New Lansing Gardens Housing v. Columbus Metro. Housing ( 2022 )

RECOMMENDED FOR PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 22a0201p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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NEW LANSING GARDENS HOUSING LIMITED
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PARTNERSHIP,
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Plaintiff-Appellant, > No. 21-3942
│
│
v. │
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COLUMBUS METROPOLITAN HOUSING AUTHORITY; │
ASSISTED HOUSING SERVICES CORPORATION, │
Defendants-Appellees. │
│
┘
Appeal from the United States District Court for the Southern District of Ohio at Columbus.
No. 2:20-cv-02475—Michael H. Watson, District Judge.
Argued: June 9, 2022
Decided and Filed: August 24, 2022
Before: MOORE, STRANCH, and LARSEN, Circuit Judges.
_________________
COUNSEL
ARGUED: Michael R. Shebelskie, HUNTON ANDREWS KURTH, LLP, Richmond, Virginia,
for Appellant. Loriann E. Fuhrer, KEGLER BROWN HILL + RITTER, Columbus, Ohio, for
Appellees. ON BRIEF: Michael R. Shebelskie, J. Pierce Lamberson, HUNTON ANDREWS
KURTH, LLP, Richmond, Virginia, for Appellant. Loriann E. Fuhrer, KEGLER BROWN HILL
+ RITTER, Columbus, Ohio, for Appellees.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 2
_________________
OPINION
_________________
JANE B. STRANCH, Circuit Judge. The U.S. Department of Housing and Urban
Development (HUD) oversees the Section 8 low-income housing assistance program. Owner
New Lansing renewed its Section 8 contract with Columbus Metropolitan Housing Authority in
2014. In 2019, at the contractual time for its fifth-year rent adjustment, New Lansing submitted
a rent comparability study (RCS) to assist CM Authority in determining the new contract rents.
Following the 2017 HUD Section 8 Guidebook, CM Authority forwarded New Lansing’s RCS to
HUD, which obtained an independent RCS. Based on the independent RCS undertaken pursuant
to HUD’s Guidebook requirements, the Housing Authority lowered New Lansing’s contract
rents amount. New Lansing sued for breach of contract and declaratory judgment. The district
court granted the Defendants’ Motion to Dismiss. For the reasons that follow, we AFFIRM.
I. BACKGROUND
A. Section 8 Contracts
The Section 8 low-income housing assistance program is governed by 42 U.S.C. § 1437f,
which is part of the Housing and Community Development Act of 1974, Pub. L. No. 93-383, § 8,
88 Stat. 633, 662, that was later amended by the Multifamily Assisted Housing Reform and
Affordability Act of 1997 (MAHRA).1 The Section 8 program’s purpose is to “aid[] low-income
families in obtaining a decent place to live and [to] promot[e] economically mixed housing.”
42 U.S.C. § 1437f(a).
Through the Section 8 program, HUD gives rent subsidies to qualified low-income
families who rent from property owners that participate in the program. Graoch Assocs. # 33,
L.P. v. Louisville/Jefferson Cnty. Metro Hum. Rels. Comm’n, 508 F.3d 366, 369 (6th Cir. 2007).
HUD authorizes state or local governmental entities, called “public housing authorities” (PHA),
to administer the program. Caswell v. City of Detroit Hous. Comm’n, 418 F.3d 615, 617 (6th
1This opinion also refers to the 1999 amendments of MAHRA, which are codified at 42 U.S.C. § 1437f
note.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 3
Cir. 2005). Section 8 permits HUD to enter into agreements with PHAs called “annual
contributions contracts.” 42 U.S.C. § 1437f(b)(1). In turn, the annual contributions contracts
between the PHAs and HUD allow the PHAs to “enter into contracts to make assistance
payments to owners of existing dwelling units.” Id. The annual contributions contracts require
the PHAs to comply with HUD requirements that are in effect when discharging their obligations
under the Section 8 program.
