Free Response to Motion - District Court of Federal Claims - federal

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UNITED STATES OF AMERICA COURT OF FEDERAL CLAIMS BENJAMIN ALLI, SHAKI ALLI and BSA CORPORATION, a Michigan Corporation Plaintiffs, vs. UNITED STATES OF AMERICA, Defendant. _____________________________________/ STEMPIEN & STEMPIEN, PLLC By: Gregory J. Stempien Eric Stempien Attorney for Plaintiff 315 N. Center Street Suite 200 Northville, MI 48167 (248) 735-9200 DEPARTMENT OF JUSTICE, COMMERCIAL LITIGATION By: Marla Conneely Attorney for Defendant 1100 L Street N.W., Room 11054 Washington, DC 20005 (202) 307-0318 _____________________________________/ Case No. 01-669C Judge Allegra

PLAINTIFF'S ANSWER TO DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

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INTRODUCTION On August 15, 2005, Defendant filed a Motion for Partial Summary Judgment, claiming that it is entitled to summary judgment pursuant to RFCF 56 on Count VI of Plaintiffs' Second Amended Complaint. Defendant presents two bases for its motion: (1) the language contained within the housing assistance payments contract grants it unfettered discretion to grant or refuse permission for a landowner to sell or transfer its property and (2) the parties to the proposed transaction failed to present the proper HUD forms for request for approval. Because the contract does not grant the government unfettered discretion and because HUD preemptively refused to consent to the sale of the property at issue, the Defendant's motion should be denied. Plaintiffs rely on the attached brief, their Response to Defendant's Proposed Findings of Uncontroverted Fact and Plaintiffs' Proposed Findings of Uncontroverted Fact in support of their Answer. FACTS1 On June 9, 1989 BSA Corporation (hereinafter "BSA") purchased the Collingwood property from a private party, L&R Realty Limited Partnership. As part of the purchase, BSA assumed the Collingwood housing assistance payments (hereinafter "HAP") contract between L&R Realty Limited Partnership and HUD. Exhibit 2 - Defendant's Counter Complaint, paragraph 73 HUD also held a purchase money mortgage for the Collingwood property. The HAP contract provides that The Owner agrees that it has not made and will not make any sale, assignment, or conveyance or transfer in any fashion, of this Contract, the Agreement . . . or the project or any part of them or any of its interest in them, without the prior written consent of HUD. However, in the case of an
For a complete recitation of facts related to the parties' contractual relationships, please see Plaintiffs' Motion for Partial Summary Judgment. The facts stated in this section relate to Count VI of Plaintiffs' Second Amended Complaint.
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assignment as security for the purpose of obtaining financing of the project, HUD shall consent in writing if HUD has approved the terms of the financing. When the initial HAP contract expired, BSA and HUD entered into an agreement to extend the contract March 15, 2000. Prior to the expiration of that contract, HUD suspended its obligations pursuant to the contract and ceased all payments to BSA. HUD declared an "involuntary mortgageein-possession" and denied BSA possession of its property. HUD further initiated foreclosure

proceedings on October 5, 1999. Exhibit 2 - Defendant's Counterclaims, page 12, paragraph 86 Prior to the foreclosure proceedings, BSA entered into a purchase agreement with Cory Fanning (hereinafter "Fanning") for a total sale price of $675,000.00. Exhibit 7 - Purchase Agreement The purchase agreement was executed on July 15, 1999. The real estate broker who represented BSA was Gary Hopkins (hereinafter "Hopkins") who worked for Marcus & Millichamp, a company who specializes in marketing apartment buildings in the City of Detroit. Exhibit 6 Deposition of Gary Hopkins, p. 6, lines 2-8 Fanning sought financing for the purchase from GMAC Commercial Mortgage Corporation (hereinafter "GMAC"). Exhibit 4, Deposition of Cory Fanning, p. 23, lines 3-7 Fanning entered into an agreement with GMAC for the financing of the purchase of the Collingwood properties. Exhibit 1 Paragraph 1 of the agreement provides that GMACCM is authorized to be the Borrower's exclusive Agent and HUDapproved mortgagee to negotiate, process and close an insured loan for the project with HUD. GMAC was Fanning's representative with regard to obtaining the appropriate approvals from HUD. Further, it is clear that GMAC is experienced in obtaining HUD approval for financing the purchase of real estate, because it is a "HUD approved mortgagee". Despite the fact that both BSA and
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Fanning wished to proceed with the purchase, HUD refused to approve the sale. Exhibit 6 Deposition of Gary Hopkins, p. 12, lines 17-25, p. 13 lines 1-8; Exhibit 4 - Deposition of Cory Fanning, p. 21, line 25, p. 22, lines 1-4; Exhibit 8 - Affidavit of Benjamin Alli, paragraphs 6-9 After refusing to approve the sale, HUD continued its foreclosure proceeding. On March 13, 2000 HUD sold the Collingwood properties by auction. Exhibit 3 HUD received approximately $80,000.00 in proceeds from the sale, less than 15% of the purchase price offered by Fanning. In the Second Amended Complaint, Count VI states that HUD violated the HAP contract by arbitrarily and without reason refusing to approve the sale to Fanning, thereby causing damages in the amount of $675,000.00. Because the evidence clearly indicates that the sale was not

