Kent Farm Co. v. Hills, Civ. A. No. 76-1157.

• Decision Date: 08 July 1976
• Docket Number: Civ. A. No. 76-1157.
• Citation: 417 F. Supp. 297
• Parties: KENT FARM COMPANY, Plaintiff, v. Carla HILLS et al., Defendants.
• Court: U.S. District Court — District of Columbia

417 F. Supp. 297

KENT FARM COMPANY, Plaintiff, v. Carla HILLS et al., Defendants.

Civ. A. No. 76-1157.

United States District Court, District of Columbia.

July 8, 1976.

COPYRIGHT MATERIAL OMITTED

Philip A. Lacovara, Peter M. Kreindler, Washington, D. C., for plaintiff.

Mary Ann Clifford, Atty., Department of Justice, Washington, D. C., for defendants.

PRELIMINARY INJUNCTION

GESELL, District Judge.

Upon consideration of plaintiff's motion for a preliminary injunction, after full hearing, and for the reasons set forth in the accompanying Memorandum constituting the Court's findings of fact and conclusions of law filed herewith, it is hereby

ORDERED that defendants, their agents, officers, servants, employees, attorneys and all persons in active concert or participation with them are restrained until further Order of the Court from taking any action to institute foreclosure proceedings with respect to, or to proceed further to foreclosure upon, the mortgage of Kent Farm Village; and it is further

ORDERED that defendants, after reconsideration of the situation, may move the Court to vacate or modify the preliminary injunction, provided that they first file with the Court and serve on plaintiff a written statement of their reasons for initiating new foreclosure proceedings that complies with the standards set in the accompanying Memorandum. Further proceedings, if deemed necessary by the Court, will be scheduled at that time. All discovery in this case is stayed until further Order of the Court.

MEMORANDUM

Kent Farm Village is a federally assisted, multifamily, low and moderate income housing project. This is an action to enjoin mortgage foreclosure proceedings and consequent sale of the project at public auction by the Department of Housing and Urban Development (HUD), which holds the mortgage that is seriously in arrears. Plaintiff contends that foreclosure (a) violates the Secretary's declared moratorium on foreclosures, (b) contravenes the national housing policy and HUD policies and guidelines, (c) is based upon certain erroneous factual premises, and (d) is attributable to the personal animus of certain HUD officials and employees. Accordingly it asserts the rationale of the contemplated foreclosure remains unexplained, is based on an arbitrary and capricious abuse of discretion and consequently violates the Administrative Procedure Act.

HUD contends that it has discretion to foreclose, that it has not abused that discretion, and that it should be allowed to proceed in order that it may properly fund and administer its insurance programs and carry out its obligations to oversee housing projects of this type consistent with national housing policy in the public interest.

The Court has jurisdiction, among other things, under the Administrative Procedure Act, 5 U.S.C. §§ 702, 706 to review this final agency action.

Statement of Background Facts

Plaintiff, Kent Farm Company, is a limited partnership organized under the laws of Massachusetts and is the owner of Kent Farm Village. This project was built with the aid of a mortgage loan of approximately $5,000,000, that was insured under Section 221 of the National Housing Act, 12 U.S.C. § 1715l. As the statute declares, Section 221 is intended "to assist private industry in providing housing for low and moderate income families and displaced families," 12 U.S.C. § 1715l(a). In return for a HUD-insured mortgage loan at a below-market interest rate, the owner-mortgagor must enter into a Regulatory Agreement with HUD that provides that units within the housing project may be leased only to families meeting the income limitations established by HUD and only at rents approved by HUD. The owner's annual dividends are restricted to six percent of the owner's equity investment, and rents are calculated and approved so that project income will be sufficient at "full occupancy" (95 percent of capacity) to pay operating expenses, amortize the mortgage, fund a replacement reserve, and yield a six percent dividend to the investors. Kent Farm Village consists of 250 units with a current occupancy rate that ranges from 95 percent to 97 percent, with vacancies due to the normal turnover of tenants.

