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In the United States Court of Federal Claims
Nos. 01-46C, 01-251C, 01-416C (Filed: June 2, 2005) ____________ * Summary judgment; Breach of contract; HUD CUYAHOGA METROPOLITAN HOUSING * section 8 housing program; HAP contracts; AUTHORITY, * 1994 amendments to Housing Act of 1937; * HUD Notice 95-12; Damages; One-percent Plaintiff, * rule of 42 U.S.C. § 1437f(c)(2)(A); Expectancy * damages; Legal impact of law effectuating a v. * breach; Causation v. mitigation; Construction * of overall limitation in HAP contracts and 42 THE UNITED STATES, * U.S.C. § 1437f(c)(2)(C); Judicial estoppel; * Cost of comparability studies; Prejudgment Defendant. * interest. ____________ OPINION ____________ Fred Joseph Livingstone, Taft, Stettinus & Hollister, Cleveland, OH, for plaintiff. Andrew P. Averbach, U.S. Department of Justice, Washington, D.C., for defendant, with whom was Assistant Attorney General Peter D. Keisler. ALLEGRA, Judge: "If a contract is broken, the measure of damages generally is the same, whatever the cause of the breach."1 This is the second leg of a jurisprudential voyage having its genesis in a series of contracts entered into between the plaintiff, Cuyahoga Metropolitan Housing Authority (CMHA or plaintiff), and the Department of Housing and Urban Development (HUD) to provide lowincome housing under the United States Housing Act of 1937 (the Housing Act). This court previously held that plaintiff's rights under these contracts were repudiated by Congress in 1994, when it amended the Housing Act to alter how rent subsidies were to be determined. Cuyahoga Metro. Hous. Auth. v. United States, 57 Fed. Cl. 751, 762 (2003) (CMHA I). That repudiation was exacerbated, this court further opined, when HUD, in a 1995 directive, imposed additional requirements on obtaining rent increases that were not envisioned in either the contracts or the
1
Globe Ref. Co. v. Landa Cotton Oil Co., 190 U.S. 540, 544 (1903) (Holmes, J.).
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1994 legislation. Id. In so concluding, the court rejected defendant's banner defense that no repudiation or breach arose under the so-called unmistakability doctrine. Id. at 777-80. At issue in the pending cross-motions for partial summary judgment are what damages are awardable for the resulting partial breaches of the HAP contracts. I. BACKGROUND
A detailed recitation of the factual and statutory background of this case may be found in this court's prior opinion. Id. at 752-58. This court will rehearse here only those details necessary to provide context, filling in a few additional facts as necessary. In 1974, Congress amended the Housing Act of 1937 to create what is known as the Section 8 housing program. See 42 U.S.C. § 1437f. Under the program, tenants make rental payments based on their income and ability to pay; HUD then makes "assistance payments" to the private landlords to make up the difference between the tenant's contribution and a "contract rent" agreed upon by the landlord and HUD. 42 U.S.C. §§ 1437a(a), 1437f(c)(3); see also Nat'l Leased Hous. Ass'n v. United States, 105 F.3d 1423, 1425 (Fed. Cir. 1997) (describing the program); CMHA I, 57 Fed. Cl. at 753-55 (same). In 1978 and 1979, CMHA and HUD entered into three Housing Assistance Payments ("HAP") contracts under this program. Each contract concerned one of three properties: Quarrytown Tower Apartments (Quarrytown), with 180 onebedroom units; Severance Tower Apartments (Severance), with 190 one-bedroom units; and Ambleside Tower Apartments (Ambleside), with 201 one-bedroom units. The contracts' anniversary dates are January 31, May 1, and August 15, respectively. The framework for these contracts was governed, in part, by 42 U.S.C. § 1437f(c)(1), under which an initial maximum monthly contract rent was established for each dwelling unit. As originally enacted, 42 U.S.C. §1437f(c)(2) provided for adjustments in this maximum monthly rent thusly (A) The assistance contract shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract 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. * * * * *
(C) Adjustments in the maximum rents as hereinbefore provided shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Secretary. 42 U.S.C. § 1437f(c)(2)(A) and (C) (1982). The HAP contracts in question implemented these provisions by providing that adjustment of rents will be made annually on the basis of a -2-
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reasonable formula, subject to an "overall limitation" preventing adjustments from producing material differences between the rents at comparable assisted and unassisted units. The annual adjustment was implemented through Section 1.8b ("Automatic Annual Adjustments") of the HAP contracts, which provides, in pertinent part (1) Automatic Annual Adjustment Factors will be determined by the Government at least annually; interim revisions may be made as market conditions warrant. Such Factors and the basis for their determination will be published in the Federal Register. . . . On each anniversary date of the Contract, the Contract Rents shall be adjusted by applying the applicable Automatic Annual Adjustment Factor most recently published by the Government. Contract Rents may be adjusted upward or downward, as may be appropriate; however, in no case shall the adjusted Contract Rents be less than the Contract Rents on the effective date of the Contract.
