City of Joliet v. New West

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-3032 & 08-3033
C ITY OF JOLIET, ILLINOIS,
Plaintiff-Appellee,
v.
N EW W EST, L.P., and N EW B LUFF, L.P.,
Defendants-Appellants.
U NITED S TATES D EPARTMENT OF H OUSING
AND U RBAN D EVELOPMENT and E VERGREEN
T ERRACE T ENANTS,
Intervening Defendants-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 6746—Charles R. Norgle, Sr., Judge.
A RGUED JANUARY 12, 2009—D ECIDED A PRIL 9, 2009
Before E ASTERBROOK, Chief Judge, and W ILLIAMS and
S YKES, Circuit Judges.
E ASTERBROOK, Chief Judge. For several years the City of
Joliet, Illinois, has been trying to acquire the Evergreen
2 Nos. 08-3032 & 08-3033
Terrace apartment complex, which the City believes is so
run-down that it constitutes a public nuisance. After the
City commenced eminent domain proceedings in state
court, New West, a partnership that owns the complex,
removed the proceeding to federal court and filed a suit
under 42 U.S.C. §1983 seeking an injunction and damages.
The district court put the condemnation on ice and dis-
missed the §1983 action—erroneously, we held in New
West, L.P. v. Joliet, 491 F.3d 717 (7th Cir. 2007). We
directed the district court to take up the condemnation
proceeding first, as its disposition could resolve some
or all of the issues in the §1983 suit.
One of New West’s arguments in the §1983 suit was that,
because it has accepted a federal subsidy under §8 of the
Housing Act of 1937, 42 U.S.C. §1437f, federal law pre-
empts the City’s proceeding. Our opinion had this to say:
New West contends that §8 and the Fair Housing
Act [42 U.S.C. §§ 3601–19] prevent condemnation
of Evergreen Terrace, but it does not rely on any
particular provision of that statute. Section 8 is a
subsidy program, a carrot rather than a stick.
HUD’s regulations implementing the §8 program
contemplate the possibility of the parcel’s condem-
nation; they do not purport to forbid condemna-
tions. See 24 C.F.R. §§ 245.405, 248.101. For its part,
the Fair Housing Act forbids discrimination in
housing programs without providing that any
given housing development has a right to contin-
ued existence. Just as with §8, federal regulations
implementing the FHA cover the demolition of
Nos. 08-3032 & 08-3033 3
housing projects. 24 C.F.R. Part 970, and exempt
condemned buildings from these rules, see 24
C.F.R. §970.3. If Joliet thinks that a given parcel of
land should be put to a public use, such as a park,
and is willing to foot the bill, it is hard to see any
obstacle in federal law.
491 F.3d at 721. In the district court the Department of
Housing and Urban Development intervened and con-
tended that §221 of the National Housing Act of 1954 (as
amended in 1961 and 1966), 12 U.S.C. §1715l, and the
Multifamily Assisted Housing Reform and Affordability
Act of 1997, 42 U.S.C. §1437f note, block condemnation.
The district court rejected that contention in reliance on
our opinion, but, after concluding that HUD was making
new arguments that we had not addressed, certified the
case for interlocutory appeal under 28 U.S.C. §1292(b). We
accepted the appeal, because we thought that HUD was
relying on particular language said to preempt state
and local condemnation laws. Now that the appeal has
been fully briefed and argued, however, HUD and the
other parties acknowledge that neither of these statutes
has any clause preempting state law. At this point we
could stop and affirm, relying on the law of the case. But
because HUD was not a party to the first appeal, and has
invoked two statutes that New West did not mention, we
think it best to give the Department a full hearing and
plenary decision.
First, however, a word on subject-matter jurisdiction.
Joliet contends that there is none, because when the case
was removed HUD was neither a party to the suit nor even
4 Nos. 08-3032 & 08-3033
a lender to New West. The eminent domain proceeding
arises under state and local law. Although New West
raised preemption as a federal defense, it has long been
understood that a federal defense does not support re-
moval. See, e.g., Metropolitan Life Insurance Co. v. Taylor,
481 U.S. 58 (1987); Gully v. First National Bank, 299 U.S. 109(1936); Bennett v. Southwest Airlines Co., 484 F.3d 907,
rehearing denied, 493 F.3d 762 (7th Cir. 2007). (The excep-
tion for “complete preemption,” see Franchise Tax Board
of California v. Construction Laborers Vacation Trust, 463
U.S. 1 (1983), does not apply; no one argues that federal
law occupies the fields of housing or municipal powers.)
