Merrill Tenant Council v. U.S. Dept. of Housing and Urban Development (HUD), 79-2476

• Decision Date: 14 January 1981
• Docket Number: No. 79-2476,79-2476
• Citation: 638 F.2d 1086
• Parties: MERRILL TENANT COUNCIL et al., Plaintiffs-Appellants, v. UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1086

638 F.2d 1086

MERRILL TENANT COUNCIL et al., Plaintiffs-Appellants, v. UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) et al., Defendants-Appellees.

No. 79-2476.

United States Court of Appeals Seventh Circuit.

Argued Oct. 23, 1980.

Decided Jan. 14, 1981.

Anthony J. Fusco, Jr., Legal Assistance Foundation of Chicago, Chicago, Ill., for plaintiffs-appellants.

Thomas P. Sullivan, U. S. Atty., Robert Breisblatt, Asst. U. S. Atty., Chicago, Ill., James T. Duda, Lansing, Ill., Robert E. Bennett, Chicago, Ill., for defendants-appellees.

Before SWYGERT, PELL and CUDAHY, Circuit Judges.

SWYGERT, Circuit Judge.

Plaintiffs appeal from an order dismissing their class action complaint which alleges that the United States Department of Housing and Urban Development ("HUD"), the Secretary of HUD, various HUD officials and two private management companies have failed to pay interest on tenant security deposits as required by Illinois law. Plaintiffs did not bring their action under the Federal Tort Claims Act, 28 U.S.C. § 1346(b), but they instead sued in contract on the theory that the Illinois statutes requiring interest payment on security deposits were incorporated as implied terms in their agreements with HUD. We hold that plaintiffs may sue in contract, and that for purposes of this action sovereign immunity was waived under 12 U.S.C. § 1702.

In the first count of their complaint, plaintiffs referred to Ill.Rev.Stat. ch. 74, §§ 91-93, and sought, inter alia, an order to pay all interest due and a permanent injunction regarding prospective compliance. The second count cited Ill.Rev.Stat. ch. 74, § 92 and requested a declaratory judgment that defendants willfully failed to pay the interest and an order to pay damages in the amount of the security deposits paid by plaintiffs together with court costs and reasonable attorney's fees. The federal defendants moved to dismiss, and the trial judge dismissed both counts of the complaint without opinion. He also dismissed the private defendants sua sponte.

We reverse and order the complaint reinstated against both the federal and private defendants, except insofar as plaintiffs allege entitlement to damages in the amount of the security deposits. That portion of Ill.Rev.Stat. ch. 74, § 92 requiring that a lessor who willfully fails to pay interest to a lessee pay damages in the amount of the security deposit, we find to be a penalty and thus void under this contractual cause of action.

I

Assuming as we must that the allegations in the complaint are true, plaintiffs-appellants Merrill Tenant Council which is an unincorporated association representing tenants residing at 6700-6716 South Merrill Avenue in Chicago ("Merrill Project"), Mary Berry, Willie and Maxine Ferguson, Beverley Gardner, Inez Hill, Janice Adams, and Henrietta Hill reside in multi-family housing projects owned or operated by HUD. HUD and Moon C. Landrieu, Secretary of HUD; Elmer C. Binfold, Director of the Chicago Area Office of HUD; William Miller, Director of Housing Management in the Chicago Area Office; and John Davis, Director of Property Disposition in the Chicago Area Office, are charged with the administration of the properties at issue and are federal defendants in this case. Private defendant Scherer Management, Inc. has been management agent for HUD of the Merrill Project. Private defendant Pyramidwest Realty and Management, Inc. has been managing agent for HUD with regard to the projects in which plaintiffs Inez and Henrietta Hill and plaintiff Adams reside.

Plaintiffs Gardner, Berry, and Willie and Maxine Ferguson paid security deposits to defendants, their agents, or predecessors in interest, at least three years prior to filing the complaint in this case. No interest has been paid to any of the plaintiffs by any of the defendants. Plaintiffs Adams and Inez and Henrietta Hill also paid security deposits to defendants, their agents, or predecessors in interest, more than two years before the complaint was filed in this case. None has received a payment of interest from the defendants.

At a meeting of the Merrill Tenant Council held on October 27, 1976, HUD was informed that interest due on security deposits was not being paid. On May 10, 1977 plaintiffs' counsel wrote to the Director of the Chicago Area Office of HUD demanding that interest due residents in all HUD owned or operated properties within the jurisdiction of the Chicago Area Office be paid. On July 27, 1977 another letter was sent, this time to the Area Counsel for the Chicago Area Office of HUD, stating that the interest had still not been paid. No interest was paid to any of the plaintiffs, and this class action lawsuit was filed in the Circuit Court of Cook County on January 30, 1978.