The subsequent contract between the PHA and the Section 8 property owner is called a
Housing Assistance Payment Contract (HAP Contract). The HAP Contract provides for owner
duties that are consistent with the Section 8 regulations and sets the monthly rent that the owner
is entitled to receive—known as “contract rents.” Wade v. Cuyahoga Metro. Hous. Auth., 134
F.3d 373, 1998 WL 24991, at *1 n.1 (6th Cir. 1998) (unpublished table decision); 42 U.S.C.
§ 1437f(c)(1)(A). In turn, the arrangement allows the PHAs to act as contract administrators,
i.e., they become “responsible for monitoring performance by the owner.” 24 C.F.R. § 880.201.
The rent subsidy payments that PHAs make on behalf of low-income renters are called
“housing assistance payments.” Cuyahoga Metro. Hous. Auth. v. K & D Grp., Inc.,
618 F. App’x 842, 844 (6th Cir. 2015). Those payments go directly to Section 8 property owners
for rent, and the low-income families pay rent based on their income. Id. HUD reimburses the
PHA for the payments it makes to Section 8 property owners. One & Ken Valley Hous. Grp.
v. Maine State Hous. Auth., 716 F.3d 218, 219–20 (1st Cir. 2013). Based on HUD guidelines,
the payments from the PHAs to the property owner are adjusted periodically. Id. at 220.
Congress became concerned over time that “a substantial number of housing units
receiving project-based assistance have rents that are higher than the rents of comparable,
unassisted rental units in the same housing rental market.” MAHRA, § 511(a)(5). As a result, it
enacted MAHRA “to encourage owners of eligible multifamily housing projects to restructure
their FHA-insured mortgages and project-based assistance contracts in a manner that is
consistent with this [Act] before the year in which the contract expires.” § 511(b)(3). While
creating these incentives, Congress used MAHRA to prescribe requirements that would
“preserve low-income rental housing affordability and availability while reducing the long-term
costs of project-based assistance.” § 511(b)(1). Because the purposes and the requirements of
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 4
MAHRA govern the Section 8 housing program and are central to this litigation, we review
MAHRA’s key provisions.
Section 524 of MAHRA created new policies for renewing Section 8 project-based
contracts on “market rents.” See Hotel Oakland Assocs. v. Doyle Real Est. Advisors, LLC, No.
21-CV-05389-SK, 2022 WL 1493267, at *1 (N.D. Cal. May 3, 2022). Section 524(a)(5) of
MAHRA provides that HUD “shall prescribe the method for determining comparable market
rent by comparison with rents charged for comparable properties.” MAHRA, Pub. L. No. 105-
65, 111 Stat. 1344 (1997) (as amended by Pub. L. No. 106-74, 113 Stat. 1074, 1109–16 (1999))
(codified at 42 U.S.C. § 1437f note). For contracts at the end of a five-year period that are
renewed under § 524(a), like the one at issue here, “the Secretary shall compare existing rents
with comparable market rents for the market area and may make any adjustments in the rent
necessary to maintain the contract rents at a level not greater than comparable market rents or to
increase rents to comparable market rents.” § 524(c)(1).
The statute “does not prescribe the method the Secretary should use to compare rents”;
instead, Congress granted HUD discretion to establish requirements to effectuate MAHRA, and
HUD employed that discretion to issue Section 8 Renewal Guidebooks. See MAHRA,
§ 524(a)(5); see also Hotel Oakland Assocs., 2022 WL 1493267, at *2. “To respond to the
evolving nature of Section 8 renewal legislation and policy,” HUD periodically revises the
Guidebooks and makes them available online—at least three Guidebooks (2012, 2015, and 2017)
have been issued during the relevant time period here. “To make Section 8 policy more effective
and accessible for HUD’s partners,” the Guidebook “provides comprehensive guidance for
renewing expiring Section 8 HAP contracts.” The 2017 Guidebook states that “[t]he instructions
in [it] apply to all Contract Administrators who are responsible for overseeing Section 8 HAP
contracts.”
As part of that guidance, the Guidebook has provided instruction on the RCS process
since at least 2012, including HUD’s standards for preparing, submitting, and reviewing RCSs to
determine the comparable market rents. The 2017 Guidebook explains that “[t]he purpose of a
Rent Comparability Study (RCS) is to estimate ‘market’ rents for each Section 8-unit type.
