Free Post Trial Brief - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

FRANCONIA ASSOCIATES, a Limited Partnership, et al., Plaintiffs, v. THE UNITED STATES, Defendant. File No. 97-381C Judge Francis M. Allegra

PLAINTIFFS POST-TRIAL BRIEF
_________________________________________________________________________

Jeff H. Eckland Attorney For Plaintiffs FAEGRE & BENSON LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402-3901 Telephone: (612) 766-7000 Telecopy: (612) 766-1600 Of Counsel: William L. Roberts Mark J. Blando FAEGRE & BENSON LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402-3901 Telephone: (612) 766-7000 Telecopy: (612) 766-1600

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TABLE OF CONTENTS I. THE DEAL ....................................................................................................................1 A. The Deal Between The Parties Granted Plaintiffs The Right To Convert Their Properties To Conventional Uses.................................................. 2 1. 2. B. C. D. II. The Termination Option Was Set Forth In Crystal Clear Terms. ..................................................................................................... 2 The Contracts Were Protected Against Modification By Subsequent Legislation. ........................................................................... 5

The Right To Convert Was The Quid Pro Quo For The Deal. .......................... 8 The Government Held Out The Prepayment Right As An Inducement To Attract Owners Into The Program. .............................................11 By Government Policy, Prepayment Was Encouraged And Even Compelled..........................................................................................................14

THE REPUDIATION..................................................................................................15 A. B. C. Defendant Is Bound To Standard Contract Law Principles. ................................16 Defendant Repudiated Plaintiffs Contracts By Enacting Legislation Curtailing Their Original Prepayment Rights. ..................................17 Defendant s Repudiation Spawned Critical Legal Consequences........................19

III.

THE LESSER DEALS ................................................................................................20 A. B. Plaintiffs Were Not Obligated To Continue To Deal With The Government Following Its Repudiation. .............................................................21 The Prepayment Alternatives Offered By The Repudiating Legislation All Require Owners To Forfeit Their Original Contract Rights. .................................................................................................24 Defendant s Proposed Alternatives To Unrestricted Prepayment Are Unreasonable, Economically Unsound, Or Simply Unavailable........................................................................................................26 1. 2. The Application And Evaluation Process................................................28 The Incentives .....................................................................................29

C.

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3. 4. IV.

The Forced Sale ..................................................................................31 The G-4 Restricted Prepayment...........................................................33

THE BREACH ............................................................................................................35 A. Defendant Failed To Perform Its Contractual Obligations. .................................36 1. 2. B. Each Plaintiff Established The Date On Which Defendant Breached Its Contract. ............................................................................36 Prepayment Without Restrictions Is Not An Option For Any Of The Plaintiffs. ............................................................................39

Defendant s Breach Is Not Protected By The Unmistakability Doctrine. ............................................................................................................42 1. The Court Is Not Bound To The Prior Erroneous Ruling In This Case Regarding The Applicability Of The Unmistakability Doctrine........................................................................43 The Unmistakability Doctrine, Which Protects The Government Only When It Is Acting In Its Capacity As The Sovereign, Is Inapplicable Here. ......................................................45

2.

V.

THE TAKING .............................................................................................................45 A. B. C. Plaintiffs Takings Claims Are Ripe For Judicial Review. ..................................46 Plaintiffs Hold Protected Property Interests In Their Real Estate And Their Contract Rights. ................................................................................49 Applying The Penn Central Analysis, Plaintiffs Suffered A Taking Of Their Properties.................................................................................50 1. 2. 3. D. Character of the Government Action.......................................................50 Interference with Reasonable Investment-Backed Expectations ...........................................................................................50 Economic Impact....................................................................................51

The Lesser Alternatives Provided Under The Statutes Do Not Provide Plaintiffs Just Compensation. .............................................................53

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VI.

DAMAGES ..................................................................................................................54 A. B. C. Plaintiffs Presented A Fair And Reasonable Estimate Of Their Damages ............................................................................................................54 Plaintiffs Damages Models Were Conservative And Proper For Each Claim. .......................................................................................................56 Plaintiffs Models Accounted For All Appropriate Offsets. ................................60

CONCUSION ..........................................................................................................................62

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TABLE OF AUTHORITIES Federal Cases Abdallah v. Abdallah, 359 F.2d 170 (3d Cir. 1966) ...................................................................37 Acme Investment, Inc. v. Southwest Tracor, Inc., 105 F.3d 412 (8th Cir. 1997) ..........................................................................................................................37 Adams v. United States, 42 Fed. Cl. 463 (Fed. Cl. 1998)............................................................45 Apex Mining Co. v. Chicago Copper & Chemical Co., 306 F.2d 725, 731 (8th Cir. 1962) .........................................................................................................................22 Bluebonnet Savings Bank, F.S.B. v. United States, 266 F.3d 1348 (2001) .......................................................................................................................................54 Brazos Elec. Power Coop., Inc. v. United States, 52 Fed. Cl. 121, 129 (2002) ...............................................................................................................................25 Buere'-Co. v. United States, 16 Cl. Ct. 42 (1988)................................................................. 47, 49 C.J. Langenfelder & Son, Inc. v. United States, 384 F.2d 1005 (Ct. Cl. 1967) ............................................................................................................................27 California Federal Bank v. United States, 245 F.3d 1342 (Fed. Cir. 2001)..................................................................................................................................55 Campfield v. Sauer, 189 F. 576 (6th Cir. 1911) .........................................................................21 Chancellor Manor v. United States, 331 F.3d 891 (Fed. Cir. 2003) ............................................................................................................................ 45, 50, 51 Churchill Chemical Corp. v. United States, 602 F.2d 358 (Ct. Cl. 1979) ........................................................................................................................................22 Cienega Gardens v. United States, 265 F.3d 1237 (Fed. Cir. 2001) .................................................................................................................................. 47, 48 Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003) .............................................................................................................8, 11, 45, 50, 51, 52 Cienega Gardens v. United States, 33 Fed. Cl. 196 (1995) ........................................................24

