Federal Property Management Corp. v. Harris

• Decision Date: 21 August 1979
• Docket Number: Nos. 78-3275,78-3346,s. 78-3275
• Citation: Federal Property Management Corp. v. Harris, 603 F.2d 1226 (6th Cir. 1979)
• Parties: FEDERAL PROPERTY MANAGEMENT CORPORATION et al., Plaintiffs-Appellees, v. Patricia Roberts HARRIS et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1226

603 F.2d 1226

FEDERAL PROPERTY MANAGEMENT CORPORATION et al., Plaintiffs-Appellees, v. Patricia Roberts HARRIS et al., Defendants-Appellants.

Nos. 78-3275, 78-3346.

United States Court of Appeals Sixth Circuit.

Argued Dec. 4, 1978.

Decided Aug. 21, 1979.

James C. Cissell, U. S. Atty., Susan J. Dlott, Asst. U. S. Atty., Dayton, Ohio, Barbara Allen Babcock, Asst. Atty. Gen., Dennis G. Linder, Maryann Clifford, Dept. of Justice, Washington, D. C., for defendants-appellants in both cases.

Armistead W. Gilliam, Jr., Smith & Schnacke, Charles J. Faruki, Dayton, Ohio, Douglas B. Gregg, Cohen & Gregg Co., L. P. A., Dayton, Ohio, for plaintiffs-appellees in both cases.

William Kanter, Dept. of Justice, Washington, D. C., for defendants-appellants in 78-3346.

Before EDWARDS, Chief Judge, PHILLIPS, Senior Circuit Judge, and DeMASCIO, ^* District Judge.

DeMASCIO, District Judge.

The defendant-appellant Secretary of the Department of Housing and Urban Development (HUD) entered into rent supplement contracts with each of the plaintiffs-appellees, 34 owners of low and moderate income housing projects insured under Section 221(d)(3) and Section 236 of the National Housing Act. ¹ See 12 U.S.C. § 1701 Et seq. These rent supplement payments are made directly to each project owner for the benefit of eligible tenants to reduce their rent to 25% Of their income or 30% Of the approved rent, whichever is greater. Plaintiffs failed to make timely payments on their mortgages and, as a consequence, the mortgages were assigned to HUD by the original mortgagees. Rather than terminate the rent supplement contracts and institute foreclosure proceedings, the Secretary elected to set off the payments against plaintiffs' obligations under the delinquent mortgages.

The plaintiffs filed this action in the district court seeking a declaratory judgment that the Secretary's decision to set off plaintiffs' rent supplement payments was "without basis in law" and calculated to deprive plaintiffs of the ability to manage their projects in keeping with "sound management procedures." ² The parties stipulated to the material facts and filed cross motions for summary judgment with supporting affidavits. In his affidavit, Mr. Kalish, HUD's Deputy Director, asserts that it is HUD's policy not to terminate a rent supplement contract when a mortgage is in default in order to give the defaulting mortgagor "a reasonable opportunity to cure his default." Rather than making payments directly to the owner/mortgagor, however, the Secretary uses the sums earned under the rent supplement contracts to reduce the owners' delinquency. Mr. Kalish further states that HUD will release rent supplement funds when it is apparent that a project owner cannot meet utility costs or requires funds for emergency maintenance. On the other hand, the Executive Vice President of the plaintiff Management Corporation indicates in his affidavit that the actual rent received from the projects is insufficient to meet expenses and still make mortgage payments; that when rent supplement payments are withheld ". . . the projects become deteriorated and run-down (and) (t)his condition adversely affects the quality of life of the tenants." ³

The district court granted plaintiffs' motion for summary judgment and ordered the Secretary to release all rent supplement payments previously withheld. Judgment and Order of March 15, 1978 and April 6, 1978. Although the court found that the Secretary had a common law and contractual right to set off the rent supplement payments against the plaintiffs' mortgage delinquencies, the court held that the decision to set off the rent supplement payments in this instance could not possibly advance national housing policy. The court reasoned that HUD was not an ordinary commercial lender and was not, therefore, free to operate in its own best financial interest, but had to advance national housing policy at all times. Federal Property Management Corp. v. Harris, 448 F.Supp. 560 (S.D.Ohio 1978). The district court indicated that it could not grasp the logic of the Secretary's assertion that setting off the rent supplements in lieu of contract termination could maintain tenant benefits and postpone foreclosure which, at the same time, provide the project owners an opportunity to cure their defaults. Id. at 562-63. The court stated:

It is true that defendants' procedure has preserved tenant benefits. We cannot imagine however, that denial of "an integral part of the financial composite" of plaintiffs' projects will result either in cure of defaults or avoidance of foreclosure. The More likely outcome is a steady degradation of the facilities and a consequent loss of tenants, leading inevitably to foreclosure. Such a result will benefit neither the displaced residents nor the parties herein.