(2)
Consistent with 42 U.S.C. § 1437f(c)(2)(C), the HAP contracts also contain, in Section 1.8d, an "Overall Limitation," that states: Notwithstanding 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; provided, that this limitation shall not be construed to prohibit differences in rents between assisted and comparable unassisted units to the extent that such differences may have existed with respect to the initial Contract Rents. HUD regulations in effect at the time the contracts in question were executed mirrored these requirements. See 24 C.F.R. § 880.609(c) (1979). To protect the differences which "may have existed with respect to the initial Contract Rents," HUD developed what is known as the "initial difference," equal to the difference between the initial Section 8 contract rents and the original comparables.2
2
On January 14, 1986, HUD's Deputy Assistant Secretary for Multifamily Housing Programs issued a memorandum setting forth two alternate ways for determining whether a material difference exists. This memorandum explained that a material difference would exist "whenever the adjusted Section 8 rent would exceed 120 percent times the sum of the comparable rent and the initial difference" or where (1) The adjusted Section 8 rent would exceed the correlated unassisted rent for comparable units by more than the initial difference for that unit type. -3-
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In the early 1980s, HUD began using "comparability studies" surveys of rents at comparable unassisted buildings to enforce the "overall limitation" in its various HAP contracts. This practice was challenged in court as violating the contracts. Attempting to resolve this litigation, Congress, in 1987, added the following sentence to section 1437f(c)(2)(C): "If the Secretary . . . does not complete and submit to the project owner a comparability study not later than 60 days before the anniversary date of the assistance contract under this section, the automatic annual adjustment factor shall be applied." Housing and Community Development Act of 1987, Pub. L. No. 100-242, § 142(c)(2)(B), 101 Stat. 1850 (1988), codified at 42 U.S.C. 1437f(c)(2)(C). But, litigation over the rent adjustment method continued, prompting Congress, in 1989, to enact Section 801 of the Reform Act (the Reform Act), Pub. L. No. 101-235, 103 Stat. 2057-2059 (codified at 42 U.S.C. 1437f(c)(2)(C) (Supp. II 1990) and 42 U.S.C. 1437f note (Supp. II 1990)). The Reform Act prescribed new procedures for calculating rent adjustments. Retrospectively, it required HUD to pay landlords an increased amount, above what the studies required HUD to pay under its interpretation of the contracts; prospectively, it established a limited role, under defined criteria, for HUD's future use of comparability studies. The Reform Act required HUD to promulgate "regulations for conducting comparability studies for projects where the Secretary has reason to believe that the application of the formula adjustments . . . would result in such material differences" between assisted and unassisted units, and to use those studies to establish a "modified annual adjustment factor" for a geographically smaller area. § 801(c), 103 Stat. 2058 (1989). The statute described, in detail, the methodology the Secretary was to use in conducting these studies. It also stated that if a modified adjustment factor could not be established or failed to eliminate material differences between rents at comparable assisted and unassisted units, the Secretary could employ another methodology "for conducting comparability studies in order to establish rents that are not materially different from rents charged for comparable unassisted units." Id. In keeping with those provisions, HUD promulgated regulations to govern the conduct and use of comparability studies to generate modified adjustment factors, and, in cases in which such factors were ineffective, to provide for a system of adjusting rents through comparability studies. See 24 C.F.R. § 888.301 et seq.. In 1993, the Supreme Court, in Cisneros v. Alpine Ridge Group, 508 U.S. 10 (1993), upheld the amendments to section 801 made by the Reform Act. Following Alpine Ridge, Congress remained concerned that subsidized rents were still higher than warranted. In response, it amended section 1437f(c)(2)(A) of Title 42 by adding the following language:
(2) The adjusted Section 8 rents would exceed the amount needed to `operate' comparable projects. An attachment to the memorandum set forth guidelines for determining the amount needed to operate comparable projects. -4-
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However, where the maximum monthly rent, for a unit in a new construction, substantial rehabilitation, or moderate rehabilitation project, to be adjusted using an annual adjustment factor exceeds the fair market rental for an existing dwelling unit in the market area, the Secretary shall adjust the rent only to the extent that the owner demonstrates that the adjusted rent would not exceed the rent for an unassisted unit of similar quality, type, and age in the same market area, as determined by the Secretary. The immediately foregoing sentence shall be effective only during fiscal year 1995. Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1995, Pub. L. No. 103-327, 108 Stat. 2298, 2315 (1994) ("the 1994 Act" or "1994 amendments"). The 1994 Act provided that the amendment "shall apply to all contracts for new construction, substantial rehabilitation, and moderate rehabilitation projects under which rents are adjusted under section 8(c)(2)(A) of [the United States Housing Act of 1937] by applying an annual adjustment factor." Id. Subsequent amendments cumulatively made the provision applicable to "fiscal year 1996 prior to April 26, 1996, and fiscal years 1997 and 1998, during fiscal year 1999 and thereafter."3 The 1994 Act made at least one other potentially significant change reducing the annual adjustment factor in situations where a given unit was occupied by the same tenant during a prior year. In this regard, the amended statute provided: Except for assistance under the certificate program, for any unit occupied by the same family at the time of the last annual rental adjustment, where the assistance contract provides for the adjustment of the maximum monthly rent by applying an annual adjustment factor and where the rent for a unit is otherwise eligible for an adjustment based on the full amount of the factor, 0.01 shall be subtracted from the amount of the factor, except that the factor shall not be reduced to less than 1.0. In the case of assistance under the certificate program, 0.01 shall be subtracted from the amount of the annual adjustment factor (except that the factor shall not be reduced to less than 1.0), and the adjusted rent shall not exceed the rent for a comparable unassisted unit of similar quality, type, and age in the market area. Pub. L. No. 103-327, 108 Stat. 2298 at 2315 (1994) (codified at 42 U.S.C. § 1437f(c)(2)(A)). As with the modification above, this "1-percent deduction" was originally applicable only during
