331 F.3d 891 (Fed. Cir. 2003), 02-5066, Chancellor Manor v. U.S.

Docket Nº:02-5066
Citation:331 F.3d 891
Party Name:Chancellor Manor v. U.S.
Case Date:June 12, 2003
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit

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331 F.3d 891 (Fed. Cir. 2003)

CHANCELLOR MANOR, Gateway Investors, LTD., and Oak Grove Towers Associates, Plaintiffs-Appellants,


UNITED STATES, Defendant-Appellee.

No. 02-5066.

United States Court of Appeals, Federal Circuit

June 12, 2003

Rehearing Denied Nov. 6, 2003.

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Jeff H. Eckland, Faegre & Benson LLP, of Minneapolis, Minnesota, argued for plaintiffs-appellants. With him on the brief were William L. Roberts and Mark J. Blando.

John E. Kosloske, Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellee. On the brief were David M. Cohen, Director, and Mark L. Josephs, Senior Trial Counsel.

Before SCHALL, GAJARSA, and DYK, Circuit Judges.

GAJARSA, Circuit Judge.

This is a regulatory takings case wherein the Plaintiffs allege that the United States's enactment of legislation relating to low-income housing programs breached contracts between the Plaintiffs and the United States and effected a regulatory taking of property protected under the Fifth Amendment. Plaintiffs-Appellants, Chancellor Manor ("Chancellor Manor"), Gateway Investors, Ltd. ("Gateway Investors"), and Oak Grove Towers Associates ("Oak Grove") (collectively "Appellants" or "Owners"), appeal the November 30, 2001 final judgment of the United States Court of Federal Claims granting summary judgment to the United States on Appellants' breach of contract and takings claims. Chancellor Manor v. United States, 51 Fed. Cl. 137 (2001). Because the Court of Federal Claims correctly granted summary judgment with respect to Appellants' breach of contract claims but incorrectly determined that Appellants did not possess protectible real property interests and thus presented no compensable takings claims, we affirm-in-part, reverse-in-part, and remand for further proceedings consistent with this opinion.


Appellants are the owners of various multifamily rental housing projects in Minnesota. The housing projects were developed and financed pursuant to Section 221(d)(3) and Section 236 of the National Housing Act ("NHA") through a three-party arrangement including the Owners, the Department of Housing and Urban Development ("HUD"), and private lenders. The Section 221(d)(3) and Section 236 programs ("the programs") were designed by Congress primarily to encourage creation of low-income housing. Generally, in exchange for an agreement by property

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Owners to maintain particular properties as low-income housing properties (subject to federal regulations), the United States granted various tax benefits and committed to insuring the mortgages of the Owners. Prior to 1968, this mortgage insurance enabled the Owners to obtain below-market rate mortgages (Section 221(d)(3)). After 1968, the NHA was amended to enable Owners to obtain a market-rate mortgage with an interest rate subsidy from the United States and enabled the lenders to issue long-term mortgages amortizable over a forty-year period (Section 236). In addition, as Appellants contend, another incentive was the option to prepay the mortgages, without HUD approval, at the end of a twenty-year term and thus eliminate the restrictions on the property imposed by federal regulation. These changes to the federal regulations, including the elimination of the twenty-year prepayment option, are the subject of the present, and other, litigation.1

The three-party transaction was essentially a government-subsidized real estate development deal between the Owners and the lenders. The United States's role in the transaction was to act as an insurer for the Owners in the event of default of the Owners' mortgage commitments. In exchange for the United States's commitment, the Owners agreed to various restrictions on the use of the properties in the programs. These obligations included: (1) constructing and maintaining housing in accordance with HUD specifications; (2) renting only to HUD-approved low- and moderate-income tenants; (3) charging only HUD-approved rents; (4) maintaining cash reserves to self-insure against default; and (5) limiting return on investment to no more than an annual return of six percent on initial investment.

The three parties to this complicated transaction made various commitments to each other, evidenced by the execution of at least five separate independent agreements, including a Mortgage Note ("Note") and a Mortgage between the Owners and the lenders; a Regulatory Agreement and a Mortgagor's Certificate between the Owners and HUD; and a Commitment for Insurance Advances ("Insurance Commitment") between the lenders and HUD.2 None of the agreements included any cross-referencing clause integrating the agreements as a single transaction or making the United States, the Owners, and the lenders parties to each separate agreement.

