Henry Barracks Housing Corp. v. United States

• Citation: 150 Ct. Cl. 689,281 F.2d 196
• Decision Date: 15 July 1960
• Docket Number: No. 524-58.,524-58.
• Parties: HENRY BARRACKS HOUSING CORPORATION v. UNITED STATES.
• Court: Court of Federal Claims

150 Ct. Cl. 689, 281 F.2d 196 (1960)

HENRY BARRACKS HOUSING CORPORATION v. UNITED STATES.

No. 524-58.

United States Court of Claims.

July 15, 1960.

Bernard J. Gallagher, Washington, D. C., for plaintiff.

Carl Eardley, with whom was Asst. Atty. Gen., George Cochran Doub, for defendant. Max L. Kane, Washington, D. C., was on the briefs.

DURFEE, Judge.^*

This case presents the court with the problem of what liability, if any, the Government has to the operator of a Wherry Housing project who defaults on his mortgage payments because the project is not occupied by the number of tenants who were originally determined to be necessary to insure profitable operation.

Plaintiff is a Puerto Rican corporation which, in the latter part of 1953, communicated a desire to the Department of the Army Corps of Engineers to be considered as a prospective sponsor for a housing project at Cayey, Puerto Rico, which would be occupied by the military and civilian personnel assigned to Henry Barracks military post. The project was of the type contemplated by Title VIII of the National Housing Act, as amended, 63 Stat. 570, 571; 12 U.S. C.A. § 1748, known as the Wherry Housing Act.

After receiving notification that it had been selected to sponsor the project, plaintiff obtained a mortgage loan insured by the Federal Housing Administration (FHA) and entered into a seventy-five year lease with the Government at a nominal rental of public lands on which the project was to be erected.

Plaintiff began construction in October 1954. At about the time that the project was completed the local newspapers reported that the Army intended to deactivate Henry Barracks. Plaintiff had at no time previously been informed of this contemplated action, but it was confirmed by Army spokesmen in December 1955.

Despite attempts made by plaintiff to obtain the use of post facilities like the officers' club and swimming pool in order to attract tenants from the island's population-at-large, the project operated with a high percentage of vacant units because of the transfer of the personnel for whom the housing had been built away from Henry Barracks. Because of this development, plaintiff was unable to maintain the mortgage payments on the project and the holder of the mortgage foreclosed. The mortgagee purchased the property at public sale and subsequently transferred it to the FHA in return for Government debentures.

The plaintiff has alleged in its petition that certain representations made by the defendant induced it to sponsor the project, and that the deactivation of Henry Barracks was a breach of the contract between plaintiff and defendant. Plaintiff asks damages which include the loss of anticipated earnings for the period of the lease and the loss of capital invested in the construction.

The Wherry Housing Act was enacted as a means of encouraging private investors to engage in the construction of rental housing which would serve the needs of military and civilian personnel on duty at military installations. Decent housing is an essential morale factor in the creation and continuation of a skilled military establishment and the Act was intended to result in the construction of such housing. Prior to the passage of the Act this type of housing was distinctly unattractive to private builders because the military installations were often located in isolated areas. Ordinarily, the operators of such housing would have had to rely on the Government installation for its services and utilities as well as for the land on which to build. Imperiling operations still further from the viewpoint of private capital was the fact that the relative impermanency of military installations would make such housing subject, over the long run, to sudden reductions in the number of potential tenants.

The legislation aimed to remove the unattractive features of military housing investment through three major provisions: (1) a special form of mortgage insurance would be made available up to 90 percent of the replacement cost so that the builders could obtain the necessary financing, (2) the building sites would be leased to the builders by the Government on a long term, nonrevocable basis, and (3) utilities would be provided by the nearby installation on a long term basis.

At the time of the enactment of Title VIII, Title VI of the National Housing Act, 55 Stat. 55, was in effect providing for mortgage insurance by the FHA if it found that the project for which the loan was requested was an "acceptable risk." Title VI was obviously inappropriate as a basis of mortgage insurance on housing built near isolated military posts because the questionable permanency of the prospective tenants made such housing not an "acceptable risk," by FHA standards. Consequently, the major distinction between Title VI and Title VIII (Wherry Housing) is that Title VIII permits the FHA to issue the mortgage insurance if the Secretary of the military department concerned furnishes a certificate of need for the housing which the FHA could regard in the same manner as the finding of "acceptable risk" in Title VI.

The pattern of events which culminated in the building and operation of Henry Barracks housing is representative of the procedure followed in any Wherry Housing project. Contemporaneously with its receipt of notification of acceptance as sponsor, the plaintiff received from the Army certain information pertaining to construction and operation of the housing. Among other things, the informational letter revealed that the construction and operation of the project would be subject to certain controls by the defendant. Proceeding on the information contained in the letter, plaintiff executed a 75-year lease with the defendant at a rental of $100 per annum, obtained the financing for the project, and secured FHA insurance on the mortgage.

As noted above, a prerequisite to the securing of mortgage insurance was the furnishing to the FHA of a certificate of need from the Secretary of the Army which said:

"In accordance with the provisions of Section 803(b) (2) of Title VIII of the National Housing Act, the undersigned, as the duly authorized designee of the Secretary of Defense, hereby certifies that:

"the above identified housing project is necessary to provide adequate housing for civilian or military personnel (including Government contractors\' employees) assigned to duty at the military installation named above; such military installation is deemed to be a permanent part of the Department of the Army;

"there is no present intention to substantially curtail the activities at such installation; and

"based on the official records of the said Department, the military and civilian personnel who will be expected to occupy the dwelling units described above and for whom the project is intended, should be able to pay the proposed average monthly rentals per family unit as stated."

This certicate was furnished to plaintiff who forwarded it to the FHA with its application for mortgage insurance.

The informational letter received by the plaintiff at the time of his selection as sponsor indicated that the approved rental schedule for the project would be based on a net return not to exceed 6½ percent of the estimated replacement cost, and plaintiff was also informed that maximum rentals would be prescribed by the defendant. The project analysis subsequently issued by the FHA for Henry Barracks housing estimated annual and net incomes and operating expenses for the project and estimated the occupancy at 97 percent of capacity. Plaintiff obtained a mortgage loan in the amount of $631,100 which was 90 percent of the FHA estimated replacement cost, as provided in the statute, and the amount of the construction capital not borrowed was covered by direct investment of the plaintiff.

This is the first time that we have been called upon to interpret the Wherry Housing portion of the National Housing Act, and so a discussion in some detail is in order. The plaintiff argues that it relied to its detriment on certain representations contained in the certificate of need and the lease. The allegations of breach of contract seem to raise the question of whether the defendant made any expressed or implied promise that the Army and civilian personnel assigned to Henry Barracks would not be curtailed, or that it would not be deactivated, thereby agreeing to guarantee an adequate rental income on the housing project.

The defendant, on the other hand, takes the position that there is no contractual guarantee of permanency of Henry Barracks or full occupancy of the project, that there is no statutory obligation to compensate for reduced tenancies resulting from curtailed activities, and that the Government made no representations on which a theory of detrimental reliance can be based.

The plaintiff's motion indicates that the representations on which it relies are to be found in the certificate of need and are repeated in the lease. It maintains that these contractual representations were breached when Henry Barracks was deactivated soon after the project was completed and the implication is that these documents warranted or guaranteed that operations at the post would be continued in an undiminished fashion. Plaintiff reasons that since the lease specified that it was designed to effectuate the purpose of Title VIII, and since the purpose of Title VIII was to relieve the existing shortage of housing adjacent to military posts resulting from the uncertain permanency of such posts, there was a representation of permanency...