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Evergreen Square of Cudahy v. Wisconsn Housing & Economic Development Authority

United States Court of Appeals, Seventh Circuit

February 17, 2017

Evergreen Square of Cudahy, et al., Plaintiffs-Appellants,
Wisconsn Housing & Economic Development Authority, Defendant/Third Party Plaintiff-Appellee. And CRAIG T. CLEMMENSEN, Acting Secretary of the United States Department of Housing & Urban Development, Third Party Defendant-Appellee.

          Argued September 27, 2016

         Appeal from the United States District Court for the Eastern District of Wisconsin. No. 2:13-cv-00743-JPS - J. P. Stadtmueller, fudge.

          Before BAUER, ROVNER, and HAMILTON, Circuit Judges.

          ROVNER, Circuit Judge.

         Evergreen Square of Cudahy ("Evergreen Square"), Grant Park Square Apartments Company ("Grant Park"), and Washington Square Apartments Company ("Washington Square") are property owners (collectively, "Owners") who participated in the federal rental assistance program commonly known as "Section 8." They sued the Wisconsin Housing and Economic Development Authority ("Wisconsin Housing" or the "Authority") for allegedly breaching the contracts that governed payments to the Owners under the program. Because Wisconsin Housing receives all of its Section 8 funding from the United States Department of Housing and Urban Development ("HUD"), the Authority filed a third-party breach of contract claim against HUD. The district court granted summary judgment in favor of Wisconsin Housing and dismissed the claims against HUD as moot. The Owners appeal and we affirm.


         The Section 8 program provides housing assistance payments "[f]or the purpose of aiding low-income families in obtaining a decent place to live and of promoting economically mixed housing[.]" 42 U.S.C. § 1437f(a). See also Cisneros v. Alpine Ridge Group, 508 U.S. 10, 12-14 (1993) (explaining basic features of the Section 8 program). The program is administered by HUD in conjunction with public housing agencies. HUD enters into annual contribution contracts with public housing agencies, which in turn enter into contracts with property owners to make housing assistance payments that subsidize rentals for qualified tenants. Under these contracts, the tenants are required to pay a percentage of their income to the property owners, the housing agencies pay the remaining rent, and HUD reimburses the housing agencies. In areas where there are no public housing agencies, HUD enters into contracts directly with property owners in order to provide housing assistance payments. In this case, HUD contracted with Wisconsin Housing, which in turn entered into agreements with each of the Owners. The parties call the agreements between the state housing agencies and property owners "housing assistance payment contracts" or "HAP contracts" and we will follow that convention as well.

         Section 8 provides that the HAP contracts will establish the maximum monthly rent which property owners are entitled to receive for each dwelling unit. 42 U.S.C. § 1437f(c)(1)(A). In addition to setting standards for the initial rent for subsidized units, Section 8 also dictates how rents may be adjusted in order to reflect changes in fair market rental values over time. The statute provides that a HAP contract "shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units or, if the Secretary determines, on the basis of a reasonable formula." 42 U.S.C. § 1437f(c)(2)(A). But Congress also imposed an overall limit on any increases, providing that rent adjustments "shall not result in material differences between the rents charged for assisted units and unassisted units of similar quality, type, and age in the same market area, as determined by the Secretary." 42 U.S.C. § 1437f(c)(2)(C).

         Even with these measures in place, the automatic rent increase system sometimes pushed rents well above market rates for comparable unsubsidized housing units. See One & Ken Valley Housing Group v. Maine State Housing Auth., 716 F.3d 218, 221 (1st Cir. 2013). When HUD tried to rein in the excess increases, lawsuits followed. In response to this litigation over HAP contracts, Congress amended Section 8, first in 1988 and again in 1994. As a result of the 1988 amendments, HUD or a public housing agency could deny an automatic annual rent adjustment at a Section 8 site by submitting a comparability study to the property owner at least sixty days before the adjustment was to take effect. One & Ken Valley, 716 F.3d at 221-22. This change led to more litigation by property owners who asserted that their HAP contracts entitled them to automatic annual adjustments without regard to comparability studies. The Supreme Court concluded that, under the overall limitations clause of the HAP contracts, property owners were not entitled to formula-based rent adjustments that materially exceed market rents for comparable units. Alpine Ridge, 508 U.S. at 21. The Court also found that the overall limitation clause of the HAP contracts "affords the Secretary sufficient discretion to design and implement comparability studies as a reasonable means of effectuating its mandate." Alpine Ridge, 508 U.S. at 21; One & Ken Valley, 716 F.3d at 222.

         In 1994, one year after the Alpine Ridge decision, Congress amended Section 8 again:

[W]here the maximum monthly rent... to be adjusted using an annual adjustment factor exceeds the fair market rental for an existing dwelling unit in the market area, the Secretary shall adjust the rent only to the extent that the owner demonstrates that the adjusted rent would not exceed the rent for an unassisted unit of similar quality, type, and age in the same market area, as determined by the Secretary.