Still, the presence of the national government as a
party with a security interest in the real estate supplies
jurisdiction. 28 U.S.C. §§ 1444, 2410. It would be point-
less to order this suit remanded, only to have HUD re-
remove it in a trice. The Supreme Court has held that,
when a suit is removed prematurely, the district court
may proceed if it has subject-matter jurisdiction at the
time it enters judgment. American Fire & Casualty Co. v.
Finn, 341 U.S. 6 (1951); Grubbs v. General Electric Credit
Corp., 405 U.S. 699 (1972); Caterpillar Inc. v. Lewis, 519 U.S.
61 (1996). This rule, coupled with the presence of HUD
(and its desire to have the suit resolved in federal court),
means that remand is unnecessary.
Three federal statutes are involved in this proceeding,
and HUD contends that two of them preempt state and
local law. The first statute, §8 of the Housing Act, 42
U.S.C. §1437f, provides federal rent subsidies for low-
income tenants; as we observed in 2007, this statute does
Nos. 08-3032 & 08-3033 5
not preempt any state or local law. HUD concurs. The
second is §221 of the National Housing Act, 12 U.S.C.
§1715l. This statute creates a program under which the
federal government insures mortgages on privately
owned, multifamily properties, some tenants of which
receive rent subsidies under §8. HUD has established
criteria that owners must meet before a loan is insured.
HUD also is authorized to pay off the private lenders
and become a direct lender. For descriptions of this
program, see Cienega Gardens v. United States, 194 F.3d 1231(Fed. Cir. 1998), and Geneva Towers Tenants Organization v.
Federated Mortgage Investors, 504 F.2d 483 (9th Cir. 1974).
The final statute, the Multifamily Assisted Housing
Reform and Affordability Act of 1997, 42 U.S.C. §1437f
note, allows HUD to renegotiate mortgages insured or
assumed under §221 of the National Housing Act. High
mortgage payments make it hard (sometimes impossible)
for owners to offer below-market rents to their tenants;
renegotiated mortgages with lower monthly payments
cut the rents to the beneficiaries of the §8 program.
Owners who seek lower mortgage payments under the
1997 Act must promise to keep their rental properties
available to low-income tenants for 30 years.
Evergreen Terrace, which has 356 apartments, has
participated in the §8 and §221 programs since the 1960s.
By the late 1970s the owner was in default on its
mortgage loans. HUD paid off the lenders, became the
mortgage holder, foreclosed, and took title to the com-
plex. New West purchased part of the complex from HUD
in 1980 for $1, and the rest in 1982 for another $1. New
West took out large mortgage loans, which HUD insured
6 Nos. 08-3032 & 08-3033
under §221. New West promised both the lenders and
HUD that it “will not permit or suffer the use of any of
the property for any purpose other than the use for
which the same was intended at the time this Mortgage
was executed.”
In 2001 New West asked HUD to restructure the mort-
gages under the 1997 Act, reducing the monthly pay-
ments. Both the Illinois Housing Development Authority
and Heskin Signet Partners reported to HUD that the
approximately 600 residents of Evergreen Terrace lack
other available options for low-income housing. Relying
on these reports, HUD approved the restructuring in
2006, paid off the original lenders, and became the
lender (and mortgage holder) itself. As part of the trans-
action, New West promised that, for the next 30 years, the
property “shall be used solely as rental housing with no
reduction in the number of residential units unless ap-
proved in writing by HUD”. New West simultaneously
entered into new 20-year agreements with HUD for §8
subsidies to low-income tenants. These agreements under-
take not to transfer, assign, or encumber the property
without HUD’s approval.
When we agreed to hear this interlocutory appeal, we
understood HUD to argue that the contracts that New
West had signed in 2006 themselves preempted any
state and local powers of condemnation, and we directed
the parties to address the question how New West could
give away a governmental power that it never possessed.
