HELLERMANN v. Romney, 71-C-598.
| Decision Date | 11 February 1976 |
| Docket Number | No. 71-C-598.,71-C-598. |
| Citation | 409 F. Supp. 352 |
| Parties | Arthur K. HELLERMANN, Plaintiff, v. George W. ROMNEY, Secretary of the Department of Housing and Urban Development, and Eugene H. Gulledge, Federal Housing Commissioner, Defendants. |
| Court | U.S. District Court — Eastern District of Wisconsin |
COPYRIGHT MATERIAL OMITTED
Charne, Glassner, Tehan, Clancy & Taitelman, by F. Thomas Olson and Irvin B. Charne, Milwaukee, Wis., for plaintiff.
William J. Mulligan, U. S. Atty., by William E. Callahan, Jr., Asst. U. S. Atty., Milwaukee, Wis., for defendants.
DECISION and ORDER
The plaintiff, sponsor-mortgagor and life tenant of a multi-family housing project in Nashville, Tennessee, has sued the Secretary of Housing and Urban Development (HUD) and the Acting Federal Housing Commissioner in a 12-count amended complaint. The action was tried to the court in November, 1975, after which both parties filed post-trial briefs. The plaintiff has informed the court that relief is no longer sought with regard to four of the twelve counts, and it is apparent from the absence of proof at trial and from the briefs that the same is true with regard to count 9 of the amended complaint. Accordingly, this opinion, which constitutes the findings of fact and conclusions of law required by Rule 52(a), Federal Rules of Civil Procedure, will address itself to the first seven counts of plaintiff's amended complaint.
The amended complaint alleges that the defendants and their agents arbitrarily and capriciously disallowed certain legitimate expenses in determining the size of the insured mortgage for the project, which reduced the size of the mortgage actually insured, required additional investment on the part of the plaintiff, and reduced the plaintiff's return on his investment. Before the project was completed, it was converted from one established under § 221 of the National Housing Act, 12 U.S.C. § 1715l, to one established under § 236 of the Act, 12 U.S.C. § 1715z-1. The plaintiff claims that he was told by HUD officials that the conversion would not require any additional investment or expenditure on his part, but that such investment or expenditure was later required. Mortgage subsidies are provided by HUD to projects established under § 236, and the plaintiff claims that the amortization schedule established by HUD differs from that required by law, with the result that his mortgage payments for interest have been larger than legally required. Additional claims are made relating to undue delay on the part of HUD in granting rent increases, HUD's failure to establish rent levels adequate to cover service of the mortgage and provide a return on the plaintiff's investment, and HUD's refusal to allow the withdrawal of interest earned on deposits in a required "replacement reserve fund."
The parties have filed a stipulation of uncontested facts, which I adopt as my own findings. Additional findings of fact appear below in the separate discussions of each count of the amended complaint.
On March 19, 1970, the plaintiff entered into a regulatory agreement with the defendant pursuant to § 236 providing for the endorsement by the defendants for insurance of a mortgage on the plaintiff's housing project in the amount of $807,500. (Ex. 98) The defendants also agreed to make subsidy payments to the mortgagee, on behalf of the plaintiff, based on the amount of the endorsed mortgage. The plaintiff contends that he was entitled to the endorsement of a mortgage in an amount considerably in excess of $807,500 and that the defendants acted arbitrarily, capriciously and in violation of applicable statutes and regulations in refusing to endorse a larger mortgage for the project. I believe the plaintiff has failed to meet his burden of showing that he is entitled to any relief under this cause of action.
In 1963 the plaintiff, already an experienced builder of public housing projects, entered into a contract for the purchase of the land upon which the project was constructed, and he subsequently paid $11,700 for the land. He submitted a "request for pre-application analysis of multifamily housing proposal" to the defendants on April 17, 1967 (Ex. 4), and was invited by the defendants on August 22, 1967, to file a formal application for a conditional commitment for mortgage insurance for a project to be constructed on that land. He was informed that an allocation of $650,000 of below market interest rate funds had been approved for his proposal and advised that the invitation to submit a formal application was conditioned on specified modifications in his original proposal, such as the inclusion of some one-bedroom units in the project. (Ex. 6)
On December 21, 1967, the plaintiff submitted an "application for project mortgage insurance" for a mortgage in the amount of $750,000 to be insured under the provisions of § 221(d)(3). (Ex. 13) The defendants issued a conditional commitment on January 31, 1968, to insure a project with a maximum mortgage amount of $784,200. (Ex. 24) This commitment was conditioned upon, among other things, a specified mixture of one and two-bedroom units to be constructed.