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Cienega Gardens v. United States, 194 F.3d 1231 (Fed. Cir. 1998) ........................................................................................................................................24 Cienega Gardens v. United States, 38 Fed. Cl. 64 (1997) ..........................................................32 City of Detroit v. Detroit Citizens' St. Railway, 184 U.S. 368 (1902) .........................................................................................................................................6 Clearfield Trust Co. v. United States, 318 U.S. 363 (1943)........................................................16 Coast-to-Coast Finance Corp. v. United States, 45 Fed. Cl. 796 (2000) .......................................................................................................................................44 Commonwealth Associates v. Palomar Medical Tech., Inc., 982 F. Supp. 205 (S.D.N.Y. 1997) ...................................................................................................38 Conoco Inc. v. United States, 35 Fed. Cl. 309 (1996) ................................................................44 Cooke v. United States, 91 U.S. 389 (1875)...............................................................................16 Craft Machine Works, Inc. v. United States, 926 F.2d 1110 (Fed. Cir. 1991)....................................................................................................................................6 Devon Energy v. United States, 45 Fed. Cl. 519 (1999) .............................................................47 Duquesne Light Co. v. Barash, 488 U.S. 299 (1989) .................................................................51 Eastern Minerals International, Inc. v. United States, 36 Fed. Cl. 541 (1996) ................................................................................................................................48 Electric & Missile Facilities, Inc. v. United States, 189 Ct. Cl. 237, 416 F.2d 1345 (1969) ..............................................................................................................................54 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) ........................................................................................................................................55 Energy Capital Corp. v. United States, 47 Fed. Cl. 382 (Fed. Cl. 2000) ............................................................................................................................ 22, 23, 61 FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944) .................................................................51 First Federal Lincoln Bank v. United States, 54 Fed. Cl. 446 (2002) .........................................................................................................................................8

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Fisher v. First Stamford Bank & Trust, 751 F.2d 519 (2d Cir. 1984) ........................................................................................................................................27 Florida Rock Industrial v. United States, 18 F.3d 1560 (1994) ..................................................52 Franconia Associates v. United States, 536 U.S. 129 (2002) ................................ 1, 16-19, 36, 40 General Dynamics Corp. v. United States, 47 Fed. Cl. 514 (2000) ...................................................................................................................................8, 44 Gindes v. United States, 740 F.2d 947 (Fed. Cir. 1984) ............................................................43 Glendale Federal Bank v. United States, 43 Fed. Cl. 390 (1999) ...............................................55 Gould, Inc. v. United States, 67 F.3d 925 (Fed. Cir. 1995).........................................................43 Grass Valley Terrace v. United States, 51 Fed. Cl. 436 (Fed. Cl. 2002) ........................................................................................................................................44 Greene v. Safeway Stores, Inc., 210 F.3d 1237 (10th Cir. 2000) ................................................38 Hage v. United States, 35 Fed. Cl. 147 (1996) ..................................................................... 48, 49 Hi-Shear Tech. Corp. v. United States, 53 Fed. Cl. 420 (Fed. Cl. 2002) ........................................................................................................................................54 Holland v. United States, No. 95-524C (Fed. Cl. July 30, 2003) ..................................................8 Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001).........................................................................................................................62 Income Properties/Equity Trust, Jones v. Wal-Mart Stores, Inc., 33 F.3d 987 (8th Cir. 1994) .........................................................................................................................19 Kellett Aircraft Corp, 186 F.2d 197 (3d Cir. 1950) ............................................................. 22, 27 Ketchikan Pulp Co. v. United States, 20 Cl. Ct. 164 (1990) ........................................... 22, 27, 28 Kers & Co. v. ATC Commission Group, Inc., 9 F. Supp. 2d 1267 (D. Kan. 1998) ..........................................................................................................................38 Kimberly Associates v. United States, 261 F.3d 864 (9th Cir. 2001) ........................................................................................................................................44