See Pub.L. No. 105-33, § 2004, 111 Stat. 257 (1997); Pub. L. No. 105-65, § 201(C)(1), 111 Stat. 1364 (1997); Pub. L. No. 104-204, § 201(g), 110 Stat. 2893 (1996). -5-
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fiscal year 1995, but subsequently was extended to cover "fiscal year 1996 prior to April 26, 1996, and fiscal years 1997 and 1998, and during fiscal year 1999 and thereafter."4 On March 7, 1995, HUD issued Notice 95-12, by its terms designed "[t]o effect all applicable contracts with HAP anniversary dates from [March 7, 1995] to the end of Federal [fiscal year] 1995 (through September 30, 1995)." This directive prescribed, with exceptions not herein relevant If current project rents on a . . . contract (before the application of the AAF) are above the published [fair market rent] for the area then in order to receive a rent increase, the owner must submit, at least 60 days prior to the HAP contract anniversary date, form HUD 92273, Estimates of Market Rent by Comparison, . . . completed by a non-identity of interest, state certified, general appraiser, FOR EACH UNIT TYPE (e.g. 1BR, 2BR, etc.). This form must contain at least three examples of unassisted housing in the same market area of similar age, type and quality. Regarding the consequences of not filing a comparability study, the notice indicated If the owner fails to submit the information required by this Notice at least 60 days before the contract anniversary date, then the rent levels will not be adjusted on the contract anniversary date, rather the new rent levels will go into effect 60 days after receipt of the required information. However, if the owner fails to submit this information by the date of the FY 1996 HAP contract anniversary, then no increase will be granted for the FY 1995 contract year. At several other points, the notice reiterated the consequences of not filing a timely request for increase.5 According to the directive, if the owner demonstrated that comparable, unassisted rents were more than five percent over contract rents, HUD would increase contract rents to the lesser of: (i) contract rents adjusted according to the AAAF; or (ii) the comparable, unassisted rent plus the so-called "initial difference."6 Although Notice 95-12 expired, by its terms, on
See Pub.L. No. 105-33, § 2004, 111 Stat. 257 (1997); Pub. L. No. 105-65, § 201(C)(1), 111 Stat. 1364 (1997); Pub. L. No. 104-204, § 201(g), 110 Stat. 2893 (1996). For example, at another point, it stated that "[i]f an owner does not request an increase or fails to submit a request based on the guidelines in this chapter, then the rents will remain the same as the current contract rents, unmodified by HUD or the Contract Administrator." The directive gave several examples of how these rules should be implemented, including one in which the project was eligible to receive the AAAF based on the comparable and another in which the project was eligible only for the comparable rents. -66 5
4
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September 30, 1995, later notices reinstated and made permanent its provisions. See, e.g., HUD Notice 97-14 (March 17, 1997); HUD Notice 00-14 (Aug. 9, 2000).7 Except as noted below, CMHA last received rent adjustments based upon published AAAFs in 1994.8 CMHA took no action with regard to contract rent adjustments until 1999, when it requested payment of the past due annual rent increases that HUD failed to make after the 1994 contract year. CMHA first provided information regarding comparable unassisted units for Quarrytown on November 17, 2000, indicating that the sum of comparable rents plus the initial difference exceeded the 1994, $560 contract rent in every year from 1995 through 2000. On January 23, 2001, it filed complaint No. 01-46C in this court, seeking contract rent increases for Quarrytown for 1995 through 2000. On January 26, 2001, HUD retroactively increased Quarrytown's 1995 rents to $576, after determining that Notice 95-12 did not apply to 1995 for Quarrytown because of its effective date.
These notices all contain provisions that do not require HUD field offices to revisit rent increases based on AAAFs approved during periods that notices were not in effect. For example, Notice 95-12 stated: If the Field Office has already issued the rent increase approval letter and/or a new Rent Schedule implementing the [AAAF](s) for FY 1995, these rents will remain the approved rents regardless of whether or not they have been made effective at the property by the issuance date of the Notice. If a Field Office has approved the application of the AAF to contract rents, for FY 1995, the approved rents will not be reconsidered under the procedures of this Notice. Notably, while Notice 95-12 did not provide a procedure for waiving any of its requirements, subsequent notices appear to contain such a provision. For example, HUD Notice 97-14 indicated that "the provisions for comparability where gross project rents exceeded FMR and lower [AAAF]s for units with no-turnover" could be waived via "explicit approval of the Assistant Secretary of Housing FHA Commissioner." The following chart reflects the 1994 rents and compares them to the initial rents and "initial difference" for each property
Name Quarrytown Severance Ambleside Initial Contract Rent $310 $299 $298 Initial Difference $62 $61 $60 1994 Contract Rent $560 $572 $575
8
7
-7-
