Kargman v. Sullivan, s. 76-1304

• Decision Date: 15 June 1977
• Docket Number: Nos. 76-1304,s. 76-1304
• Citation: 552 F.2d 2
• Parties: Max R. KARGMAN et al., Plaintiffs, Appellees, v. Thomas A. SULLIVAN et al., Appellants. Bertram A. DRUKER et al., Plaintiffs, Appellees, v. CITY OF BOSTON et al., Appellants. to 76-1307.
• Court: U.S. Court of Appeals — First Circuit

Page 2

552 F.2d 2

Max R. KARGMAN et al., Plaintiffs, Appellees, v. Thomas A. SULLIVAN et al., Appellants.

Bertram A. DRUKER et al., Plaintiffs, Appellees, v. CITY OF BOSTON et al., Appellants.

Nos. 76-1304 to 76-1307.

United States Court of Appeals First Circuit.

Argued Oct. 7, 1976.

Decided March 31, 1977.

As Amended on Denial of Rehearing June 15, 1977.

Thomas H. Martin, Boston, Mass., with whom Philip A. Mason and Mason & Martin, Boston, Mass., were on brief, for City of Boston and Boston Rent Board.

Brien Michael Olmstead, Boston, Mass., for Sarah Wean and others.

Robert L. Klivans, Boston, Mass., with whom Palmer & Dodge, Boston, Mass., was on brief, for James M. Kelley and others.

Mark Stern, East Boston, Mass., with whom Galvin & Stern, East Boston, Mass., was on brief, for Roberta Krakov and others.

Thomas G. Dignan, Jr., Boston, Mass., with whom R. K. Gad, III, Ropes & Gray, Robert J. Sherer, John W. Gahan, III, and Roche, Carens & DeGiacomo, Boston, Mass., were on brief, for Max Kargman and others.

William E. Hughes, Asst. U. S. Atty., was on brief, for United States of America.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

COFFIN, Chief Judge.

The major legal problem in this case is to try to fit the fact that owners of four federally subsidized low and middle income housing projects in Boston have to satisfy both federal and municipal authorities as to the reasonableness of their rents within the doctrinal pronouncements of the Supreme Court in Supremacy Clause decisions. This requires us to review the record as to the impact on plaintiffs of the procedures and decisions of the Boston Rent Board in reviewing requests for rental increases and to determine whether the district court's conclusion that "an impermissible conflict" exists, 410 F.Supp. 1314, 1320 (D.Mass.1976), can stand.

I.

The history and longevity of this litigation are already formidable. ¹ The factual background is more fully set forth in the district court's opinion, 410 F.Supp. at 1315-1319. These are two consolidated cases, in which the plaintiffs-appellees are owners of large apartment complexes housing low and middle income tenants. ² Their housing developments are federally subsidized and are regulated and financed under § 221(d)(3) of the National Housing Act, 12 U.S.C. § 1715l (d)(3). Under this program, which is administered by the U. S. Department of Housing and Urban Development (HUD), and designed to assist private industry in providing housing for low and middle income families, 12 U.S.C. § 1715l (a), owners receive insurance on mortgage loans, can borrow at below market interests rates, are subject to reduced equity requirements, and enjoy various tax advantages. See generally Hahn v. Gottlieb, 430 F.2d 1243, 1245-46 (1st Cir. 1970). In order to obtain these advantages, mortgagors must sign regulatory agreements with HUD which oblige the owners to charge tenants at prices "not exceeding" those in the approved schedules. Pertinent to these cases is HUD's commitment in these agreements to approve rent schedules "necessary to compensate for any net increase, occurring since the last approved rental schedule, in taxes . . . and operating and maintenance expenses". HUD's general formula in arriving at approved rent increases is to allow coverage of mortgage retirement and debt service, operating expenses, and, in accordance with 24 C.F.R. § 221.532(a), a six per cent return on equity.

Beginning in 1970 the city of Boston initiated its own system of rent control which applied to § 221(d)(3) housing, amending the ordinance in some respects in 1972. This system required plaintiffs, after having received federal approval of a rent increase, to request the additional approval of the Boston Rent Board. In so doing, they were subjected to further delay, additional expense, more detailed investigation, somewhat different approaches to countable costs, an adversary hearing and possible appeal, and the possibility of either approval of a lower rent increase than that authorized by HUD or an absolute denial.