(Neither the City of Joliet nor the State of Illinois has
made any promise to HUD about the maintenance of
Nos. 08-3032 & 08-3033 7
Evergreen Terrace.) HUD’s appellate brief responded to
our inquiry by disclaiming this theory of preemption. The
contracts do not affect state or local powers, HUD recog-
nizes. Owners such as New West must comply with all
state and local laws—indeed, 24 C.F.R. §883.310(b)(6)
specifies that recipients of federal assistance are bound
by all “[a]pplicable State and local laws, codes, ordinances,
and regulations.”
Why isn’t eminent domain among these applicable
state and local laws? HUD’s answer is that condemnation
would interfere with the purposes of §221 and the 1997
Act. Both statutes are designed to enlarge, or at least
preserve, the stock of housing available for low-income
tenants. The “findings” in §511 of the 1997 Act make this
explicit. If Joliet can condemn Evergreen Terrace, 356
apartments for low-income tenants will disappear, and
these tenants do not have ready alternatives. (That’s what
the Illinois Housing Development Authority and Heskin
Signet Partners concluded.) Removing 356 units from the
housing stock could undermine achievement of the na-
tional purpose and so is preempted, the argument con-
cludes. This line of argument implies that local govern-
ment cannot condemn any housing, whether or not the
owner has secured federal financing—for demolition of
unsubsidized units diminishes the supply, and drives up
the price of remaining units, as surely as the demolition
of units that already enjoy federal subsidies. Yet none of
the litigants ventures an argument that bold.
The question at hand is whether a state or local law can
be preempted by the “findings” and “purposes” clauses of
8 Nos. 08-3032 & 08-3033
a federal statute, even though the state or local law does
not conflict with any rule of law established in the federal
statute. Recently the Supreme Court emphasized that
preemption inferred from a clash of goals and objectives
should not be used expansively, unless the agency has
issued a preemptive regulation with the force of law, and
that an agency’s view that application of local law would
interfere with the national objective is no substitute
for such a regulation. Wyeth v. Levine, No. 06–1249 (U.S.
Mar. 4, 2009), slip op. 17–25. Justice Breyer filed a concur-
ring opinion to stress the importance of a preempting
regulation, and Justice Thomas, concurring in the judg-
ment, expressed doubt about this entire category of
implied preemption.
HUD does not contend that any federal regulation
prevents state and local governments from using eminent
domain or otherwise exercises the federal power of pre-
emption under the Supremacy Clause. One federal regula-
tion issued under the statutes at issue does preempt
state and local law, but HUD understandably does not
rely on (or even mention) it. This regulation, 24 C.F.R.
§248.183, says that no state or local law may prevent
any borrower under the federal programs from
prepaying the loan, and that no state or local law may set
a cap on the rate of return that owners participating in
the federal programs may realize. Subsection (c) of this
regulation says that other state and local laws, such as
zoning and building standards, are not preempted. So
federal regulations not only do not contain the sort of
clause that the Justices thought important in Wyeth but
also state that most state property regulations survive.
Nos. 08-3032 & 08-3033 9
True, this savings clause does not mention eminent do-
main, but the main point is that no federal regulation
even tries to displace local governments’ power to take
ownership of property by paying just compensation.
The approach of Wyeth to one side, it is hard to see any
conflict between federal and state goals, because (a) none
of the three statutes at issue makes participation compul-
sory; it is not a violation of federal law for a given owner
to remain outside the program, so it cannot be said that
federal law demands that a particular apartment unit
remain standing; and (b) the agreements by which
private owners enter the program do not diminish state
and local powers (as HUD concedes).
Private owners are entitled to withdraw their prop-
erties from the program at any time despite their 20-year
and 30-year promises. All they have to do is pay off the
federally insured loan. 24 C.F.R. Part 248. The con-
ditions last only as long as the loans. If private owners
can withdraw (and then demolish) their properties
without violating any rule of federal law, why can’t state
or local governments acquire the properties through
eminent domain and then withdraw and demolish them?
