Lifgren v. Yeutter, Civ. No. 4-89-912.

• Court: United States District Courts. 8th Circuit. United States District Court of Minnesota
• Writing for the Court: DOTY
• Citation: 767 F. Supp. 1473
• Docket Number: Civ. No. 4-89-912.
• Decision Date: 27 June 1991
• Parties: Velma LIFGREN, Ruby Peterson, Florence Anderson, Dennis Erickson, Marie Erickson, Philip Schaffner, Clem Ostertag, Florence Peterson, Esther Helps, Clara Ecklund, Herma Blair, Grace Peterson, Lillian Magnuson, Jeanette Johnson, Esther Faust, Evelyn Pruszka, Ivy Vitous, Colette Ledin, Clinton Ledin, Lillian Bathhurst, and Paul Bathhurst, Plaintiffs, v. Clayton YEUTTER, in his official capacity as the United States Secretary of Agriculture; Neal Sox Johnson, in his official capacity as acting Administrator of the Farmers Home Administration; Russ Bjorhus, in his official capacity as Minnesota State Director of the Farmers Home Administration; and William H. Slininger, in his official capacity as District Director for the Farmers Home Administration; Paddington Investors, a Minnesota Partnership, Defendants.

767 F. Supp. 1473

Velma LIFGREN, Ruby Peterson, Florence Anderson, Dennis Erickson, Marie Erickson, Philip Schaffner, Clem Ostertag, Florence Peterson, Esther Helps, Clara Ecklund, Herma Blair, Grace Peterson, Lillian Magnuson, Jeanette Johnson, Esther Faust, Evelyn Pruszka, Ivy Vitous, Colette Ledin, Clinton Ledin, Lillian Bathhurst, and Paul Bathhurst, Plaintiffs,
v.
Clayton YEUTTER, in his official capacity as the United States Secretary of Agriculture; Neal Sox Johnson, in his official capacity as acting Administrator of the Farmers Home Administration; Russ Bjorhus, in his official capacity as Minnesota State Director of the Farmers Home Administration; and William H. Slininger, in his official capacity as District Director for the Farmers Home Administration; Paddington Investors, a Minnesota Partnership, Defendants.

Civ. No. 4-89-912.

United States District Court, D. Minnesota, Fourth Division.

June 27, 1991.

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Timothy L. Thompson, Mid-Minnesota Legal Assistance, Inc., Minneapolis, Minn., and Virginia Stark, Cambridge, Minn., for plaintiffs

Stuart M. Gerson, Asst. Atty. Gen., Jerome G. Arnold, U.S. Atty., Mary Jo Madigan, Asst. U.S. Atty., Arthur R. Goldberg and Carlotta P. Wells, Attys., Dept. of Justice, Civ. Div., Washington, D.C., for federal defendants.

Roy W. Holsten, Holsten & Schumann, P.A., Stillwater, Minn., for defendant Paddington Investors.

ORDER

DOTY, District Judge.

This matter is before the court on plaintiffs' motion for summary judgment against the United States Secretary of Agriculture, the Acting Administrator of the Farmers Home Administration, the

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Minnesota State Director of the Farmers Home Administration, the District Director for the Farmers Home Administration (the "Federal Defendants") and Paddington Investors ("Paddington"). Also before the court is Paddington's motions to dismiss plaintiffs' complaint and for summary judgment against the Federal Defendants. Finally, the court will consider the Federal Defendants' motions to dismiss plaintiffs' complaint and for summary judgment against Paddington

For the reasons stated herein, plaintiffs' motion will be granted in part and denied in part, Paddington's motion to dismiss will be denied, Paddington's motion for summary judgment will be granted in part and denied in part, the Federal Defendants' motion to dismiss will be denied, and the Federal Defendants' motion for summary judgment will be granted in part and denied in part.

FACTUAL BACKGROUND

Plaintiffs are low income elderly or handicapped residents of Heather Creek Apartments ("Heather Creek"). Heather Creek is a rental project financed by the Farmers Home Administration ("FmHA") under Section 515 of the Housing Act of 1949. Heather Creek is also subsidized by the Department of Housing and Urban Development ("HUD") under Section 8 of the Housing Act of 1937. Defendant Paddington is the owner of Heather Creek and built the project with funds it borrowed from FmHA. The present lawsuit resulted from Paddington's attempt to prepay the FmHA mortgage on Heather Creek. In order to understand the facts of this case, it is first necessary to summarize the statutory and regulatory framework which surrounds the funding of projects such as Heather Creek.

A. Statutory and Regulatory Background

FmHA financed Heather Creek under Section 515 of the Housing Act of 1949, 42 U.S.C. § 1485, which is commonly known as the "Rural Rental Housing Program". Congress enacted Section 515 of the Rural Rental Housing Program in an effort to resolve the housing shortage for the elderly and others on low incomes in rural areas. Under Section 515 the FmHA¹ is authorized to extend loans to nonprofit organizations for the purpose of developing rural renting housing for the elderly. Over the years, Congress has expanded Section 515 to cover housing and related facilities for elderly persons and families or other persons and families of low income. See id.