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Koby v. United States, 53 Fed. Cl. 493 (2002) ................................................................21-28, 60 LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363 (Fed. Cir. 2003).........................................................................................................................61 Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992)...............................................47 Lynch v. United States, 292 U.S. 571 (1934) .........................................................................6, 16 MacDonald, Sommer & Frates v. County of Yolo, 477 U.S. 340 (1986) .......................................................................................................................................48 Marathon Oil Co. v. United States, 177 F.3d 1331 (Fed. Cir. 1999) ..........................................................................................................................................7 Mendenhall v. Barber-Greene Co., 26 F.3d 1573 (Fed. Cir. 1994) .................................................................................................................................. 43, 44 Messenger v. Anderson, 225 U.S. 436 (1912) ............................................................................43 Middleton v. United States, 175 Ct. Cl. 786 (1966)....................................................................27 Mindel v. Image Point Productions, Inc., 725 F.Supp. 189 (S.D.N.Y. 1989) .......................................................................................................................20 Midwest Indus. Painting of Fla., Inc. v. United States, 4 Cl. Ct. 124 (1983) ................................................................................................................................22 Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000).........................................................................................5, 7, 16, 18, 19, 44 Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893) .......................................................................................................................................53 National Steel Corp. v. Great Lakes Towing Co., 574 F.2d 339 (6th Cir. 1978) ..........................................................................................................................61 Nobles v. Rural Community Insurance Services, 122 F. Supp. 2d 1290 (M.D. Ala. 2000).........................................................................................................................6 Palazzolo v. Rhode Island, 533 U.S. 606 (2001)........................................................................47 Penn Central Transport Co. v. New York City, 438 U.S. 104 (1978) ................................................................................................................................. 46, 53
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Perry v. United States, 294 U.S. 330 (1935) ..............................................................................16 Plaintiffs in Winstar-Related Cases v. United States, 37 Fed. Cl. 174 (1997) ................................................................................................................................19 Robinson v. United States, 305 F.3d 1330 (Fed. Cir. 2002).................................................. 26, 27 Roehm v. Horst, 178 U.S. 1 (1900)............................................................................................19 Siller Brothers v. United States, 655 F.2d 1039 (Ct. Cl. 1981) ...................................................21 Sinking-Fund Cases, 99 U.S. 700 (1879).....................................................................................7 Slotkin v. Citizens Casualty Co., 614 F.2d 301 (2d Cir. 1980)....................................................43 Southern Cal. Fed. Sav. & Loan Ass'n, No. 93-52C (Fed. Cl. Aug. 7, 2003) .......................................................................................................... 22, 27, 35, 55 Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531 (1918) ................................................................................................................................61 Specialty Assembling & Packing Co. v. United States, 355 F.2d 554 (Ct. Cl. 1966) ...........................................................................................................................54 Stanspec Corp. v. Jelco, Inc., 464 F.2d 1184 (10th Cir. 1972) ...................................................21 Suitum v. Tahoe Regional Planning Agency, 520 U.S. 725 (1997); ......................................................................................................................................47 Sun Cal, Inc. v. United States, 25 Cl. Ct. 426 (1992) .................................................................27 T.C. Bateson Constr. Co. v. United States, 162 Ct. Cl. 145, 319 F.2d 135 (1963) ........................................................................................................................22 United States v. Westlands Water District, 134 F. Supp. 2d 1111 (E.D. Cal. 2001) ........................................................................................................................44 United States v. Winstar Corp, 518 U.S. 839 (1996)......................................... 5-7, 11, 16, 17, 62 Venice Maid Co., Inc. v. United States, 639 F.2d 690 (Ct. Cl. 1980) ........................................................................................................................................22 Wells Fargo Bank v. United States, 88 F.2d 1012 (Fed. Cir. 1996) .......................................................................................................................................55
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White v. Murtha, 377 F.2d 428 (5th Cir. 1967) ..........................................................................44 Whitney Benefits, Inc. v. United States, 926 F.2d 1169 (Fed. Cir. 1991) .................................................................................................................................. 53, 54 Williamson County Reg'l Planning Commission v. Hamilton Bank, 473 S. 172 (1985)............................................................................................................47 Wood v. Lovett, 313 U.S. 362 (1941)...........................................................................................6 WRB Corp. v. United States, 183 Ct.Cl. 409 (1968) ..................................................................54 State Cases Cain v. Grosshans & Petersen, Inc., 413 P.2d 98 (1966) ...........................................................21 Coppola v. Marden, Orth & Hastings Co., 118 N.E. 499 (1917).................................... 21, 24, 25 D'Oliveira v. Rare Hospitality Int'l, Inc., 2003 WL 1223854 (R. I. Super. Feb. 13, 2003) .......................................................................................................38 Foster v. Bartolomeo, 581 N.E.2d 1033 (Mass. App. Ct. 1991) .................................................37 Fullington v. M. Penn Phillips, 395 P.2d 124 (Or. 1964) ...........................................................37 Green v. Smith, 261 Cal. App. 2d 392, 398, 67 Cal. Rptr. 796 (Cal. Ct. App. 1968)..................................................................................................................27 Lyon v. Willie, 288 N.W.2d 884 (Iowa 1980) ............................................................................37 Stanley Manly Boys' Clothes, Inc. v. Hickey, 259 S.W. 160 (Tex. 1924) ........................................................................................................................................21 Zanker Development Co. v. Cogito System Inc., 264 Cal. Rptr. 76 (Cal. Ct. App. 1989)..................................................................................................................27 Other Cases 42 Op. Att'y Gen. 417 (Dec. 29, 1969) ......................................................................................14 Federal Statutes and Regulations 42 U.S.C. § 1472(b)(3)..............................................................................................................15 42 U.S.C. § 1472(c)(4)..............................................................................................................25
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42 U.S.C. § 1472(c)(4)(A)............................................................................................. 18, 28, 29 42 U.S.C. § 1472(c)(4)(B).........................................................................................................30 42 U.S.C. § 1472(c)(4)(C).........................................................................................................30 42 U.S.C. § 1472(c)(5)(A)............................................................................................. 26, 31, 32 42 U.S.C. § 1472(c)(5)(B).........................................................................................................26 42 U.S.C. § 1472(c)(5)(G)............................................................................................. 18, 25, 40 7 C.F.R. Pt. 1944-E, Ex. B-1 (1980)..........................................................................................57 7 C.F.R. § 1865.2(c) (1979) ................................................................................................ 14, 15 7 C.F.R. § 1866.2 (1978)...........................................................................................................18 7 C.F.R. § 1965.204 ..................................................................................................................28 7 C.F.R. § 1965.206(a)..............................................................................................................28 7 C.F.R. § 1965.214(b)..............................................................................................................29 7 C.F.R. § 1965.215(c)..............................................................................................................40 7 C.F.R. Pt. 1965-E ............................................................................................................. 18, 26 7 C.F.R. Pt. 1965-E, Ex. A-4.....................................................................................................26 RD Instruction 1965-E .........................................................................................................25-41 Legislative Materials 125 Cong. Rec. 18204 (1979)......................................................................................................9 126 Cong. Rec. 22650 (1980)....................................................................................................17 136 Cong. Rec. 26372 (1980)....................................................................................................16 H.R. Rep. No. 100-122(I), 100th Cong., 1st Sess. at 53 (1987), 1987 U.S.C.C.A.N. .....................................................................................................................9 Pub. L. No. 87-70, 75 Stat. 149 (1961) .....................................................................................14

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Pub. L. No. 87-723, 78 Stat. 670 (1962) ......................................................................................5 Pub. L. No. 90-488, 82 Stat. 476 (1968) ....................................................................................62 Pub. L. No. 96-153, § 503, 93 Stat. 1134 (1979)........................................................................17 Pub. L. No. 96-399, § 514, 94 Stat. 1671 (1980)........................................................................17 Pub. L. No. 100-242, 101 Stat. 1877 (1989) ..............................................................................54 Treatises, Books and Articles Belden & Wiener, HOUSING IN RURAL AMERICA (1999) ...................................................... 14, 62 A. Corbin, Corbin on Contracts (1951) .....................................................................................21 A. Corbin, Corbin on Contracts (Interim Edition 2002).............................................................37 1 Dobbs Law of Remedies (2d ed. 1993)...................................................................................61 FARNSWORTH ON CONTRACTS (1998) ........................................................................................19 Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward A General Theory of Contractual Obligation, 69 Va. L. Rev. 967 (1983) .......................................................................................................................................21 G. Karvel & M. Unger, REAL ESTATE PRINCIPLES AND PRACTICE (9th Ed. 1991) .......................................................................................................................4, 57 Restatement (Second) of Contracts (1981) ................................................... 18, 19, 23, 27, 37, 54 Williston, S., A Treatise on the Law of Contracts ......................................................................19 18B C. Wright, et al., Federal Practice and Procedure (2002) ..................................................44

