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January 28, 2013: NHLP’s Amicus Position Adopted By Second Circuit in HUD Disposition Case
In Ku v. HUD, the United States Court of Appeals for the Second Circuit has ruled that HUD properly restricted bidding at the foreclosure sale of an assisted senior development. NHLP and preservation allies had filed an amicus brief urging that HUD’s action be upheld on narrow grounds.
Case Background: HUD sold a Section 202/Section 8 assisted senior rental property in Newburgh, NY at a restricted foreclosure auction. At the sale, eligible purchasers were restricted to HDCs, public entities, and lienholders (including HUD). HUD was the high bidder (for the mortgage balance), and took title for immediate re-sale to the City of Newburgh, which then transferred the property to a preservation purchaser. Ku was ineligible to bid under these conditions, and sued HUD after the sale, arguing that HUD had illegally restricted the sale and disqualified him from bidding. The District Court dismissed Ku’s case, accepting HUD’s broad argument that the flexible authority statute made HUD’s action unreviewable by the court and that Ku’s claim was otherwise barred by sovereign immunity.
On Ku’s appeal, HUD once again argued that its decision was unreviewable by a court. NHLP and its allies, including the Housing Preservation Project, the New York State Tenants and Information Service, the Association for Neighborhood and Housing Development, and the Local Initiatives Support Corporation, represented by Ed Josephson of Legal Services NYC, filed an amicus supporting HUD’s use of restricted auctions under its existing statutory authority. However, the amicus sought to ensure that the Second Circuit did not ratify the reasoning of the District Court or HUD -- that the Flexible Authority statute precludes judicial review, which would damage future preservation efforts whenever HUD makes bad decisions.
After briefing and argument, the Second Circuit issued a summary order upholding dismissal of Ku’s claim, reasoning that HUD’s restriction of the bidding was “entirely reasonable,” within its statutory authority, and not an abuse of discretion under the APA. As urged by the amicus, the court thus avoided any broader pronouncements about reviewability and sovereign immunity.
Issue Background: Starting in the late 1990s, Congress relaxed the laws governing HUD’s foreclosure and disposition policies by enacting a so-called “flexible authority” statute in 1997, 12 U.S.C. Sec. 1715z-11a. That law contains language that, if interpreted broadly, would allow HUD to override all other applicable laws, such as the federal Multifamily Mortgage Foreclosure Act and the Multifamily Property Disposition Reform Act, as well as the Fair Housing Act. A few district courts, including the trial court in this case, have unfortunately sanctioned such a broad interpretation. In one such case back in 2003, HUD sold a Bronx property called Pueblo de Mayaguez to a purchaser with a checkered track record named Emmanuel Ku, which a federal district court upheld under the flexible authority statute. In response to the risk presented by the flexible authority statute, advocates have obtained two key policy changes: (1) enactment of the Schumer Amendment starting in 2006, requiring HUD to maintain any existing project-based Section 8 contracts on properties facing foreclosure or HUD disposition sale, and (2) HUD-imposed bidding conditions designed to preserve threatened properties by ensuring transfer to responsible purchasers with adequate resources for repairs. Since Secretary Donovan took over in 2009, HUD has generally supported a preservation strategy for troubled properties, not taking full advantage of the flexible authority to override other laws and dump properties for market-rate use. However, housing advocates remain concerned about the risks from a broad interpretation of the flexible authority statute posed by a change in Administrations or a budget shortfall resulting from sequestration or other future appropriations decisions.