One & Ken Valley Housing Group v. Maine State Housing Authority , 716 F.3d 218 ( 2013 )

United States Court of Appeals
For the First Circuit
No. 12-1952
ONE AND KEN VALLEY HOUSING GROUP, ET AL.,
Plaintiffs, Appellants,
v.
MAINE STATE HOUSING AUTHORITY,
Defendant/Third-Party Plaintiff, Appellee,
v.
SHAUN DONOVAN, Secretary, U.S. Department of Housing &
Urban Development,
Third-Party Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Lynch, Chief Judge,
Howard, Circuit Judge,
and Casper,* District Judge.
Harry J. Kelly, III, with whom W. Daniel Deane and Nixon
Peabody LLP were on brief, for appellants.
Robert A. Jaffe, with whom Barry P. Steinberg, Kutak Rock LLP,
*
Of the District of Massachusetts, sitting by designation.
and John Bobrowiecki, Maine State Housing Authority, were on brief,
for appellee Maine State Housing Authority.
Kyle A. Forsyth, Attorney, with whom Stuart F. Delery, Acting
Principal Deputy Assistant Attorney General, J. Christopher Kohn,
Director and Ruth A. Harvey, Assistant Director, Commercial
Litigation Branch, Civil Division, were on brief for appellee U.S.
Department of Housing and Urban Development.
Carl A.S. Coan, III, Raymond K. James and Coan & Lyons on
brief for National Association of Home Builders, National Leased
Housing Association, National Apartment Association, National Multi
Housing Council, National Affordable Housing Management
Association, Institute of Real Estate Management, Council for
Affordable and Rural Housing, and Leading Age, amici curiae in
support of appellants.
May 14, 2013
HOWARD, Circuit Judge. The Section 8 program is a vast
effort on the part of federal, state, and local authorities to
provide decent, safe, and sanitary housing to low-income families,
the elderly, and the disabled. The program is administered by the
U.S. Department of Housing and Urban Development ("HUD") in
conjunction with state and local public housing agencies across the
country. Under the part of the program at issue here,1 state and
local agencies enter into housing assistance payments ("HAP")
contracts with private landlords, and the landlords agree to make
units available to Section 8-assisted households. The assisted
households, in turn, pay 30 percent of their monthly adjusted
income to their landlords in rent; the landlords receive the
remainder of the rent from the relevant public housing agency; and
the public housing agencies are fully reimbursed by HUD.2 The
payments from the state and local agencies to the Section 8
1
Section 8 assistance may be either "project-based" or
"tenant-based." Park Vill. Apt. Tenants Ass'n v. Mortimer Howard
Trust, 636 F.3d 1150, 1152 (9th Cir. 2011). This suit involves the
project-based component of the program. According to HUD
estimates, approximately 1.2 million low-income families live in
units that receive project-based aid, and another 2.2 million
families receive tenant-based assistance. U.S. Dep't of Hous. &
Urban Dev., FY 2013 Budget: Housing and Communities Built to Last
17, 43 (2012).
2
Where no public housing agency is able to implement the
program, the Section 8 statute authorizes the HUD Secretary to
enter into contracts with landlords directly. 42 U.S.C. §
1437f(b)(1) (2006).
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landlords are adjusted periodically according to guidelines
promulgated by HUD.
Plaintiffs-appellants are five limited partnerships that
own multifamily housing rental projects in southern and central
Maine. All of the partnerships have entered into HAP contracts
with the Maine State Housing Authority ("MaineHousing") in order to
participate in the Section 8 program. In December 2009, the
partnerships sued MaineHousing in federal district court for breach
of contract, alleging that MaineHousing had wrongfully refused to
grant them certain annual increases in their Section 8 payments
(although MaineHousing has allowed some upward adjustments).
MaineHousing, while denying the plaintiffs' allegations, impleaded
HUD as a third-party defendant, arguing that if MaineHousing had
breached its contracts with the partnerships, then it had done so
only at HUD's direction. All parties sought summary judgment; a
magistrate judge recommended judgment for MaineHousing and HUD on
the grounds that no material breach of contract had occurred; and
the district court adopted the magistrate's recommended decision.
The partnerships appeal, and we affirm.
I.
