Parkridge Investors Ltd. Partnership by Mortimer v. Farmers Home Admin.

• Decision Date: 07 January 1994
• Docket Number: No. 93-1270,93-1270
• Citation: 13 F.3d 1192
• Parties: PARKRIDGE INVESTORS LIMITED PARTNERSHIP, by Harold MORTIMER, David Mortimer, and John Phelps, General Partners, Appellant, v. FARMERS HOME ADMINISTRATION, an Agency of the United States Department of Agriculture, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1192

13 F.3d 1192

62 USLW 2443

PARKRIDGE INVESTORS LIMITED PARTNERSHIP, by Harold MORTIMER David Mortimer, and John Phelps, General Partners, Appellant, v. FARMERS HOME ADMINISTRATION, an Agency of the United States Department of Agriculture, Appellee.

No. 93-1270.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 12, 1993.

Decided Jan. 7, 1994.

Ronald W. Banks, Rapid City, SD, argued, for appellant.

Robert A. Mandel, Rapid City, SD, argued (Ted L. McBride and Robert A. Mandel, on the brief), for appellee.

Before RICHARD S. ARNOLD, Chief Judge, WOLLMAN and LOKEN, Circuit Judges.

RICHARD S. ARNOLD, Chief Judge.

This case is about the power of the United States to modify its contractual obligations, by statute, to prevent the frustration of clear program purposes. We sympathize with the view of appellant, Parkridge Investors, that the United States has acted unfairly in this instance; even so, we conclude that firmly entrenched legal doctrine allows the government to act as it did. Therefore, we decline to hold unconstitutional the Emergency Low Income Housing Preservation Act, 42 U.S.C. Sec. 1472(c), as applied to appellant's loan, and thus affirm the District Court's ¹ grant of summary judgment in favor of appellee Farmers Home Administration (FmHA).

I.

The Rural Rental Housing Program, Section 515 of the Housing Act of 1949, 42 U.S.C. Sec. 1485, was enacted to ameliorate housing shortages for the elderly and other low-income persons in rural areas. See Lifgren v. Yeutter, 767 F.Supp. 1473, 1477 (D.Minn.1991). Among other provisions, the statute authorizes FmHA to make loans to developers and owners of rural rental units. In exchange, borrowers agree to provide affordable housing over the duration of their government-assisted mortgages. Ibid. The clear objective of the program--expanding the stock of rural rental housing for low-income persons--provides the backdrop for this case.

Ridgestone Apartments is a multi-family complex in Deadwood, South Dakota. The 13-unit complex was constructed by the Ridgestone partnership with financing obtained in 1974 from FmHA under the Rural Rental Housing Program. As part of the transaction, FmHA made three loans to the Ridgestone partnership, which were incorporated into the provisions of a promissory note. The note provided, in part, that "[p]repayments of scheduled installments, or any portion thereof, may be made at any time at the option of Borrower." (Emphasis supplied.) This transaction also involved two mortgages, both of which stated that "[t]his instrument shall be subject to the present regulations of the [FmHA], and to its future regulations not inconsistent with the express provisions hereof." (Emphasis supplied.)

In 1985, Parkridge bought the complex and assumed the rights and obligations of the Ridgestone partnership. FmHA approved the sale, conditioned upon execution of a new loan agreement and assumption agreements. The assumption agreements provided that predecessor agreements would remain "in full force and effect," except where modified by the new agreements. ² The assumption agreements also reiterated that they were "subject to present regulations of the [FmHA] and to its future regulations which are not inconsistent with the express provisions hereof." (Emphasis supplied.) The parties agree that, as of that time, Parkridge had a practically unfettered option to prepay.

In 1987, Congress passed the Emergency Low Income Housing Preservation Act of 1987, Pub.L. No. 100-242, 101 Stat. 1815, 1877, 1886-90 (1988), 42 U.S.C. Sec. 1472(c) (the Preservation Act). This legislation responded to congressional concern that a large portion of the federally assisted housing stock, including 150,000 units constructed under the FmHA program, was vulnerable to prepayment and therefore removal from the low-income market--thus thwarting the basic purpose of the program. Id. at 1877-78; H.R.Rep. No. 122(I), 100th Cong., 1st Sess. 53, reprinted in 1987 U.S.Code Cong. & Admin.News 3317, 3369-70. The provisions of the Preservation Act are well summarized in a recent Minnesota district court case:

Prior to the enactment of the Preservation Act, borrowers of Section 515 loans ... had the option of prepaying their mortgages at any time and removing their project from the program without restrictions....