Plaintiff, in financial difficulty from the start, defaulted on the mortgage in September, 1973. When Kent Farm Village was completed in 1971, the project "income analysis and appraisal" prepared by HUD had budgeted real property taxes at $69,000, and HUD fixed initial rents on that basis. Taxes have been assessed by the City of East Providence at approximately $134,000 annually for the years 1972 through 1976, nearly twice the amount originally predicted. These additional taxes and related legal expenses are the principal reasons for the default.

The Federal National Mortgage Association, then the mortgagee of Kent Farm Village, exercised its option under the mortgage insurance contract to assign the mortgage to HUD and collect the mortgage insurance, and on June 26, 1974, HUD became the mortgagee.

The Providence office of HUD, which has jurisdiction over Kent Farm Village, recommended immediate foreclosure. This was delayed pending a financial audit of the project. Plaintiff challenged the increased tax assessments imposed locally and submitted a proposed Reinstatement Plan. HUD eventually rejected the Plan. Foreclosure was further delayed when plaintiff sought reconsideration and amended the Plan. The Amended Plan was rejected in March, 1976, with an indication that foreclosure would go forward unless plaintiff within ten days remitted $341,000, an amount allegedly representing all the tax deficiency and one-half the interest deficiency. Further delay occurred while an accounting error was adjusted reducing the $341,000 to $255,709. Ultimately it was determined that the limited partners were unwilling to put up the funds due to various uncertainties. During this period a total of approximately 20 meetings occurred between plaintiff and HUD to explore methods of reinstating the mortgage.

This series of events culminated in a decision by HUD at the highest level in Washington during the first week of June, 1976, to institute formal foreclosure proceedings. On June 28, 1976, HUD gave the first of three weekly notices necessary for the contemplated foreclosure sale at public auction presently scheduled for July 19. As of July 1, 1976, Kent Farm Company had failed to make $791,277.16 in payments due under the promissory note, mortgage and regulatory agreement.

On June 25 plaintiff instituted this suit and filed an application for a temporary restraining order which was denied by the Court on the same day. Plaintiff then moved for a preliminary injunction, a hearing was promptly held, and the matter is now before the Court for decision.

Against this background of undisputed facts the Court, upon a careful review of the briefs and arguments of counsel and after considering the affidavits, documents and the testimony, finds and concludes as follows:

A. The Decision to Foreclose

The Kent Farm project essentially is providing decent, safe and sanitary living quarters for low and moderate income families consistent with the intent and purpose of the National Housing Act.

The project is not financially viable, but is in serious and ever-increasing default and there is no reasonable prospect that the limited partners will contribute additional funds out of their own pockets or achieve a reinstatement of the mortgage satisfactory to HUD. While increased taxes and legal fees are major factors, it does not appear from the record what other management and expense factors, if any, are responsible for its steadily increasing default.

There is a HUD moratorium still in effect which establishes a policy dealing with contemplated foreclosure of certain types of HUD-held mortgages. Although the moratorium was never formally promulgated or published, it is clear that HUD has repeatedly emphasized the policy and adhered to its terms, that the moratorium presently continues in operation and that it is applicable to plaintiff's mortgage. The moratorium, as formulated in a contemporaneous telegram to all HUD regional administrators, reads as follows:

Secretary Lynn announced 1/14/75 an immediate moratorium on the filing of any new foreclosures on any subsidized projects with HUD-held mortgages. This moratorium will be in effect until around the first of March or until further notice. The moratorium does not apply to unsubsidized projects or to single family mortgages. The moratorium does not cover subsidized projects where the situation is hopeless, as evidenced by abandonment, incomplete construction, regulatory agreement improprieties and similar conditions. The moratorium should have no immediate effect on the work done in the area/insuring offices. The decision as to whether or not to proceed with foreclosure will be made in the central office. Area/insuring offices will continue to make recommendations on specific projects, as in the past. The

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