Johnson v. Secretary of and U.S. Dept. of Housing and Urban Development, Federal Housing Admin.

• Decision Date: 01 August 1983
• Docket Number: No. 81-3793,81-3793
• Citation: 710 F.2d 1130
• Parties: Lewis E. JOHNSON, Plaintiff-Appellant, v. The SECRETARY OF AND U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, FEDERAL HOUSING ADMINISTRATION, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1130

710 F.2d 1130

Lewis E. JOHNSON, Plaintiff-Appellant, v. The SECRETARY OF AND U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT, FEDERAL HOUSING ADMINISTRATION,

Defendants-Appellees.

No. 81-3793.

United States Court of Appeals, Fifth Circuit.

Aug. 1, 1983.

Dutel & Dutel, Russell J. Nunez, Jr., William J. Dutel, New Orleans, La., for plaintiff-appellant.

Joan Elaine Chauvin, Asst. U.S. Atty., New Orleans, La., Charlene Berry, Dept. of HUD Region, Office of the Regional Administration, Fort Worth, Tex., Michael Kimmel, Dept. of Justice, Civil Div., Appellate Staff, Richard A. Olderman, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before WILLIAMS and JOLLY, Circuit Judges and WILL(fn*), District Judge.

E. GRADY JOLLY, Circuit Judge:

This appeal seeks money damages in connection with the development and construction of a low-cost housing project. It arises from the exclusion by the Secretary of Housing and Urban Development ("Secretary") of the profit and overhead paid by a project owner to a subcontractor from the total amount of the insurable mortgage. The Secretary made the exclusion because he found that the subcontractor had an "identity of interest" with the owner. We agree that the Secretary acted arbitrarily, capriciously and erroneously in finding an "identity of interest." We agree that the amount in question should have been included in the total amount of the insurable mortgage. Nevertheless, with the exception of the district court's dismissal of Lewis E. Johnson's claim for the monetary amount which he would have received as interest reduction payments on $36,400, we affirm the district court's dismissal of the complaint. We do so on the ground that a judgment for the other monetary amounts sought as damages in this case cannot come from the funds in the possession and control of the Secretary. Because a judgment for such amounts in this case can be paid only from the general public treasury, the doctrine of sovereign immunity prevents the recovery here sought.

I.

Section 236 of the National Housing Act, as amended, 12 U.S.C. Sec. 1715z-1, provides a program of mortgage insurance intended to induce private lenders to finance low-cost housing projects by authorizing the Secretary of the Department of Housing and Urban Development to insure eligible mortgages. Under this program, a private lender provides permanent financing for construction of a rental housing project, and the Secretary insures the mortgage and agrees to buy it out in case of default. 12 U.S.C. Sec. 1715e. Section 236 also encourages private industry to provide reduced rental housing by authorizing the Secretary to subsidize the monthly mortgage interest payments to the lending institution on behalf of the owner. 12 U.S.C. Sec. 1715z-1.

Section 236 provides that the Secretary will make direct interest reduction payments to the lender in behalf of the owner-mortgagor. These payments are 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. Sec. 1715z-1(c). This subsidy to the owner results, of course, in lower operating costs which enable section 236 project owners to charge lower rents to their tenants. In return, project owners are strictly regulated in the amount of rent they can charge and profits they can earn. 12 U.S.C. Sec. 1715z-1(f)(1) and (e); 24 C.F.R. Sec. 236.55. Section 236 is also intended to induce private lenders to readily finance low-cost housing projects by authorizing the Secretary to insure eligible mortgages against default (including advances during construction). 12 U.S.C. Sec. 1715e.

In other words, HUD's involvement in advancing the housing program under section 236 is limited to: (1) insuring the mortgagee against default; (2) providing in behalf of the owner-mortgagor a direct payment to the mortgagee-lender of monthly mortgage interest payments; and (3) approving and regulating, inter alia, construction costs and charges, rents charged and profits earned.

On October 22, 1972, the Federal Housing Commissioner, acting on behalf of the Secretary and pursuant to section 236, accepted the proposed Laurel Gardens Apartment Project ("the project") as an insurable risk and issued a Commitment for Insurance of Advances to the Bank of New Orleans Mortgage Corporation ("BNO"). The Department of Housing and Urban Development ("HUD") committed to insure the mortgage note for ninety percent of the $1,174,643 replacement cost of the project, to be located in New Orleans, Louisiana, to a maximum of $1,057,100.