Although this case ultimately turns on a narrow question
of contract law, it arises in the context of a complex web of
statutes and regulations governing federal housing aid. In 1974,
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Congress amended the New Deal-era Housing Act to add the provision
commonly known as "Section 8"; this provision authorized the HUD
Secretary "to enter into annual contributions contracts with public
housing agencies pursuant to which such agencies may enter into
contracts to make assistance payments to owners of existing
dwelling units." Housing and Community Development Act of 1974,
Pub. L. No. 93-383, § 201(a), 88 Stat. 633, 662 (codified as
amended at 42 U.S.C. § 1437f(b)(1)) (amending United States Housing
Act of 1937, Pub. L. No. 75-412, 50 Stat. 888). While these
"annual contributions contracts" make reference to particular
projects, the only parties to the annual contributions contracts
are HUD and the public housing agencies administering the Section
8 program. Between 1975 and 1978, HUD and MaineHousing entered
into annual contributions contracts covering each of the five sites
at issue in the present litigation.
The original Section 8 statute provided that rents paid
to landlords at program sites would be adjusted on at least an
annual basis "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." 88 Stat. at 663 (codified at 42 U.S.C. §
1437f(c)(2)(A)). To guard against these rent adjustments producing
a windfall for Section 8 landlords, the statute added the caveat
that automatic adjustments "shall not result in material
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differences between the rents charged for assisted and comparable
unassisted units, as determined by the Secretary." Id. (codified
at 42 U.S.C. § 1437f(c)(2)(C)). These statutory provisions remain
in force today.
Pursuant to Section 8, HUD publishes "automatic annual
adjustment factors" for specific Census regions and metropolitan
areas that reflect changes in the Consumer Price Index for rent and
utilities over the previous year. See 24 C.F.R. §§ 888.201-.204
(2012); 77 Fed. Reg. 22,340, 22,340-43 (Apr. 13, 2012). HUD
regulations state that Section 8 rents should be calculated by
multiplying the applicable annual adjustment factor for the
appropriate Census region or metropolitan area by the rent
stipulated by contract for each unit. 24 C.F.R. § 888.203.
HUD has also drafted a standard form contract for state
and local agencies to use when entering into agreements with
Section 8 landlords. Once HUD and MaineHousing had entered into
annual contributions contracts covering the five sites in question,
MaineHousing entered into housing assistance payments contracts
with owners of the five properties. The HAP contracts varied in
duration, with the longest providing for renewals over the course
of 40 years, until 2018. All of the HAP contracts contained a
provision, section 1.9(b)(2), stating that each year, "the Contract
Rents shall be adjusted by applying the applicable Automatic Annual
Adjustment Factor most recently published by the Government." All
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of the contracts also included an "overall limitation clause"
(section 1.9(d)), which states that:
Notwithstanding any other provisions of this
Contract, adjustments as provided in this
Section shall not result in material
differences between the rents charged for
assisted and comparable unassisted units, as
determined by the [housing authority] . . . ;
provided, that this limitation shall not be
construed to prohibit differences in rents
between assisted and comparable unassisted
units to the extent that such differences may
have existed with respect to the initial
Contract Rents.
At the outset of the Section 8 program's existence,
public housing agencies applied the automatic annual adjustment
factors published by HUD and granted regular rent increases to
Section 8 landlords; HUD, for its part, funded these rent increases
through its annual contributions to the public housing agencies.
In the early 1980s, however, officials at HUD became concerned that
the automatic annual adjustments were pushing rents at some Section
8 sites well above the market rates for comparable unsubsidized
units. In 1983, when HUD and a local housing authority sought to
prevent an automatic annual adjustment from taking effect at a
Section 8 site in Bremerton, Washington, the affected landlord
filed a federal suit. The Ninth Circuit held that--despite the
overall limitation clause in the HAP contract between the Section
8 landlord and the local housing agency--the landlord was still
entitled to automatic annual adjustments in rental payments.
