Falzarano v. U.S.

Decision Date02 October 1979
Docket NumberNo. 78-1512,78-1512
Citation607 F.2d 506
PartiesBarbara FALZARANO et al., Plaintiffs-Appellants, v. UNITED STATES of America et al., Defendants-Appellees. First Circuit
CourtU.S. Court of Appeals — First Circuit

Brian Michael Olmstead, East Boston and Mitchell I. Greenwald, Pittsfield, Mass., with whom Susan S. Beck, Lexington, Mass., Gershon M. Ratner, Boston, Mass., Arthur L. Johnson, Jamaica Plain, Mass. and Roy Jack Watson, Jr., Boston, Mass., were on briefs for appellants.

Richard D. Glovsky, Asst. U. S. Atty., Chief, Civ. Div., Boston, Mass., with whom Edward F. Harrington, U. S. Atty., Boston, Mass., was on brief for Federal appellees.

Jeffrey B. Rudman, Boston, Mass., with whom Thomas D. Herman, and Hale & Dorr, Boston, Mass., were on brief for Max Kargman, et al., appellees.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

BOWNES, Circuit Judge.

Plaintiffs-appellants are certain tenants in two federally subsidized housing projects located in Boston. They filed a class action suit against the United States, the Secretary of Housing and Urban Development (HUD), and the Acting Director of the HUD Area Office in Boston. They named as private defendants the owners and managers of the two housing projects, Max and William Kargman, High Point Village Company, Brandywyne Village Company, First Realty Management Corporation, First Realty Corporation of Boston, and Lease-All Corporation.

The original complaint was 240 pages long. It alleged a scheme of siphoning funds by the private defendants from the projects in excess of the legally permissible limits and the federal defendants' acquiescence in the scheme. As a result of the scheme, plaintiffs averred that they had to pay excessively high rents and live in deteriorated housing.

The defendants moved to dismiss the complaint on three grounds: lack of jurisdiction, Fed.R.Civ.P. 12(b)(1); failure to state a claim, Fed.R.Civ.P. 12(b)(6), on the basis that our decision in Hahn v. Gottlieb, 430 F.2d 1243 (1st Cir. 1970), disposed of the matter; and on the further ground that the complaint failed to comply with the requisites of Fed.R.Civ.P. 8(a), which calls for a "short and plain statement of the claim(.)" The district court granted the motion to dismiss for failure to state a claim, also noting that the prolixity of the complaint offended Fed.R.Civ.P. 8(a). Plaintiffs have appealed from the dismissal. After filing the appeal, plaintiffs moved to vacate the dismissal with leave to amend the complaint and substitute an abbreviated complaint of 70 pages with a 40 page attached appendix. The district court denied the motion, stating that the amended complaint did not clear the hurdles posed by the original complaint. 1

We treat first the jurisdictional question. Plaintiffs forward several bases for asserting their claims against the private defendants in a federal forum: (1) an implied right of action under the National Housing Act, 12 U.S.C. § 1715L (d)(3); (2) as third party beneficiaries of the regulatory agreement between the landlords and HUD; (3) under their lease, which incorporates the regulatory agreement by reference; (4) under the fourteenth amendment, for deprivation of their rights under color of state law. Jurisdiction is claimed under 28 U.S.C. §§ 1331, 1343, 1337, and 1361. Each of the cited statutes requires that the cause of action be tethered to either a substantive statute or the federal constitution. We examine each of the four grounds advanced by plaintiffs to determine if any provides them the right to proceed in a federal court. 2


The National Housing Act, 12 U.S.C. § 1715L (d)(3), does not expressly provide for a private right of action. That section reads in pertinent part:

(d) To be eligible for insurance under this section, a mortgage shall

(3) if executed by . . . a private nonprofit corporation or association, or other mortgagor approved by the Secretary, and regulated or supervised under Federal or State laws . . . , or agencies thereof, or by the Secretary 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

(ii) not exceed (certain set sums, established by law) (.)