The Mortgage and Note issued by the Owners to the lenders were the documents that evidenced the funding for the programs. The Note outlined the terms and conditions of the repayment from the borrower-owner to the lender and was payable over a forty-year period with an option to prepay the Note, without HUD approval, after twenty years. HUD endorsed the Note as part of its insurance

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commitment but was not otherwise a party to the Note. The Mortgage on the subject properties secured payment of the Note.

The Insurance Commitment between HUD and the lenders memorialized HUD's agreement to provide an insurance endorsement for the Owners-mortgagors' Notes. The Mortgagor's Certificate between the Owners and HUD referenced this agreement between HUD and the private lenders regarding HUD's insurance endorsement of the Owners' Notes. The Mortgagor's Certificate stated that the Owner "agrees to accept a loan insured by you [HUD] upon the terms set forth in your Commitment...."

The Regulatory Agreement between HUD and the Owners memorialized the Owners' agreement to the "affordability restrictions," including restrictions on the income levels of tenants, allowable rental rates, and the rate of return on investment the Owners could receive from the project discussed above.

The only document that explicitly references the twenty-year prepayment option is the Note. The prepayment option in the Note reflected the contemporaneous HUD regulations, see 24 C.F.R. §§ 221.524(a)(ii), 236.30(a)(1)(i) (1970), governing the Section 221(d)(3) and Section 236 programs. Cienega IV, 194 F.3d at 1235. The relevant sections of the regulations provided that:

A mortgage indebtedness may be prepaid in full and [HUD's] controls terminated without prior consent of HUD ... (i) If the prepayment occurs after the expiration of 20 years from the date of the final insurance endorsement of the mortgage....

24 C.F.R. § 236.30(a)(1)(i) and (ii).

The regulations also stated that:

The regulations in this subpart may be amended by [HUD] at any time and from time to time, in whole or in part, but such amendments shall not adversely affect the interests 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 [HUD] has made a commitment to insure.

24 C.F.R. § 236.249 (1970) (emphasis added).

By prepaying the balance of the outstanding loan represented by the Note, an Owner could terminate HUD's affordability restrictions imposed on the property and convert the property into a conventional rental property, thereby charging market rental rates and increasing the Owners' return on investment to a free-market rate of return. Cienega IV, 194 F.3d at 1235.

In the late 1980s, the United States became concerned that a large number of Owners participating in the programs might exercise their prepayment option, creating a shortage in the supply of low-income housing and injuring existing tenants. Id. Consequently, in 1988, Congress enacted the Emergency Low-Income Housing Preservation Act ("ELIHPA"). ELIHPA placed a two-year moratorium on mortgage prepayments to allow Congress time to devise a permanent solution to the potential shortage of low-income housing. Id.

In 1990, ELIHPA was replaced by the Low-Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). LIHPRHA made permanent the moratorium on prepayment and authorized HUD to provide additional incentives to Owners in exchange for remaining in the programs, including, inter alia: (1) increased access to residual receipts accounts; (2) increased rents; (3) additional

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financing for capital improvements; and (4) the ability to draw funds from the project by accessing a portion of the equity in the housing project through a second mortgage, insured by HUD. 12 U.S.C. § 4109 (Supp. II 1990). A key aspect of LIHPRHA required HUD approval for any election to prepay a mortgage. Id. LIHPRHA included a number of criteria required for HUD approval, including written findings by HUD that prepayment would not: (1) materially increase economic hardship for current tenants; (2) result in a monthly rental payment that exceeds percentages set by statute; (3) involuntarily displace current tenants without good cause; or (4) diminish the supply of low-income housing that would be sufficient for the needs of the community. 12 U.S.C. § 4108(a) (Supp. II 1990).

In 1996, Congress enacted the Housing Opportunity Program Extension Act ("HOPE"). HOPE restored the prepayment rights to Owners, without HUD approval, provided the Owners agreed not to raise rents for a period of sixty days after the prepayment of any unpaid balance of the Notes. Id.

By accepting a government-insured loan pursuant to the Section 221 or Section 226 program, each Owner was required to agree to the numerous regulatory restrictions discussed above. The twenty-year prepayment option period began at...

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