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As for Severance, CMHA first provided comparability information for that property on March 2, 2001, indicating that the sum of comparable rents plus the initial difference exceeded the 1994, $572 contract rent in every year from 1995 to 1997. On March 27, 2001, HUD retroactively increased the 1996 Severance rents to $582 after determining that Notice 95-12 did not apply to the property for 1996. On April 26, 2001, CMHA filed complaint No. 01-251C in this court, seeking contract rent increases for Severance for 1995 through 2000. On May 16, 2002, HUD increased Severance contract rents to $601 for 2000, and to $603 for 2001. Lastly, CMHA provided its first comparability study for the Ambleside property on May 15, 2001, indicating that the sum of comparable rents plus the initial difference did not exceed the 1994, $575 contract rent until 1997. On July 17, 2001, CMHA filed complaint No. 01-416C in this court, seeking contract rent increases for Ambleside for 1995 through 2001. On March 19, 2002, HUD retroactively increased 1996 Ambleside rents to $585, and on May 16, 2002, increased contract rents for Ambleside for 2000 to $604, and for 2001 to $606. On September 26, 2003, Cuyahoga filed an amended complaint with respect to the Ambleside property, seeking damages for 2001. Thus, in approximately the first half of 2001, CMHA filed three independent actions in this court one per project. On July 24, 2001, this court ordered the cases consolidated. Thereafter, the parties filed cross-motions for summary judgment. On September 22, 2003, this court concluded that plaintiff's rights under these contracts were repudiated when Congress, in 1994, amended the Housing Act to alter how rent subsidies were to be determined, which repudiation was exacerbated when HUD issued and then followed Notice 95-12. CMHA I, 57 Fed. Cl. at 762. The court, however, ruled that, based upon the pending motions, it was unable to resolve the damages to which plaintiff was entitled, stating: Finally, both parties would have this court press ahead and consider specifically what damages are owed CMHA. On brief, plaintiff proceeds from the notion that this court's rejection of defendant's unmistakability doctrine argument means that the 1994 amendments do not apply to it and that, instead, it is entitled to the adjustments owed under the original HAP contracts. For its part, defendant contends that the court should enter judgment in its favor to the extent that CMHA failed to timely demonstrate entitlement to contract rent increases under the 1994 amendments. At this point, both contentions seem wrong--this court does not hold that either the 1994 amendments or the 1995 HUD directive are inapplicable to CMHA, as would be the case, for example, were such amendments unconstitutional or the directive invalid; rather; it holds that the amendments and the directive ultimately effectuated a breach of plaintiff's HAP contracts. In the court's view, this means that plaintiff is entitled to whatever damages are appropriate, under the circumstances, on account of that breach. In theory, such damages may hinge on the extent of the breach here and likely will fall within the traditional categories of expectancy, reliance or restitution damages. As such, they may or may not track those damages that have been awarded in Winstar savings -8-
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and loan cases, such as LaSalle Talman Bank v. United States, 317 F.3d 1363 (Fed. Cir. 2003) and Bluebonnet Sav. Bank v. United States, 266 F.3d 1348 (Fed. Cir. 2001). To determine this, however, the court believes that additional briefing and, potentially, fact-finding is required. Accordingly, the court declines to award any damages at this time. CMHA I, 57 Fed. Cl. at 781. Subsequently, the parties filed cross-motions for partial summary judgment zeroing in on damages issues. Oral argument on those motions was held on June 18, 2004. Thereafter, the court ordered two rounds of supplemental briefing that addressed various issues.9 That briefing has now been completed. II. DISCUSSION
Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. RCFC 56; Hunt v. Cromartie, 526 U.S. 541, 549 (1999); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). CMHA essentially seeks two types of damages. First, it claims expectancy damages based upon HUD's failure to adjust its rents by application of the AAAFs subject to the overall limitation. Significantly, plaintiff contends these adjustments should be made: (i) without regard to the 1-percent deduction for units with no turnover, as required by 42 U.S.C. § 1437f(c)(2)(A), as amended by the 1994 Act; and (ii) employing an overall limitation equal to 120 percent of the sum of the comparable rents and the so-called "initial difference." Second, CMHA seeks restitution damages to cover the cost of the comparability studies it has submitted to HUD in connection with the requested annual adjustments. While defendant has little quarrel with the latter category of damages, it strenuously objects to the first. On the latter count, it remonstrates, inter alia, that expectancy damages are not recoverable here because plaintiff failed to comply with the new rent adjustment procedures set forth in the 1994 amendments and Notice 95-12. Defendant also asserts that, in calculating damages here, there is neither basis upon which to disregard the 1-percent deduction required by section 1437f(c)(2)(A), nor grounds to support plaintiff's limning of the overall limitation.
Specifically, the court ordered the parties to provide their views on four issues: (i) whether the repudiation of a contract by legislation results in a series of breaches or in a single breach marked, at the latest, by the time of filing suit; (ii) whether the specific provisions of legislation that repudiate a prior contract are enforceable in determining damages for a breach and, if so, under what circumstances; (iii) how damages are calculated where the breaching party, by virtue of his breach, puts himself in a position where he can no longer regulate the contract price under the terms of the original agreement; and (iv) whether the "material difference" threshold allegedly, 120 percent of the comparable rent plus initial difference is not only a ceiling that cannot be exceeded, but also a floor on the rent to which plaintiff is entitled. -9-
9
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A.
Did the One-Percent Rule in the 1994 Act Effectuate a Breach?