The regulations treat condemnation as one legitimate
source of proceeds used to prepay and retire the loans, and
thus to escape the conditions. 24 C.F.R. §248.101. Indeed,
the regulatory approval needed to prepay the loans and
withdraw from the program voluntarily is not required
when proceeds of condemnation are the source of funds
used to pay off the loans. Ibid. By treating condemnation
as a special case, one that removes the property from
10 Nos. 08-3032 & 08-3033
an otherwise-required approval, the agency has shown
that condemnation is possible. What’s the point of a
special rule for applying the proceeds of condemnation
if, as HUD argues, condemnation is always preempted?
Another regulation provides that HUD’s approval for
changing a property’s use is not required when the
change results from eminent domain. 24 C.F.R. §245.405,
§970.3. And that’s not all. The documents that New West
signed contemplate the possibility of condemnation.
Paragraphs 6 and 8 of the loans and mortgages provide
that the proceeds of condemnation must be paid first to
the lenders (including HUD) until the loans have been
satisfied; that’s a strange proviso if condemnation is
always forbidden by federal law. HUD dismisses all of
these clauses, and its own regulations, as irrelevant
because they are not issued under the 1997 Act, but the
fact remains that there is no affirmative declaration of
preemption in any statute or rule, no concrete conflict
between condemnation and any part of the 1997 Act, and
no good reason to think that the 1997 Act contravenes
HUD’s own regulations under §8 and §221.
All that can be said is that, when housing is withdrawn
by prepayment (including prepayment made possible by
just compensation paid for a taking), the statutory goal of
increasing (or at least preserving) the stock of low-income
housing is undercut. Yet HUD does not point to any
decision of the Supreme Court holding a state or local
law preempted by broad goals (such as that more
housing is better than less, low prices better than high
prices) or by a general declaration such as “there exists
Nos. 08-3032 & 08-3033 11
throughout the Nation a need for decent, safe, and afford-
able housing”, §511(a)(1) of the 1997 Act. Nor has HUD
cited any decision of any federal court holding that §221
or the 1997 Act—or for that matter any other subsidy
system, such as farm price supports or loan guarantees
for veterans or small business owners, all of which
include “findings” sections comparable to §511—preempts
any state or local authority to take ownership through
eminent domain.
That silence is telling. We do not deal here with a city
or state as regulator of private conduct. Eminent domain
is a governmental power. Many decisions of the
Supreme Court hold that only a clear statement in a
national statute can supersede a governmental body’s
own operations. See, e.g., Cook County Solid Waste Agency
v. Corps of Engineers, 531 U.S. 159, 171 (2001); Gregory
v. Ashcroft, 501 U.S. 452, 460–61 (1991). HUD does not
contend that any language in §221 or the 1997 Act
supplies a “clear statement” of a national decision to
displace eminent domain. As we have mentioned, there
is no statement to that effect, clear or otherwise. There
is only HUD’s contention that condemnation will
interfere with national goals. That stripe of argument
was made in Solid Waste Agency and Gregory, where it
did not prevail. Congress may well have the power to
prevent state or local governments from condemning low-
income housing, but it has not declared that it has exer-
cised that power; there has been no debate, no oppor-
tunity for the states to make their positions known to
Congress, no proposed regulation with preemptive
12 Nos. 08-3032 & 08-3033
effect, and no focused decision by the Legislative and
Executive Branches of the national government.
Quite apart from the Supreme Court’s plain-statement
canon for federalism cases, there is the principle that
general statements of national policy do not preempt
concrete laws. “Findings” and “purpose” clauses are
common in federal statutes. Like the clauses in §511 of
the 1997 Act, they are usually sweeping in scope and
declare an urgent need to solve a problem. But in legisla-
tion details matter. How far will the legislature go, and
what costs will it bear, to achieve its ends? “[N]o legisla-
tion pursues its purposes at all costs. Deciding what
competing values will or will not be sacrificed to the
achievement of a particular objective is the very essence
of legislative choice—and it frustrates rather than effectu-
ates legislative intent simplistically to assume that what-
ever furthers the statute’s primary objective must be the
law.” Rodriguez v. United States, 480 U.S. 522, 525–26 (1987)
(emphasis in original). When courts rely on purpose
clauses, rather than the concrete rules that the political
branches have selected to achieve the stated ends, judges
become effective lawmakers, bypassing the give-and-
take of the legislative process. It is therefore no surprise
that the Supreme Court does not think that declarations
of purpose, however sweeping, preempt state or local
laws. See Hawaii v. Office of Hawaiian Affairs, No. 07–1372
(U.S. Mar. 31, 2009), slip op. 10–11 (37 “whereas” clauses
setting out congressional findings and reasons for
adopting a joint resolution do not have any effect inde-
pendent of the resolution’s two operative clauses).