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The United States Supreme Court issued its decision in this matter on June 10, 2002, allowing the claims of all plaintiffs to go forward and remanding the case for further proceedings. Franconia Assoc. v. United States, 536 U.S. 129 (2002). The trial of all thirty-one plaintiffs was then held on June 16, 2003 through June 26, 2003, in Des Moines, Iowa. At the trial, plaintiffs introduced over 800 exhibits and presented the testimony of seventeen witnesses, including fourteen owners and owner representatives, two expert witnesses on damages, and one former government employee. Pursuant to the Court s Order of July 15, 2003, plaintiffs hereby respectfully submit this Post-Trial Brief. I. A deal is a deal. That was the deal. THE DEAL - Donald Stordahl (II/555)

- Scalia, J., Franconia Assoc., oral argument (4/15/02)

Plaintiffs are men, women and partnerships from across the United States who entered into a contract with the United States for mutual gain, believing that their government would carry out its end of the deal. Some plaintiffs own their properties through partnerships; some own them as individuals; one owns its property as a corporation. Some plaintiffs own multiple properties; some own only one. Some plaintiffs are Harvard-educated; some never went to college. Some are still actively involved in the real estate business; some have retired or are semi-retired. One plaintiff has learned, since the close of trial, that he is terminally ill. Despite their differences, however, plaintiffs have at least one thing in common that brought them together in this Court: they had a deal with the United States government and the government dishonored that deal. And because they had a deal, plaintiffs were not required to accept any of the lesser deals that the government devised as supposed compensation for its wrongful conduct. These common themes resounded repeatedly throughout the course of the

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trial, enforcing the fundamental principle that governs this case: defendant, like any other party to a real estate transaction, must take responsibility for its conduct in failing to live up to its contractual obligations. This unified message harmonizes the many voices heard at trial and mandates judgment in favor of plaintiffs. A. The Deal Between The Parties Granted Plaintiffs The Right To Convert Their Properties To Conventional Uses. 1. The Termination Option Was Set Forth In Crystal Clear Terms.

The deal agreed to by the parties in this case was quite simple. Each plaintiff entered into a contract with the Farmer s Home Administration ( FmHA ) of the Department of Agriculture pursuant to the Section 515 program. The contracts, reflected in a promissory note, loan

agreement and mortgage, provided that the owner would construct rental housing in a rural area using funds borrowed from the FmHA. The promissory note and mortgage made each plaintiff solely responsible for repaying the full loan amount plus interest at the rate stated on the note. JSF ¶ 6 (borrower promises to pay principle loan amount plus interest).1 The terms of the mortgages typically were fifty years. See, e.g., JX 103, JX 104; see also VI/1267.2 The sole financial benefit inuring to plaintiffs within the confines of the program is a nominal annual fee equaling eight percent of their initial down payment. JX 103 at 5. Thus, for example, a property like Riverfront, which placed a $22,400 down payment on its property in 1974, can earn only a maximum of $1,344 per year while in the program. JX 2. Many plaintiffs

Citations herein are to the parties Joint Stipulation of Facts ( JSF ), the parties joint exhibits ( JX ), plaintiffs exhibits ( PX ), defendant s exhibits ( DX ), and the trial transcript, referenced by volume and page number (e.g., II/555 ).
2

1

The contracts appeared on standard forms drafted by the agency. In a number of cases, plaintiffs negotiated special terms with the FmHA that were incorporated into the contracts. For example, Mr. Levy testified that he negotiated with the agency to include in all of the contracts signed by his partnerships a non-recourse provision. IV/1264-65, 1295; JX 51 at 2.
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have been unable to obtain even this meager return for many years, as the agency maintains the right to reduce or even eliminate the annual return depending on how project finances balance out each year. JX 103 at 5 (stating that the return of up to eight percent can be paid out of project reserves only [w]ith the prior consent of the Government and only if sufficient funds will remain in the reserve account after the payment). 3 As a result, there is no guarantee that any of the plaintiffs will be able to earn even their eight percent return in any given year through the remainder of their mortgage terms.4 While the Section 515 program placed heavy burdens on plaintiffs with little immediate return, the contracts did not by any means require owners to stay in the program for their full fifty-year mortgage terms. See VI/1265-69. Instead, the contracts permitted plaintiffs to

terminate their participation in the program by prepaying their mortgages at a time of their choosing (the termination option ). See VI/1265-69. The right to terminate through

prepayment of the loan was clearly set forth in each promissory note as follows: Prepayments of scheduled installments, or any portion thereof, may be made at any time at the option of Borrower. JSF ¶ 7. 5
3

E.g., IV/947 (Riverfront has faced a struggle to obtain its annual return, given agency s refusal to grant needed rent increases); IV/876-77, 889 (Eastwood has not received its return in four out of the last five years due to investments of funds made to maintain and improve the property); IV/646 (Dogwood Glen did not receive its return for several years); V/1177 (Fox Ridge II has often failed to receive a return). Indeed, the analysis performed by defendant s expert witness Dr. Hamm on the plaintiffs ability to obtain their annual return indicates a substantial default rate of 15-20%. See DX 42 at 34-35; II/470-71.
4

So long as their properties remain in the program, plaintiffs are also bound to various regulatory covenants, including requirements regarding tenant eligibility, rent levels, and cash reserves. E.g., JX 103 at 5-7. Plaintiffs are also required to submit annual budgets and other documentation and are subjected to various government reporting and oversight requirements while in the program. Id; III/707-11; II/617.
5