‘Market Rent’ is the rent that a knowledgeable tenant would most probably pay for Section 8
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 5
units . . . if the tenants were not receiving rental subsidies and rents were not restricted by
HUD . . . .”
The 2017 version of the Guidebook requires HUD to obtain an independent RCS when
the owner’s RCS exceeds 140% of the “Median Gross Rent.” According to the Guidebook, the
140% Rule comes into play when the owner’s “RCS concludes that the project’s median rent for
the assisted units . . . exceeds 140 percent of the ‘Median Gross Rent by Zip Code Tabulation
Area’ . . . .” This Rule impacted New Lansing’s HAP Contract renewal process as described
below.
B. New Lansing’s HAP Contract
New Lansing is a limited partnership that owns Lansing Gardens, an apartment complex
located in Bridgeport, Ohio. Defendants are CM Authority, the PHA serving as a contract
administrator for the HUD Section 8 program, and Assisted Housing Services Corporation, the
authorized agent for CM Authority (collectively, the Housing Authority).
In 2014, New Lansing and the Housing Authority renewed the HAP Contract for a
20-year term. Section 5 of the Renewal Contract provides for a “fifth-year adjustment” of
contract rents, which requires the Housing Authority to adjust the monthly contract rents as
follows:
(b) At the expiration of each 5-year period of the Renewal Contract term,
the contract administrator shall compare existing contract rents with comparable
market rents for the market area. At such anniversary of the Renewal Contract,
the contract administrator shall make any adjustments in the monthly contract
rents, as reasonably determined by the contract administrator in accordance with
HUD requirements, necessary to set the contract rents for all unit sizes at
comparable market rents. Such adjustments may result in a negative adjustment
(decrease) or positive adjustment (increase) of the contract rents for one or more
unit sizes.
(c) To assist in the determination of the contract rents, the contract
administrator may require that the owner submit to the contract administrator a
rent comparability study (at the owner’s expense) in accordance with HUD
requirements.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 6
Section 8 of the Renewal Contract addresses the effect of HUD’s regulations and other
requirements, which may change over time:2
The Renewal Contract shall be construed and administered in accordance with all
statutory requirements, and with all HUD regulations and other requirements,
including amendments or changes in HUD regulations and other requirements
during the term of the Renewal Contract. However, any changes in HUD
regulations and requirements which are inconsistent with the provisions of the
Renewal Contract, including the provisions of section 5 (contract rent) and section
10 (distributions), shall not be applicable.
At the time the 2014 Renewal Contract was signed, the 2012 Section 8 Policy Guidebook
was in effect. The next year, HUD issued the 2015 Guidebook, which introduced the “140%
Rule” that remained in the 2017 Guidebook. The 2017 Guidebook, published on June 30, 2017,
states “[t]his guidance will apply to renewal and amend rent packages received by the
Department (or post-marked) July 28, 2017 or later.” The Amended Complaint (herein
“Complaint”) takes issue with the Housing Authority’s application of the 140% Rule in the 2017
Guidebook.
According to the 2017 Guidebook, if a HUD-commissioned RCS is required and differs
from the owner’s RCS, then “HUD will compare the gross rent potential for the subject project
as determined by the HUD-commissioned RCS versus the owner-contracted RCS, and the final
market rent for the subject project will be determined” as required by the Guidebook. “When the
HUD comparable gross rent potential is greater than the owner’s comparable gross rent potential,
the final comparable market rents will be the owner’s comparable market rents.” But, according
to Chapter 9 of the Guidebook, the analysis changes when the HUD comparable gross rent
potential is less than the owner’s comparable gross rent potential:
2A PHA has a duty to “comply with HUD regulations and other HUD requirements.” 24 C.F.R.