Ultimately, the sponsor and general contractor of the project, Lewis E. Johnson, was found by HUD to have an "identity of interest" ¹ with one of his subcontractors A.J. Ward, Jr. As a result of this finding, HUD disallowed the amount of $36,519 from the mortgagor's certificate of actual cost. This amount represented Ward's profit and overhead on the project. Consequently, Johnson, as general contractor on the project, was forced to pay the disallowed amount of $36,519 to Ward from his own funds as opposed to those funds disbursed to him by BNO under the HUD commitment. In addition, because of this finding of an identity of interest with Ward, certain amounts were disallowed from the mortgagor's certificate of actual cost. In all, a total amount of $40,376 was disallowed. These disallowances resulted in a reduction by the Secretary of the maximum insurable mortgage on the project from $1,034,100 to $997,700. The mortgage loan for the project was accordingly reduced by $36,400. The project was thereby deprived of the interest reduction payments the Secretary would have been required to make over the life of the mortgage to BNO on $36,400. Finally, a purchase agreement for the project had been reached with the National Corporation for Housing Partnerships ("NCHP") and the National Housing Partnership ("NHP"). ² The purchase agreement provided that, in addition to assuming the mortgage, the price of the purchased interest paid to Johnson would equal 10.03% of 99% of the mortgage loan authorized by the Secretary for final endorsement for insurance, but not in excess of $105,000. Consequently, because of the Secretary's reduction of the maximum insurable mortgage by $36,400, the purchase price of the 99% interest in the project was reduced by $3,614.41.

Johnson also claimed that he had sustained the following losses as the result of the identity of interest finding: (1) a builder's and sponsor's Profit and Risk Allowance of $3,651.90; and (2) an architect fee of $1,700. Both of these items were disallowed from the mortgagor's certificate of actual cost and are part of Johnson's claimed damages.

Filing suit in district court, Johnson sought as damages the monetary amounts referred to in the two preceding paragraphs as well as the interest reduction payments which would have been made on $36,400. ³ After a five-day trial, the district court ruled that HUD had acted arbitrarily and capriciously in finding that an identity of interest existed between Johnson and Ward, but that Laurel Gardens, a Partnership in Commendam, was the real party in interest. It went on to find that the Secretary was liable to Laurel Gardens for a sum equal to the amount of interest reduction payments that would have been paid on $36,400. The district court, however, found that because Laurel Gardens, not Johnson, was the real party in interest, the Secretary was not liable to Johnson for any of the claimed damages, including the interest reduction payments. Johnson was granted leave to amend his complaint and substitute Laurel Gardens in his place as plaintiff. Johnson did not amend, but rather moved for reconsideration. The motion for reconsideration 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 recover damages from the Secretary as aforenoted.

II.

Our story began in 1971. Johnson and Warren Orr were the owners of certain land in New Orleans upon which Clifford Sherman and George Potter intended to construct a section 236 low-income housing project. Several deaths interceded. Orr died in January 1972, while negotiations for the land were still pending. Sherman died after the Secretary, in October 1972, issued a ninety-day Commitment to Insure the project for $1,057,100. This Commitment to Insure was based upon having Sherman and Potter as sponsors; with the death of Sherman a new sponsorship was formed consisting of Potter, Johnson and A.J. Ward, Jr. This new group of sponsors was proposed to HUD in March 1973. Ward was to be the general contractor.

Although the New Orleans Area Office of HUD (HUD/NOAO) initially rejected Ward as unsuitable for sponsorship of the project, Ward felt that it would eventually accept him after it reconsidered the matter. Accordingly, he and Johnson obtained a loan from the Bank of New Orleans (BNO) to help purchase the land for the project. The note evidencing the loan of $117,000 was executed by Johnson and Ward and bound them "in solido." The proceeds of the loan were deposited in the account of Laurel Gardens. Concurrently, Johnson and Ward executed a written agreement that was intended to release Ward from any liability on the note if HUD/NOAO failed to reverse its earlier determination rejecting Ward as a sponsor. At the time of the execution of the promissory note and release, neither Johnson nor Ward knew that Ward would ultimately be unacceptable to HUD/NOAO as sponsor of the project.

After meeting with Ward, HUD/NOAO again rejected him as a...