While every plaintiffs contract included this prepayment provision, the post-1979 owners also agreed to a twenty-year covenant which provided that they were not permitted to raise
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The fact that the prepayment right was contained in the promissory note is significant. The promissory note is considered the bedrock of any real estate transaction. This is because the promissory note is the instrument that secures the fundamental obligation of the borrower to pay back the loan. See G. Karvel & M. Unger, REAL ESTATE PRINCIPLES AND PRACTICE 213 (9th Ed. 1991). As David Hodges testified, a promissory note is the fundamental cornerstone of real estate business. V/1209-10. Thus, the prepayment right was an express term of the core

agreement executed by the parties for each transaction. The right to prepay and leave the program was confirmed by several other contract provisions. For example, the right was reinforced by a refinancing provision, typically found in both the loan agreement and mortgage, which required plaintiffs to pay off their government loan and take on a private mortgage when financing on similar terms became available. JSF ¶ 8; JX 16 at 2; JX 17 at 3; see also II/508, 524-525. In addition, the loan agreement made clear that the various covenants restricting the use of the property would terminate once the loan was paid in full, in that the covenants were to remain in effect only [s]o long as the loan obligations remain unsatisfied. E.g., JX 103 at 5. Finally, the twenty-year covenant found in every post-

1979 contract made clear that the owners obligation to remain in the program was for a period of twenty years and no more. See JSF ¶ 12. Indeed, if the contracts in any way permitted the government to keep all owners locked in for fifty years, there would be no need to include a requirement that the post-1979 owners to stay in for twenty years. Thus, there is only one reasonable interpretation of the parties contracts: plaintiffs had the option to terminate their participation in the program at a time of their choosing by prepaying

rents for a period of twenty years after the loan was made. JSF 12. All of the post-1979 owners in this case have reached the end of their twenty-year covenants.
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their mortgages. The government s obligation to release plaintiffs from the program s regulatory covenants upon prepayment was clear and unmistakable. 2. The Contracts Were Protected Against Modification By Subsequent Legislation.

Plaintiffs contracts made clear that their terms, including the prepayment right, could be modified only by consent between the parties, expressed in writing. In particular, the loan agreement stated that it could be changed by agreement between the Government and the [owner], and that any such agreement must be in writing. JSF ¶ 11; JX 103 at 8. Indeed, the Id. Nothing in the

contracts actually referred to themselves as being contractually binding.

contracts granted either party the right to change the terms without the other party s consent. Any such authority would render the contracts illusory. See United States v. Winstar Corp, 518 U.S. 839, 921 (1996) ( Winstar ) (government contracts should not be read in a manner that renders the government s obligations illusory ); see also Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 620 (2000) ( Mobil ). The contracts also spelled out how the applicable statutes and regulations would impact the parties rights and obligations. With regard to legislation, the loan agreement provided that any loan made or insured will be administered subject to the limitations of the authorizing act of Congress and related regulations. JSF ¶ 9; JX 103 at 7. The authorizing act of Congress

referred to in this clause is Section 515 of the National Housing Act, passed in 1962, which created the Section 515 program. Pub. L. No. 87-723, § 4(b), 78 Stat. 670, 671 (1962); see also JX 103 at 1 (referencing section 515(b) of the Act). The contract did not reference any

prospective modifications to the statute or any other laws that might be passed in the future. Id. With regard to regulations, the contracts were even more explicit. Each promissory note

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provided that it was subject to the present regulations of the Farmer s Home Administration and to its future regulations not inconsistent with the express provisions hereof added); see also VI/1276-78, 1273, 1274-75. These provisions make clear that the contracts were subject to the governing statute and regulations as they existed when the contracts were executed not to any future changes in the JSF ¶ 10 (emphasis

law. See I/212; VI/1271-72, 1298. It has long been recognized that, absent express contractual language to the contrary, reference in a government contract to statutes or regulations results only in incorporation of the then-current regulations, not statutes or regulations as they

change over time. Winstar, 518 U.S. at 868 (1996); accord id. at 922 (Scalia, J., concurring); Wood v. Lovett, 313 U.S. 362, 369-70 (1941); Craft Mach. Works, Inc. v. United States, 926 F.2d 1110, 1115 (Fed. Cir. 1991); see also Nobles v. Rural Community Ins. Servs., 122 F.Supp.2d 1290, 1292, 1300 (M.D. Ala. 2000) (contract made [s]ubject to the provisions of the Federal Crop Insurance Act and the regulations issued under that Act construed to incorporate the terms of the statute and regulations as they existed when the contract was signed).6 As the Supreme Court held more than 100 years ago: [Congress] cannot undo what has already been done, and it cannot unmake contracts that have already been made, but it may provide for what shall be done in the future, and may direct what preparation shall be made for the due performance of contracts already entered into.

6

Even where the terms of a government contract expressly make it subject to future regulatory and legislative changes, the government will not be permitted to work a forfeiture of the private party s investment by revoking its obligations through subsequent statutes or regulations. Lynch v. United States, 292 U.S. 571, 577-78 (1934) (government found liable even though contract provided that it was subject to all amendments to the original Act, [and] to all regulations then in force or thereafter adopted ); City of Detroit v. Detroit Citizens St. Ry., 184 U.S. 368, 377-78, 384, 398 (1902) (although public contract was expressly subject to further rules, orders or regulations, the government could not issue subsequent regulations that unilaterally revoked material terms of the contract or destroyed the plaintiff s investment).
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Sinking-Fund Cases, 99 U.S. 700, 721 (1879) (concluding that Congress could not by direct legislation vacate mortgages already made . . . nor release debts already contracted ). In short, while the government may enact laws governing the future conduct of its citizens, it cannot through legislation rewrite the terms of contracts it has already signed. In Marathon Oil Co. v. United States, 177 F.3d 1331, 1337 (Fed. Cir. 1999), for example, the Federal Circuit held that a contract made subject to the governing statute, regulations issued pursuant to that statute, and all other applicable statutes and regulations, was not subject to future inconsistent legislation. The Court noted that construing the contract as incorporating all future actions, whether by statute or regulation, by one of the parties would raise serious questions about illusory contracts. Id. The Supreme Court agreed that the contract s reference

to applicable statutes and regulations incorporated the terms of such statutes and regulations only as they existed at the time the contracts were executed. Mobil, 530 U.S. at 616-17. The Court observed that any other interpretation would render the contracts economically unfeasible. Id. Without some such contractual provision limiting the Government s power to impose new and different requirements, the companies would have spent $158 million to buy next to nothing. ). * * *