Nos. 08-3032 & 08-3033 13
Consider Puerto Rico Dep’t of Consumer Affairs v. ISLA
Petroleum Corp., 485 U.S. 495 (1988). A federal statute
ended most federal price controls for petroleum and
natural gas. The statute’s purpose clause (and the accom-
panying committee reports) declared that it is bad policy
to interfere with the market’s pricing mechanism, in the
absence of monopoly or equivalent concerns. Puerto Rico
continued to enforce its own price controls for these
products, and the producers contended that the Com-
monwealth’s legislation was preempted by the combina-
tion of the purpose clause, the end of federal regulation,
and the legislative history showing the intent behind
these provisions. A court of appeals agreed and held
the law preempted—but the Supreme Court reversed.
The Court explained: “While we have frequently said
that pre-emption analysis requires ascertaining congressio-
nal intent . . . , we have never meant that to signify con-
gressional intent in a vacuum, unrelated to the giving of
meaning to an enacted statutory text. . . . Respondents
have brought to our attention statements that may
reflect general congressional approval of a free market
in petroleum products, or general congressional belief
that such a market would result from enactment of the
[statute], or even general congressional desire that it
result. But unenacted approvals, beliefs, and desires are
not laws. Without a text that can, in light of those state-
ments, plausibly be interpreted as prescribing federal pre-
emption it is impossible to find that a free market was
mandated by federal law.” 485 U.S. at 501 (emphasis in
original). In other words, it takes a federal command to
preempt a state or local law; a conflict between a local
14 Nos. 08-3032 & 08-3033
law and legislative aspirations does not displace another
jurisdiction’s law. Wyeth reiterated that point. Cf. American
Hospital Ass’n v. NLRB, 499 U.S. 606 (1991); Lincoln v. Vigil,
508 U.S. 182 (1993). Similarly, Congress desired (and
hoped) that §211 and the 1997 Act would increase the
stock of low-income housing, but a text that preempts
state or local legislation is not among the steps that Con-
gress took toward that objective.
This is not to say that federal law leaves local powers
unaffected. A state or local government is not free to use
its powers in order to discriminate against persons of a
particular race, for example. And federal law limits the
use of condemnation powers (as well as zoning
or building codes) to turn a jurisdiction into an all-
white, upper-income enclave. See Arlington Heights v.
Metropolitan Housing Development Corp., 429 U.S. 252 (1977).
Cf. Wisconsin Community Services, Inc. v. Milwaukee, 465
F.3d 737 (7th Cir. 2006) (en banc). But HUD does not
contend that Joliet has invoked the power of eminent
domain with an intent, or an effect, forbidden by the
Constitution or a federal statute; HUD maintains that the
City does not have a power to condemn federally subsi-
dized housing, no matter how run-down the building,
no matter how large the remaining supply of housing
for low-income tenants, and no matter the use to which
the city will put the land. On HUD’s view, a city is for-
bidden to acquire and raze a decrepit and dangerous
building, near a brand new apartment block with unused
low-income units, in order to replace the old building
with a new park or city hall—and this is so even if the
federal appropriation can be redirected to another
Nos. 08-3032 & 08-3033 15
property to maintain the aggregate supply of low-income
housing. (HUD does not contend that condemnation of
Evergreen Terrace would leave it unable to spend its full
appropriation.) Such a sweeping displacement of govern-
mental authority cannot be imputed to §221 or the 1997
Act. It might be sensible to enact a system under which
HUD could certify a lack of affordable housing in a
given locale and thus block any steps to diminish the
existing stock. But no federal statute gives HUD this
authority, let alone one that can be exercised without
notice to the cities whose powers will be diminished.
