictions in the present case are a regulatory
imposition which encourage the preservation of the
existing use of plaintiffs’ property as low-income
housing. Of course, it is not within the province of the
court to weigh the relative societal merits between
preservation of historic landmarks and preservation of
the low-income housing market; that is the prerogative
of the legislature. But to the extent that plaintiffs
82a
might distinguish landmark preservation from housing
preservation on the grounds that the latter transfers
some benefits to tenants at the expense of landlords--on
top of the general social benefit of providing for
adequate housing--such reasoning, as discussed above,
was rejected by the Supreme Court as a ground for
finding a taking in Yee.!6 Because of these factual
consistencies between this case and Penn Central and
Yee, therefore, the court is not yet convinced that the
government, by enacting the prepayment restrictions,
has exceeded the limits of what is permissible under the
Fifth Amendment without just compensation.
Inasmuch as plaintiffs' case with regard to the first
Penn Central criterion is weak at this stage,
defendant's theory that the prepayment restrictions
represent an exercise of the government's "police
power" is even more attenuated. Defendant argues that
Congress enacted the prepayment restrictions in order
to avert a national crisis in the supply of low-income
housing, and, on that ground, the government is not
liable for compensation under the Takings Clause even
if the restrictions are found to abrogate a "property
-right."
As discussed above, courts have long held
government actions to be immune from a Takings
Clause challenge when such actions are undertaken to
protect the public health, safety or morals (or,
alternatively, the public welfare). Accordingly, courts
have accepted the police power defense for actions
which resulted in the seizure or destruction of private
property without compensation when such actions were
undertaken, for example, to prevent the manufacture or
16 The court notes that in its Yee decision, the Supreme Court
discussed, but did not decide, whether the Escondido rent control
ordinance was a regulatory taking. 503 U.S. at 532-39, 112 S.Ct. at
1531-34.
83a
sale of alcoholic beverages (Mugler v. Kansas, 123 U.S.
623, 666, 8 S.Ct. 278, 299, 31 L.Ed. 205 (1887)); to
prevent the spread of disease (Miller v. Schoene, 276
U.S. 272, 279-80, 48 S.Ct. 246, 247-48, 72 L.Ed. 568
(1928)); to prevent the spread of a conflagration (B & F
Trawlers, 27 Fed.Cl. at 304-05), or to prevent nuclear
proliferation (Allied-General, 839 F.2d at 1576). The
police power defense has also succeeded where the
government has prohibited a particular use of private
property which would be injurious to the public (but not
seized or destroyed property) as in Jarboe-Lackey
Feedlots, Inc. v. United States, 7 Cl.Ct. 329, 338-39
(1985).
The government's reliance on the police power
defense as justifying the action at issue in this case,
however, is misplaced. By comparison with the
precedents, the mere declaration by Congress or a
government agency that a "housing crisis" exists would
not appear to establish a prima facie case that the
public's health, safety, morals or welfare are
endangered to a point which would justify an
abrogation of any or all of plaintiffs' property rights. To
the contrary, a housing shortage appears to be precisely
the kind of societal problem which calls for an inquiry
into whether the restrictions on private property
enacted to combat the problem "force some people alone
to bear public burdens which, in all fairness and justice,
should be borne by the public as a whole." Armstrong,
364 U.S. at 49, 80 S.Ct. at 1569. It calls, in other words,
for analysis as a taking and not as an exercise of police
power.
With regard to the second Penn Central factor, i.e.,
the economic impact of the regulatory imposition, the
Supreme Court observed that the designation of Grand
Central Terminal as a historic landmark "not only
permits but contemplates that appellants may continue
84a
to use the property precisely as it has been used for the
past 65 years.... So the law does not interfere with
what must be regarded as Penn Central's primary
expectation concerning the use of the parcel." 438 U.S.
at 136, 98 S.Ct. at 2665. The Court further found that
the continued use as a railroad terminal permitted Penn
Central to earn a " ‘reasonable return’ on its
investment," even though the landmark designation
prohibited the most profitable use of the station. Id.
