Chuck L. Edson, Esq.
Peabody & Brown
Washington, D.C.
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First, this has been a trip down memory lane, certainly for me and many of you. It is not coincidental that CRHD was founded in 1980, because we were organized in response to the 1979 Act. It was the prepayment restrictions that really drove us together; a group decided to form a council to try to prevent this kind of legislation. We were successful, at least in 1980, when Congress got religion and repealed the retroactive restrictions. I think that the history that Jeff went through is very cogent and very interesting.
I think it would be well to recount the actual experience in suing on these matters. Our firm has represented plaintiffs of HUD projects [221(d)(3)’s and 236’s] that had the right to prepay. We filed a case about the same time as Cienega called Anaheim Gardens; due to some procedural differences, they got their Summary Judgment first. Our motion will be heard in March, but we think the issues are identical. We would hope we would also get a Summary Judgment. So you do have strong precedent in this very Court, the United States Court of Federal Claims, that a breach of contract occurred. You also have the Winstar case, which I think is very strong precedent. On the other hand, you have different judges hearing different cases in the Court of Federal Claims. One judge on the trial level is not bound to follow another. It is not absolutely certain that another judge would come up with the same ruling either in the HUD cases, and there are numerous additional cases that have been filed (again, not class action, but individual plaintiffs drawn together) to be heard before different judges. How they will come out, I don’t know; Jeff has a different judge in his case so he or she is not bound to follow even the Cienega Gardens ruling.
Real Issue is Damages
The real issue, in my mind, is damages. I think it would be instructive to take a look at what is going on in Cienega Gardens. They have actually had a hearing or trial on damages in November. It was very, very well tried, at least on the plaintiff’s side. The plaintiff’s theory of damages was that there was a damage period beginning on the date that you could have prepaid under your note, and ending (it had an ending) on either the date you got benefits under ELIPHA (and there were ELIPHA benefits, or ELIPHRA, as the case may be) or if you did not, on May 1, 1996 — HUD’s liberation day, that was the day you were allowed to prepay. That plaintiff’s theory of damages (in fact, the theory of damages was accepted by both plaintiff and defendant) is that you would take the income that you would have earned in the market, the net income, and subtract from that the net income you would have had under government assistance. There was no interest factored in. I do not pretend to know the law on it, but this judge was living in an interest-free world. I am not sure that interest would be factored in in the Farmers Home cases; it has not been factored in here.
The government experts came up with a theory that the project was better off under government control; there is an old legal expression called chutzpah. There were three different reasons. One, the management fees were income to the project, even though you had a different entity doing the management. Second, your interest reduction payment (your 236 payments which are just like your 515 payments) are income to the owner. Third, they assumed the owner would take out a 75% loan, not just enough loan to pay off the old loan, but a 75% loan. There were three factors that would mitigate the damages.
The court has not yet ruled on damages; indeed, he is going out to Los Angeles to look at the projects under the theory of damages. Why? I don’t know.
Here, we don’t have an ending period. But, what I think will happen, what I think should happen, I hope this association lobbies like hell to get the law repealed, to allow your contractual rights. Which, of course, will terminate the damage period; all for the better, it will give you exactly what you want. The final thing on damages is — do this calculation yourself — could you really have run your project at market rates, paying market interest, in the area where you are? In many cases, in Jeff’s hypothetical, the answer is yes. I assure you, in many cases, the answer is no, you do not want to go out into the world.
Chairman Mao
The late Chairman Mao, I think, once said to a million cheering Chinese at the 35th anniversary of the Revolution: Revolution is no Bar Mitzva reception. And, let me tell you, litigation is no Bar Mitzva. It is a tough go; the government is fighting this every bit of the way. They are challenging our motion for Summary Judgment even though the judge has identically ruled on it in Cienega. The government is conceding nothing in our action, and I would imagine the same in yours. That doesn’t mean you shouldn’t go forward; it means every reason that you should. But I’m just trying to put some of what Jeff has put so well in a larger perspective.
Next: Remarks by Susan S. Azad, Esq.