Hahn v. Gottlieb

• Decision Date: 14 August 1970
• Docket Number: No. 7552.,7552.
• Parties: Karl W. HAHN et al., Plaintiffs-Appellants, v. Joseph GOTTLIEB et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — First Circuit

430 F.2d 1243 (1970)

Karl W. HAHN et al., Plaintiffs-Appellants, v. Joseph GOTTLIEB et al., Defendants-Appellees.

No. 7552.

United States Court of Appeals, First Circuit.

August 14, 1970.

Samuel Hoar, Boston, Mass., with whom L. Scott Harshbarger, Robert S. Bowditch, Jr., Harrison A. Fitch, and Goodwin, Procter & Hoar, Boston, Mass., were on the brief, for appellants.

Kenneth F. Phillips, Berkeley, Cal., Myron Moskovitz, and David B. Bryson on the brief for National Housing and Development Law Project, amicus curiae.

Robert J. Sherer, Boston, Mass., with whom Joseph D. Cronin and Roche, Carens & DeGiacomo, Boston, Mass., were on the brief, for Joseph Gottlieb, John C. Pappas, and Bertram Druker, appellees.

Morton Hollander, Atty., Dept. of Justice, with whom William D. Ruckelshaus, Asst. Atty. Gen., Herbert F. Travers, Jr., U. S. Atty., Alan S. Rosenthal, and Judith S. Seplowitz, Attys., Dept. of Justice, were on the brief, for John W. Flynn, Boston Regional Director, Federal Housing Administration, appellee.

Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

In this appeal, we are asked to decide whether tenants in housing subsidized under § 221(d) (3) of the National Housing Act have the right to an administrative hearing and judicial review when their landlord proposes to increase rents.

Plaintiffs are members of a tenants' association at the Castle Square project in Boston (the project), a development of low-and middle-income housing financed under § 221(d) (3), as amended, 12 U.S.C. § 1715l(d) (3). Defendants Gottlieb and Druker (the landlord) are the current owners of the project. Prior to the expiration of the plaintiffs' leases in July 1969, the landlord filed a proposed monthly rent increase of $28 per apartment with defendant Flynn, Regional Director of the Federal Housing Administration. Plaintiffs sought an opportunity to be heard on the proposed increase; and, when the FHA failed to satisfy their request, they brought suit in the federal district court.

The district court initially granted plaintiffs' prayer for a preliminary injunction, then vacated its order when the FHA agreed to provide a hearing. The hearing was held before a member of the FHA's Boston staff. Several tenants gave graphic evidence concerning construction defects, which plaintiffs maintain were the cause of higher maintenance and operating costs. Plaintiffs also introduced expert evidence designed to show that the landlord could maintain a satisfactory rate of return on his investment with a smaller rent increase. Shortly after the hearing, defendant Flynn notified plaintiffs that he had granted a monthly increase of $22.00 per apartment, $11.00 effective immediately and $11.00 a year hence.

Plaintiffs immediately renewed their prayer for a preliminary injunction, complaining that the FHA had failed to afford them a "full and fair" hearing. However, the district court, reversing its original position, held that plaintiffs had no right to an FHA hearing and no standing to protest agency procedure in court. The court reasoned that under the National Housing Act, the Secretary of Housing and Urban Development (HUD), under whose jurisdiction the FHA falls, has the widest latitude in determining proper procedures; that, absent statutory authority, tenants had no right to be heard; and that plaintiffs had no legally protected interest since the government was acting under a contract to which plaintiffs were not parties.

On appeal, plaintiffs raise two main issues: first, they assert a constitutional right to a hearing, including opportunity to cross-examine adverse witnesses and an agency decision based on a formal record; and second, they claim a right to judicial review of adverse agency action.¹

I. Statutory Scheme

We begin our consideration of plaintiffs' claims by examining the statute, § 221(d) (3), as amended by the Housing Act of 1961, Public L. 87-70, 75 Stat. 149. The general goal of national housing policy is to provide "a decent home and a suitable living environment for every American family". 42 U.S.C. §§ 1441, 1441a. Section 221(d) (3) seeks to implement this goal by assisting "private industry in providing housing for low and moderate income families and displaced families." 12 U.S.C. § 1715l (a). This assistance to the private sector takes two forms. First, the FHA provides insurance on long-term mortgage loans covering up to 90 per cent of the project's cost, thus encouraging private investment in projects which would otherwise be too risky. Second, eligible borrowers can obtain below-market interest rates on FHA-insured loans, thus reducing the rentals necessary to service the landlord's debt obligation.² 12 U.S.C. § 1715l(d) (5).