Rainier View Assocs. v. United States, 848 F.2d 988, 990-91 (9th
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Cir. 1988), cert. denied, 490 U.S. 1066 (1989). HUD refused to
apply the Rainier View decision outside of the Ninth Circuit, and
other courts disapproved of Rainier View's holding. See, e.g.,
Carmichaels Arbors Assocs. v. United States, 789 F. Supp. 683, 685,
688-89 (W.D. Pa. 1992); Sheridan Square P'ship v. United States,
761 F. Supp. 738, 743-44 (D. Colo. 1991); Nat'l Leased Hous. Ass'n
v. United States, 22 Cl. Ct. 649, 652, 659-60 (Cl. Ct. 1991).
With litigation over the HAP contracts pending in various
federal courts, Congress passed a series of amendments addressing
HUD's efforts to rein in rent increases. The first two of these
amendments, enacted in 1988 and 1989, clarified the process by
which the HUD Secretary could deny automatic annual adjustments at
Section 8 sites. Under the amendments, HUD or a public housing
agency could deny an automatic annual adjustment at a Section 8
site by submitting a "comparability study" to the project owner at
least sixty days before the annual adjustment was set to take
effect. See Housing and Community Development Act of 1987, Pub. L.
100-242, § 142(c)(2), 101 Stat. 1815, 1850 (1988) (codified at 42
U.S.C. § 1437f(c)(2)(C)); Department of Housing and Urban
Development Reform Act of 1989, Pub. L. No. 101-235, § 801(c), 103
Stat. 1987, 2058 (same).
After the 1988 and 1989 amendments, Section 8 landlords
in Washington and California brought suit again, claiming that
their HAP contracts entitled them to automatic annual adjustments
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without regard to the results of comparability studies conducted by
HUD. The Ninth Circuit reiterated its holding in Rainier View and
"rejected HUD's argument that an 'Overall Limitation' provision in
the contracts permitted HUD to use market rates to cap rent
adjustments." Alpine Ridge Grp. v. Kemp, 955 F.2d 1382, 1383-84
(9th Cir. 1992) (citing Rainier View, 848 F.2d at 990-91). The
Supreme Court granted certiorari and reversed the Ninth Circuit's
decision. As Justice White wrote for a unanimous Court, "the
contract language is plain that no project owner may claim
entitlement to formula-based rent adjustments that materially
exceed market rents for comparable units." Cisneros v. Alpine
Ridge Grp., 508 U.S. 10, 21 (1993). The Alpine Ridge Court
concluded that the overall limitation clause affords HUD
"sufficient discretion" to design and implement a method for
ensuring that contract rents do not rise above market rates. Id.One year after the Alpine Ridge decision, Congress
amended the Section 8 statute to place further limits on automatic
annual adjustments. The 1994 law provided, in pertinent part,
that:
[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.
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Pub. L. No. 103-327, 108 Stat. 2298, 2315 (codified at 42 U.S.C. §
1437f(c)(2)(A)).3
Whereas the 1988 and 1989 amendments saddled HUD with the
burden of producing a "comparability study" whenever it sought to
withhold an automatic adjustment, the 1994 amendment seemed to
shift the onus onto landlords to demonstrate that adjusted rents
would not exceed the market rent for comparable units. See
Greenleaf Ltd. P’ship v. Ill. Hous. Dev. Auth., No. 08 C 2480, 2009
U.S. Dist. LEXIS 119375, at *11-14 (N.D. Ill. Dec. 23, 2009). HUD
addressed this apparent tension in 1995 with the promulgation of
Notice H 95-12, which provided state and local housing authorities
with detailed guidelines for implementing the previous year's
statutory changes. Notice H 95-12 directed housing authorities to
consult a document published annually by HUD that lists "fair
market rents" for different unit types on a regional basis.4 Where
the rent for a Section 8 unit that would result from the automatic
adjustment is higher than the corresponding fair market rent listed
in the HUD-published tables, Notice H 95-12 instructs the public
3
Although the 1994 amendment only applied to rent adjustments
for fiscal year 1995, Congress subsequently made the provision
permanent. See Balanced Budget Act of 1997, Pub. L. No. 105-33, §
2003, 111 Stat. 251, 257 (codified at 42 U.S.C. § 1437f(c)(2)(A)).
4
For the State of Maine, HUD publishes fair market rents for
zero-, one-, two-, three-, and four-bedroom units in eight
metropolitan areas and eleven non-metropolitan counties. U.S.