Under the Preservation Act, an owner of a project funded by a ... Section 515 loan who wishes to prepay his outstanding indebtedness must submit a request to pre-pay to the FmHA. Before 30 days pass, the FmHA must notify each tenant of the housing unit as well as interested nonprofit organizations and appropriate state and local agencies that the owner of the project has submitted a request to prepay the Section 515 loan. 42 U.S.C. Sec. 1472(c)(3). The FmHA is not allowed to accept prepayment offers until it complies with certain steps specified in the Preservation Act. First, the FmHA must attempt to enter into an agreement under which the owner of the project commits to extend the low income use of the project for 20 years from the date of such agreement. 42 U.S.C. Sec. 1472(c)(4)(A). Because the Preservation Act aims at extending the low income use of Section 515 projects, the FmHA is authorized to offer various financial incentives to owners who have indicated a desire to pre-pay Section 515 loans.... 42 U.S.C. Sec. 1472(c)(4)(B). If, despite the incentives the FmHA has offered to the owner, the owner will not enter into an agreement to extend the low income use of the project, then the FmHA must require the owner to offer to sell the project to a qualified nonprofit organization or public agency at fair market value. 42 U.S.C. Sec. 1472(c)(5)(A). ³ Once the project is offered for sale to a qualified nonprofit organization or public agency, if 180 days passes without a bona fide offer of purchase being submitted, then the FmHA may accept the owner's prepayment request. 42 U.S.C. Sec. 1472(c)(5)(A)(ii).

Lifgren, 767 F.Supp. at 1478 (footnote omitted). ⁴

FmHA has issued Preservation Act regulations, codified at 7 C.F.R. Sec. 1965.90. Under the relevant provisions, ⁵ when FmHA receives a prepayment request, it first determines the need for low-income housing, then offers financial incentives to induce the borrower to extend low-income use. 7 C.F.R. Sec. 1965, Exh. E(III-IV). If the borrower refuses to enter into such an agreement, FmHA determines if one of the two narrow exceptions outlined in 42 U.S.C. Sec. 1472(c)(5)(G) applies. 7 C.F.R. Sec. 1965, Exh. E(V). If these exceptions do not apply, the project's fair-market value is determined, ⁶ and FmHA requires the borrower to offer the project for sale--to a qualified nonprofit organization or public agency--for a period of 180 days. 7 C.F.R. Sec. 1965, Exh. E(VI). Finally, should the borrower receive no bona fide offer by the end of this time period, then FmHA will accept prepayment on the loan--so long as federal funds are either then available to assist a potential purchaser, or have not been available for any project in the nation for 15 months. 7 C.F.R. Sec. 1965, Exh. E(VII).

In short, whereas under the old scheme FmHA had to accept prepayment from borrowers like Parkridge at any time, under the Preservation Act FmHA may accept prepayment only at the end of an intricate, six-month-long (or longer) procedure. Moreover, should a willing non-profit or public agency purchaser emerge, the party desiring to prepay may not even wind up in possession of the property. ⁷

In August of 1990, Parkridge sought permission to prepay its loan under the terms of the loan instruments. FmHA declined the offer and countered with incentives to continue providing housing to eligible persons under an extended loan agreement. Parkridge rejected the incentives and renewed its offer of full payment. Again, FmHA refused, asserting that "the loan documents as amended, including the right to prepay, were modified by the assumption agreements, as well as the mortgages which provided that these loans were subject to regulatory changes which modified the option to prepay...." Jt.App. 44. Instead, FmHA proposed that the apartments be appraised and offered for sale to a non-profit organization, in order to retain the property in the program for the balance of the project's useful life. Parkridge rejected this proposal and sued, seeking a declaration that FmHA is unconditionally obligated to accept the offer of prepayment, because the Preservation Act is unconstitutional as applied to the partnership's loans.

The District Court concluded that the Preservation Act passed constitutional muster. Order of Dec. 17, 1992, at 5. In its decision, the Court relied largely on Lifgren v. Yeutter, supra, which held, with respect to contractual provisions virtually identical to those in this case, that the regulations promulgated pursuant to the Preservation Act were not inconsistent with the applicable loan agreements and did not constitute an unconstitutional taking under the Fifth Amendment. 767 F.Supp. at 1485-88. This appeal followed.

II.

On appeal, Parkridge argues that FmHA's refusal to accept prepayment breaches the clear terms of the loan agreements and constitutes a denial of Parkridge's due-process rights and an unconstitutional taking under the Fifth Amendment. ⁸ In response, FmHA argues that 1) the new legislation is not truly inconsistent with the regulations existing at the time of the initial loan; 2) even if the Preservation Act's terms are inconsistent with the contract, the government's actions were foreseeable given the purposes of the program; 3) the government, through its contract, did not unmistakably waive its sovereign power to amend statutory provisions which pertain to the contract; 4) the case is not yet ripe to determine whether there has been an unconstitutional taking, because Parkridge refused to abide by the prescribed procedures and offer the project for sale; and 5) there could be no...