Cinega Gardens v. U.S.

• Decision Date: 07 December 1998
• Docket Number: Nos. 97-5126,97-5134,s. 97-5126
• Citation: 194 F.3d 1231
• Parties: (Fed. Cir. 1998) CIENEGA GARDENS, CLAREMONT VILLAGE COMMONS, COVINA WEST APARTMENTS, DEL AMO GARDENS, DEL VISTA VILLAGE, DeSOTO GARDENS, LAS LOMAS GARDENS, OXFORD PARK, PARTHENIA TOWNHOMES, PIONEER GARDENS, PUENTE PARK APARTMENTS, RAYEN PARK APARTMENTS, RESEDA PARK APARTMENTS, ROSCOE PARK APARTMENTS, SAN JOSE GARDENS, SUNLAND PARK APARTMENTS, KITTRIDGE GARDENS I, KITTRIDGE GARDENS II, 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, PLACITA GARDEN APARTMENTS, SKYLINE VIEW GARDENS, VILLA FONTANA and VILLAGE GREEN, Plaintiffs, and SHERMAN PARK APARTMENTS, INDEPENDENCE PARK APARTMENTS, PICO PLAZA APARTMENTS and ST. ANDREWS GARDENS, Plaintiffs/Cross-Appellants, v. UNITED STATES, Defendant-Appellant
• Court: U.S. Court of Appeals — Federal Circuit

Page 1231

194 F.3d 1231 (Fed. Cir. 1998)

CIENEGA GARDENS, CLAREMONT VILLAGE COMMONS, COVINA WEST APARTMENTS, DEL AMO GARDENS, DEL VISTA VILLAGE, DeSOTO GARDENS, LAS LOMAS GARDENS, OXFORD PARK, PARTHENIA TOWNHOMES, PIONEER GARDENS, PUENTE PARK APARTMENTS, RAYEN PARK APARTMENTS, RESEDA PARK APARTMENTS, ROSCOE PARK APARTMENTS, SAN JOSE GARDENS, SUNLAND PARK APARTMENTS, KITTRIDGE GARDENS I, KITTRIDGE GARDENS II, 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, PLACITA GARDEN APARTMENTS, SKYLINE VIEW GARDENS, VILLA FONTANA and VILLAGE GREEN, Plaintiffs, and SHERMAN PARK APARTMENTS, INDEPENDENCE PARK APARTMENTS, PICO PLAZA APARTMENTS and ST. ANDREWS GARDENS, Plaintiffs/Cross-Appellants, v. UNITED STATES, Defendant-Appellant.

Nos. 97-5126, 97-5134

UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

Decided December 7, 1998

Everett C. Johnson, Jr., Latham & Watkins, of Washington, DC, argued for plaintiffs cross-appellants. With him on the brief were Richard P. Bress, Leonard A Zax, of Washington, DC; and Susan S. Azad, of Los Angeles, California.

John E. Kosloske, Senior Trial Counsel, Commercial litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Frank W. Hunger, Assistant Attorney General and David M. Cohen, Director. Of counsel on the brief were Carole W. Wilson, Associate General Counsel, Angelo Aiosa, Assistant General Counsel, and Kathleen Burtschi, Attorney, Litigation Division, Office of General Counsel, Department of Housing and Urban Development, of Washington, DC.

Susan Hegal, Cambridge and Somerville Legal Services, of Cambridge, Massachusetts, for amicus curiae Cambridge Economic Opportunity, Inc. Margaret F. Turner, Greater Boston Legal Services, of Boston, Massachusetts, for amicus curiae Boston Affordable Housing Coalition, Inc. James R. Grow, National Housing Law Project, of Oakland, California, for amicus curiae National Alliance of HUD Tenants, Inc. Roderick T. Field, Los Angeles Housing Law Project, of Los Angeles, California, for amicus curiae Inquilinos Unidos. Chancela Al-Mansour and R. Mona Tawatao, San Fernando Valley Neighborhood Legal Services, of Pacoima, California, for amicus curiae Valley Pride Village Tenants Association. Andrew Scherer, Legal Services for New York City, Legal Support Unit, of New York, New York, for amici curiae Community Training and Resource Center, Inc., et al. Edward J. Eisner, Bet Tzedek Legal Services, of North Hollywood, California, for amicus curiae Victoria Cohen.

Jeff H. Eckland, Faegre & Benson LLP, of Minneapolis, Minnesota, for amici curiae Apache Apartments of Owatonna, et al. With him on the brief were R. Carl May and William L. Roberts.

Joel Martin Levy, Staff Attorney, and Anthony A. Trendacosta, General Counsel, of Santa Monica, California, for amicus curiae Santa Monica Rent Control Board. James K. Hahn, City Attorney, Claudia McGee Henry, Senior Assistant City Attorney, and Sharon Siedorf Cardenas, Assistant City Attorney, of Los Angeles, California for amicus curiae City of Los Angeles. Louise H. Renne, City Attorney, Teresa L. Stricker-Croley, Deputy City Attorney, and Leslie B. Trutner, Deputy City Attorney, of San Francisco, California, for amicus curiae City and County of San Francisco.

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 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. 17151 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). Specifically, the court determined that the enactment of ELIHPA and LIHPRHA breached the contracts by prohibiting the prepayment of the plaintiffs' mortgage loans after twenty years without HUD's approval. 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). ¹ Because we conclude that privity of contract did not exist between the Owners and HUD, so as to confer jurisdiction on the Court of Federal Claims with respect to the Owners' breach of contract claims, 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,² 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)(3)," 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 33 Fed. Cl. at 202-03.

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 203. By prepaying the outstanding loan, an owner could 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. 1715l note (1994) (Preservation of Low Income Housing, 221(a), 222, 225); Cienega Gardens, 33 Fed. Cl. at 204.

In 1990, ELIHPA was replaced by...