The essential part of the "most profitable use" thwarted
by regulation was appellant's full exploitation of its air
rights above the station. The Court observed, however,
that in addition to the landmark development
restrictions, New York City had also implemented a
program whereby a developer such as Penn Central
could sell or transfer its lost development rights to
other properties in the same neighborhood. The Court
found that such transfer rights lessened the economic
impact of the restrictions inherent in the landmark
designation:
While [transfer] rights may well not have
constituted "just compensation" if a "taking" had
occurred, the rights nevertheless undoubtedly
mitigate whatever financial burdens the law has
imposed on applicants and, for that reason, are to
be taken into account in considering the impact
of regulation.
438 U.S. at 137, 98 S.Ct. at 2666 (citation omitted).
On the other hand, the Federal Circuit has clarified that
"the mere presence" of financial benefits in a regulatory
scheme which is otherwise alleged to constitute a
taking does not necessarily dispose of the issue of
whether a taking has occurred. Whitney Benefits, Inc.
v. United States, 752 F.2d 1554, 1557 (Fed.Cir.1985),
cert. denied, 502 U.S. 952, 112 S.Ct. 406, 116 L.Ed.2d
354 (1991) (holding that the inclusion of a formula for
85a
determining just compensation in legislation restricting
surface mining rights does not preclude court from
finding a legislative taking).
Like the appellants in Penn Central, who showed
that the denial of a permit to build a 53-story tower
atop their train station cost them literally millions of
dollars in potential rents, 438 U.S. at 116, 98 S.Ct. at
2655, plaintiffs in the present case argue that the
economic impact of the prepayment restrictions can be
measured in the millions of dollars, since the
restrictions prevent plaintiffs from converting their
properties to more profitable uses.17
Again like the appellants in Penn Central, the
plaintiffs at bar are able to continue to use their
property for the same business purposes they have
always used it-their "primary expectation," in the
words of Justice Brennan. Furthermore, as discussed
earlier, LIHPRHA authorizes HUD to award financial
incentives to property owners who agree to forbear
prepayment or who seek prepayment but have their
applications denied. In the terms of Penn Central, such
17 Although the Penn Central appellants ultimately lost their
case, "economic impact" evidence can be critical. In Lucas, for
example, the petitioner had spent $975,000 to purchase two
undeveloped parcels of oceanfront land, intending to construct
homes on each parcel. His plans were consistent with the zoning
ordinances then in effect. But in 1988, before Mr. Lucas could
begin construction, the state passed legislation prohibiting new
construction in an area which included both of Mr. Lucas's parcels
of land. 505 U.S. at 1008-09, 112 S.Ct. at 2889-90.
Similarly, the Federal Circuit in Loveladies found that a
corporation had been denied economically viable use of a 12.5 acre
parcel of land when the Army Corps of Engineers refused to grant
a landfill permit pursuant to federal wetlands regulations. The
corporation's proposed development would have been permitted
under the laws in place at the time the project was initiated.
Loveladies, 28 F.3d at 1174. As a result of the permit denial, the
value of the parcel was reduced from $2,658,000 to $12,500--a
reduction of more than 99 percent. Jd. at 1174-75.
86a
incentives may mitigate the harsh economic impact of
the prepayment restrictions, even though they would
not necessarily be adequate as "just compensation" in
the event of a taking.
Despite the similarities between Penn Central and
the present case, the record now before the court is
inadequate for the court to fulfill its fact-finding
obligations with respect to the “economic impact"
criterion. As discussed above, the Federal Circuit
requires this court to base its conclusions regarding
economic impact on a comprehensive factual inquiry
which would include consideration of (1) whether the
government acted "fairly and _ reasonably" in
implementing the regulation affecting property rights;
(2) whether the regulatory regime also provides "direct
compensating benefits" and whether those benefits
accrue mainly to the property or, instead, to the general
public; and (3) whether there are “alternative
permitted activities" available to plaintiffs in lieu of
prepayment and whether those alternative activities
are "economically realistic." Florida Rock II, 18 F.3d at
1571.