The first ruling herein dealt exclusively with liability issues; this second was to deal with damages. Yet, in its pending motion, CMHA elliptically argues for the first time in this case that the 1994 Act effectuated a breach by reducing the AAAFs by 1 percent "for any unit occupied by the same family at the time of the last annual rental adjustment." 42 U.S.C. § 1437f(c)(2)(A). It claims that this court's prior opinion "recognized that the [1994] Amendments were proposed to Congress by HUD and adopted by Congress as a way to save money on its HAP contracts" and asseverates that because the 1-percent deduction was part of this "moneysavings package," it also gave rise to a breach. But, the second proposition does not flow from the first that the 1-percent modification of the AAAF formula for occupied properties reduced program costs does not, ipso facto, mean that it was inconsistent with any of the provisions of the HAP contracts. In relevant terms, those contracts merely provide that "Automatic Adjustment Factors will be determined by the Government at least annually," and that "[s]uch Factors and the basis for their determination will be published in the Federal Register." Nothing in this language suggests that there will be a single, monolithic factor for all units at a given property or that Congress could not authorize HUD, in determining the AAAF for a given unit, to make a different adjustments for those in which no turnover had occurred. Accordingly, there is no indication that the statutory 1-percent deduction constituted the abrogation of any right or obligation established under the HAP contracts. Cf. Franconia, 61 Fed. Cl. at 732-33; CMHA I, 57 Fed. Cl. at 762. On this issue, this court need go no further.10 B. Expectancy Damages Based Upon the Failure to Make Adjustments
Plaintiff's primary claim is that it is entitled to expectancy damages corresponding to the rent adjustments it would have received but for the partial breach of its HAP contracts. "The general rule in common law breach of contract cases," the Federal Circuit has oft-stated, "is to award damages sufficient to place the injured party in as good a position as he or she would have been had the breaching party fully performed," San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557, 1562-63 (Fed. Cir. 1997), in short, to give the injured party "the benefits [it] expected to receive had the breach not occurred." Glendale Federal Bank FSB v. United States, 239 F.3d 1374, 1380 (Fed. Cir. 2001) (citing Restatement (Second) of Contracts, § CMHA arguably waived this argument by failing to raise it in its motion for summary judgment on liability issues. See Belgrave v. Pena, 254 F.3d 384, 386 (2d Cir. 2001). Indeed, even in its current briefs, plaintiff deals with this issue in a cursory fashion. But, plaintiff is not alone in belatedly raising new arguments regarding liability. While claiming that it is not seeking reconsideration of this court's prior liability ruling, defendant, nonetheless, argues that HUD could require plaintiff to provide comparability studies under a provision in the HAP contract that requires owners to "furnish such information and reports pertinent to the Contract as reasonably may be required from time to time by the Government." In the court's view, taken in the context of the entire contract, and particularly given the detailed adjustment provisions therein, there is no way that this clause could reasonably be construed to require owners to provide comparability studies as part of a revised adjustment regime. -1010
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344(1)(a)) (hereinafter "Restatement"); see also Franconia Assocs. v. United States, 61 Fed. Cl. 718, 746 (2004). Conversely, it is also axiomatic that "the non-breaching party should not be placed in a better position through the award of [expectancy] damages than if there had been no breach." Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003). As such, "[e]xpectation damages are recoverable provided they are `actually foreseen or reasonably foreseeable, are caused by the breach of the promisor, and are proved with reasonable certainty.'" National Australia Bank v. United States, 63 Fed. Cl. 352, 355 (2004) (quoting Bluebonnet, 266 F.3d at 1355). (1) Availability of Expectancy Damages
The above principles are undisputed. To facilitate resolution of the cross-motions, the parties also agree that: (i) any expectation damages recoverable here should be calculated by treating each contract year as giving rise to a separate breach; and (ii) to the extent expectation damages are allowable, the overall limitation should apply even though HUD did not prepare comparability studies during any of the relevant years and plaintiff supplied such studies later. The latter point represents a significant concession by CMHA, which, while seeking the equivalent of the rent adjustments, cedes that those adjustments remain subject to the overall limitation in the HAP contracts. Finally, defendant apparently neither contests that the damages plaintiff seeks in the form of increased rents were "reasonably foreseeable" nor that these damages can be proven with reasonable certainty, at least, once certain parameters (e.g., the overall limitation) are established. At this juncture, the parties part company, adopting widely divergent courses. In particular, they strenuously disagree as to whether expectation damages in the form of increased rents may be recovered for any of the years in which plaintiff did not provide a comparability study within the time periods set by Notice 95-12. Recall, that notice requires, at a minimum, that the request and study be provided within the relevant contract year.11 But, the required documents were not so provided for the years remaining at issue, leading defendant to rejoin that by virtue of its failure to comply timely with Notice 95-12, CMHA may not receive the damage equivalent of the rent increases it seeks via this litigation. In defendant's view, the rents in question were lost neither because of the passage of the 1994 amendments nor the adoption of Notice 95-12, but because plaintiff did not timely comply with the post-1994 regime for obtaining rent increases. This nonfeasance, defendant maintains, constitutes both an intervening cause, severing the chain of causation between the breaches and the lost increases, as well as a failure to mitigate damages. On both counts, it repeatedly stresses that the 1994 Act and Notice 95-12 (and the time limitations in the latter) are valid and fully apply to CMHA, despite the fact, of course, that these same authorities effectuated the breaches here. To apply to an entire contract year, a request for adjustment and supporting study must, under Notice 95-12, be supplied at least 60 days prior to the beginning of the contract year; no increase would forthcoming under the notice if the request was not received during the relevant contact year. -1111
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Defendant views this case as boiling down to a simple "fast-fish, loose-fish" distinction:12 without exception, either one submits a timely and complying request for a rent increase or can never receive that increase, either directly or in the form of damages. But, while defendant views this proposition as almost self-evident, it most certainly is not as was said of Melville's "Moby Dick," there is more here than a simple story about a fish. There is no real debate that the 1994 Act is the law of the land. But, that says nothing about whether plaintiff may recover expectation damages, for the issue here is not the validity of the 1994 Act, but how that statute impacts, if at all, within the established analytical framework governing the availability of expectation damages. Defendant would go further and ascribe to the statute an overarching impact one that transcends any of the specific prongs of the expectation damages analysis and overtrumps plaintiff's right to such damages based on its failure to comply with the new rent adjustment regime. But, in so contending, defendant seemingly dons blinders to a critical point, to wit, that expectation damages, by design, provide a claimant "the benefits [it] expected to receive had the breach not occurred," Glendale Federal Bank, 239 F.3d at 1380 (emphasis added); see also LaVan v. United States, 382 F.3d 1340, 1350 (Fed. Cir. 2004); Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 1308 (Fed. Cir. 2004) (quoting Restatement § 344 cmt.a) ("[c]ompensation of a party's expectation interest `attempt[s] to put him in as good a position as he would have been in had the contract been performed, that is, had there been no breach."). Logic suggests that, consistent with the theory of expectation damages, this court cannot afford controlling and preclusive effect to the very statutory provisions that triggered the breach. Defendant cites no case to the contrary and there is none. Certainly, no case involving a statutorily-triggered breach of contract has treated the offending statute as insulating the government from damages. To the contrary, in determining expectation damages, courts have disregarded the breaching provisions in determining, for example, what profits a plaintiff would have received but for the passage of the statute.13 Were the law otherwise, Congress could negate, with impunity, the inflation adjustment provisions in any government contract merely by adopting a moratorium on increases such a law would breach prior contracts, but assertedly not require the payment of damages. This scenario, if effective, would reduce the notion of having enforceable government contracts to a
12
See Herman Melville, Moby-Dick: or, the Whale ch. 89 (1851).