Dep't of Hous. & Urban Dev., Schedule B: FY 2013 Fair Market Rents
for Existing Housing, at 18-21 (2012), available at
http://www.huduser.org/portal/datasets/fmr.html.
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housing authority to presume that the contract rent is above-
market. See U.S. Dep't of Hous. & Urban Dev., Notice H 95-12 (Mar.
7, 1995); see also U.S. Dep't of Hous. & Urban Dev., Notice H 2002-
10 (May 17, 2002) (carrying forward Notice H 95-12 method); 77 Fed.
Reg. 22,340, 22,341 (Apr. 13, 2012) (carrying forward Notice H
2002-10).
In promulgating Notice H 95-12, HUD was aware that most
Section 8 sites were subject to the same standard form HAP
contracts, and HUD was likewise aware that under the overall
limitation clause in those contracts, Section 8 landlords were
entitled to receive above-market rents to the extent that such
differences existed at the outset of their contracts. See Notice
H 95-12, at 3 ("need to assure that the initial difference which
existed in the initial contract rents is protected, as required by
the [HAP] contract"). Accordingly, Notice H 95-12 prescribed a
formula for calculating this "initial difference": 0.1 times the
initial Section 8 contract rent. Put differently, 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
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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 underpriced relative to
comparable unsubsidized units in the area.
Up until the publication of Notice H 95-12, MaineHousing
made rent adjustments at all five properties every year in
accordance with the automatic annual adjustment factors published
by HUD. For the first decade after Notice H 95-12 was promulgated,
MaineHousing denied the landlords' requests for further upward
adjustments, citing the limitations imposed by the HUD notice. In
2005, all five landlords submitted rent comparability studies to
MaineHousing in an effort to show that the 10 percent formula
underestimated the "initial difference" at their sites. Based on
these studies, and at the urging of MaineHousing, HUD agreed to let
the five landlords use an alternative method for calculating the
initial differences at their sites. Rents rose at all five sites
in 2005, with increases of up to $1,092 per unit per year (although
the amount of the increase varied from unit to unit and site to
site). Rents at three of the five sites have remained at 2005
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levels, while HUD has allowed further upward adjustments at the two
other sites in subsequent years.
II.
Despite the 2005 rent adjustments for all five sites and
additional increases at two of the five sites in subsequent years,
owners of the five sites filed a complaint against MaineHousing in
federal district court in December 2009 alleging three counts of
breach of contract. Before addressing the merits of the landlords'
complaint, we pause to consider whether the suit belongs in federal
court at all. Although none of the parties raise the issue on
appeal, we have an obligation to inquire into our subject matter
jurisdiction sua sponte. Liu v. Amerco, 677 F.3d 489, 492-93 (1st
Cir. 2012).
In their complaint, the plaintiffs invoke federal subject
matter jurisdiction pursuant to 28 U.S.C. § 1331, which grants
district courts "original jurisdiction of all civil actions arising
under the Constitution, laws, or treaties of the United States."
Yet their only claims are for breach of contract, and they appear
to acknowledge that their breach-of-contract claims arise under the
laws of the State of Maine. As a general rule, federal courts lack
subject matter jurisdiction over state law breach-of-contract
actions where, as here, the plaintiffs and the defendant hail from
the same state. See Mass. Universalist Convention v. Hildreth &
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Rogers Co., 183 F.2d 497, 499 (1st Cir. 1950) (per curiam).
Federal courts allow an exception to this rule only in the rare
instance where the contract is governed by state law but a "federal
issue is decisive" to the dispute and "the federal
ingredient . . . is sufficiently substantial to confer the arising
under jurisdiction." E.g., W. 14th St. Commercial Corp. v. 5 W.
14th Owners Corp., 815 F.2d 188, 196 (2d Cir. 1987).
The federal ingredient doctrine applies in a "special and
small category of cases" where a "state-law claim necessarily
raise[s] a stated federal issue, actually disputed and substantial,
which a federal forum may entertain without disturbing any
congressionally approved balance of federal and state judicial
responsibilities." Gunn v. Minton, 133 S. Ct. 1059, 1065 (2013)
(internal quotation marks omitted); see also Rosselló-González v.
Calderón-Serra, 398 F.3d 1, 12-13 (1st Cir. 2004). The Supreme
Court recently reaffirmed the doctrine's vitality in Grable & Sons
Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S.
