Supreme Court Favor Affordable Housing Owners

June 11, 2002

Court Says Borrowers Of FmHA Loans Can Enforce Contracts, Seek Compensation

Inman News Features

The U.S. Supreme Court today ruled that private owners of Section 515 affordable housing have the right to enforce their contracts with the U.S. government and seek compensation for lost income.

Section 515 was designed to create rental housing in rural areas through private development and ownership. An incentive for owners was the option to prepay their government mortgages at some point and convert their units to market-rate housing. But in 1988, Congress enacted the Emergency Low Income Housing Preservation Act, making it more difficult for owners to opt out of the program.

The 9-0 decision in Franconia Associates, et. al. vs. United States was a victory for Franconia, who argued that the owners should have the right to reclaim lost income from the date they decided to prepay their government mortgage and were denied the opportunity to do so -- not from the effective date of 1988 when Congress enacted the housing preservation act.

The Court ruled that the statute of limitations did not start until the owners first decided to prepay their mortgages and learned from the government they could not. The owners had built their projects during or before 1979, but the Court's decision extends to owners who built their projects through 1989.

Writing for a unanimous Court, Justice Ruth Bader Ginsburg said, "'The United States does business on business terms.'"

"This case was about fundamental considerations of fairness," said Jeff Eckland of Franconia Associates. "Many of these owners are small 'mom and pop' operators who found themselves locked into 50-year mortgages with limited financial returns, despite the fact that they secured the right in their contracts to opt out at any time. This victory means they will have the opportunity to seek fair compensation for continuing to own and operate affordable housing."

The owners asked the Court to reverse a lower court's decision that the breach of contract and takings claims of "pre-1979" Section 515 owners was barred by the statute of limitations. The lower court held that the owners' claims were barred because they were filed more than six years after Feb. 8, 1988 -- the effective date of the legislation that now permits Section 515 owners to prepay their government mortgages without restriction only under limited conditions.

"Putting prospective plaintiffs (housing owners) to the choice of either bringing suit soon after the Government's repudiation or forever relinquishing their claims would surely proliferate litigation. Every borrower of FmHA loans, for example, would be forced to sue the Government within six years of ELIHPA's enactment in order to preserve a claim stemming from that Act," wrote Ginsburg.

Copyright: Inman News Service

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