42 U.S.C. § 1437f(c)(2)(A). Under the 1988 provision, HUD had the burden of producing a comparability study whenever it sought to withhold an automatic adjustment. The 1994 amendment shifted to the property owners the burden of demonstrating that adjusted rents would not exceed the market rent for comparable unassisted units. One & Ken Valley, 716 F.3d at 222.

         In 1995, HUD issued Notice H 95-12 ("1995 Notice") in order to provide housing authorities with guidelines for implementing the statutory changes. The 1995 Notice directed public housing authorities to consult HUD's annual fair market rent charts for different unit types[1] in different geographic regions. Where the automatic increase would result in a rent higher than the corresponding fair market value listed in HUD-published tables, the 1995 Notice directed public housing authorities to assume that the contract rent is above-market. But HUD also accounted for the fact that, under the overall limitation clause, landlords were entitled to receive above-market rents to the extent that those differences existed at the outset of their contracts:

         HUD adopted an assumption that, from the outset, public housing agencies were paying Section 8 landlords 10 percent more than the fair market rents for comparable units.

As long as the difference between the adjusted rent and the fair market rent is less than this "initial difference, " Notice H 95-12 allows state and local housing agencies to continue to grant rent increases based on the automatic annual adjustment factors. However, if the difference between the adjusted rent and the HUD-published fair market rate rises to more than 10 percent of the initial contract rent, Notice H 95-12 instructs housing authorities to deny further upward adjustments to Section 8 landlords. A Section 8 landlord can only escape from under this ceiling by submitting its own rent comparability study showing that, despite the discrepancy with HUD's published fair market rents, the Section 8 unit is actually under-priced relative to comparable unsubsidized units in the area.

One & Ken Valley, 716 F.3d at 223.[2]

         As part of the Section 8 program, each year, HUD publishes "annual adjustment factors" for specific geographic areas that reflect changes in the Consumer Price Index for rents and utilities over the prior year. See 24 C.RR. §§ 888.201-204 (2012). Prior to the 1994 amendments, HUD published a single table to apply to all housing stock. After the 1994 amendments, HUD began publishing two tables each year, one for "turnover units, " and one for "non-turnover units." The turnover rates apply to units occupied by a new tenant since the last annual contract anniversary date. The non-turnover rates apply to units occupied by the same tenant as the last contract anniversary date. The tables presume that the costs to landlords are lower when the same tenant stays in the unit, and so the non-turnover rates are one percent (.01) lower than the turnover rates.

         To this point, we have described the general provisions at play in all Section 8 HAP contracts, and we now turn to the facts specific to this case. Evergreen Square owns a 105-unit housing project in Cudahy, Wisconsin. Evergreen Square's HAP contract term began with a five-year term on April 1, 1977. The contract has been renewed seven times (in five year increments) and is set to expire on March 31, 2017. Grant Park owns a 153-unit project in South Milwaukee, Wisconsin. Grant Park's initial five-year contract commenced on July 1, 1980 and was then renewed for five additional five-year terms, expiring on June 30, 2010. Washington Square owns an 88-unit project in Cudahy, Wisconsin. Washington Square's initial twenty-year HAP contract went into effect on December 1, 1982, was renewed twice for five-year terms, and expired on November 30, 2012. Both the Evergreen Square and Grant Park HAP contracts provide that, on the anniversary date, the contract rents "shall be adjusted by applying the applicable Automatic Annual Adjustment Factor most recently published by the Government." Washington Square's contract is slightly different. It provides that, "[u]pon request from the Owner to [Wisconsin Housing], Contract Rents will be adjusted on the anniversary date" of the HAP Contract "in accordance with 24 CFR Part 888 and this Contract. See, however, paragraph (d)." Paragraph (d) implemented the overall limitation provision of the statute. A similar overall limitation paragraph appears in the contracts for Evergreen Square and Grant Park, but only Washington Square was required to ask for the automatic annual increase. From 2006 until the contract expired in 2012, Wisconsin Housing approved adjustments to Washington Square's rents only when Washington Square submitted a rent adjustment request.

         The Owners sued Wisconsin Housing in federal court for breaching the HAP contracts by failing to approve automatic rent increases for certain years, by requiring the Owners to submit comparability studies in order to receive increases, and by arbitrarily reducing the increases for non-turnover units by one percent. Wisconsin Housing filed a third-party suit against HUD, which provides all of the funding for the program. After the district court dismissed the suit for lack of federal jurisdiction, we reversed and remanded with instructions to reinstate the plaintiffs' complaint. See Evergreen Square of Cudahy v. Wisconsin Housing & Econ. Dev. Auth.,776 F.3d 463 (7th Cir. 2015). We concluded that, although the breach of contract claims found their origins in state rather than federal law, the claims belonged in ...

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