308 (2005). And although we have emphasized that federal
ingredient jurisdiction "should be applied with caution," Metheny
v. Becker, 352 F.3d 458, 460 (1st Cir. 2003) (internal quotation
marks omitted), this is one of the few cases that fits squarely
within the federal ingredient exception.
The dispute in this case involves a federal contractor's
implementation of a federal program; the contracts at issue were
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drafted and approved by a federal agency and signed by a federal
official; and the plaintiffs allege that the contractor (here,
MaineHousing) was in breach of the agreement by following a
guideline promulgated by a federal agency pursuant to a federal
statute. Singly, none of these "federal ingredients"--a claim
against a federal contractor; an agreement drafted and approved by
a federal agency; a defense based on a federal statute or
guideline--would be sufficient to establish "arising under"
jurisdiction. See, e.g., Empire Healthchoice Assur., Inc. v.
McVeigh, 547 U.S. 677, 699-701 (2006); Louisville & Nashville R.R.
Co. v. Mottley, 211 U.S. 149, 152-153 (1908); Lindy v. Lynn, 501
F.2d 1367, 1369 (3d Cir. 1974); Ippolito-Lutz, Inc. v. Harris, 473
F. Supp. 255, 259 (S.D.N.Y. 1979). Yet the scope of federal
ingredient jurisdiction is determined by the totality of the
circumstances, not by a single-factor test. See Grable, 545 U.S.
at 313-14. Based on the totality of the circumstances, we find
that the federal ingredients of the case predominate.
It is of particular significance here that "[f]ederal
jurisdiction is favored in cases that present 'a nearly pure issue
of law that could be settled once and for all and thereafter would
govern numerous cases.'" Bender v. Jordan, 623 F.3d 1128, 1130
(D.C. Cir. 2010) (quoting Empire Healthchoice, 547 U.S. at 700)
(alterations and some internal quotation marks omitted). We note
that other Section 8 landlords have brought almost identical
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actions elsewhere.5 The outcomes of the legal questions in these
cases will dictate whether HUD and/or the public housing agencies
that administer Section 8 must pay millions of dollars in
additional rents to landlords, which--in turn--could require the
agencies to scale back the scope of the Section 8 program. "The
issue is potentially so important to the success of the [Section 8]
program--since on its resolution may turn the amount of
lower-income housing actually provided--that we believe that
Congress, had it thought about the matter, would have wanted the
question to be decided by federal courts applying a uniform
principle." Price v. Pierce, 823 F.2d 1114, 1119-20 (7th Cir.
1987) (Posner, J.); see also Almond v. Cap. Props., Inc., 212 F.3d
20, 24 (1st Cir. 2000) (First Circuit is "content to follow Price
pending further enlightenment from the Supreme Court"). Moreover,
"there is no discernable state interest in a state forum" that
would outweigh the federal interest in uniformity. See Bender, 623
F.3d at 1131; see also R.I. Fishermen's Alliance, Inc. v. R.I.
Dep't of Envtl. Mgmt., 585 F.3d 42, 51-52 (1st Cir. 2009).
The decision to apply the federal ingredient doctrine in
a particular case is necessarily fact-bound. See Gully v. First
Nat'l Bank in Meridian, 299 U.S. 109, 117 (1936) (Cardozo, J.)
5
See, e.g., Cathedral Square Partners Ltd. P'ship v. S.D.
Hous. Dev. Auth., No. 07-4001, 2011 U.S. Dist. LEXIS 1703 (D.S.D.
Jan. 5, 2011); Greenleaf Ltd. P’ship, 2009 U.S. Dist. LEXIS 119375;
Arlington Hous. Partners, Inc. v. Ohio Hous. Fin. Agency, 2012 Ohio
1412 (Ohio Ct. App. 2012).
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(federal ingredient doctrine requires "common-sense accommodation
of judgment to kaleidoscopic situations"). In the circumstances of
this case, we conclude that federal question jurisdiction exists,
as (1) "[t]he imposition of liability on Government contractors
will directly affect the terms of Government contracts," Boyle v.
