Johnson v. SECRETARY OF/AND US DEPT. OF HOUSING
| Decision Date | 03 September 1981 |
| Docket Number | Civ. A. No. 77-3746. |
| Citation | 544 F. Supp. 925 |
| Parties | Lewis E. JOHNSON v. The SECRETARY OF/AND U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT and Federal Housing Administration. |
| Court | U.S. District Court — Eastern District of Louisiana |
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William J. Dutel, Russell J. Nunez, Jr., New Orleans, La., for plaintiff.
Joan Elaine Chauvin, New Orleans, La., Charleen Berry, Fort Worth, Tex., for defendants.
In 1968 Congress declared that the national goal of "a decent home and a suitable living environment for every American family" had not been fully realized for many of the nation's lower income families. Accordingly, it amended the National Housing Act of 1934 by enacting the Housing and Urban Development Act of 1968,1 "to assist families with incomes so low that they could not otherwise decently house themselves ..." 12 U.S.C. § 1701t (1976). Section 236 of the National Housing Act ("Section 236")2 is designed, in furtherance of this goal, first to encourage private industry to provide reduced rental housing by authorizing the Secretary ("Secretary") of the United States Department of Housing and Urban Development ("HUD") to subsidize the monthly interest payments on behalf of the owner of a rental housing project designed for occupancy by lower income families. Interest reduction payments equal to the difference between the monthly payment for principal and interest, which the project owner as mortgagor is obligated to pay at market rates, and the amount that the owner would pay if the mortgage bore interest at the rate of one percent (1%) a year, 12 U.S.C. § 1715z-1(c), result in lower operating costs. This enables Section 236 project owners to charge lower rents to their tenants. In return, project owners are strictly regulated in the amount of rent they may charge and the profits they may earn. 12 U.S.C. § 1715z-1(f)(1) and (e); 24 C.F.R. § 236.55. Second, Section 236 is intended to induce private lenders to finance low-cost housing projects by authorizing the Secretary to insure eligible mortgages (including advances during construction), which are held by approved mortgagees and are secured by property upon which the structure is to be built. 12 U.S.C. § 1715l (1976).
Laurel Gardens, a Partnership in Commendam, ("Laurel Gardens") is the sponsor/owner/mortgagor of the Laurel Gardens Apartments Project ("Laurel Gardens project" or "the project"), FHA # 064-44094-LD, a Section 236 federally insured multifamily rental apartment housing project designed for occupancy by lower income families. Plaintiff, Lewis E. Johnson ("Johnson"), is a general partner of Laurel Gardens and the general contractor for the project. By this action, Johnson seeks to recover damages against the Secretary of/and HUD based on a complaint which rather obliquely merges into one statement of "general allegations" what can best be analyzed as four separate claims. In his first two claims, Johnson contends that the Secretary improperly reduced the insurable mortgage originally authorized for the Laurel Gardens project first, by finding that an identity of interest existed between Johnson and one of his subcontractors, and second, by refusing to approve certain change order requests. Third, Johnson claims that he incurred damages when he relied to his detriment on a misrepresentation of material fact made by an authorized representative of the Secretary. Finally, Johnson alleges that the Secretary failed to approve retroactively, contrary to his agent's express representations, an increase in the management fees Johnson would receive under his housing management contract.
Trial was held on February 21, 22, 25, 26, and 27, 1980, before the Court sitting without a jury. After hearing the testimony and considering the pleadings, the designated depositions and exhibits received into evidence as well as the post-trial briefs submitted by the parties, the Court makes its findings of facts and conclusions of law in the following opinion.
OPINIONOn October 20, 1972, after application review, feasibility study, project appraisal and income analyses and other internal procedures, the Commissioner (hereinafter referred to indistinguishably as the "Secretary") of the Federal Housing Commission (a bureau of HUD and hereinafter referred to indistinguishably as "HUD"), acting on behalf of the Secretary, and pursuant to Section 236 and the regulations promulgated thereunder, 24 C.F.R. §§ 236.1 et seq., accepted the proposed Laurel Gardens project as an insurable risk and issued a Commitment for Insurance of Advances to BNO Mortgage Corporation ("BNO") with George E. Potter ("Potter") and Clifford W. Sherman ("Sherman") as sponsors. HUD committed to insure the mortgage note for 90% of the $1,174,643 replacement cost of the project to a maximum of $1,057,100.