Although HUD concedes that no court has attributed any
preemptive effect to §221 or the 1997 Act, it urges us to
draw guidance from Public Utility District No. 1 of Pend
Oreille County v. United States, 417 F.2d 200 (9th Cir. 1969),
and Morgan City v. South Louisiana Electric Cooperative Ass’n,
31 F.3d 319 (5th Cir. 1994), amended and rehearing en banc
denied (over dissent), 49 F.3d 1074 (5th Cir. 1995). These
decisions held that federal law preempts state or local
efforts to condemn rural electric utilities that enjoyed
federal financing under the Rural Electrification Act, 7
U.S.C. §901 et seq. (At least one court of appeals has
reached a contrary conclusion. See Stilwell v. Ozarks Rural
Electric Cooperative Corp., 79 F.3d 1038 (10th Cir. 1996).) As
HUD sees things, the decisions of the fifth and ninth
circuits show that local condemnation powers are incom-
patible with federally subsidized financing designed to
achieve a federal goal (whether providing electricity to
farms or housing to low-income renters).
Neither the fifth circuit nor the ninth discussed the clear-
statement rule for preemption of core governmental
16 Nos. 08-3032 & 08-3033
powers, or the need (which the Court stressed in ISLA
Petroleum) to find a conflict with a concrete statutory text.
Perhaps those principles were not argued in those cases. To
the extent these courts think that federal financing rou-
tinely displaces state laws, their decisions cannot be
reconciled with Arkansas Electric Cooperative Corp. v.
Arkansas Public Service Comm’n, 461 U.S. 375 (1983),
and Wabash Valley Power Ass’n v. Rural Electrification
Administration, 903 F.2d 445 (7th Cir. 1990). What is more,
both the fifth and the ninth circuits stressed that the
federal interest was not principally related to financing.
The problem with local condemnation is that electricity
is distributed by a network. Pull out one generating
station or set of transmission lines, and the rest of the
network can be adversely affected. “This is not an
ordinary case because what is sought to be taken here
is part of a system and [if one part is condemned] a ques-
tion remains as to the capacity of the remaining portions
of the system to function.” Pend Oreille, 417 F.2d at 201.
One jurisdiction’s condemnation thus could affect con-
sumers in other jurisdictions; that justified a federal role.
There is no comparable network externality when one
city condemns an apartment block.
New West, and a tenants’ association at the apartment
complex, advance additional arguments, none of which
HUD supports. They contend, for example, that con-
demnation of Evergreen Terrace violates the Contract
Clause (Art. I §10 cl. 1) because it will affect the contracts
that New West has with other entities. But “the Contract
Clause has never been thought to protect against the
exercise of eminent domain.” Hawaii Housing Authority v.
Nos. 08-3032 & 08-3033 17
Midkiff, 467 U.S. 229, 243 n.6 (1984). A state cannot displace
a contract by fiat, but it may take interests in contracts,
as in other property. New West and the tenants’ associa-
tion contend that, if this is so, then Joliet must be trying
to take HUD’s mortgage interests in Evergreen Terrace,
and as no state may acquire federal property against
the wishes of the national government, see Armstrong v.
United States, 364 U.S. 40, 43 (1960), it follows that the
City’s resort to eminent domain violates the Property
Clause (Art. IV §3 cl. 2) or principles of intergovernmental
immunity. Yet the national government does not own
Evergreen Terrace, which Joliet proposes to acquire.
HUD’s interest is as a secured creditor of New West.
No case of which we are aware holds that the Property
Clause (or any other part of the Constitution) treats a
federal loan as immunizing the borrower from state
regulation (including eminent domain) on the theory that
the state is “really” regulating the federal interest as a
lender. One might as well say that if New West owed
taxes, and the IRS had placed a lien on Evergreen Terrace,
that step would prevent the City from using eminent
domain (or a bankruptcy court from selling the building
to satisfy New West’s other creditors).
This eminent domain proceeding has been stalled since
its institution more than three years ago. We trust that
the district court will now bring it to a speedy conclusion.
A FFIRMED
4-9-09