As it stands, the record of this case contains no
information with which the court could determine
whether the government has acted "fairly and
reasonably" in imposing the prepayment restrictions on
the plaintiffs at bar. With respect to whether ELIHPA
or LIHPRHA provides “direct compensating benefits"
which might mitigate the loss of any putative property
rights or permits "economically realistic" alternative
activities, it would be necessary to take into
consideration the several financial incentives which
LIHPRHA authorizes HUD to offer owners who agree
to extend the affordability restrictions on their
properties. The record before the court, however,
contains no information by which the court could
87a
evaluate the economic effect of the availability of
LIHPRHA incentives to the plaintiffs in this case. The
court believes that the factual record needed to dispose
of this issue can be fully developed at trial.
As for the third and final Penn Central factor, the
degree to which the regulatory imposition interferes
with distinct and reasonable investment-backed
expectations, defendant argues that plaintiffs’
expectations, under the _ circumstances, were
"unreasonable," applying the ruling made by the
Supreme Court in Monsanto, 467 U.S. at 1005, 104 S.Ct.
at 2874. Defendant has emphasized that plaintiffs
operate in a highly regulated field, and, therefore, they
should have expected that the government might
change its mind about allowing plaintiffs to exercise the
rights set forth in their deed of trust notes. The Eighth
Circuit made the same suggestion in Parkridge, the
case which challenged the constitutionality of
ELIHPA's prepayment restrictions, finding:
[I]t was foreseeable that the government
might impair the partnership's contractual
options in order to prevent the programs's
purposes from being foiled. Therefore, we
cannot agree that Parkridge's expectation of a
continued, unrestricted right to prepay was
"reasonable."
13 F.3d at 1199. This court cannot wholeheartedly
agree with the Eighth Circuit's suggestion that the
foreseeability of regulatory change, by itself, implies
that plaintiffs have entertained unreasonable
expectations. Plaintiffs' prepayment expectations were
based on express language contained in their deed of
trust notes and authorized by HUD. The prepayment
clauses were consistent, moreover, with
contemporaneous HUD _ regulations, and _ those
regulations remained in force for the better part of the
88a
first 20 years of plaintiffs' mortgages. On that basis, the
court cannot conclude that plaintiffs' expectations were
"unreasonable."!8 The important question with respect
to plaintiffs’ expectations, therefore, is not whether
they were "reasonable," but whether they were
"investment-backed."
In support of their position, plaintiffs make the
following assertions (in the words of Jona Goldrich, an
investor in each of the 21 partnerships which are
plaintiffs in this case):
Because the partnerships intended to prepay
the mortgages on the HUD projects after 20
years, they selected project locations which they
believed would increase in value and allow them
to attract market-rate tenants after the projects
were free of HUD restrictions. Although there
were available at that time numerous potential
development sites on relatively inexpensive land
in inner city neighborhoods and in less desirable
suburban locations, the partnerships
deliberately selected and paid a premium for
desirable urban and suburban locations close to
shopping, bus routes, schools and other
amenities, in contrast to sites selected by most
developers of HUD-insured properties.
Goldrich Declaration at paragraph 13.
Mr. Goldrich's statement alleging that he and his
partners made special efforts to construct properties
that would be more valuable once prepayment rights
were exercised, is apparently an effort to satisfy the
18 Despite the court's disagreement with certain portions of
Parkridge, the court must point out that the Eighth Circuit's
analysis of the reasonableness of Parkridge's expectations was not
essential to the court's ultimate disposition of that case because
Parkridge sought to enjoin the implementation of ELIHPA-a
remedy not available in a takings case in this court.
ila
89a
requirement that a taking claim be supported by
"investment-backed expectations." Jn Florida Rock I .
the Federal Circuit suggested that a relevant
consideration in this context is to compare a property
owner's initi
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