§ 982.52(a). “HUD requirements are issued by HUD headquarters, as regulations, Federal Register notices or other
binding program directives.” Id.; see also Request for Proposals; Contract Administrators for Project-Based Section
8 Housing Assistance Project (HAP) Contracts, 64 Fed. Reg. 27358, 27360 (May 19, 1999) (“In addition to
publication in the Federal Register and the CFR, HUD issues additional program requirements as HUD ‘directives’,
including HUD notices, handbooks and forms.”). The regulations define comparable market rents as “rents
determined in accordance with section 524(a)(5) of MAHRA and HUD’s instructions.” 24 C.F.R. § 402.2(c).
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 7
When the HUD comparable gross rent potential is less than the owner’s
comparable gross rent potential, the final comparable market rents will be
determined by reviewing if the owner’s comparable rent potential is:
i. less than 105 percent of the HUD comparable rent potential, and if so, the
final comparable market rents will be the owner comparable market rents;
or
ii. greater than or equal to 105 percent of the HUD comparable rent potential,
in which case the final comparable market rents will be 105 percent of the
market rents as determined by the HUD-commissioned RCS.
Chapter 9 of the Guidebook also addresses any disagreement an owner may have with the
HUD-commissioned RCS:
Transparency: The owner can request a copy of the HUD-commissioned RCS for
information purposes only. There are no negotiations allowed nor is there an
appeal process for differences between the two RCSs. However, if the owner
identifies factual discrepancies, such as errors in square footage or computational
errors that contribute to a large discrepancy in concluded rents, then the owner
may notify HUD and HUD will review such discrepancies. For other issues, such
as choice of comparables, amount of adjustments or derivation of concluded rent,
the HUD-commissioned RCS will prevail, and cannot be appealed or questioned
by the owner.”
In 2019, five years into the Renewal Contract, New Lansing submitted an RCS to the
Housing Authority that sought to increase the contract rents amount. The Housing Authority
determined that the study triggered the 140% Rule and submitted the study to HUD for approval.
HUD obtained an independent RCS, and the Housing Authority subsequently issued a new rent
schedule to New Lansing in which the new contract rents were lower than those in place before
the initiation of the fifth-year adjustment process. New Lansing unsuccessfully protested to the
Housing Authority and HUD about the new contract rents and HUD’s RCS.
C. Procedural Background
New Lansing sued the Housing Authority, alleging breach of contract and requesting a
declaratory judgment and injunctive relief. In its Complaint, New Lansing contends that the
Housing Authority acted in bad faith and breached Sections 5 and 8 of the Contract when it
enforced HUD’s RCS and applied the 140% Rule, which New Lansing contends is inconsistent
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 8
with the Contract. The Housing Authority moved to dismiss the case for failure to state a claim
and for failure to join HUD as a necessary party.
The district court dismissed the case, reasoning that the complaint did not plausibly allege
a breach of contract claim, and it denied New Lansing’s declaratory judgment request.
Addressing arguments that the Housing Authority acted in bad faith, the court determined that,
assuming a claim of bad faith had been asserted, it must be dismissed because Ohio law does not
recognize a bad faith claim in this situation. And if New Lansing intended to allege that the
Housing Authority breached the duty of good faith and fair dealing, the court held that the claim
must be dismissed because it is not an independent cause of action.
Before that dismissal, the United States, a nonparty, filed a statement of interest under
28 U.S.C. § 517, though it maintained it should not be made a party to the case. The district
court reviewed the Government’s statement but disposed of the case based on the parties’
briefing. Though some documents were attached to the Housing Authority’s motion, the court
also declined to convert the motion to dismiss into one for summary judgment. In granting
dismissal, the court considered only the allegations in New Lansing’s Complaint and its Renewal
Contract exhibit; it did not consider other exhibits and declined to grant New Lansing permission
to file supplemental exhibits. New Lansing timely appealed.
II. STANDARD OF REVIEW
We review a district court’s grant of a motion to dismiss de novo. Nolan v. Detroit
Edison Co., 991 F.3d 697, 707 (6th Cir. 2021). Construing the complaint in the light most
favorable to New Lansing, we “accept all well-pleaded factual allegations as true,” and
determine whether the complaint sufficiently states “a claim to relief that is plausible on its
face.” Hill v. Snyder, 878 F.3d 193, 203 (6th Cir. 2017) (quoting Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009)).