To administer this two-pronged program, the statute confers broad discretion on the Secretary of HUD. The Secretary is authorized to approve mortgagors and to supervise their operations "under a regulatory agreement or otherwise, as to rents, charges, and methods of operation, in such form and in such manner as in the opinion of the Secretary will effectuate the purposes of this section." 12 U.S.C. § 1715l(d) (3). Similar discretion is vested in the Secretary concerning eligibility for occupancy, 12 U.S.C. § 1715l(d) (3) (iii), construction standards, 12 U.S.C. § 1715l(f), terms of amortization, 12 U.S.C. § 1715l(d) (6), and consent to the release of the mortgagor, 12 U.S.C. § 1715l(e) (2).

Implementing these broad grants of authority, the Secretary has promulgated regulations concerning priorities and income limits for occupancy in § 221(d) (3) projects. 24 C.F.R. § 221.537. The Secretary also regulates the landlord's return on his investment by strictly supervising accounting practices, 24 C.F.R. § 221.531(b), and, in the case of limited distribution mortgagors like defendants Gottlieb and Druker, by setting a six per cent ceiling on return. 24 C.F.R. § 221.532(a). Applications for rent increases must be submitted to the FHA, which takes into account the rental income necessary to maintain a project's economic soundness and "to provide a reasonable return on the investment consistent with providing reasonable rentals to the tenants." 24 C.F.R. § 221.531(c). FHA's agreement with the landlord in this case further provides that rental increases will be approved if necessary to compensate for increases in expense "over which the owners have no effective control".

These regulations illustrate that the success of a § 221(d) (3) project requires a flexible exercise of administrative discretion. The ultimate goal of the program is housing for low and middle income families, but this goal is to be achieved by expanding the range of housing needs which can be met by private enterprise. S.Rep.No.281, 87th Cong., 1st Sess. 3 (1961), To provide low-income housing while maintaining a sound investment requires considerable adaptability. We think Congress recognized this need for adaptability when it authorized the Secretary to regulate mortgagors by individual agreement as well as by general rule. Of course, the need for administrative flexibility does not of itself preclude an agency hearing or judicial review, but we must take care lest we kill the goose in our solicitude for the eggs.³

II. Right to a Hearing

Plaintiffs' initial claim is that they are entitled to a formal hearing before the FHA prior to the approval of any rent increase. This contention finds no support in the text of the National Housing Act. Plaintiffs claim, however, that both the right to a hearing and its procedural characteristics can be derived from the Due Process Clause of the Fifth Amendment.⁴ Broadly speaking, resolution of this claim requires us to balance the interests of the government in the procedure adopted against the citizen's interest in greater safeguards. Goldberg v. Kelly, 397 U.S. 254, 263, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970). As an initial step in the weighing process, we must determine "the precise nature of the government function involved as well as of the private interest that has been affected by government action." Cafeteria & Restaurant Workers Union v. McElroy, 367 U.S. 886, 895, 81 S.Ct. 1743, 1748, 6 L.Ed.2d 1230 (1961); accord, Goldberg v. Kelly, supra, 397 U.S. at 263, 90 S.Ct. 1011. Then, since different standards of fairness have traditionally been associated with different types of proceedings, we must examine the nature of the FHA proceedings and the possible burdens and benefits which might flow from the rights asserted by plaintiffs. Hannah v. Larche, 363 U.S. 420, 442, 80 S.Ct. 1502, 4 L.Ed.2d 1307 (1960).

In this case, as we have seen, the primary role of the government is that of insurer for private investors. The government attempts to regulate its contractual relations with mortgagors in order to advance public welfare, but its freedom to pursue social goals is limited by the need to avoid excessive losses.⁵ While the government may have less freedom as an insurer than it does as an employer, compare Cafeteria & Restaurant Workers Union v. McElroy, supra, 367 U.S. at 896-898, 81 S.Ct. 1743, the government needs considerable procedural flexibility in either case.

The private interest affected, on the other hand, is the interest of low and middle income families in housing they can afford. The government has not, however, undertaken to provide this assistance directly under the § 221(d) (3) program. Instead, the government provides a limited subsidy to private landlords, who then enter an ordinary lease arrangement with eligible tenants. Plaintiffs are not legally "entitled" to low rents in the same sense that the welfare recipient in Goldberg v. Kelly, supra, was entitled to basic sustenance under a system of categorical assistance. Compare 42 U.S.C. § 602(a) (10); King v. Smith, 392 U.S. 309, 316, 327, 88 S.Ct. 2128, 20 L.Ed.2d 1118 (1968). Moreover, the tenant's interest is not directly jeopardized each time the FHA...