See, e.g., Comm. Fed. Bank v. United States, 59 Fed. Cl. 338, 350-51 (2004) (calculating expectation damages in Winstar-type case by estimating what plaintiff's profits would have been in the "but-for world" of the previously existing capital requirements); Coast Fed. Bank, FSB v. United States, 49 Fed. Cl. 53, 55 (2001) ("It is immaterial whether, for purposes of calculating plaintiff's damages by hypothesizing a "no breach" world that differs from the real world only by eliminating the breach, the resulting scenario is unrealistic. Any scenario that assumes that plaintiff's contract was not breached is in some measure unrealistic, since it assumes away all the events that led to that breach of contract."). -12-
13
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whimsy, unleashing the same sort of intense legal discomfort that led this court soundly to reject defendant's unmistakability defense. See CMHA I, 57 Fed. Cl. at 777-80; see also United States v. Winstar, 518 U.S. 839, 921-22 (1996) (Scalia, J., concurring) (noting that broad application of the unmistakability defense would render government contracts "illusory"). Although the circumstances sub judice are less startling, this case is fundamentally no different as with the moratorium, defendant seeks to invoke here provisions of a statute that the theory of expectation damages treats as nonexistent. The decisional law demonstrates that, for a statute to have the preclusive effect defendant desires, it must either bluntly withdraw the government's waiver of sovereign immunity, or more subtlely impact, in defendant's favor, one or more of the prongs of the legal algorithm governing expectation damages. The former is not the case here. Determining whether the latter is true requires the court to consider, ab ovo, whether defendant's invocation of the new adjustment regime presents either an issue of causation or one of mitigation. In Franconia, supra, this court confronted a similar question. There, it held that the enactment of two statutes, which permanently restricted the prepayment of certain Farmers' Home Administration loans, constituted a repudiation of prior loan agreements that contained unrestricted prepayment provisions. Franconia, 61 Fed. Cl. at 730-33. When this repudiation blossomed into a series of breaches, the obligors on the mortgages sought damages equal to the profits they allegedly lost when they could not prepay their mortgages and convert their housing complexes to private, commercial use. Yet, defendant claimed that these property owners only had themselves to blame that their failure to elect one or more of the economic incentives offered by Congress to encourage property owners to remain in the rural housing program constituted an intervening cause that precluded the owners from recovering the lost profits. Id. at 749-50. Unpersuaded, the court observed: While "in the workaday world, the conceptual distinctions between damage, 'duty' to minimize, mitigation, and proximate cause are frequently blurred," . . . the fact is these concepts have distinct purposes and definitions. In order to prove that losses were "proximately caused" by defendant's breach, plaintiffs need not show that they might have avoided or minimized such losses or that defendant's conduct was the "sole" cause of their damages. See Long Island Sav. Bank, FSB v. United States, 60 Fed. Cl. 80, 90 (2004); Westfed Holdings, 55 Fed. Cl. [544, 553 (2003)]. . . . Rather, they must only show that the breach was a "substantial factor" and that the damages flowed "inevitably and naturally" therefrom. Bluebonnet, 266 F.3d at 1356; Long Island, 60 Fed. Cl. at 90; Ramsey, 101 F. Supp. [353, 357 (Ct. Cl. 1951)]. Thus, plaintiffs need not show that each dollar claimed was entirely unaffected by outside events. Citizens, 59 Fed. Cl. [507, 514-15 (2004)]. By comparison, where instead the question presented involves an injured party's failure to act to lessen damages, the issue does not involve proximate causation, but rather mitigation. See Deere & Co. v. Reinhold, 2000 WL 486607 at *8 (E .D. Pa. Apr.24, 2000). As one leading commentator has summarized, "[a]lthough the injured party's own failure to avoid a loss may bar recovery for that loss, this is -13-
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not thought of as a consequence of a requirement of causation, but of a limitation under a 'mitigation' rule." III. E Allen Farnsworth, Farnsworth on Contracts (Farnsworth) § 12.1 at p. 149 (2d ed.1998); see also id. at § 12.12 at p. 228. Franconia, 61 Fed. Cl. at 750 (additional case citations omitted). It continued: Were these distinctions untrue, "the doctrine of mitigation of damages would lose much of its significance," Willems Indus. Inc. v. United States, 295 F.2d 822, 831 (Ct. Cl. 1961). Indeed, in every case, a breaching party could simply recast its mitigation defense in causation terms and thereby avoid the hurdles imposed by the established case law. Under this scenario, such a party would never be called upon affirmatively to plead, let alone prove, mitigation, and instead would benefit from a pervasive causation defense not subject, like mitigation, to the bounds of reasoned decisionmaking. Id. Cementing its views, the court concluded that "[t]he decisional law [thus] demonstrates that, as between the concepts of causation and mitigation, [defendant's] contentions sound only under the latter doctrine, the contours of which have been carefully charted by the courts to avoid placing exactly the sort of burdens on injured parties that defendant would assign here." Id. So it is here. For the same reasons as in Franconia, defendant's arguments sound in mitigation, not causation, and must be tested as such.14 Notably, apart from asserting that plaintiff timely should have availed itself of the new adjustment process, defendant neither contests that the breach was a "substantial factor" in plaintiff not receiving what otherwise would have been automatic rent adjustments, nor that the damages corresponding to the failure to receive those adjustments flowed "inevitably and naturally" from the breach. Bluebonnet, 266 F.3d at 1356; Long Island, 60 Fed. Cl. at 90; Ramsey v. United States, 101 F. Supp. 353, 357 (Ct. Cl. 1951). Stated in the affirmative, it appears that the causal connection between the breach and the loss of the additional rent has been "definitely established" as the increases would not have been lost "but for the breach." California Fed. Bank v. United States, 395 F.3d 1263, 1268 (Fed. Cir. 2005).15 The question that remains is whether plaintiff should have mitigated its damages by