III. DISCUSSION
On appeal, New Lansing argues that the Housing Authority breached the Renewal
Contract by determining the adjusted contract rents using HUD’s 140% Rule, which New
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 9
Lansing contends is inconsistent with Section 5 of the Contract. New Lansing also presents two
arguments expanding its presentation to the district court: it now argues that the 2017
Guidebook applies only to contracts renewed after July 28, 2017 and that none of the
Guidebooks are incorporated into the Renewal Contract.3 We address each argument in turn.
A. Ohio Contract Law
The parties agree that Ohio law applies. An Ohio breach of contract claim has four
elements: “the existence of a contract, performance by the plaintiff, breach by the defendant, and
damage or loss to the plaintiff.” Savedoff v. Access Grp., Inc., 524 F.3d 754, 762 (6th Cir. 2008)
(quoting Jarupan v. Hanna, 878 N.E.2d 66, 73 (Ohio Ct. App. 2007)). A breach consists of
“fail[ure] to perform according to the terms of the contract or act[ing] in a manner that is
contrary to its provisions.” Id.Interpreting written contract terms, including whether those terms are ambiguous, is a
matter of law to be determined by the court. In re Fifth Third Early Access Cash Advance Litig.,
925 F.3d 265, 276 (6th Cir. 2019). Because Ohio courts presume that the intent of the parties
“reside[s] in the language they choose to use in their agreement,” the court must ascertain and
apply the intent of the parties as evidenced by the language in the contract. Savedoff, 524 F.3d at
763 (quoting Graham v. Drydock Coal Co., 667 N.E.2d 949, 952 (Ohio 1996)). Thus, Ohio
courts generally give common words their ordinary meaning and technical terms their technical
meaning, “unless a different intention is clearly expressed.” In Re Fifth Third Early Access Cash
Advance Litig., 925 F.3d at 276 (quoting Foster Wheeler Enviresponse, Inc. v. Franklin Cnty.
Convention Facilities Auth., 678 N.E.2d 519, 526 (Ohio 1997)).
If the contract terms are not ambiguous, courts apply the plain language of the contract.
Savedoff, 524 F.3d at 763. But when contractual language “‘is unclear, indefinite, and
reasonably subject to dual interpretations or is of such doubtful meaning that reasonable minds
could disagree as to its meaning,’ then it is ambiguous as a matter of law.” In re Fifth Third
Early Access Cash Advance Litig., 925 F.3d at 276 (quoting Cadle v. D’Amico, 66 N.E.3d 1184,
3Contradicting its allegations in the Complaint, New Lansing now argues that no Guidebooks are
incorporated into the Renewal Contract regardless of their year.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 10
1188 (Ohio Ct. App. 2016)). Under Ohio law, the meaning of the contract becomes “a question
of fact” when an ambiguity exists. Id. (quoting Books A Million, Inc. v. H & N Enters., Inc., 140
F. Supp. 2d 846, 854 (S.D. Ohio 2001)).
B. The Relevance of the Guidebooks
New Lansing advances two arguments to support its claim that the Guidebooks have no
relevance to the Renewal Contract. First, it contends that the 2017 Guidebook “is facially
limited to contracts that post-date its issuance.” Relatedly, it asserts that the Renewal Contract
does not incorporate any version of the Guidebook. As did the district court, we examine the
language of the Guidebooks because the Complaint references and quotes the Guidebooks and
the parties’ arguments hinge on their analysis of the Guidebooks. See Rondigo, L.L.C.
v. Township of Richmond, 641 F.3d 673, 680–81 (6th Cir. 2011).
Regarding its date of issuance argument, New Lansing points out that the 2017
Guidebook was effective July 28, 2017, whereas the parties entered the Renewal Contract on
November 1, 2014. The Housing Authority responds that the plain language of the 2017
Guidebook establishes its applicability to the full 20-year term of the Renewal Contract.