In sum, the terms of the deal provided, consistent with applicable case law, that (1) plaintiffs had the option to prepay and raise rents at any time (limited only by the now-expired 20-year covenants for the post-1979 owners), (2) the deals were contractually binding and could be changed only by written agreement between the parties, and (3) the contracts could not be modified by any contrary statutes or regulations that might be passed in the future.7

As explained in part IV(C), infra, the unmistakability doctrine is not an issue in this case because it simply does not apply. However, the discussion in this section establishes that even if the doctrine did apply here, plaintiffs contracts easily satisfy the requirements of the doctrine. See Winstar, 518 U.S. at 922 (unmistakability doctrine requires at most a clear promise to
7

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B.

The Right To Convert Was The Quid Pro Quo For The Deal. Well, I had plans . . . when I went into this, I wasn t looking at doing government housing for 50 years. I don t think anybody would commit themselves to something like that. - Phoebe Perri (II/604) All of the plaintiffs testified that they would not have signed their contracts absent the

termination option.8 Stated otherwise, none of the plaintiffs would have entered the program if there was a possibility that they could be prohibited from leaving the program until their mortgage terms expired. Id. Several plaintiffs discussed the prepayment term with agency officials before signing their contracts to confirm that they would have the option to prepay. I/172, 174-75; I/185, 188; III/716; VI/1257-58; V/1101-02. A number of plaintiffs even had their contracts reviewed by attorneys before closing to ensure that they guaranteed the right to prepay. I/204-05; VI/1266; III/792; VI/1292. Clearly, plaintiffs did not enter into the Section 515 program with the vision that they and their heirs would be involved in running governmentsubsidized housing for fifty years. I/180; II/509-10; II/590-91; II/604. Nor did plaintiffs sign their contracts in order to obtain a low interest rate loan. The

stated interest rates on the notes were actually at or near market rates, and the notes made the plaintiffs liable for the full amount of the mortgage at the rate stated on the note. E.g., JX 104. Although government subsidies produced an effective one percent interest rate on the loans, regulate in a certain fashion into the future) (Scalia, J., conc.); Cienega Gardens v. United States, 331 F.3d 1319, 1334 (Fed. Cir. 2003) (finding that under HUD housing program, [t]he owners contractual prepayment rights are such clear, unqualified rights as the contract terms at issue in Winstar); General Dynamics Corp. v. United States, 47 Fed.Cl. 514, 546-48 (2000) (holding that the unmistakability doctrine is satisfied where the contract language is crystal clear and lends itself to only one reasonable interpretation ). Indeed, under recent case law, a promise need not even be express to satisfy the unmistakability doctrine. See First Fed. Lincoln Bank v. United States, 54 Fed. Cl. 446, 456 (2002) (holding that a promise for certain regulatory treatment need not be explicit when the obligation is subsumed within other terms of the contract); accord Holland v. United States, No. 95-524C (Fed. Cl. July 30, 2003).
8

See I/179, 180, 215; VI/1262; II/543, 544; II/590-91, 604; II/633, 637; IV/865, 866; IV/895; V/947, 1003; IV/1019; V/1094; V/1134-35; V/1199.
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those subsidies provided no benefit to plaintiffs.

See II/438, 441-42; VII/1561, 1567-69;

VI/1262; IX/2187-88. This is because until an owner is able to prepay and leave the program, the owner s return is strictly limited to the annual fixed fee, which, as explained above, is capped at eight percent of the initial down payment. JX 103 at 5. Thus, the deal only made financial sense to plaintiffs if they could prepay and be freed of the program s restrictions when they chose to exercise their option to do so. I/179, 215; VI/1262, 1266; VI/1275-76; II/543, 554; II/590-91; II/633; IV 865-66 (Mr. Baker would absolutely not have entered into contracts without prepayment right); IV/895 (Mr. Wells couldn t even think of entering into contracts absent the right to prepay at any time); IV/947, 1004; IV/1019; V/1094; V/1134-35; V/1199. The right to terminate was crucial from a financial standpoint also because of the tax implications of Section 515 ownership. See II/542-43, 545; VI/1265. While certain tax benefits initially were available under the program, those benefits ran out as each project s depreciation schedule expired. See 125 Cong. Rec. 18204 (1979) ( The tax advantage in this type of project looks toward a maximum term of about 10 years. ). Thus, as the tax benefits of remaining in the program diminished, the incentive to leave the program increased. H.R. Rep. No. 100-122(I), 100th Cong., 1st Sess. at 53 (1987), 1987 U.S.C.C.A.N. at 3369 (noting that the exhaustion of many tax benefits available to Section 515 participants was driving owners to prepay or refinance their FmHA loans ). Mr. Donald Stordahl, for example, planned to prepay as soon as his property was fully depreciated. II/542-545. Without the right to prepay, however, plaintiffs would be trapped in the program with no remaining tax incentives, and facing the possibility of negative tax consequences for years and years into the future. Thus, the temporary nature of the tax benefits available under the program made the termination option all the more critical.