United Techs. Corp. 487 U.S. 500, 507 (1988); (2) the
"dispute . . . turn[s] on the interpretation of a contract
provision approved by a federal agency pursuant to a federal
statutory scheme," Almond, 212 F.3d at 25; (3) the alleged breach
occurred only because the contractor was following the federal
agency's explicit instructions, see Corr. Servs. Corp., 534 U.S. at
74 n.6; (4) the case presents a pure question of law that will
govern numerous cases nationwide, see Bender, 623 F.3d at 1130; (5)
the federal government has an overwhelming interest in seeing the
issue decided according to a uniform principle, see Price, 823 F.2d
at 1119-20; and (6) there is no countervailing state interest in
having the dispute adjudicated in a state forum, see Bender, 623
F.3d at 1131; R.I. Fishermen's Alliance, Inc., 585 F.3d at 51-52.
Having satisfied ourselves that we have jurisdiction over the
claims that remain live in this case, we move on to the merits.6
6
We need not address the propriety of federal jurisdiction
over any claims against HUD. MaineHousing has not appealed from
the district court's dismissal of its third-party complaint, and
the landlords have waived any possible claims against HUD by not
addressing those claims in their brief on appeal. See Decaro v.
Hasbro, Inc., 580 F.3d 55, 64 (1st Cir. 2009) ("contentions not
advanced in an appellant's opening brief are deemed waived").
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III.
The merits issues that we must decide are (1) whether the
HAP contracts allow MaineHousing to invoke the overall limitation
clause to limit payments to the plaintiffs and (2) if so, whether
MaineHousing properly invoked the overall limitation by employing
the Notice H 95-12 method to calculate the difference between the
plaintiffs' contract rents and those of comparable unassisted
units.7 We are the first federal appellate court to reach this
question.8 Although some federal trial courts in other circuits
7
The magistrate judge's recommended decision noted that, if
MaineHousing did not breach the HAP contracts by applying the
Notice H 95-12 method, then there is no need to reach the
additional question of whether the HAP contracts prohibit
MaineHousing from applying a so-called "nonturnover deduction" to
reduce the automatic annual adjustment by 1 percentage point at
units that have not changed tenants. On appeal, the landlords have
not argued that their nonturnover deduction argument remains
relevant if the magistrate judge's primary recommendation is
affirmed. See Decaro, 580 F.3d at 64.
The landlords do devote a portion of their reply brief to the
argument that "participation in the Section 8 program does not
automatically constitute consent . . . to whatever terms Congress
or HUD may come up with in the future." But the magistrate judge's
recommended decision did not state that the landlords had consented
to whatever terms Congress or HUD might conjure up. Rather, the
magistrate concluded that the landlords had in fact consented to
the overall limitation clause in the original HAP contracts and
that MaineHousing properly invoked the overall limitation clause in
denying further rent adjustments. Accordingly, we need not reach
the question of when--if ever--subsequent changes to the Section 8
statute would excuse MaineHousing from its obligations under its
contracts with the landlords.
The landlords' additional arguments address the calculation of
damages and thus need not be addressed if we conclude that no
material breach has occurred.
8
After oral argument, the landlords and MaineHousing both
filed letters directing our attention to the Federal Circuit's
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have answered this question in the negative,9 we ultimately take
our guidance from the Supreme Court's Alpine Ridge decision.
There, a unanimous Court concluded that the terms of the overall
limitation clause--which apply "notwithstanding any other
provisions" of the HAP contract--"override conflicting provisions
of any other section." Alpine Ridge, 508 U.S. at 18. That
conclusion survives the 1994 amendment to the Section 8 statute and
controls our analysis here.
As we have noted, the overall limitation clause allows
MaineHousing to withhold the otherwise-automatic annual adjustments
in rental payments so long as MaineHousing has "determined" that
the adjustments would "result in material differences between the
recent decision in Haddon Housing Associates, L.P. v. United
States, 711 F.3d 1330 (Fed. Cir. 2013). In that case, the Federal
Circuit expressed no view regarding the impact of the overall
limitation clause in the landlord's HAP contract, as the issue was
not preserved for appeal. Id. at 1335-36 & nn. 1-2.