Plaintiffs sued individually and on behalf of all other persons similarly situated alleging that defendants failed to comply with Ill.Rev.Stat. ch. 74, §§ 91-93, governing the payment of interest on tenant security deposits. ¹ In the first count of their complaint plaintiffs alleged that defendants failed to comply with Ill.Rev.Stat. ch. 74, §§ 91-93. Plaintiffs sought, inter alia, an order to pay all interest due, and a permanent injunction regarding prospective compliance. The second count of the complaint, relying on Ill.Rev.Stat. ch. 74, § 92, requested a declaratory judgment that defendants' failure to pay interest was willful, and an order to pay damages in an amount equal to the amount of the security deposits paid by plaintiffs for each twelve month period for which defendants willfully failed to pay interest along with court costs and reasonable attorney's fees.

On motion of the federal defendants, pursuant to 28 U.S.C. § 1442(a)(1), the case was removed to the United States District Court for the Northern District of Illinois. ² The district judge certified the case as a class action. On August 6, 1979 the federal defendants filed a motion to dismiss the complaint. That motion was granted without opinion in an order of October 18, 1979, in which the district judge sua sponte, found that the "defendants other than the federal defendants were and are acting only as agents of the federal defendants and as such should be dismissed." A final judgment order was entered on November 15, 1979, and this appeal followed.

II

Plaintiffs-appellants argue that their cause of action for nonpayment of interest due on security deposits is contractual. The federal defendants, citing this court's recent decision in FDIC v. Citizens Bank & Trust Co., 592 F.2d 364 (7th Cir.), cert. denied, 444 U.S. 829, 100 S.Ct. 56, 62 L.Ed.2d 37 (1979), contend that plaintiffs' suit sounds in tort and therefore must be brought under the Federal Tort Claims Act, 28 U.S.C. § 1346(b), which it was not. We do not agree with the defendants that our decision in FDIC v. Citizens Bank and Trust Co. controls this case or that this suit necessarily sounds in tort. In Citizens Bank & Trust Co., a creditor of an insolvent state bank sued the Federal Deposit Insurance Corporation ("FDIC"), alleging that FDIC, acting as receiver, had wrongfully transferred assets of the insolvent bank to itself in its corporate capacity. The creditor argued that the insolvent bank had committed a breach of contract and that FDIC was a successor in interest to the bank. This court stated that FDIC, in its corporate capacity, assumed no liabilities of the receivership; we held that FDIC "entered into no contract with the creditor." 592 F.2d at 368 (emphasis added.) If FDIC, as receiver, did violate its duties, we concluded, liability for that breach would be in tort.

The facts of the present case compel a different holding. Here defendants are the lessors of real property and plaintiffs are their tenants. HUD or its predecessor in interest received a security deposit from each plaintiff. Whether the posting of a security deposit was a written term in the lease, that payment was required as part of the agreement between lessor and lessee. Illinois law provides that interest must be paid on a security deposit by a

lessor of residential real property containing 25 or more units, who receives a security deposit from a lessee ... computed from the date of the deposit at a rate of 5% per year on any such deposit held by the lessor for more than 6 months.

Ill.Rev.Stat. ch. 74, § 91. ³

We agree with plaintiffs that the statutory duty to pay interest became an implied term of the contract that existed between the plaintiffs and HUD.

As early as 1883, the Illinois Supreme Court stated:

... (N)othing is better settled than that in many contracts ... the law silently annexes certain conditions ... which are not all, in express terms provided for in the contract, yet, in contemplation of law, they are nevertheless regarded as a part of the contract, and the non-performance of them may, in an action on the contract, be assigned as a breach thereof.

Nevin v. Pullman Palace Car Co., 106 Ill. 222, 233 (1883). In Schiro v. W. E. Gould & Company, 18 Ill.2d 538, 165 N.E.2d 286 (1960), the Illinois Supreme Court held that a purchaser damaged because of a builder's failure to comply with duties imposed by municipal ordinances could sue in contract, although the contract did not expressly incorporate the requirements of the municipal code. Citing Economy Fuse & Mfg. Co. v. Raymond Concrete Pile Co., 111 F.2d 875 (7th Cir. 1940), in which this court had interpreted Illinois law, the Illinois Supreme Court stated that the law existing at the time and place of the making of the contract formed a part of the contract as though it had been expressly incorporated therein. ⁴ Schiro was followed in Jack Spring, Inc. v. Little, 50 Ill.2d 351, 280 N.E. 208 (1972). There the Illinois Supreme Court held that there was an implied warranty of habitability fulfilled by compliance with the pertinent provisions of the Chicago Building Code which were incorporated in the contract. Defendants'...