Under Section 515 of the Rural Rental Housing Program, the FmHA is authorized to issue loans at market rates to developers and owners of Rural Rental Housing for the elderly and persons with low incomes. Because the elderly and persons with low incomes cannot normally afford the rents which owners of such projects would charge, Congress enacted a number of subsidy programs designed to work in conjunction with Section 515 loans. One of the programs Congress has enacted is the Section 8 Housing Assistance Program which is administered by HUD and codified at 42 U.S.C. § 1437f. Under Section 8, owners of projects funded with Section 515 loans enter into housing assistance payment contracts with the government which provide that low income tenants pay up to 30% of their income for rent. The government then pays the difference between the amount of rent the low income tenant pays and the fair market rental value of the rental unit.

The idea behind Section 515 loans and the Section 8 subsidy program was that elderly and other low income individuals would have a secure supply of affordable housing during the term of the FmHA mortgage.² The supply of housing for low

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income individuals was not absolutely secure, however, because the developers of projects financed by Section 515 loans could pay the entire outstanding balance of the loan prior to the maturity date of the mortgage. Such prepayment by the developers of Section 515 projects had the effect of displacing the low income tenants that had occupied the units prior to prepayment. That displacement frustrated the congressional intent embodied in the Rural Rental Housing Program. See H.R.Rep. No. 154, 96th Cong., 1st Sess. 43, reprinted in 1979 U.S.Code Cong. & Admin.News 2317, 2359. In response to developers prepaying their Section 515 loans and the displacement of low income tenants that followed thereon, Congress enacted the Emergency Low Income Housing Preservation Act of 1987 ("the Preservation Act"). Pub.L. No. 100-242, 101 Stat. 1815-1886 (1988) (codified at 42 U.S.C. § 1472(c) (1988)). Section 515 loans were usually made for a term of 40 or 50 years. Prior to the enactment of the Preservation Act, borrowers of Section 515 loans which were approved prior to December 21, 1979, ("pre-1979 loans") had the option of prepaying their mortgages at any time and removing their project from the program without restrictions. Through the Preservation Act, Congress placed certain restrictions on prepayment of Section 515 loans which were used to fund pre-1979 projects

Under the Preservation Act, an owner of a project funded by a pre-1979 Section 515 loan who wishes to prepay his outstanding indebtedness must submit a request to prepay to the FmHA. Before 30 days pass, the FmHA must notify each tenant of the housing unit as well as interested nonprofit organizations and appropriate state and local agencies that the owner of the project has submitted a request to prepay the Section 515 loan. 42 U.S.C. § 1472(c)(3). The FmHA is not allowed to accept prepayment offers until it complies with certain steps specified in the Preservation Act. First, the FmHA must attempt to enter into an agreement under which the owner of the project commits to extend the low income use of the project for 20 years from the date of such agreement. 42 U.S.C. § 1472(c)(4)(A). Because the Preservation Act aims at extending the low income use of Section 515 projects, the FmHA is authorized to offer various financial incentives to owners who have indicated a desire to prepay Section 515 loans. Specifically, the Preservation Act authorizes the FmHA to offer owners the following incentives:³ (1) increasing the rate of return on the investment; (2) reducing the interest rate on the loan; (3) providing additional rental assistance; (4) providing an equity loan; and (5) in connection with clauses (2) and (4), providing incremental rental assistance to prevent an increase in rents to tenants who are not already receiving rental assistance. 42 U.S.C. § 1472(c)(4)(B). If, despite the incentives the FmHA has offered to the owner, the owner will not enter into an agreement to extend the low income use of the project, then the FmHA must require the owner to offer to sell the project to a qualified nonprofit organization or public agency at fair market value. 42 U.S.C. § 1472(c)(5)(A). Once the project is offered for sale to a qualified nonprofit organization or public agency, if 180 days passes without a bona fide offer of purchase being submitted, then the FmHA may accept the owner's prepayment request. 42 U.S.C. § 1472(c)(5)(A)(ii).

Under the Preservation Act the FmHA must follow the steps delineated above before it may accept an owner's prepayment request. The only exceptions to the Preservation Act's requirements outlined above apply after the FmHA has attempted to secure the owner's participation in an agreement that will extend the low income use of the project. Specifically, if the project owner refuses to enter a 20 year agreement even after the FmHA offers

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him or her the financial incentives delineated in 42 U.S.C. § 1472(c)(4)(B), then the FmHA must require the owner to offer to sell the project to a qualified nonprofit organization or a public agency unless one of two exceptions to that requirement applies. There are two situations in which the FmHA does not have to require the project owner to offer the project for sale to a qualified nonprofit organization or public agency. First, the owner can enter into an agreement with the FmHA under which the owner is obligated to use the housing for low or moderate income individuals for 20 years from the date of the execution of the mortgage agreement and then the owner must sell the property to a qualified nonprofit organization or public agency at the expiration of that 20 year period. 42 U.S.C. § 1472(c)...