9
See, e.g., Haddon Hous. Assocs., LLC v. United States, 99
Fed. Cl. 311, 340 (2011) ("the overall-limitation clause did not
survive the 1994 Amendments"), aff'd in part on other grounds and
rev'd in part, 711 F.3d 1330 (Fed. Cir. 2013); Park Props. Assocs.,
L.P. v. United States, 82 Fed. Cl. 162, 176 (2008) ("the effect of
the repudiation of the pricing mechanism in the HAP contracts was
to deprive the overall limitation of any continuing vitality");
Cuyahoga Metro. Hous. Auth. v. United States, 57 Fed. Cl. 751,
759-60 & n.13 (2003) (Cuyahoga I) (HUD can only invoke overall
limitation clause by conducting comparability study); see also
Cathedral Square Partners Ltd. P'ship, 2011 U.S. Dist. LEXIS 1703,
at *37-38. But cf. Cuyahoga Metro. Hous. Auth. v. United States,
65 Fed. Cl. 534, 560 (2005) (Cuyahoga II) (HUD's calculation of
"material difference" under Notice H 95-12 is "reasonable, given
the language of the HAP contracts, as amplified by the statute as
it existed at the time those contract were executed").
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rents charged for assisted and comparable unassisted units." The
one caveat is that the overall limitation clause preserves the
landlord's right to receive above-market rental payments to the
extent of the initial difference between the contract rent and the
market rate. MaineHousing argues that it has used the method set
forth in Notice H 95-12 to "determine" that further automatic
adjustments would result in "material differences" between contract
rents and market rates. That method relies on the tables of fair
market rents published annually by HUD: If the contract rent is
higher than the corresponding fair market rent for comparable units
in the region (and if the difference is more than 10 percent of the
initial contract rent), then a Section 8 landlord cannot receive a
further rent increase unless the landlord can show--based on "at
least three examples of unassisted housing in the same market area
of similar age, type and quality"--that the resulting rent level
after application of the automatic annual adjustment will still be
below the market rate. Notice H 95-12, at 3.
The landlords maintain that MaineHousing never
"determined" that automatic adjustments would result in material
differences between contract rents and market rates because the
verb "determine" means "to reach a decision after thought and
investigation," Webster's New World Dictionary (2d ed. 1986)
(emphasis added), whereas MaineHousing rotely applied the Notice H
95-12 formula without any independent inquiry. But to "determine"
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also means to "ascertain definitely by . . . calculation." Oxford
English Dictionary (Online ed. 2013); see also The American
Heritage Dictionary (2d College ed. 1982) ("ascertain definitely,
as after . . . calculation"). MaineHousing certainly calculated
that the adjusted rents at assisted units would rise above the fair
market rents for comparable units, and it based this calculation on
a HUD-prescribed formula and HUD-published data. The landlords'
cherry-picked dictionary definitions do not convince us that
MaineHousing's act of calculation was anything but a
"determination."10
The landlords also argue that the fair market rents
published by HUD cannot be used as a measure of "the rents charged
for . . . comparable unassisted units." The landlords suggest that
unassisted units are only "comparable" to Section 8 units if they
are in a similar neighborhood and share other common
characteristics such as size, age, physical configuration,
10
To support their position that the only way MaineHousing can
invoke the overall limitation clause is by performing a site-
specific rent comparability study, the landlords point to the 1988
amendment to the Section 8 statute--and, in particular, to a clause
in that amendment that states: "If the [HUD] Secretary or
appropriate State agency does not complete and submit to the
project owner a comparability study not later than 60 days before
the anniversary date of the assistance contract . . . , the
automatic annual adjustment factor shall be applied." Pub. L. No.
100-242, § 142(c)(2), 101 Stat. at 1850 (codified as amended at 42
U.S.C. § 1437f(c)(2)(C)). But the sixty-day rule is not in the HAP
contracts, which all state that automatic annual adjustments should
not go forward if MaineHousing determines that the adjustments
would lead to material differences between contract rents and
market rates notwithstanding any other provision.
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amenities, and utilities. HUD's fair market rent figures, by
contrast, are calculated on a county-wide or metropolitan-area-wide
basis. HUD reports 40th-percentile rents for zero-, one-, two-,
three-, and four-bedroom units in each area, but the fair market
rent figures do not include a more fine-grained breakdown by unit
type.