The plaintiff, by letter of February 9, 1968, requested two modifications in the proposed project: a reduction in the number of one-bedroom units and corresponding increase in the number of two-bedroom units and a change in the form of ownership of the project to a life estate in the plaintiff with the remainder in a third party approved by the defendants. (Ex. 25) On February 19, 1968, the defendants accepted the plaintiff's second proposed modification, but rejected the first, "because this would necessitate a complete rework of your proposal." (Ex. 26)
On June 10, 1968, the plaintiff applied for a firm commitment for an insured mortgage in the amount of $787,000 pursuant to § 221(d)(3), based on an estimated replacement cost for the project of $874,858. (Ex. 31) On June 20, 1968, a determination of maximum insurable mortgage in the amount of $787,000 was made by the defendants. (Ex. 36) This determination was based on the amount stated in the application, which was slightly lower than the amount based on the defendants' estimated replacement cost. A "commitment for insurance of advances" was issued by the defendants on June 25, 1968, in the amount of $787,000. (Ex. 43) Paragraph 3 of this commitment required the plaintiff to submit a construction contract with the general contractor to the defendants for approval.
This contract, between the plaintiff and Robert A. Utke, the remainderman, as owners, and the plaintiff, as contractor, was executed on August 12, 1968. (Ex. 45) It established the actual cost of construction as the measure of payments due the contractor, subject to a maximum of $676,917, denominated the "cash upset" amount. Actual construction costs were considerably in excess of this "cash upset" figure, and some other costs of developing the project, not included in the construction contract, were ultimately greater than the estimates used by the plaintiff in preparing his application and by the defendants in determining their commitments. Part of the increase in costs was the result of the plaintiff's decision to use materials and install fixtures of a quality higher than that required by the defendants' specifications.
After review of the plaintiff's certification of the increased expenses, the defendants disallowed $66,239, with the result that the recognized "actual cost" of improvements and land was insufficient to support the endorsement of an insured mortgage in an amount greater than $817,700. The defendants, however, did not increase the amount of the insured mortgage above the $787,000 already committed to the plaintiff's project. Subsequently, the plaintiff and the defendants agreed to convert the project to a § 236 project, and the defendants' mortgage commitment was increased to $807,500, a figure accepted by the plaintiff and Mr. Utke on February 25, 1970. (Ex. 82) A mortgage in that amount was insured, pursuant to § 236, on March 19, 1970. (Ex. 90, 92)
Insurance of mortgages pursuant to § 236 is regulated by 12 U.S.C. § 1715z-1(j)(3), which reads in part: "To be eligible for insurance under this subsection, a mortgage shall meet the requirements specified in subsections (d)(1) and (d)(3) of section 1715l of this title, except as such requirements are modified by this subsection."
The relevant portion of § 1715l(d)(3) reads:
The statutory language indicates that the maximum mortgage amount depends upon an estimate of costs to be made by the Secretary before the actual costs are known — the estimate is of the replacement cost of the proposed improvements. Mortgagors of § 221 and § 236 projects are required by 12 U.S.C. § 1715r to certify to HUD that the full amount of their subsidized mortgage is needed to cover the allowable percentage of their costs, or to pay any unneeded portion of the mortgage proceeds to the mortgagee in reduction of the mortgage obligation.
As applied to the plaintiff's project, § 1715r required a certification that 90% of the...
To continue reading
Request your trial
-
Johnson v. SECRETARY OF/AND US DEPT. OF HOUSING
...cost overruns by denying the mortgagor the right to use subsidized mortgage proceeds to finance such overruns. Hellerman v. Romney, 409 F.Supp. 352, 356 (E.D.Wisc.1976). Upon completion of construction, a Section 236 project mortgagor will not necessarily be entitled to the maximum mortgage......