Despite the parties' failure to introduce into evidence the customary Regulatory Agreement (FHA Form 3135), one of the principal documents which forms the contractual relationship between the Secretary and a Section 236 sponsor, the evidence clearly indicates that on April 19, 1973, the Secretary, pursuant to his Commitment to Insure, executed an agreement to insure the mortgage for the Laurel Gardens project,3 subject to any reductions required by the National Housing Act or the applicable regulations. The Secretary is authorized even before the actual costs of a project are known, to commit public funds for the insurance of a § 236 mortgage. That commitment of funds, however, is limited in advance to a maximum amount which is based on the replacement cost of the proposed project. 12 U.S.C. §§ 1715z-1(j)(3) and 1715l(d)(3)(iii). The Secretary's agreement to insure the mortgage of the Laurel Gardens project was limited to a maximum amount of $1,057,100. The maximum insurance amount discourages 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 amount originally committed by the Secretary. Section 227 of the National Housing Act, 12 U.S.C. § 1715r, prohibits the Secretary from insuring a mortgage until the mortgagor agrees to certify its "actual costs" upon completion of the project and prior to final endorsement of the mortgage. The "actual cost" of the project to the mortgagor includes amounts paid for labor, materials, construction contracts, off-site public utilities, streets, organizational and legal expenses, general overhead and up to a 10% allowance for builder's and sponsor's profit and risk. 12 U.S.C. § 1715r(c). Section 1715r requires the mortgagor of a § 236 project to certify that it will pay any unneeded portion of the mortgage proceeds to the mortgagee in reduction of the mortgage obligation. The cost certification process insures that the proceeds of an insured mortgage are used only for intended public purposes and are not diverted to other uses by mortgagors. Id. Laurel Gardens agreed, pursuant to § 1715r, to certify its actual costs and to repay any sums received in excess of its certified actual costs. That agreement is contained in FHA Form 3306, the Agreement and Certification.4
On May 6, 1974, Laurel Gardens by Johnson certified that the actual cost of the project as of February 28, 1974, was $1,047,765.5 On May 23, 1975, the Secretary authorized for final endorsement a maximum insurable mortgage of $997,700. In reaching this amount, the Secretary ultimately disallowed $75,889 from the certified "actual cost" submitted by Laurel Gardens.6 Of this amount, $40,376 was disallowed as a result of the Secretary's determination that an identity of interest existed between Johnson and Ward. Johnson contends that this amount was improperly disallowed. I agree.
Prior to 1973, Johnson had no plans to construct, own or operate a § 236 federally insured multifamily apartment project. He and Warren Orr ("Orr"), however, owned the land upon which Sherman and Potter proposed to build the Laurel Gardens project. In January, 1972, while the parties were engaged in negotiations for the sale of the land to Sherman and Potter, Orr died. Johnson was appointed executor of Orr's estate and continued negotiations for the sale of the land.
As already stated, on November 20, 1972, the Secretary issued a 90-day Commitment to Insure the mortgage of the Laurel Gardens project based on a sponsorship composed of Sherman and Potter. Prior to the expiration of the Secretary's Commitment to Insure, however, the project was without a viable sponsorship. First, Sherman, who, in addition to serving as a sponsor of the project intended to act as the general contractor as well, died. Second, HUD determined that Potter would no longer be acceptable as a sponsor due to the deterioration of his financial status.
Since the Laurel Gardens project was now without a sponsor, Johnson decided to co-sponsor the project if a suitable co-sponsor could be found. Virgil Elliott ("Elliott"), who served as a consultant to Johnson and as a loan broker for BNO, solicited Nathan Jones, the then Assistant Director of the New Orleans Area HUD Office ("HUD/NOAO"), for recommendations of acceptable persons who might consider co-sponsoring the Laurel Gardens project with Johnson. Jones suggested that Elliott contact either Albert J. Ward ("Ward") or Trudie Black. Johnson, Elliott and Potter thereafter discussed with Ward, and on February 5, 1973, agreed upon, a proposal in which Johnson and Ward would sponsor respectively 47½% of the project while Potter would sponsor 5%.7
Ward additionally agreed to build the project as general contractor. Subsequently, on March 13, 1973, BNO submitted, and on March 16,...
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Johnson v. Secretary of and U.S. Dept. of Housing and Urban Development, Federal Housing Admin.
...was denied, and Johnson's complaint was thereupon dismissed in its entirety. Johnson v. Secretary of/and U.S. Department of Housing and Urban Development, 544 F.Supp. 925 (E.D.La.1981). On appeal, Johnson contends that he was the real party in interest and that he should be allowed to recov......
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Johnson v. Secretary Of/And US Dept. of HUD
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