consummated only because of HUD's failure to consent due to its desire to foreclose the mortgage for Collingwood, summary judgment is not appropriate. ARGUMENT I. STANDARD OF REVIEW

Defendant brings this motion pursuant to Court of Federal Claims Rule 56, which provides, in pertinent part, that a party is entitled to summary judgment if "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law". (See also Cienega Gardens v. United States, 194 F.3d 1231 (1998) Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, when ruling on a motion for summary judgment. The evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 US 242 (1986)

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II.

THE CONTRACT AT ISSUE IN THIS MATTER DOES NOT GRANT THE GOVERNMENT UNFETTERED DISCRETION IN DETERMINING WHETHER TO APPROVE A SALE

In support of its Motion, the Defendant guides the Court to its HUD Handbook related to the administration of Section 8 assisted housing. In its Motion and Proposed Findings of

Uncontroverted Fact, the government provides a detailed list of all of the steps that HUD must take in determining whether to approve or disapprove a proposed transfer of subsidized real property. The handbook makes clear that HUD must review each application based on the criteria. The reasonable implication of those provisions is that if the applicant(s) meet those criteria, then the sale should be approved. Therefore, the government does not have unfettered discretion to approve or disapprove a particular sale. Defendant states in its brief that "the plain language of the contracts did not impose any duty upon HUD to approve the sale". Defendant's brief p. 8 However, it follows this statement with a detailed argument discussing all of the criteria for approval. Further, the government's position that it has unfettered discretion to approve the sale would render its obligation meaningless, creating an illusory promise. An illusory promise is "not a promise at all as that term has been herein defined. If the expression appears to have the form of a promise, this appearance is an illusion". Mastaw v. Naiukow, 105 Mich App 25, 29; 306 NW2d 378 (1981) This proposed interpretation of the contract language is improper. Clearly, the government's decision to so substantially interfere with an owner's property rights cannot be based on whim or caprice. Of course, the government argues that BSA and Fanning failed to submit the proper documents and therefore did not meet the criteria set forth in the handbook. However, the applicant must be given the opportunity to submit the documents for proper review. Again, the government
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cannot have unfettered discretion to simply deny a request for transfer by failing to consider it.. There must be some duty imposed on HUD, otherwise that provision of the contract would be illusory. As discussed in more below, HUD preemptively denied the request for sale and instead decided to proceed with the foreclosure. In doing so, HUD violated not only the HAP contract handbook, but also the Mortgage Servicing regulations. Failing to follow its own handbooks and regulations, which Defendant argues is part of the contract, creates, at a minimum, a question of fact as to whether HUD breached the HAP contract with BSA. II. HUD DENIED THE SALE TO FANNING AND IN DOING SO VIOLATED ITS OWN REGULATIONS AND BREACHED ITS CONTRACT WITH BSA

The government's second argument is that, if it did not have unfettered discretion, Plaintiffs' claim for breach of contract still fails because the proper documents were not filed and the criteria set forth in the handbook was not met. In fact, the government argues that HUD "never refused to approve the sale as plaintiffs [sic] allege" Defendant's brief, p. 16 However, every other party to the sale (BSA, Fanning and Hopkins) have testified that the only reason that the sale was not consummated was HUD's failure to approve the purchase. Fanning testified: Q Did you purchase the Collingwood/Kirkwood apartments pursuant to this agreement? No. It fell through. Why? I think it was because it was repossessed by HUD. Do you remember what time that was? * * * *
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You know what, I was -- I was close....I know that I was getting really close to the end. Like -- And so -- Whenever that was, that's when it fell apart. Were you surprised that the property was -- Were you surprised to hear that the property was repossessed by HUD? Oh, yeah. Why? Well, I -- I didn't -- I mean thought that it was, you know, okay to sell. Who told you that the property had been repossessed? My broker called me and said it had fallen through. * * * *

