190 F.3d 310 (5th Cir. 1999), 98-20181, Christopher Village, Ltd Partnership v. Retsinas

Docket Nº:98-20181
Citation:190 F.3d 310
Party Name:CHRISTOPHER VILLAGE, LIMITED PARTNERSHIP; WILSHIRE INVESTMENTS CORPORATION, PLAINTIFFS-APPELLANTS, v. NICHOLAS P RETSINAS; ET AL, DEFENDANTS, NICHOLAS P RETSINAS; ALBERT CASON, DIRECTOR MULTIFAMILY HOUSING MANAGEMENT; THE HONORABLE ANDREW M CUOMO, SECRETARY OF HOUSING AND URBAN DEVELOPMENT; HENRY CISNEROS, DEFENDANTS-APPELLEES.
Case Date:September 15, 1999
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 310

190 F.3d 310 (5th Cir. 1999)

CHRISTOPHER VILLAGE, LIMITED PARTNERSHIP; WILSHIRE INVESTMENTS CORPORATION, PLAINTIFFS-APPELLANTS,

v.

NICHOLAS P RETSINAS; ET AL, DEFENDANTS,

NICHOLAS P RETSINAS; ALBERT CASON, DIRECTOR MULTIFAMILY HOUSING MANAGEMENT; THE HONORABLE ANDREW M CUOMO, SECRETARY OF HOUSING AND URBAN DEVELOPMENT; HENRY CISNEROS, DEFENDANTS-APPELLEES.

No. 98-20181

United States Court of Appeals, Fifth Circuit

September 15, 1999

Page 311

Appeal from the United States District Court for the Southern District of Texas

Before Jones, Smith, and Emilio M. Garza, Circuit Judges.

The opinion of the court was delivered by: Edith H. Jones, Circuit Judge

Appellants Christopher Village, Ltd. and Wilshire Investments (collectively "Village"), owned and managed a federally subsidized low income housing complex in Bryan, Texas. They filed this suit contending that the Department of Housing and Urban Development (HUD) caused

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Village to default on its obligation to maintain the property by denying necessary rent increases and illegally demanded a multimillion-dollar equity contribution from Village. As the suit progressed, HUD reacquired and sold the property at foreclosure, and the apartment complex has been torn down. Nevertheless, as to the part of this case which is not moot, we hold that HUD's actions were arbitrary and capricious. Village is entitled to a partial declaratory judgment in its favor.

BACKGROUND

1. HUD Regulatory Scheme

The National Housing Act was enacted (and subsequently amended) to "assist private industry in providing housing for low and moderate income families and displaced families." 12 U.S.C.A. §§ 1715l(a) (West 1989). To foster private investment, the Act authorizes HUD to insure private mortgage loans used to construct low income housing. See 12 U.S.C.A. §§ 1715l(d)(3) (West 1989). In addition, the Act and HUD regulations encourage private investment by allowing owners to borrow money at reduced interest rates, reducing a borrower's equity requirements, permitting owners to sign non-recourse notes, and, prior to the 1986 tax code changes, granting owners and investors generous tax benefits. See generally, Kargman v. Sullivan, 552 F.2d 2, 4 (1st Cir. 1977). By granting owners these benefits, Congress sought to reduce the financial risk associated with operating low income housing by "reducing the rentals necessary to service the landlord's debt obligation." Hahn v. Gottlieb, 430 F.2d 1243, 1245 (1st Cir. 1970); see also Beck Park Apartments v. United States Dep't of Hous. and Urban Dev., 695 F.2d 366, 368 (9th Cir. 1982).

In exchange for these financial benefits, HUD requires low income property owners to enter into "Regulatory Agreements" that give HUD extensive regulatory authority over the operation and maintenance of the property. See 12 U.S.C.A. §§ 1715l(d)(3).1 Under a standard Regulatory Agreement, an owner must dedicate the property for medium or low income tenants, must remain a sole asset entity (i.e., may not engage in any business other than owning and operating the property), may not take a profit distribution over six percent per year, must adequately maintain the property, and may not increase rents without approval from HUD. See Kargman, 552 F.2d at 4. If an owner violates the Regulatory Agreement, HUD may declare the property in default, accelerate the mortgage, and foreclose on the property.2 HUD also sets the maximum allowable rent an owner can charge its tenants. In doing so, HUD is supposed to provide owners with sufficient funds to operate and maintain the property, service the debt, pay taxes, cover various reserve requirements, and provide the owner a reasonable return on investment. See, e.g., 12 U.S.C.A. §§ 1747c (West 1989).3 If rental revenues fail to cover these costs, an

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owner can request a rental increase from HUD. See 24 C.F.R. §§ 245.325.