MaineHousing and HUD counter that the fair market rent
figures are designed to reflect "the rent, including the cost of
utilities (except telephone) . . . , that must be paid in the
market area to rent privately owned, existing, decent, safe and
sanitary rental housing of modest (non-luxury) nature with suitable
amenities." 24 C.F.R. § 888.111(b). The figures are adjusted to
"exclude public housing units, newly built units and substandard
units." Id. § 888.113(a). Thus, the fair market rent figures do
provide a basis for comparing rents at privately owned Section 8
sites to rents for other units in the general vicinity, taking
account of unit quality, amenities, utilities, and (to some extent)
age. Since HUD reports rents at the 40th percentile in each county
or metropolitan area, this means that contract rents will only be
deemed above-market for purposes of Notice H 95-12 if rents at the
Section 8 site are more expensive than rents for four out of ten
existing decent, safe, and sanitary units in the area with the same
number of bedrooms, same ownership status, and roughly the same
amenities. Moreover, HUD has established a procedural mechanism by
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which landlords can challenge the results of the Notice H 95-12
calculation: by submitting an appraiser's market rent
estimates--based on at least three comparable units--showing that
adjusted rents would be consistent with prevailing market rates.
See Notice H 95-12, at 5-6; see also U.S. Dep't of Hous. & Urban
Dev., Estimates of Market Rent by Comparison (Form HUD-92273) (July
2003). Indeed, the plaintiffs all took advantage of this mechanism
when they submitted their own comparability studies to MaineHousing
and HUD in the mid-2000s, and HUD responded by approving upward
adjustments at all five sites.
Ultimately, we need not decide whether the Notice H 95-12
method is the best way to calculate rents for "comparable
unassisted units" under the HAP contracts. The contracts construed
by the Supreme Court in Alpine Ridge are in all relevant respects
identical to the contracts at issue here, and consistent with
Alpine Ridge, we read the overall limitation clause as "expressly
assign[ing] to [the agency] the determination of whether there
exist material differences between the rents charged for assisted
and comparable unassisted units." See Alpine Ridge, 508 U.S. at
21. Thus, our role is not to determine de novo whether this
calculation was correct. Rather, our role is to determine whether
the Notice H 95-12 method represents a "reasonable means" of making
the comparison. Id.; accord Carmichaels Arbors Assocs., 789 F.
Supp. at 689 n.6 ("Under our interpretation of the HAP
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contract, . . . any reasonable means of ascertaining whether
material differences in rents exist is authorized under the terms
of the contract."); Nat'l Leased Hous. Ass'n, 22 Cl. Ct. at 659
("the HAP contracts do not contain any provision limiting HUD to
any particular methodology for making its comparability
determination").11 We have already explained that MaineHousing's
reliance on the Notice H 95-12 method--while not the same as the
site-specific studies that the landlords seek--still does
incorporate important considerations of comparability. This
method, combined with the procedural safeguards which we described
above (and which were actually utilized in this case), certainly
qualifies as "reasonable." We do not read the contracts of the
Alpine Ridge decision to demand more than that.
11
The Alpine Ridge Court did say that "rent adjustments
indicated by the automatic adjustment factors remain the
presumptive adjustment called for under the contract," and that
automatic annual adjustments would be withheld "only in those
presumably exceptional cases where the Secretary has reason to
suspect that the adjustment factors are resulting in materially
inflated rents." 508 U.S. at 19-20. But the Alpine Ridge Court
was not asked to decide what would happen if HUD and the state and
local housing agencies--applying HUD-mandated methods--found
"materially inflated rents" to be not "exceptional" but rather
quite common. And the Alpine Ridge Court certainly did not say
that in such a scenario, HUD or the state and local housing
agencies would be contractually obligated to grant automatic annual
adjustments even after finding that the resulting rents would be
materially above the calculated market rates.
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IV.
In sum, we hold that the overall limitation clauses in
each of the housing assistance payments contracts allow
MaineHousing to withhold otherwise-automatic annual adjustments in
contract rents where MaineHousing determines--based on the formula
prescribed by HUD in Notice H 95-12 and the fair market rent data
published by HUD--that further adjustments would result in material
differences between contract rents and market rates. The district
court's decision granting MaineHousing's motion for summary
judgment with respect to the plaintiffs' complaint is affirmed.
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