The (c)ourt is aware that HUD has adopted the set-off policy in a well-intentioned attempt to steer a middle course between foreclosure and escalating mortgage losses. Id. at 563 (emphasis added).

In this appeal, ⁴ the Secretary argues that it was within her discretion to impose her set off policy in lieu of foreclosure. She further argues that, absent a determination that her actions were "arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law," the district court had no authority to set aside her policy decision based solely upon a finding that her action would "more likely" cause a steady degradation of plaintiffs' projects. We agree and, therefore, reverse.

With the passage of the Housing Act of 1949, ⁵ Congress sought to eradicate substandard living conditions and to provide a decent home for every American family. In Section 2 of the Act, Congress declared that the general welfare and security of the nation require:

housing production and related community development sufficient to remedy the serious housing shortage, the elimination of substandard and other inadequate housing through the clearance of slums and blighted areas, and The realization as soon as feasible of the goal of a decent home and suitable environment for every American family . . . . 42 U.S.C. § 1441 (emphasis supplied).

Thus, with passage of the Housing Act of 1949, 42 U.S.C. § 1441, and the Housing and Urban Development Act of 1968, 12 U.S.C. § 1701t, Congress established a national program to achieve the goal of a "decent home . . . for every American family." 42 U.S.C. § 1441 (1976). To attain this goal, Congress implemented a policy whereby:

(1) (P)rivate enterprise (would) be encouraged to serve as large a part of the total need as it can; (2) governmental assistance (would) be utilized where feasible to enable private enterprise to serve more of the total need . . . . 42 U.S.C. § 1441 (1976).

HUD was given broad powers to implement the national housing program, and was charged with the duty to exercise its

. . . powers, functions, and duties under this or any other law, consistently with the national housing policy declared by this Act and in such manner as will facilitate sustained progress in attaining the national housing objective hereby established . . . . 42 U.S.C. § 1441.

HUD was directed to encourage and to assist production of housing of sound standards of design, construction and livability, to reduce the cost of housing without sacrifice of standards, and to stabilize the housing industry. In 1968, Congress reaffirmed its housing goal and declared "that the supply of the Nation's housing (was) not increasing rapidly enough to meet the national housing goal . . . ." 42 U.S.C. § 1441a (1976). Congress stressed the need to concentrate on preserving existing neighborhoods through rehabilitation and improvements in management and maintenance. 42 U.S.C. § 1441a(c) (1976). Congress repeated its national housing goal in the banking code, emphasizing that that goal had not yet been realized. Congress declared:

(T)he highest priority and emphasis should be given to meeting the housing needs of those families for which the national (housing) goal has not become a reality; and in the carrying out of such programs there should be the fullest practicable utilization of the resources and capabilities of private enterprise and of individual self-help techniques. 12 U.S.C. § 1701t (1976).

To effectuate its national housing goal, Congress authorized HUD to enter into rent supplement contracts with owners of low and moderate income housing projects as a means for creating low and moderate income rental units. 12 U.S.C. § 1701s (1976). The Secretary is authorized to establish criteria and procedures for determining the eligibility of tenants on whose behalf rent supplement payments will be made. 12 U.S.C. § 1701s(a) and (e) (1976). The Secretary is authorized to acquire possession of and title to any property either by a voluntary conveyance in extinguishment of the mortgage indebtedness or by foreclosure on property covered by the mortgage. Notwithstanding these provisions, the Secretary is empowered to pursue to final collection "by way of compromise Or otherwise all claims assigned (to her,) notwithstanding Any other provision of law." 12 U.S.C. § 1713(k) and (L ) (emphasis added).

These provisions support our conclusion that the Secretary's decision to set off rent supplement payments against the project owners' delinquent mortgages is consistent with the national housing policy expressed in the acts. The Secretary's set off policy is a reasonable method to collect plaintiffs' delinquent payments in accordance with 12 U.S.C. § 1713(L ) and cannot be viewed, in our opinion, as an abuse of discretion. Congress recognized that HUD's ability to achieve the national housing goal was limited by the enormity of the problem and that long range objectives had to be...