The motion to dismiss is governed by the Renewal Contract’s language, the Guidebook,
and the allegations in the Complaint. Section 8 of the Contract states:
The Renewal Contract shall be construed and administered in accordance with all
statutory requirements, and with all HUD regulations and other requirements,
including amendments or changes in HUD regulations and other requirements
during the term of the Renewal Contract. However, any changes in HUD
regulations and requirements which are inconsistent with the provisions of the
Renewal Contract, including the provisions of Section 5 (contract rent) and
Section 10 (distributions), shall not be applicable.
New Lansing argues that the 2017 Guidebook is not a HUD “requirement” within the
meaning of Section 8 of the Contract because, by its own terms, the 2017 Guidebook does not
purport to apply to contracts executed before July 2017. But New Lansing ignores the rest of the
Guidebook’s applicability clause, which also applies to “amend rent packages received by the
Department (or post-marked) on or after July 28, 2017.” An “amend rent package[],” although
not specifically defined in the Guidebook, most naturally refers to documents pertaining to a
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 11
change in contract rents, which describes just what New Lansing submitted—after July 28,
2017—during the fifth-year adjustment process. The plain language of the Guidebook applies to
New Lansing’s efforts in 2019 to make a fifth-year adjustment that would increase its rents
effective November 1, 2019.
Notably, New Lansing acknowledged in its Complaint that the 2017 Guidebook is “a
subsequent HUD requirement.” The 2017 Guidebook is a change in HUD requirements that was
contemplated by Section 8 of the Renewal Contract and applies to the parties’ contractual
arrangement unless, per Section 8, it is “inconsistent” with some other provision of the Renewal
Contract. Thus, New Lansing’s claims that the 2017 Guidebook does not apply to the fifth-year
adjustments required in its 2014 Renewal Contract is disproven by the mechanics of the Section
8 program, the plain language of the Renewal Contract and the Guidebook, and the allegations of
New Lansing’s Complaint.
New Lansing now also asserts that the Guidebooks cannot apply because the Renewal
Contract does not incorporate any version of the Guidebook. To incorporate a document by
reference in Ohio, “the contract must make clear reference to the document and describe it in
such terms that its identity may be ascertained beyond a doubt.” 84 Lumber Co., LP
v. Thompson Thrift Constr., Inc., No. 2:15-CV-1052, 2018 WL 3583227, at *5 (S.D. Ohio July
26, 2018) (citing Volovetz v. Tremco Barrier Sols., Inc., 74 N.E.3d 743, 751 (Ohio Ct. App. 10th
Dist. 2016)).
Here, Section 8 of the Contract specifically references HUD requirements and includes
changes in those requirements during the term of the Contract, unless those changes are
inconsistent with the provisions of the Renewal Contract. A “requirement” is simply “something
called for or demanded; a condition which must be complied with.” Requirement, Oxford
English Dictionary (3d ed. 2010), https://www.oed.com/view/Entry/163260. As explained
above, the 2017 Guidebook fits this bill. Contract administrators are “required to follow the
Guidebook,” including the “special procedures” outlined in the 140% Rule. We are satisfied,
given the plain language of the Contract and its context, that the generally applicable
Guidebooks, issued under the authority Congress granted to HUD and the obligations it imposed
in MAHRA, qualify as a “requirement.” The Contract, moreover, was entered under the Section
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8 program and must be interpreted in accordance with the context and obligations of MAHRA in
mind, including the discretion Congress granted HUD when requiring HUD to prescribe a
method for determining comparable market rent. See, e.g., SunAmerica Hous. Fund 1050
v. Pathway of Pontiac, Inc., 33 F.4th 872, 880 (6th Cir. 2022) (“The [Limited Partnership
Agreement] and its relevant provisions, therefore, must be understood in the context of the
[Low-Income Housing Tax Credit] program.”). The Renewal Contract therefore incorporates
these obligations unless they are inconsistent with its other provisions. Accordingly, the key
issue here is whether the 2017 Guidebook is inconsistent with other provisions of the Renewal
Contract.
