National Housing Law Project Housing Law Bulletin

The United States Court of Federal Claims recently rejected the claims of 31 owners of Section 515 Rural Rental Housing who obtained loans from the Farmers Home Administration (FmHA), now the Rural Housing Service (RHS), prior to December 21, 1979. The owners filed suit against RHS/1/ alleging that the government breached their loan contract and took their property in violation of the Fifth Amendment when Congress enacted legislation restricting their right to prepay the loans. The court held that claims of owners’ with pre-1979 loans were barred by the statute of limitations. The court did not, however, dismiss as time barred the claims of another group of owners who obtained their loans after December 21, 1979, but denied their motion for summary judgment on their breach of contract claim on the ground that the subsequent legislation restricting their prepayment rights did not breach their agreements with RHS under the doctrine of unmistakability. Franconia Associates et al. v. United States, 43 Fed. Cl. 702 (May 6, 1999).

Prior to 1979, the Housing Act of 1949 placed no restrictions on the prepayment of RHS Section 515 rural rental housing loans. Indeed, the promissory note prepared by the agency and executed by owners specifically granted them the right to prepay "at any time at the option of the Borrower." Legislation adopted in 1979 required owners who entered into loans after that year to maintain the low-income affordability of the housing for a 15 or 20-year period depending on whether the project was receiving subsidies on behalf of the residents. In 1988, Congress enacted the Emergency Low Income Housing Preservation Act (ELIHPA)/2/ which retroactively restricted the prepayment rights of pre-1979 owners by offering them incentives to remain in the program and, in the event they rejected the incentives, requiring them to offer to sell the housing to a qualified nonprofit organization at a fair market value as determined by two independent appraisers./3/

The 1988 legislation did not affect those owners who obtained loans between 1979 and 1989. However, when Congress enacted the Housing and Community Development Act of 1992/4/ it also restricted the rights of these owners in the same manner that it restricted owners with pre-1979 loans./5/

In 1997, 43 owners of both pre- and post-1979 projects filed suit against RHS alleging that the 1988 and 1992 legislation restricting their right to prepay breached their contracts with the agency and constituted a Fifth Amendment taking for which compensation is due. In their complaint, the owners contended that the 1992 legislation constituted an anticipatory repudiation of their contract as of the date that each plaintiff would have prepaid but for RHS’s repudiation. Similarly, on the taking claim, the plaintiffs claimed that the taking occurred as of the date that RHS’s performance would be required under the contract, namely acceptance of the owner’s prepayment.

RHS responded to the complaint by filing a motion to dismiss, contending that the claims of the pre-1979 owners were time barred because all their claims accrued as a result of the 1998 legislation and that the six-year period for bringing claims against the government had lapsed. The owners countered with a motion for partial summary judgment on their breach of contract claim, arguing that the prepayment option was a material contract term that was restricted by the 1992 legislation and constituted an anticipatory repudiation of the contract.

To avoid the six-year statute of limitation in suits against the United States, the owners advanced two arguments. First, they argued that their 1997 suit was timely because the legislation that finally and permanently repudiated their contract and restricted their property rights was not enacted until 1992. Second, the owners argued that their breach of contract claim was predicated on the doctrine of anticipatory repudiation which allows the plaintiffs to sue at the earlier of the anticipatory repudiation or the breach and that the statute of limitations does not begin to run until the breach has occurred. In this case, the owners argued that the breach will not occur until sometime in the future when, in response to the owners’ seeking to prepay their loans, the government will act by refusing to allow the prepayment.

In support of their first argument, the owners contended that ELIHPA, enacted in 1988, was an interim measure that did not become permanent until 1992 when Congress enacted further legislation permanently restricting the rights of owners to prepay. The owners based their arguments on the "Findings and Purpose" sections of the legislation, which made clear that ELIHPA was an interim measure intended to avoid displacement of current tenants and the irreplaceable loss of low-income housing. They buttressed their argument by citing to the claims court decision in Anaheim Gardens v. United States, 33 Fed. Cl. 773 (1995) which expressly concluded that ELIHPA was enacted as a temporary measure.

While acknowledging that the preamble to ELIHPA states that it was being enacted as an interim measure, the court concluded that the particular provisions of ELIHPA dealing with prepayment of RHS loans were permanent in nature. According to the court:

a statute, once enacted and unless explicitly provided to the contrary, continues in force until abrogated by subsequent action of the legislature. For a statute to be abrogated there must be an explicit repeal by later legislation, or an implied repeal by a later inconsistent provision, or, if the statute states conditions for repeal, the happening of the condition./6/

Accordingly the court concluded that ELIHPA was a positive, unconditional and unequivocal declaration of fixed purpose to restrict RHS borrowers ability to prepay their loans./7/

The court found support for its conclusion by contrasting those provisions of ELIHPA restricting prepayment of HUD loans to the provisions restricting prepayment of RHS loans. The HUD restrictions were contained in two sections of the Act that were subject to a two-year sunset provision. The RHS restrictions, on the other hand, were in a separate section of the act not subject to the sunset provisions. The court reasoned that "[b]ecause Congress has provided for the expiration of some sections of the Act but not others, we must conclude that Congress intended that those sections of the Act pertaining to the prepayment of rural housing loans be permanent legislation, at least until later legislation expressly repealed it."/8/ In reaching this conclusion, the court rejected the owners’ invitation to follow its earlier decision in Anaheim Gardens, wherein it held that ELIHPA was a temporary measure. The court found its current conclusion consistent with that decision because it involved a HUD loan that was subject to the sunset provisions of the Act rather than RHS loans which were not subject to those provisions./9/