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In developing their properties, plaintiffs picked locations and completed construction with an eye toward converting to market rents in the future. Mr. Morosani, for example, had numerous discussions with FmHA officials regarding his plans to install air conditioners and a brick facade at his property. I/181-82. Mr. Morosani s property was also constructed in manner that would permit conversion to condominiums in the future. Id. I/200-01. Similarly, Mr. Levy incorporated separate entrance-ways and decks into his building. VI/1335; III/811-12. Ms. Perri beautifully landscaped both of her properties and added balconies and patios. II/588-89; PX 611 at 9. Mr. Tucker included amenities such as central air and heating, a central TV system, and a playground. II/635. All of the pre-1979 owners intended to prepay as soon as the time was ripe, based on their personal circumstances and market conditions. For example, Mr. Levy and Mr. Morosani each decided to prepay when the combination of prevailing interest rates, development and population growth in the community, and conventional rents in the market made conversion to market rents the most attractive. I/219, 260; VI/1282-83. Mr. Stordahl, as noted above, intended to prepay when the tax benefits expired. II/542-43; II/545. All of the post-1979 owners intended to prepay as soon as their twenty-year anniversaries arrived. E.g., II/639-41; IV/865; VI/128283; PX 719 at 3; PX 731 at 3; II/641. Upon prepayment, plaintiffs planned to raise their rents to market levels and use the proceeds to fund their retirements, pay for their children s education, or invest in other ventures. E.g., I/180, 254; II/557, 586, 627; IV/863, 895, 944, 1000-01; V/1195. Accordingly, all of the plaintiffs entered into the program with specific investment goals that could not be achieved without the option to prepay.

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Thus, the right to prepay and take the properties to market in the future was truly the quid pro quo for plaintiffs decision to enter into the program in the first instance.9 The termination option was at least as critical to plaintiffs deals as the regulatory treatment of goodwill was to the plaintiffs in the Winstar-related cases. See Winstar, 518 U.S. at 921; see also Cienega Gardens v. United States, 331 F.3d 1319, 1348 (holding that the plaintiffs agreed to enter the programs in reliance on prepayment as the consideration for signing the

agreements). Like the accounting treatment at issue in Winstar, the termination option was a critical component of the deal without which plaintiffs never would have signed their contracts. C. The Government Held Out The Prepayment Right As An Inducement To Attract Owners Into The Program. The termination option was an indispensable component of the Section 515 program for the agency as well as the plaintiffs. It was the agency s view, like plaintiffs , that prepayment was critical to the proper and intended functioning of the program. At trial, plaintiffs presented the testimony of Mr. Dean Greenwalt, a former FmHA employee of sixteen years. Mr.

Greenwalt s service to the agency included positions at the national office from 1976 to 1978, and from 1980 to 1985, at which time he was the Branch Chief for Multi-Family Housing Servicing. II/500-501. Mr. Greenwalt also served as the Multi-Family Housing Coordinator for California and the Chief of Rural Housing for New Mexico. II/501. In these positions, Mr. Greenwalt garnered a wealth of knowledge regarding the Section 515 program and the agency s policies and practices concerning prepayment. Id. II/503-505. Mr. Greenwalt testified that encouraging the private sector to invest in the Section 515 program was an important aspect of the overall rural development picture. II/522. The program

9

These fact regarding the criticality of the prepayment are undisputed, as the government did not challenge any of the plaintiffs testimony on this key issue.
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was promoted through seminars, training programs, brochures, and one-on-one discussions with potential owners. II/504-05; PX 812. Through these efforts, the agency informed owners that an important aspect of the program was the ability to prepay and get out of the program in the future. II/510 (the prepayment right was a very important term of the contracts). The agency also assured prospective owners that they would not be required to remain in the program for fifty years and that there would be no penalty for early prepayment. Mr. Greenwalt described the agency s discussions with potential owners as follows: They were concerned because they wanted to get out. Most of the properties were being developed by limited partnerships. General partners were generally much senior to me, and their concern was always what s going to happen to our property? Do we have to keep it in the program? In 50 years, we probably won t be here. Their intention was always okay, we can take it out of the program. There isn t a penalty. There isn t any additional requirements. We explained no, there wasn t. II/509-10. Mr. Greenwalt s testimony on the agency s marketing of the prepayment right matches the experiences of many owners who were on the other side of the table during the same time period. Mr. David Tucker, for example, first learned about the Section 515 program at one of the seminars described by Mr. Greenwalt. II/624-26. Mr. Tucker attended the 1979 National

Association of Home Builders conference in Dallas, where he attended a presentation about the Section 515 program. Id.; PX 813. One of the speakers was Paul Conn, then the Director of the Multiple Family Housing Loan Division of the FmHA. II/626. During that presentation, Mr. Conn and the other speakers described the right to prepay and convert to market rents as a chief benefit to entering into the program. Id. Some of the speakers told about the benefits of this

program, that developers could build these projects and later on prepay them and convert them to conventional rents. ).

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Similarly, Mr. Robert Baker learned about the program from his uncle, an employee in the agency s Virginia state office named Marian Baker, who told him that the attractiveness of the program was the right of the owner to bring the property to market after a period of time. IV/854-55, 857. A number of the plaintiffs also recall reviewing the agency brochure describing the Section 515 program, which confirmed their understanding that the loan documents permitted prepayment. PX 812; see I/171-72, 174-75; III/717-18; IV/858-59; V/1144. Finally, many of the owners recounted discussions with agency officials during which the agency promoted the prepayment right and assured plaintiffs that they would be able to leave the program. I/172, 174-75, 188; II/541-42; II/595; II/624-26; V/1133. The government presented no evidence to contradict the testimony of Mr. Greenwalt and the plaintiffs regarding the agency s use of the prepayment right to induce owners to enter into the Section 515 program. The government s only fact witness, Mr. Larry Anderson, did not have any direct responsibility for prepayment-related issues until he took his current position as Director of the Office of Rental Housing Preservation in 1998.10 VII/1578-79; II/502-503. As a result, Mr. Anderson did not provide any testimony at all related to events prior to the passage of the 1988 Legislation. In fact, Mr. Anderson identified Mr. Greenwalt as one of the three people who were the most knowledgeable about prepayment issues during the late 1970s and early 1980s, when all of the plaintiffs in this action entered into the program. VII/1643-44. The other two individuals he named are now deceased, leaving Mr. Greenwalt, by defendant s admission, as the only person alive who can speak with authority regarding the agency s prepayment policies during the relevant time period. Id.