C. The 140% Rule and Section 8 of the Renewal Contract
New Lansing challenges the district court’s determination that the 140% Rule is
consistent with the Contract, contending that the Rule conflicts with and thereby prevents the
Housing Authority from complying with its duties under the Contract. Given those
inconsistencies, New Lansing argues, the Guidebook is inapplicable to the Renewal Contract
under Section 8, which specifies that “any changes in HUD regulations and requirements which
are inconsistent with the provisions of the Renewal Contract . . . shall not be applicable.”
According to the 2017 Guidebook, the 140% Rule becomes relevant when the owner’s
“RCS concludes that the project’s median rent for the assisted units . . . exceeds 140 percent of
the ‘Median Gross Rent by Zip Code Tabulation Area . . . .’” As explained above, when HUD’s
rent potential determination is greater than the owner’s, the final “rents will be the owner’s
comparable market rents.” But when HUD’s comparable rents determination is less than the
owner’s, the Guidebook provides a formula which can result in the final rents being set based on
“the market rents as determined by the HUD-commissioned RCS.”
New Lansing argues that these requirements are at odds with the Housing Authority’s
duties under the Contract. It contends that such rules are inconsistent with Section 5 of the
Renewal Contract, which requires the Housing Authority to adjust the monthly contract rents by
using comparable market rents:
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 13
(b) At the expiration of each 5-year period of the Renewal Contract term,
the contract administrator shall compare existing contract rents with comparable
market rents for the market area. At such anniversary of the Renewal Contract,
the contract administrator shall make any adjustments in the monthly contract
rents, as reasonably determined by the contract administrator in accordance with
HUD requirements, necessary to set the contract rents for all unit sizes at
comparable market rents. Such adjustments may result in a negative adjustment
(decrease) or positive adjustment (increase) of the contract rents for one or
more-unit sizes.
(c) To assist in the determination of the contract rents, the contract
administrator may require that the owner submit to the contract administrator a
rent comparability study (at the owner’s expense) in accordance with HUD
requirements.
New Lansing raises five intertwined arguments as to why the 140% Rule is inconsistent
with the Renewal Contract, four of which address various ways the Rule allegedly contravenes
the Housing Authority’s contractual rights and obligations. Specifically, New Lansing claims
that the 140% Rule: (1) strips the Authority of its duty under Section 5(b) “to determine the
comparable market rent to be used to adjust” contract rents; (2) deprives the Housing Authority
of its contractual right and duty to adjust the contract rents based on its own “comparison of
comparable market rent to contract rent”; (3) caps the contract rents adjustment in violation of
what it claims is a requirement of Section 5(b)—that “the adjustment be the amount necessary
for the contract rent to equal comparable market rent”; and (4) “contravenes” Section 5(b)’s
claimed prohibition of “any contract rent adjustment not in accordance with the Renewal
Contract’s terms” on the basis that the 140% Rule “materially rewrites Section 5(b) of the
Renewal Contract” and “mandates rent adjustments at odds with Section 5(b).”
These arguments overlook the relationship between, and the respective roles of, the
Housing Authority and HUD, as set out in the Renewal Contract and as required under MAHRA
and the mechanics of the Section 8 program. The Housing Authority’s contractual duty is to
“compare existing contract rents with comparable market rents for the market area.” Critically,
Section 5 of the Renewal Contract does not include a specific process for the Housing Authority
to use in calculating market rents. Rather, in adjusting contract rents to equal market rents, the
Authority is obliged to “reasonably determine” the adjustments “in accordance with HUD
requirements.” In other words, it requires the Housing Authority to follow HUD requirements
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 14
when it compares the comparable market rents with the contract rents and when it adjusts the
rents. Congress granted HUD the authority to prescribe how to determine comparable market
rents. MAHRA, § 524(a)(5). The HUD requirement at issue is specified in the 2017 Guidebook,
which states that “[t]he instructions in this Guide apply to all Contract Administrators who are
responsible for overseeing Section 8 HAP contracts.” The Renewal Contract itself, moreover,
specifies that as a HUD contract administrator, the Housing Authority has an obligation to follow
HUD requirements in determining the comparable market rents. The Housing Authority thus
compares the current contract rents with the comparable market rents using the method
promulgated and required by HUD (here, the 140% Rule). When the 140% Rule is triggered,
HUD is to commission its own RCS, which factors into the comparable market rents.