By its terms, the statute does not create a right of action in favor of anyone. See Touche Ross & Co. v. Redington, --- U.S. ----, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979). It does, however, proscribe mortgages in excess of the legally permissible per unit limit. There has been no allegation that the mortgages executed on the projects exceed the statutory limits; rather, the claim is that the rents are excessive and the physical plant unsafe and unclean due to monies taken illegally from the projects by the landlords. The language of the statute neither creates federal rights in favor of any private party nor proscribes the behavior herein complained of. Therefore, the impropriety of inferring a federal cause of action from the statute seems clear. This view is buttressed by an application of the analysis of the factors set forth in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), for determining whether a cause of action can be inferred from a statute not expressly providing for one.

We first determine whether plaintiffs constitute the class for whose especial benefit the statute was passed. Low and moderate income tenants are indisputably the prime beneficiaries of the National Housing Act. 42 U.S.C. §§ 1441, 1441a. They are not the sole beneficiaries, however, since Congress decided to utilize the private sector to provide the necessary housing and made mortgage insurance and below-market interest rates available to encourage private enterprise to enter the low and moderate income housing market. 12 U.S.C. § 1715L (a), (d)(5). We think this case is governed by Touche Ross & Co. v. Redington, supra, --- U.S. ----, 99 S.Ct. 2479, 61 L.Ed.2d 82, where the Court found no implied cause of action in section 17(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78q(a). There, investors had sought damages against accountants who had audited securities brokerage firms. The financial reports contained errors and the customers sought to recover from the auditors when the collapse of the firm deprived them of the full value of their deposits and assets held by the bankrupt brokerage firm. By statute, the brokerage firms were required to keep books and records and submit reports as the SEC might require "as necessary and appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78q(a) (as it read in 1972, the date in question). Although the statute spoke clearly in terms of protecting the public, the Court found that injured investors had no cause of action, finding that the intent of the statute was to provide sufficient data to the SEC so that it would have an early warning of financial troubles and thus be able to take protective action before financial collapse. Even when, as in the case before the Court, the statute was unsuccessful in achieving its goal, investors could not bring suit for damages against anyone. Touche Ross, supra, --- U.S. at ----, 99 S.Ct. 2479.

Here also, while the statute states that the Secretary shall establish permissible rents and charges, no cause of action is created on behalf of the tenants. Continued financial viability of the project is a prime concern of the statute since the government, as insurer of the mortgages, will bear the brunt should there be a default. By authorizing the Secretary to set rents and charges the statute attempts to assure adequate return sufficient to prevent foreclosure while also keeping a lid on rents for the benefit of low and moderate income tenants. See Kargman v. Sullivan, 552 F.2d 2, 12 (1st Cir. 1977); 24 C.F.R. § 221.531(c). The statute does not purport to grant to the residents of the projects the right to sue for impermissible charges. Authority is given to the Secretary to seek enforcement if necessary. 12 U.S.C. § 1702. 3

The second Cort Factor leads us to examine if there is any indication of legislative intent to create or deny a private remedy. The parties agree that neither the statute nor the legislative history indicates that Congress intended to create or deny a private right of action. Where, as here, the plain language of the statute "weighs against implication of a private remedy, the fact that there is no suggestion whatsoever in the legislative history that (the Act) may give rise to suits for damages reinforces our decision not to find such a right of action implicit within (the Act)." Touche Ross, supra, --- U.S. at ----, 99 S.Ct. at 2487.

The next factor is whether a private right of action would be consonant with the overall legislative scheme. By providing for below-market interest rates and insuring the mortgages, the Act manifests an intent to stimulate the private sector's entry into constructing and operating housing projects for low and moderate income tenants. To safeguard the federal fisc against possibly disastrous exposure should the insured mortgages be foreclosed, the Secretary of HUD is permitted to regulate rents, charges and methods of operation. An overriding concern is to guarantee that the rents and charges adequately cover the carrying costs of the projects. The discretion granted to the Secretary is broad indeed: the Secretary may determine both the form and manner of regulation which, in his or her opinion, will effectuate the purposes of section 1715L. Tenants are guaranteed certain notice and hearing rights, particularly with respect to rent increases. 24 C.F.R. §§ 401.1-401.5. Permitting tenants to bring suit when they differ with the Secretary's determinations as to the adequacy of rents and charges would not, we think, harmonize with the Act's intent. See Hahn v. Gottlieb, supra, 430 F.2d 1243. Tenants are...

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