10

Before that time, from 1980 through 1998, Mr. Anderson worked in the Portfolio Management Division, which has no direct involvement in either loan origination or prepayment. VII/1578-79.
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D.

By Government Policy, Prepayment Was Encouraged And Even Compelled.

We explained to them that we didn t intend for them to be a borrower for 50 years. We expected the loans to be prepaid when other credit would be available. - Dean Greenwalt (II/508) Mr. Greenwalt also explained that the FmHA considered itself a lender of last resort and thus had no intention or desire of keeping owners obligated on their loans for the full mortgage term. II/508.11 The agency thus encouraged owners to prepay as soon as they were able. In its regulations, the agency stated that graduation of Section 515 loans to private lenders was desirable and that [b]orrowers should be inspired to graduate as a mark of success in their financial affairs. 7 C.F.R. § 1865.2(c) (1979); see also II/508, 518. The funds obtained by the

agency through prepayment could then be relent to other borrowers as needed. I/172-75, 188; II/508; see also 42 Op. Att y Gen. 417, 419 (Dec. 29, 1969). Thus, during the time period when plaintiffs entered into the program, the agency had no more interest in keeping the properties in the program for fifty years than plaintiffs did. In fact, the agency s prepayment policy went beyond encouragement: the agency

reserved the right to compel an owner to prepay if and when commercial financing became available. II/514, 523-24. The agency s authority to mandate prepayment was pervasive, as it was set forth in the contracts, the applicable statutes and regulations, and the agency s marketing

The FmHA s desire to be a lender of last resort in the Section 515 program was consistent with other housing programs developed in the 1960s, such as those administered by the Department of Housing and Urban Development ( HUD ), in which the government s role was limited to that of an insurer on the loan. See Pub. L. No. 87-70, 75 Stat. 149 (1961). The FmHA acted as a direct lender for housing developed in rural areas only because those communities traditionally had not been served by commercial lenders. See VII/1613 (L. Anderson testifying that that s been our charge right from the start, is to provide credit where other credit wasn t available to address housing needs in rural areas ); Belden & Wiener, HOUSING IN RURAL AMERICA 114 (1999) (the Section 515 program was intended to stimulate rental housing within markets and for populations not normally served by conventional lenders ). Indeed, even the FmHA acted as an insurer (rather than lender) under the closely-related 521 program. See JX 103 at 1. Clearly, the agency s vision for rural development at that time did not involve it remaining the lender on every property in its portfolio for decades and decades to come.
14

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materials.

Each contract included, sometimes in the loan agreement, promissory note and

mortgage, a refinancing clause providing as follows: If at any time it shall appear to the Government the Borrower may be able to obtain a loan from a responsible cooperative or private credit source at reasonable rates and terms for loans for similar purposes and periods of time, Borrower will, at the Government s request, apply for and accept such loan in sufficient amount to repay the Government. JSF 8 (emphasis added); JX 16 at 2; JX 17 at 3. This clause was required by law to be included in all Section 515 loans. 42 U.S.C. § 1472(b)(3); see also 7 C.F.R. § 1865.2(c) (1979) ( When voluntary graduation by refinancing cannot be accomplished, there is a legal basis for enforcing the refinancing provisions . . . ). The agency brochure describing the program also stated that [w]hen the financial position of the borrower reaches the point that he can repay or refinance through a commercial lender, the loan contract provides that he shall do so. PX 812. Thus,

there can be no doubt that graduation of Section 515 properties to the conventional market was a critical component of the program from the perspectives of both plaintiffs and the government. * * *

Each plaintiff made an investment in the Section 515 program by signing a valid, mutual, binding contract with the United States. Plaintiffs had every reason to expect that they would be able to see the very purpose of their investment come to fruition upon opting to exercise their right to prepay. After all, that was the deal. II. THE REPUDIATION

Almost to the borrower was total disgust and betrayal. They felt that we had misled them somewhere along the line because they had always believed they could prepay their loan. - Dean Greenwalt (II/510-511) I never, ever thought under any circumstance that you could change a note once it had been signed by both parties and agreed to because that s the fundamental cornerstone of real estate business, and if you can t trust a note where do you begin and leave off as to what you believe you can trust and what you can t. David Hodges (V/1209-10)

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Things did not work out as planned. While plaintiffs lived up to their end of the deal, defendant did not. In fact, none of the plaintiffs was able to fulfill the investment goals they developed in reliance on the termination option. This was because defendant repudiated

plaintiffs contracts by passing legislation in 1988 and 1992 that imposed extra-contractual restrictions on plaintiffs prepayment rights. A. Defendant Is Bound To Standard Contract Law Principles. It is the obligation of the U.S. Government to fulfill contractual agreements into which it enters, or, at a minimum, to justly compensate those parties whose contractual rights it abrogates. - Senator Heflin, 136 Cong. Rec. 26372 (1980) I thought it would be just like a normal real estate deal . . . - Brian Wells (IV/905)

The government s conduct in this case must be judged according to standard contract law principles. See Mobil, 530 U.S. at 607 ( When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals. ) (internal quotations and citations omitted); accord Winstar, 518 U.S. at 895; Clearfield Trust Co. v. United States, 318 U.S. 363, 369 (1943) ( The United States does business on business terms. ); Perry v. United States, 294 U.S. 330, 352 (1935); Lynch v. United States, 292 U.S. 571 (1934); Cooke v. United States, 91 U.S. 389, 398 (1875) (when the United States comes down from its position of sovereignty, and enters the domain of commerce, it submits itself to the same laws that govern individuals there ). The Supreme Court confirmed the application of these principles to this case in its decision in this matter. Franconia Assoc., 536 U.S. at 141 ( Once the United States waives its immunity and does business with its citizens, it does so much as a party never cloaked with immunity. ). Holding the government accountable to such standards is essential to protect the Government s own long-run interest as a reliable contracting partner in the myriad workaday

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transaction of its agencies.

Winstar, 518 U.S. at 883. By contrast, a rule expanding the would have the certain result of

Government s opportunities for contractual abrogation

undermining the Government s credibility at the bargaining table and increasing the co