See Globe Savings Bank, F.S.B. v. United States, 2005 WL 1023484 at * 18 (Fed. Cl. Apr. 29, 2005) (rejecting, following Franconia, the government's effort "to avoid the consequences of . . . [the] shift in the burden of proof" by "fram[ing] its arguments regarding mitigation in terms of causation and foreseeability"); see also Long Island, 60 Fed. Cl. at 93 (distinguishing between causation and mitigation). In California Federal, the Federal Circuit rejected the notion that a breach need only be a "substantial factor" contributing to a loss. 395 F.3d at 1267. But, a fuller reading of that opinion suggests that prior cases employing some forms of the "substantial factor" test are not necessarily erroneous. In fact, the Federal Circuit and the Court of Claims both have held that satisfaction of that test, in combination with other factors, can demonstrate causation. This was -1415
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seeking rent increases during the years in question using the new mechanism established by the 1994 Act and HUD Notice 95-12. On the latter issue, we espy familiar terra firma "a non-breaching party generally may not recover damages attributable to that party's failure to take reasonable, non-burdensome steps to avoid its loss." Koby v. United States, 53 Fed. Cl. 493, 496-97 (2002). Damages that the plaintiffs might have "avoided without undue risk, burden or humiliation" are hence not recoverable. Restatement § 350; see also Middleton v. United States, 175 Ct. Cl. 786, 792 (1966); Old Stone Corp. v. United States, 63 Fed. Cl. 65, 79 (2004); Franconia, 61 Fed. Cl. at 740. "Application of this principle," this court has stated, "requires the court to consider whether a reasonable person, acting in light of the known facts and circumstances, would have taken steps to avoid certain damages." Koby, 53 Fed. Cl. at 497. As this court explained in Franconia Whether or not the buyer's obligation to mitigate damages has been discharged depends on the reasonableness of its conduct. In this connection, reasonable
certainly true in Bluebonnet, supra, where the Federal Circuit affirmed a causation finding that this court had rendered in reliance upon a "substantial factor" test, stating The Court of Federal Claims properly determined that the breach of the forbearances was a substantial factor in Bluebonnet's increased financing costs because it forced Bluebonnet to raise capital at a time when FIRREA had made investments in thrifts riskier and considerably less attractive. The government's various arguments regarding alternative causes for the damages lack merit. 266 F.3d at 1356, rev'g, on other grounds, 47 Fed. Cl. 156, 173 (2000); see also Energy Capital Corp. v. United States, 302 F.3d 1314, 1328-29 (Fed. Cir. 2002) (affirming award of expectation damages in which this court had relied, in part, on the substantial factor test); Arthur L. Corbin, 5 Corbin on Contracts § 999 at 25 (1964) (discussing the substantial factor test). Indeed, in Franconia, this court did not find causation based solely upon the "substantial factor" test, but also concluded that the damages flowed "inevitably and naturally" from the breach. 61 Fed. Cl. at 750. Moreover, in California Federal, the Federal Circuit made clear that its holding should not be read "to say that the breach must be the sole factor or sole cause in the loss of profits," stating further that "[t]he existence of other factors operating in confluence with the breach will not necessarily preclude recovery based on the breach." 395 F.3d at 1268; see also Westfed Holdings, Inc. v. United States, 2005 WL 1119654 at *6 (Fed. Cir. May 12, 2005). At least two subsequent decisions of this court have recognized that some of the differences in the decisional law on this count may be attributable to different formulations of the "substantial factor" test, noting that the standard mapped by California Federal is essentially the same as the multifaceted approach traditionally employed by this court in considering causation issues. See, e.g., Precision Pine & Timber, Inc. v. United States, 64 Fed. Cl. 165, 166 (2005); Scott Timber Co. v. United States, 64 Fed. Cl. 130, 138 n.2 (2005); see also Alaska Pulp Co. v. United States, 59 Fed. Cl. 400, 414 (2004). -15-
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conduct is to be determined from all the facts and circumstances of each case, and must be judged in the light of one viewing the situation at the time the problem was presented. Where a choice has been required between two reasonable courses, the person whose wrong forced the choice cannot complain that one rather than the other was chosen. 