TA Moynahan Prop., Inc. v. Lancaster Village Coop., Inc.

• Decision Date: 21 May 1974
• Docket Number: No. 73-1004.,73-1004.
• Citation: 496 F.2d 1114
• Parties: T. A. MOYNAHAN PROPERTIES, INC., Plaintiff-Appellee, v. LANCASTER VILLAGE COOPERATIVE, INC., Defendant, v. George W. ROMNEY, Secretary of U. S. Dept. of Housing and Urban Development, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

496 F.2d 1114 (1974)

T. A. MOYNAHAN PROPERTIES, INC., Plaintiff-Appellee, v. LANCASTER VILLAGE COOPERATIVE, INC., Defendant, v. George W. ROMNEY, Secretary of U. S. Dept. of Housing and Urban Development, Defendant-Appellant.

No. 73-1004.

United States Court of Appeals, Seventh Circuit.

Argued June 5, 1973.

Decided May 21, 1974.

Stanley B. Miller, U. S. Atty., Indianapolis, Ind., Morton Hollander, Chief, Appellate Section, Jean A. Staudt, Atty., U. S. Dept. of Justice, Washington, D. C., for defendant-appellant.

John I. Bradshaw, Jr., Indianapolis, Ind., for plaintiff-appellee.

Before FAIRCHILD and SPRECHER, Circuit Judges, and CAMPBELL,^* District Judge.

FAIRCHILD, Circuit Judge.

The judgment appealed from declared a nullity the termination by defendant Secretary of Housing and Urban Development (HUD) of a management contract between plaintiff Moynahan and defendant Lancaster, and enjoined HUD from terminating that contract or any similar one held by plaintiff without "first establishing and following appropriate standards meeting due process requirements."

Lancaster operates a cooperative housing project for lower income families. The mortgage on its property is insured by HUD. On November 9, 1970, Lancaster and Moynahan signed an agreement on an FHA "model form" under which Moynahan was appointed managing agent for Lancaster, to render services in return for fees. The mortgagee and FHA (HUD's predecessor) endorsed their consents the same date. The agreement was to be in effect for three years, unless cancelled pursuant to its terms. One of the provisions for cancellation (Eighth (d)) permitted FHA or the mortgagee to cancel the agreement on 30 days' written notice, "with or without cause." Moynahan has other similar agency agreements.

On April 26, 1972, a representative of HUD wrote to Moynahan, notifying him that the agreement was terminated as of May 31, 1972, and stating that Lancaster had requested HUD to exercise the right of termination. On May 3, Moynahan wrote to HUD stating it would like to "appeal," wanted to express its position verbally, and requested an explanation for the termination.

On May 25, HUD wrote Moynahan referring to a visit at the HUD office, during the interim, but saying that HUD had no alternative but to terminate, and adding, "We wish to inform you that this action does not reflect adversely on your firm."

On June 29, 1972, Moynahan brought action in state court against Lancaster and HUD. The court restrained the cancellation and the action was removed by HUD to the federal district court. After a hearing, originally contemplating decision on whether to issue a preliminary injunction, the district court concluded it should decide the merits. The court decided that Moynahan's interest in performing the contract throughout the three years was an interest in property; that the circumstances of the cancellation rendered HUD's action arbitrary and capricious; and that due process requires notice and an opportunity to be heard if HUD wished to establish that it had a reasonable ground for cancellation. The district court declared the cancellation of the Lancaster contract a nullity and enjoined termination of Moynahan's other contracts, as well, "without first establishing and following appropriate standards meeting due process requirements." The principal facts developed at the hearing, largely without dispute, are as follows:

On March 27, 1972, the Lancaster Board adopted a resolution that in view of Moynahan's failure to agree to an amendment to the contract desired by the Board, the Board should formally withdraw from the agreement. On March 29, attorneys for Lancaster wrote to Moynahan purporting to give notice of termination. On March 31, the attorneys for Lancaster wrote Mr. Dodd, a representative of HUD, referring to the "apparent hostility" between Lancaster and Moynahan, with which they said Dodd was familiar, and asking Dodd to aid Lancaster in terminating the contract.

On April 26, a representative of HUD wrote to Moynahan that the Lancaster Board had requested HUD to exercise its right to terminate the agreement, and terminating it as of May 31, 1972. On May 3, Moynahan wrote HUD stating it would like to appeal, would like to express its position verbally, and would like an explanation of reasons for the cancellation. Evidently a representative of Moynahan visited the HUD office, and on May 25, a representative of HUD wrote Moynahan as already described, reaffirming the decision.

The parties stipulated, as follows:

"Over the period of several months in late 1971 and early 1972 a series of disputes arose between Lancaster Village Cooperative, Inc. and T. A. Moynahan Properties, Inc. which those parties were unable to resolve to their mutual satisfaction. Lancaster Village requested cancellation of the Management Agreement pursuant to paragraph Eight (b). Termination by mutual consent. The request was denied by T. A. Moynahan Properties. Lancaster Village Cooperative, Inc. then brought the matter to the attention of HUD."

Mr. Dodd testified that he was personally aware of the disputes referred to, that he had discussed them with representatives of Lancaster and of Moynahan, and that after the letters from the attorney for Lancaster, dated March 29 and 31, "I reviewed the project file, and, without attempting to assess fault, I concluded that these differences were not likely to be resolved." Asked why he didn't attempt to assess fault, he replied,

"Fault is not the question. It is a question of whether we think the co-op and its agent can work together effectively in the future. If it appears that they can't, then we terminate."

There was no testimony on either side illuminating the character or the nature of the amendment to the agreement requested by Lancaster, or of the disputes, and no testimony contradicting Mr. Dodd.

1. Substantive due process

The agreement permitted HUD, a government agency (as well as the mortgagee, who apparently was nongovernmental), to cancel "with or without cause." At least the government agency was limited to the extent that its choice could not be completely whimsical. Government could not act under the cancellation provision if motivated only by disapproval of the contractor's religion or politics. See Cafeteria Workers v. McElroy, 367 U.S. 886, 898, 81 S.Ct. 1743, 6 L.Ed.2d 1230 (1961). The cancellation could be challenged for fraud or such gross mistake as would necessarily imply bad faith, or a failure to exercise an honest judgment. United States v. Wunderlich, 342 U.S. 98, 99, 72 S.Ct. 154, 96 L.Ed. 113 (1951). It could be challenged by demonstrating that there was no rational basis for the decision. Scanwell Laboratories, Inc. v. Shafer, 424 F.2d 859, 869 (1970); M. Steinthal & Co. v. Seamans, 147 U.S.App.D.C. 221, 455 F.2d 1289, 1301 (1971). Cf. Jeffries v. Turkey Run Consolidated District, 492 F.2d 1, 3 (7th Cir., 1974).

We conclude that there is a substantive due process standard for valid action under the cancellation provision, but we think it was fulfilled in this case. The government has both a financial interest, in a proprietary sense, and a governmental interest, in terms of the public welfare, in successful operation of the housing project. Prima facie, at least, the reason given by Mr. Dodd, to the effect that it is good policy for the government to cancel an agency agreement where there are disputes between agent and owner not likely to be resolved, and, as a result, a probability that these parties can not work together effectively, is rational in view of the...