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Mr. Fanning, it was your intention to go through with this sale, is that correct? Oh, yes. Deposition of Cory Fanning, pp.21-22, 36 Exhibit 4

A

Hopkins, BSA's real estate broker, who was intimately involved in this sale, also testified about HUD's refusal to approve: Q A So that purchase offer, there was never a closing on that purchase offer? Never closed. * * * * Q Was it your understanding that HUD did not give the necessary approvals for this -- for the sale of this property? To my understanding, and this is going back aways, to my understanding there was not a HUD concurrence to the sale. Deposition of Gary Hopkins, pp. 12-13, Exhibit 6
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Hopkins also recalled that GMAC, on behalf of Fanning, took steps to secure HUD's approval for the sale of Collingwood. Exhibit 6 - Deposition of Gary Hopkins, p. 10, lines 19-25, p. 11, lines 1-6 It is important to note that both Fanning and Hopkins are disinterested parties to this litigation. Their recollections are clear: the sale was not completed due to HUD's refusal to consent. Further, Benjamin Alli, a plaintiff in this matter and president of BSA (hereinafter "Alli"), contacted Robert Brown, the Director of Multi-Family Housing for HUD's Detroit office (hereinafter "Brown"), upon learning that HUD had refused to approve the sale. During that conversation, Brown told Alli that HUD would not approve the sale because HUD would not allow Alli to make any more money from the government. When Alli asked for a reason for the refusal, Brown refused. During that conversation, Brown admitted that he had received and reviewed GMAC's submissions regarding the proposed sale. Exhibit 8 - Alli Affidavit, paragraphs 6-9 In addition, the government admits that it received a copy of the Purchase Agreement. Defendant's Brief p. 7, see also Affidavit of Patrick Berry, paragraph 12 (attached as page 245 of Defendant's Appendix to Motion) Brown also acknowledged to Alli that he had received and reviewed documents from GMAC. Clearly, HUD had knowledge of the proposed sale and yet never sent any written acknowledgement to the purchaser or seller; not even a form letter, as required by its handbook. It is clear that the sale was rejected by HUD. The issue then becomes whether the rejection is a breach of the HAP contract between BSA and the government. As stated above, and stressed in Defendant's Brief, the basis for approving or rejecting a proposed sale is contained within the HUD
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handbook. In this case, HUD did not even provide a pretense as a reason for the rejection. It simply rejected the proposed sale and moved ahead with its foreclosure. Its regulations are made a part of the HAP contract both by implication (the handbook provides the exact requirements of the parties) and by admission of the Defendant. Its failure to follow those regulations, due to its admitted desire to stop any financial gain by BSA or Alli, is a breach of the HAP contract. HUD's decision to foreclose instead of to allow the sale of the property is significant evidence of its motive. Its decision was based not on the written guidelines, but on its prejudice towards Alli and BSA. HUD's regulations regarding the servicing for a HUD mortgage contain a section on foreclosure. The regulations provide that prior to foreclosure, HUD must "encourage sale, by the mortgagor, as an alternative to foreclosure". Further, the regulations require that "encouragement of a sale .... Should be by active (if possible face-to-face) and direct methods rather than passively subsuming it in the text of a letter without explanation or elaboration." Exhibit 5 HUD Mortgage Servicing Handbook, p. 5-1, paragraphs 5-1(A) and 5-1(C) Even the government admits that it has a copy of the Purchase Agreement between Fanning and BSA in its possession. Therefore, it cannot deny that it had knowledge of a ready, willing and able purchaser. And yet, it continued with the foreclosure, sold the property (at less than 15% of its value) and kept the proceeds. The entire transaction is tainted and was clearly not based on proper considerations. HUD's decision to reject the proposed sale to Fanning, without explanation, without documentation and in complete disregard to its own regulations, is a violation of the HAP contract between BSA and HUD. Therefore, Plaintiffs respectfully request that this Court deny Defendant's

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Motion for Partial Summary Judgment with regard to Count VI of the Second Amended Complaint.

STEMPIEN & STEMPIEN, PLLC

______________________________ By: Eric Stempien Attorney for Plaintiffs Dated: September 7, 2005

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