Having found that the 1988 legislation repudiated the owners contractual right to prepay, the court fixed the date upon which the owner’s contractual claim accrued on the date that RHS made effective interim regulations implementing the ELIHPA, which was May 23, 1998./10/ Since the suit was not filed until 1997, the court held that the case was not filed within the six- year statute of limitations./11/

The court also rejected the pre-1979 owners’ claim that under the theory of anticipatory repudiation the statute of limitations does not begin to run until the government is required to perform under the contract--namely, when it has to accept an owner’s offer to prepay. While agreeing that the plaintiffs accurately stated the law regarding the running of the statute of limitations in an anticipatory breach situation, it disagreed with plaintiffs’ characterization of the government’s required performance. According to the court, the loan agreement between the owners and the government did not require any action from the government:

[I]t is merely a promise to allow the borrower to prepay at any time during the life of the loan. No conditions are attached to this promise. The government’s performance, if it can be called that, is to keep its promise to allow borrowers an unfettered prepayment right. No further performance was required by the government under the terms of the prepayment clause./12/

Thus, the court ruled that enactment of the 1988 legislation, which withdrew the promise to accept the owner’s offer to prepay, constituted a withdrawal of the promise and a breach of the contract and not an anticipatory repudiation of some future action./13/ In so finding, the court again distinguished Anaheim Gardens, finding that in that case the time for accepting the prepayment had not yet arrived because the initial 20-year use restriction on HUD owners had not yet expired. Thus, with respect to HUD loans, the owners were entitled to treat similar prepayment restrictions as an anticipatory repudiation because the government’s performance was not yet due./14/

While neither the government nor the owners briefed the issue of when the taking claim accrued, the court, in order to ensure that it has subject matter jurisdiction, took it upon itself to determine when the claim accrued. Relying on the plaintiffs characterization that the taking occurred as of the date of the government’s conduct, the court again concluded that the only conduct the government took was to enact the 1988 legislation. Thus, it concluded that the taking claim with respect to pre-1979 owners also accrued in 1988 and was time barred./15/

The owners of post-1979 loans sought summary judgment on their claim that RHS breached its contract with them when it established regulatory measures inconsistent with a material term of the contract, namely their right to prepay. RHS responded by arguing that the prepayment provision of the contract was not material, that the statute did not absolutely prohibit prepayment so that it does not constitute a breach of the contract, and that the claim is barred by the unmistakability doctrine, a canon of contract construction that precludes a claimant from contending that the government gave up its sovereign authority to modify contracts unless it is expressed in unmistakable terms in the contract./16/

In the instant case, the court found no unmistakable language within the prepayment provisions of the agreement between the owners and RHS that waives the government’s right to modify the prepayment terms through future legislation. While it did find other language in the agreement that states that the promissory note "shall be subject to the present regulations of the [RHS] and to its future regulations not inconsistent with the express provisions hereof," the court concluded that this language only refers to future regulations, not statutes. It concluded, therefore, that this clause protects the contract from subsequent changes by RHS but that it does not extend to future changes in law by Congress. Having reached that conclusion, the court held that the government has a dispositive defense to the claim that it breached the loan agreements through subsequent legislation and denied the plaintiffs’ motion for summary judgment./17/

As a result of the court’s actions, two claims remain in Franconia, both by owners of post-1979 projects. The first is a breach of contract claim, the second a taking claim. In light of the court’s ruling on the plaintiffs’ motion for summary judgment on the contract claim, it is unlikely that the owners will prevail on the contract claim. Moreover, because it appears from the facts of the case that no owner has sought to prepay a loan let alone been forced to sell the project to a nonprofit agency, it is doubtful that a taking claim will be upheld on the facts of this case.

Notes

1    Although the court opinion continues to refer to the agency as the Farmers Home Administration, this article will refer to the agency by its current name, Rural Housing Service (RHS).

2    Pub. L. No. 100-242, 101 Stat. 1815, 1877 (1998).

3    See 42 U.S.C. § 1472 (c) (West 1994).

4    Pub. L. No. 102-550, 106 Stat 3681 (1992).

5    See 42 U.S.C. § 1472 (c) (1)(A) (West 1994).

6    43 Fed. Cl. 702, 708.

7    Id.

8    Id.

9    Id.

10    See 53 Fed. Reg. 13,244 (April 22, 1988).

11    43 Fed. Cl. 702, at 709.

12    Id. at 710.

13    Id.

14    Id. at 711.

15    Id.

16    In deciding whether the unmistakability doctrine applied, the Court looked for guidance in United States v. Winstar, 518 U.S. 839 (1996), a plurality opinion involving federal controlled thrift institutions. In that case, the four justices voting in the plurality did not believe that the unmistakability doctrine applied to the case. At the same time, however, a majority of the justices agreed that the unmistakability doctrine applied to all government contracts, although they disagreed as to the results of its application. Understanding that to be the controlling holding of the case with respect to the unmistakability doctrine, the court proceeded to determine whether an unmistakable promise was made by RHS.

17    43 Fed. Cl. 702, 715.