The Druker plaintiffs brought suit in 1971 and the Kargman plaintiffs later that year; both sets of plaintiffs sought declaratory and injunctive relief invalidating and proscribing enforcement of the Boston Rent Board orders. In 1971 the district court abstained in the Druker case, Druker v. Sullivan, 332 F.Supp. 1126 (D.Mass.1971), affirmed, 458 F.2d 1272 (1st Cir. 1972), on the ground that a possibly dispositive state law issue existed. This proved not to be the case. See 362 Mass. 874, 287 N.E.2d 801 (1972). We subsequently denied plaintiffs' motion to reinstate the appeal and, instead, ordered the case remanded. We were somewhat ambivalent, recognizing the need for decision without avoidable delay, but hesitant to decide a question of importance to the federal government, the landlords, their tenants and the municipality on the existing record. The summary judgment record gave us, we felt, less than 20-20 vision and we lacked the benefit of any expression of views from HUD itself. We were, as we said, seeing "Hamlet" without the prince.

We therefore remanded to obtain a fuller record and a judgment based thereon. We indicated that:

" . . . the present record is meager with respect to the purposes, regulations, procedures, accounting, and practical workings of the federal and municipal systems of rent control. It would seem to us, in the light of ITT v. Minter, 435 F.2d 989 (1st Cir. 1970), that such a ventilation of the design and operations of the two regulatory schemes would be helpful in determining if they can co-exist."

We also renewed a prior district court invitation to HUD that it intervene. Finally, we operated on the naive assumption that both "ventilation" and decision could take place in time for us to review the preemption issue on the merits, if there were an appeal, by the summer of 1973.

Four years later we reach the issue. We are not in a position to say why this fruit took so long to ripen. HUD finally did intervene in the Druker case. The Druker and Kargman cases were consolidated. Depositions of a HUD official and a Boston Rent Board official were taken. Fairly voluminous exhibits were prepared. And, finally, the consolidated cases were tried for several days in 1975.

The plaintiffs' case was directed to underlining the different approaches to setting rent ceilings pursued by HUD and Boston, and their differing results. There were clearly differences in procedure, standards, time-for-decision, and, in the cases at bar, in results.

Defendants conceded differences in approach, but claimed that the approach of the Boston Rent Board, involving closer scrutiny of increased costs, was more realistic, did not jeopardize the financial stability of landlords participating in § 221(d)(3), did not require substantially more time, and more often than not resulted in approving the HUD rent figure.

The district court noted that HUD and the Boston Rent Board differed in their approaches to fixing maximum rents in three ways: (1) While HUD allowed a fixed vacancy rate of seven per cent, Boston restricted vacancy allowances to the actual rate or five per cent whichever might be lower; (2) HUD would treat as operating expenses, countable in the year of expenditure, some items which Boston would treat as capital expenses, allocated over the life expectancy of the item in question; (3) Boston would disallow certain expenses which HUD could accept. All of these combined to yield lower rent ceilings than those HUD's formula produced. A fourth factor of a different kind was recognized: the fact that the Boston procedure called for adversary proceedings and access to state court review. While these differences existed, the court found that Boston Rent Board procedures alone did not cause any mortgage defaults.

In identifying its standard for determining whether the federal law was preemptive, the court, citing Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 (1963), held out two measures: "either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained." The court had no difficulty in saying there had been no expression of a clear Congressional design. We agree. Indeed, the statute provides that eligible mortgagors must be subject to rent regulation, either under state or local law or such other method as the Secretary deems appropriate. 12 U.S.C. § 1715l (d) (3). In pursuing further analysis, the court seemed concerned not so much with the nature of the subject matter, or occupation of the field, as it was with the existence of actual conflict between local rent control and the federal program, noting that the "question for this Court is whether the operation of local rent control has frustrated the purposes" of the Act. 410 F.Supp. at 1320. On this issue it appropriately cited our reference in ITT v. Minter, supra, 435 F.2d at 993, to the standard set forth in Southern Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 766, 65 S.Ct. 1515, 89 L.Ed. 1915 (1945); i. e., that preemption must be based on a finding that the local law "palpably infringes" federal policy. The district court then concluded that the differences between the two rent-setting formulas in allowance for vacancies, allowance of certain operating expenses, and allocations to capital or operating expenses which yielded a lower Boston-approved rent ceiling for the four projects in this case and differences in timing and complexity between HUD's ex parte and Boston's adversary review proceedings, created an "impermissible conflict", ³ 410 F.Supp. at 1320.

The fact that these differences exist merely pose the preemption question they do not answer it. See Florida Lime & Avocado Growers, supra, 373 U.S. at 141, 83 S.Ct. 1210. Our task on review is to determine whether the difference between...