Importantly, New Lansing knew when it agreed to the Renewal Contract that the Contract
required the Housing Authority to adjust rents “in accordance with HUD requirements.” It also
knew that changes in HUD requirements would apply to the Renewal Contract unless those
changes were inconsistent because the plain language of that Contract said so. As a party to the
Renewal Contract, New Lansing was aware that the Housing Authority has legally binding
obligations to HUD. In other words, compliance with HUD’s Guidebook was part of the
bargained-for exchange when New Lansing agreed to enter the Renewal Contract that was
created pursuant to the Section 8 housing program.
The governing documents therefore show that the 140% Rule allows the Housing
Authority to compare the contract rents with the comparable market rents; look at the
comparable market rents that are determined by HUD’s prescribed method and then adjust the
rent so that it is set at the comparable market rents; and make the necessary adjustment to match
the comparable market rents as determined by HUD’s specified process—all as required by the
Renewal Contract. Contract Administrators, like the Housing Authority, act in accordance with
their Renewal Contracts when they compare market rents and adjust those rents per HUD
requirements. Taking the Guidebook requirements and Section 5 of the Renewal Contract
together, when the 140% Rule applies, the contract administrator can still make decisions and
perform its duties under the Renewal Contract. Thus, there is no conflict between the Renewal
Contract and the requirements of the Guidebook.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 15
New Lansing’s final argument is that 140% Rule “dispenses with the requirement” under
Section 5(b) that the Housing Authority act reasonably. It contends that the Rule requires the
Housing Authority “to act unreasonably” because the 140% Rule requires the Housing Authority
to use the HUD-commissioned RCS, “even if, as here, that study is fraudulent.” This parallels
New Lansing’s argument that the district court did not consider its claim that the Housing
Authority “breached the Renewal Contract by reducing the contracts based on the fraudulent
FRG study.” New Lansing also argues that the Housing Authority acted “unreasonably” in using
a “fraudulent” study, and that the HUD RCS “is fraudulent because it deliberately understates
the true comparable market rents at HUD’s behest.” New Lansing, however, did not sue HUD.
It is unclear whether New Lansing is now attempting to add a fraud claim to its
Complaint. The Complaint contains only two counts—“Breach of the Renewal Contract” and
“Declaratory Judgment.” New Lansing did not allege a fraud claim. To be sure, the Complaint
contains several grievances about HUD’s RCS such as that: HUD acted in bad faith by
commissioning the RCS; the RCS contained “errors, deficiencies and manipulations”; the
process was not “fair and independent”; and the RCS was “fatally defective.” Based on these
allegations, even if New Lansing had alleged a fraud claim, it is not clear that the claim would be
permitted under Ohio Law. See Med. Billing, Inc. v. Med. Mgmt. Scis., Inc., 212 F.3d 332, 338
(6th Cir. 2000) (“Ohio law goes further by requiring that fraud damages be limited to the injury
actually arising from the fraud. The tort injury must be unique and separate from any injury
resulting from a breach of contract.”).
Perhaps New Lansing’s intended claim is that the Housing Authority breached the
Renewal Contract by acting unreasonably in following the 140% Rule HUD requirement. As
explained above, the Renewal Contract requires only that the Housing Authority “make any
adjustments in the monthly contract rents, as reasonably determined by the contract administrator
in accordance with HUD requirements, necessary to set the contract rents for all unit sizes at
comparable market rents.” Congress gave HUD the authority to prescribe how to determine
comparable market rents, the Renewal Contract adopted those requirements, and thus the
Housing Authority was required to follow those HUD methods. The Housing Authority did not
act unreasonably by following the 140% Rule requirement in the 2017 HUD guidance.
No. 21-3942 New Lansing Gardens Housing v. Columbus Metro. Housing Page 16
IV. CONCLUSION
Because New Lansing has failed to plausibly allege a breach of contract claim, we
AFFIRM dismissal of its Complaint and denial of a declaratory judgment.