61 Fed. Cl. at 741 (quoting In re Kellett Aircraft Corp., 186 F.2d 197, 198 (3rd Cir.1950)); see also Beckman Cotton Co. v. First Nat'l Bank of Atlanta, 666 F.2d 181, 184 (5th Cir.1982); First Nationwide Bank v. United States, 56 Fed. Cl. 438, 444 (2003); Tampa Elec. Co. v. Nashville Coal Co., 214 F.Supp. 647, 652 (M. D. Tenn.1963). "The rule of mitigation of damages may not be invoked by a contract breaker as a basis for hypercritical examination of the conduct of the injured party, or merely for the purpose of showing that the injured person might have taken steps which seemed wiser or would have been more advantageous to the defaulter." In re Kellett Aircraft, 186 F.2d at 198-99; see also Apex Min. Co. v. Chicago Copper & Chem. Co., 306 F.2d 725, 731 (8th Cir.1962); Franconia, 61 Fed. Cl. at 741. Rather, the burden is on the breaching party to show that reasonable possibilities for mitigation existed and were ignored. See T.C. Bateson Construction Co. v. United States, 319 F.2d 135, 160 (Ct. Cl. 1963); Franconia, 61 Fed. Cl. at 741; Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544, 561-62 (2003); Robinson v. United States, 50 Fed. Cl. 368, 370 (2001). Burnishing this "undue risk and expense" standard, Williston on Contracts provides that "almost any risk of considerable loss to the injured person if he attempts to mitigate damages should be considered undue." 11 Samuel Williston, A Treatise on the Law of Contracts § 1353 (3d ed.1968); see also Brazos Electric Power Coop., Inc. v. United States, 52 Fed. Cl. 121, 129 (2002). While reasonable cost-avoiding steps include affirmative efforts to make substitute arrangements compensating for the lack of contract performance, such arrangements need not be entered into if they would expose the party to undue risk or significantly compromise its interests. See Restatement, § 350 cmts. c & g; see also Westamerica Mortgage Co. v. First Nationwide Bank, 1988 WL 76377 at *5 (D.Colo. Jul.15, 1988). Thus, an injured party is not expected to "`exalt the interests of the defaulter to his own probable detriment.'" Koby, 53 Fed. Cl. at 497 (quoting In re Kellett Aircraft, 186 F.2d at 199); see also Contempo Design, Inc. v. Chicago and N.E. Ill. Dist. Council of Carpenters, 226 F.3d 535, 554-55 (7th Cir. 2000), cert. denied, 531 U.S. 1078 (2001); Franconia, 61 Fed. Cl. at 741; John D. Calamari & Joseph M. Perillo, The Law of Contracts § 14-15 (3d ed.1987). Accordingly, courts have been reluctant to require parties, under the duty to mitigate, to deal further with the breaching party, especially if the breacher's alternative terms differ substantially from those of the original contract. Stanspec Corp. v. Jelco, Inc., 464 F.2d 1184, 1187 (10th Cir. 1972); Campfield v. Sauer, 189 F. 576, 579 (6th Cir. 1911); Franconia, 61 Fed. Cl. at 741; Koby, 53 Fed.Cl. at 497.16 In particular, a See also Cain v. Grosshans & Petersen, Inc., 196 Kan. 497, 413 P.2d 98, 102 (1966) ("[A]n innocent party is not [automatically] required to execute a less advantageous contract with one who has already welshed on his agreement."); Coppola v. Marden, Orth & Hastings Co., 282 Ill. 281, 118 N.E. 499, 500 (1917) (purchaser has no duty to pay in cash when credit terms are -1616
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plaintiff is not required to mitigate losses by "accepting an arrangement with the breaching party made conditional on the plaintiff's surrender of its rights under the repudiated contract." Brazos, 52 Fed. Cl. at 129; see also Teradyne, Inc. v. Teledyne Indus., Inc., 676 F.2d 865, 870 (1st Cir. 1982); Restatement, § 350, cmt. e. Would a reasonable person, acting in like circumstances, have sought increases under the revised mechanism adopted by Congress and implemented by HUD? And, how quickly would they have done so? Certainly, even a casual observer might readily draw parallels between this case and Franconia and Koby in the latter cases, defendant's mitigation arguments failed. Like CMHA, the plaintiffs in Franconia and Koby cases were offered less desirable, alternative transactions by the same party that had breached their original contracts the Federal government and they declined. See Franconia, 61 Fed. Cl. at 742-45 ; Koby, 53 Fed. Cl. at 498. Ironically, in Franconia, the plaintiffs' hesitancy to deal further with the government was deemed reasonable based not only upon Congress' twice repudiating their contracts, but also its repudiation of a variety of contracts under other Federal housing programs including those at issue here. Franconia, 61 Fed. Cl. at 742 ("During this same general period, Congress also saw fit to alter other low-income housing contracts, limiting the prepayment provisions in some HUD agreements and modifying the rent increase provisions in others."). In the case sub judice, the situation is the reverse and CMHA seemingly also was entitled to measure its response to the new rent adjustment regime by taking into account how HUD had performed or not under its other housing contracts. Finally, in Franconia, as may be the case here, there were issues as to how well balanced the alternative transactions offered by Congress were whether they could fairly compensate the property owners, yet still effectuate Congress' strong desire to reduce program outlays. But, Koby and Franconia were decided only after a full exploration and explication of the evidence surrounding the mitigation issue. In this case, discovery has not yet occurred. An armada of factual questions lurk over the horizon. Among them is whether given the cost and burdens of conducting the comparability studies, and without assurances that cost of those studies would be reimbursed or that significant increases would flow therefrom plaintiff reasonably delayed performing and submitting such studies while apparently contemplating whether to sue. Also relevant is whether plaintiff reasonably hesitated to make requests under the new regime, concerned that its compliance with that regime would be viewed by HUD, defendant and potentially this court as waiving its breach claims. While defendant complains that CMHA should not have hesitated to embrace the new adjustment regime, it has aggressively pursued waiver arguments in other cases, when a party aggrieved by a government breach has elected to proceed with performance. See, e.g., Westfed Holdings, Inc. v. United States, 2005
material part of the contract); Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward A General Theory of Contractual Obligation, 69 Va. L.Rev. 967, 993 n. 57 (1983). -17-
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WL 1119654 (Fed. