326 F.3d 669 (5th Cir. 2003), 00-60267, U.S. v. Southland Management Corp.

Docket Nº:00-60267
Citation:326 F.3d 669
Party Name:U.S. v. Southland Management Corp.
Case Date:April 01, 2003
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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326 F.3d 669 (5th Cir. 2003)

UNITED STATES of America, Plaintiff-Appellant,



W. Thad McLaurin, Charles C. Taylor, Jr., and Arthur W. Doty, Defendants-Appellees.

No. 00-60267.

United States Court of Appeals, Fifth Circuit

April 1, 2003

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John S. Koppel, Douglas N. Letter (argued), U.S. Dept. of Justice, Civ. Div.-App. Staff, Washington, DC, for Plaintiff-Appellant.

Alan W. Perry (argued), Roland M. Slover, Forman, Perry, Watkins, Krutz & Tardy, Jackson, MS, for Defendants-Appellees.

William Bradley Tully, John Robert Hellow, Hooper, Lundy & Bookman, Los Angeles, CA, for Federation of American Hospitals, Amicus Curiae.

Appeal from the United States District Court for the Southern District of Mississippi.


REAVLEY, Circuit Judge:

The United States seeks False Claims Act 1 penalties from the owners of an apartment project for falsely certifying that the property was decent, safe, and sanitary in requesting supplemental rent payments funded under Section 8 of the United States Housing Act. 2 The district court granted summary judgment for the owners, 3 and a panel of this court remanded for trial. 4 Those decisions addressed the materiality of the allegedly false certifications and the issue whether the owners knowingly submitted false claims. We do not reach those questions because we hold that, on this record, no false claims were made. We therefore affirm the judgment for the owners.


The National Housing Act of 1934 5 was enacted to encourage private industry to provide housing for low-income families. 6 It authorizes the U.S. Department of Housing and Urban Development ("HUD") to guarantee private mortgage loans to construct new housing and rehabilitate old structures for "families with incomes so low that they could not otherwise decently house themselves." 7 Private property owners receiving the nonrecourse mortgages must enter into a "regulatory agreement" with HUD which specifies "rents, charges, and other methods of operation, in such form and in such manner as in the opinion of the Secretary [of HUD] will effectuate the purposes of this section...." 8 In 1937, the United States Housing Act 9 was enacted to provide housing by making payments directly to local housing authorities. Section 8 was added to this Act in 1974 to authorize the making of "assistance payments" to encourage private property owners to provide housing. 10

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The amount of these assistance payments (made directly to the private property owners in the form of a subsidy) is determined by what the tenants can afford to pay, and what the private property owner could otherwise expect to charge under the prevailing market rates. 11 To receive assistance payments the property owner must enter into a housing assistance payment contract ("HAP Contract"). 12

In 1980, Defendants-Appellees W. Thad McLaurin, Charles C. Taylor Jr., and Arthur W. Doty ("the Owners") executed an agreement called the "Regulatory Agreement for Insured Multi-Family Housing Projects (With Section 8 Housing Assistance Payment Contracts)" ("the Regulatory Agreement"). Under this agreement, HUD promised to guarantee the Owners' obligation under the mortgage used to purchase an abandoned apartment complex--the Jackson Apartments--and also to subsidize tenants' rent payments in accordance with a subsequently-executed HAP Contract. The Owners, in turn, agreed to substantially rehabilitate the property and to keep it "in good repair and condition." The property was rehabilitated using the proceeds of a $2.4 million nonrecourse mortgage loan guaranteed by the United States. The Owners invested $190,000 of their own funds in the project.

Under the HAP Contract, the Owners agreed to "maintain the [property] ... to provide Decent, Safe, and Sanitary housing." The contract also required that the Owners make monthly requests for housing assistance payments. In each request--called a "HAP voucher"--the Owners were required to give the details of occupied apartments and the supplemental rental payments due, and certify that "to the best of [their] knowledge and belief (i) the dwelling units are in Decent, Safe, and Sanitary condition, [and] (ii) all other facts and dates on which the request for funds is based are true and correct...."

Both the Regulatory Agreement and the HAP Contract explained HUD's remedies if the Owners failed to comply with the contracts' terms. The Regulatory Agreement stated that upon violation of any of its parts HUD may give written notice of such violation. If the Owners failed to take corrective action, HUD was authorized to declare a default, and, among other things, to request that the mortgagee bank declare the Owners' note due and foreclose on the property. The HAP Contract required that HUD inspect the property at least once a year to see that the Owners were maintaining the units in decent, safe, and sanitary condition. In the event that HUD notified the Owners in writing that the property was not in decent, safe, and sanitary condition, and the Owners thereafter failed to take corrective action within the time prescribed in the notice, HUD was authorized to exercise any of its rights and remedies under the contract, including the abatement of housing assistance payments.

From 1981 until 1997 the Owners submitted HAP vouchers in accordance with the HAP Contract and HUD paid the vouchers. Up until 1993 the record does not indicate that the property ever failed to pass HUD's yearly inspections. But by 1993 the property was deteriorating and had become the center of criminal activity. In August 1993 the property received a "below average" rating during HUD's yearly inspection. The report stated that repair and maintenance in many areas was urgently needed, and noted that the property, like many in its area, was experiencing

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a problem with illegal drug activity. HUD's letter advising the Owners of the results of this inspection requested that the Owners respond in writing to the deficiencies noted and include a detailed explanation of their planned corrective measures.

In August 1994 HUD undertook both a management review and a physical inspection. The management received a "satisfactory" rating and the report stated that "[m]anagement is to be commended for the steps taken and planned to provide a more secure environment for the residents." However, as a result of the physical inspection, HUD gave the property a "below average" rating. The report stated that many of the deficiencies noted in 1993 had not been corrected. Of the 18 units inspected, all but two needed immediate repairs, although each unit was deemed passable under HUD's "Housing Quality Standards." 13 The report detailed numerous corrective actions required and, for each, listed an estimated cost and time frame for correction. Several months later HUD wrote, "It is understood that funds are not readily available for repairs," but asked that the Owners be mindful of the safety of tenants and workers and that "hazardous" deficiencies be addressed as soon as possible.

After 1994, the Owners devoted all rental income and subsidies to mortgage payments and property maintenance and repairs. They took no further distributions for return on their investment in the property.

In 1995 the property was rated "below average" for the third time, and all of the inspected units failed to meet HUD's Housing Quality Standards. Again, corrective action was prescribed with an estimated cost and time frame for each. Many of the deficiencies were the same as those in 1993 and 1994. The report warned that if the property was not brought into compliance within 30 days further subsidy payments "may be jeopardized." HUD's letter transmitting the report to the Owners warned them that "[t]he Department does not allow management to continue at this level of performance." 14

In late 1996 HUD gave the property the lowest rating--"unsatisfactory." The report said there were "compelling reasons" for this rating, including the fact that every inspected unit failed to comply with HUD's Housing Quality Standards. The report again cataloged the property's deficiencies and, for each, listed the necessary corrective action along with an estimated cost and time frame. The report also noted, however, that the property staff were "very cooperative throughout the physical inspection." The letter that accompanied this report stated that the property could not continue to operate in its present condition, and that failure to make corrections

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"could result in the denial of future participation" in HUD-sponsored housing programs. However, in another letter HUD wrote, among other things, "We look forward to working with you in an attempt to bring this property back to satisfactory condition."

HUD's last inspection was in May 1997. For the second time HUD gave the property an "unsatisfactory" rating. HUD again cataloged each of the property's deficiencies and advised the Owners that "[t]he Department does not allow management to continue at this level of performance." In August 1997, the Owners wrote that they were discontinuing mortgage payments due to lack of funds, and that the property was being turned over to HUD. They offered to manage the property for no charge until control could be transferred. The Owners managed the property without compensation until after the property was auctioned in July 1998.

The United States initiated this proceeding on August 5, 1998. The United States claims that the Owners violated the civil False Claims Act because...

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