Since most tenants of low income housing are on welfare and cannot afford to pay the full contract rental price, Congress created the Section 8 housing program to subsidize their rent. See 42 U.S.C.A. §§ 1437f (West 1994). "Under the program, tenants make rental payments based on their income and ability to pay; [HUD] then makes `assistance payments' to the private landlords in an amount calculated to make up the difference between the tenant's contribution and a `contract rent' agreed upon by the landlord and HUD." Cisneros v. Alpine Ridge Group, 508 U.S. 10, 12, 113 S.Ct. 1898, 1900 (1993). Because the Section 8 program requires that a tenant pay a maximum of 30% of the gross rent, if HUD approves a rental increase, the majority of the increase is absorbed by HUD via the Section 8 subsidy. The subsidy is implemented through Housing Assistance Payment ("HAP") contracts entered into between HUD and the property owners which extensively regulate an owner's management of the property. HAP contracts set the maximum allowable rent an owner may charge and the subsidy amount paid by HUD and require owners to maintain the property in a safe and sanitary condition.

2. Factual and Procedural History

The property at issue in this case, Mockingbird Run Apartments, was built in 1970 from the proceeds of a §§ 221(d)(3) insured loan and was therefore subject to a Regulatory Agreement. Because Mockingbird was receiving Section 8 subsidies, the property was also subject to a HAP contract. When Village purchased Mockingbird in 1983, it assumed the obligations and benefits of both agreements.

By 1995, Mockingbird's physical condition had substantially deteriorated and approximately $2 million was needed to restore the property. HUD warned Village that a failure to refurbish the property could result in abatement of Section 8 subsidies and constituted a default under the Regulatory Agreement. The parties began negotiating plans to repair Mockingbird, including the issue who would fund the needed repairs. Each of several plans proposed by Village stipulated that HUD would increase the contract rent and Village would incur a large loan to be repaid out of the property's future rental revenues. HUD, however, rejected the proposals, insisting instead that Village pay all of the $2 million repairs without any assistance from HUD.

In June 1995, Village formally requested that HUD increase its contract rent since Mockingbird's rental revenues were inadequate to reimburse its operating costs and the necessary maintenance and repairs. Without approving or denying the request, however, HUD replied by letter dated August 25, 1995, demanding that Village place the $2 million needed to pay for the repairs in escrow within 60 days or face default. On September 6, HUD reiterated its demand, cautioning that, although Village's rent increase request was under review, "no action will be taken at this time due to the provisions in the HUD letter dated August 25, 1995." Finally, on September 14, HUD notified Village that, since Village had not complied with the August 25, 1995 demand for $2 million and because Village had "violated paragraph eight of the Regulatory Agreement by not maintaining the mortgaged premises in good repair and condition," HUD would "proceed without further notice to take whatever remedies are appropriate". HUD intended to accelerate the mortgage and foreclose on the property. Indeed, on December 1, 1995, HUD assumed control of the property as a mortgagee in possession.4

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Village sued various HUD officers seeking a declaratory judgment, an injunction, and mandamus, arguing that HUD unlawfully refused to entertain its rent increase request, illegally demanded $2 million, and made it impossible for Village to maintain the property because of insufficient rental revenues. The district court, unmoved, ultimately denied all of Village's requested relief and granted summary judgment in favor of HUD. According to the court, HUD's rent increase decisions are unreviewable5 , and Village had an absolute obligation to maintain the property regardless whether it received sufficient rents to cover repair costs.

After obtaining the favorable summary judgment, HUD slated the property for foreclosure sale. Although Village moved the district court to stay the sale pending appeal, the district court, and subsequently this court, rejected the motion and...

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