Federal Housing Partners IV v. Cisneros

MORRIS SHEPPARD ARNOLD, Circuit Judge.

The issue in this action is whether landlords to whom the government paid subsidies were entitled to automatic rental adjustments, even if market studies showed that such adjustments resulted in rents higher than those in the local market. In light of Cisneros v. Alpine Ridge Group, — U.S. -, 113 S.Ct. 1898, 123 L.Ed.2d 572 (1993), we conclude that they are not so entitled and affirm the district court.¹

I.

Congress created the Section 8 housing program in 1974 to subsidize landlords who accept low-income tenants. Tenants made rental payments based on their income and ability to pay, and HUD then made assistance payments to the private landlords in an amount calculated to make up the difference between the tenant’s contribution and a contract rent initially agreed upon by the landlord and HUD.

The relevant statute provided that the initial contract rents would be adjusted at least annually “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.” 42 U.S.C.A. § 1437f(c)(2)(A). The statute also charged that adjustments in the contract rent could “not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Secretary.” 42 U.S.C.A. § 1437f(c)(2)(C) (1982) (amended 1989). Accordingly, the contracts provided that rental adjustments would be made through Automatic Annual Adjustment Factors (“AAAFs”) published in the Federal Register. But the contracts also provided that “[n]ot withstanding [sic] 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 Government[.]” See, e.g., J.A., vol. 2, p. 194, Housing Assistance Payments Contract § 1.8d (this clause appears as § 1.9d in many Section 8 contracts).

From 1974 to 1981, HUD made rental adjustments according to the AAAFs. In 1981, HUD suspected that AAAF-adjusted assistance payments to some landlords were excessive, and began to conduct “comparability studies” in certain real estate markets where it believed that the subsidies, adjusted upward by the automatic adjustment factors, resulted in rents materially higher than market rents. In these studies, HUD personnel selected several comparable apartment buildings and compared their unassisted rents with the rents in the Section 8 building. The comparable rents were used to limit the rent payments HUD would make under the contract.

In 1989, in response to litigation over AAAFs and comparability studies, Congress amended Section 8 to provide explicitly that HUD could limit automatic rent adjustments through the use of comparability studies, but required HUD to write and publish administrative regulations for conducting such studies in the future. See Section 801 of the Department of Housing and Urban Development Reform Act of 1989, Pub.L. No. 101— 235, 103 Stat.1987 (codified at 42 U.S.C.A. § 1437f). Congress also gave the landlords a portion of what they might have received if they had been entitled to AAAFs, and designated this scheme as the “exclusive method” for resolving past Section 8 rent subsidy disputes. See 42 U.S.C.A. § 1437f note.

After Congress passed Section 801, some landlords brought suit, alleging that the Congressional amendments violated the due process clause of the Fifth Amendment by stripping them of their vested rights to annual contract rent increases based on the AAAFs alone. In Cisneros v. Alpine Ridge Group,—U.S. -, 113 S.Ct. 1898, 123 L.Ed.2d 572 (1993), the Supreme Court concluded that the assistance contracts themselves permit comparability studies because they recognize that landlords are not entitled to rents in excess of going market rates, regardless of what rents the application of AAAFs might generate. The Supreme Court concluded:

In sum, we think that 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. We also think it clear that § 1.9d — which by its own terms clearly envisions some comparison “between the rents charged for assisted and comparable unassisted units” — affords the Secretary sufficient discretion to design and implement comparability studies as a reasonable means of effectuating its mandate. In this regard, we observe that § 1.9d expressly assigns to “the Government” the determination of whether there exist material differences between the rents charged for assisted and comparable unassisted units. Because we find that respondents have no contract right to unobstructed formula-based rent adjustments, we have no occasion to consider whether § 801 of the Reform Act unconstitutionally abrogated such a right.

Cisneros, — U.S. at-, 113 S.Ct. at 1904-05.

The instant suit was filed as a class action seeking a declaratory judgment on behalf of numerous Section 8 landlords that they had suffered a due-process violation and were entitled to AAAF-adjusted rents. The district court stayed the action pending the Supreme Court’s decision in Cisneros. After the stay was lifted, the government moved for summary judgment. In light of Cisneros, the district court concluded that the landlords lacked the necessary property right— an unqualified right to the AAAFs — that would enable them to proceed with a due-process challenge to Section 801 and the effects of the comparability studies.

II.

The landlords’ argument that they are entitled to AAAF-adjusted rents comprises three steps: (1) HUD’s attempt to execute comparability studies violated their right to procedural due process because HUD did not create nationwide standards for implementing such studies; (2) because the comparability studies violated constitutional standards, plaintiffs’ right to AAAFs became vested since AAAFs were the “presumptive” method of calculating rents under their contracts; (3) Section 801 therefore unconstitutionally abrogated plaintiffs’ vested contract right to AAAFs by providing an “exclusive remedy” for disputes over AAAFs and comparability studies. Simply put, the landlords believe that if they discredit the studies, they should receive the AAAFs.

Before a litigant can prevail on a claim alleging a due-process deprivation of a property right, he must first show an entitlement to the property right. See Carolan v. Kansas City, 813 F.2d 178, 181 (8th Cir.1987). Here, the landlords failed to prove that they had a vested property right to the AAAFs as the “presumptive method” of adjusting rents. The contention that AAAFsare the presumptive method of adjusting rents is incorrect by the terms of the contracts. While AAAFs might be the norm for practical reasons, the overriding principle set forth in the contracts is that “[AAAFs] shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Government[J” Because of this contractual clause, “no project owner may claim entitlement to formula-based rent adjustments that materially exceed market rents for comparable units.” Cisneros, — U.S. at-, 113 S.Ct. at 1904. HUD’s discretion to make rental comparisons and rent adjustments under the contracts prevented AAAFs from ever becoming a property right vested in landlords whose rents were materially different from comparable unassisted units. Only where AAAF-adjusted rents did not result in material differences between assisted and comparable unassisted units may the right to AAAFs vest in any particular landlord. The landlords have argued for an AAAF increase without a showing on the issue of comparability. Their attempt to cast doubt upon the studies does not entitle them to AAAFs, since the remedy for an improper study is simply a better study. Because we have determined that the right to AAAFs never vested under the terms of the contracts, we need not reach the constitutional issue of whether the landlords were deprived of procedural due process when HUD conducted the comparability studies. See Cisneros, — U.S. at-, 113 S.Ct. at 1905.

The Intervenors, other landlords whti joined in the action, base a similar argument on a somewhat different premise. They maintain that rulemaking procedures under the Administrative Procedures Act (“APA”) were required before HUD could perform comparability studies, and that, as a result of HUD’s failure to abide by the APA, the comparability studies are invalid and the landlords are entitled to AAAFs instead. We do not see how a failure to follow APA procedures could have given rise to a property right to AAAFs unqualified by comparable local rents, a result necessarily contrary to the contracts, the statute, and Cisneros. The statute and the contracts define the property right before us, not the APA. Even if the APA were otherwise applicable in the circumstances of this case, Congress has provided an exclusive remedy” for disputes over comparability studies in Section 801, which we must regard as more recent and more specific statutory guidance than the APA.

III.

For the foregoing reasons we affirm the judgment of the district court.

1 . The Honorable William G. Cambridge, United States District Judge for the District of Nebraska, acting on the recommendation of United States Magistrate Judge Kathleen A. Jaudzemis.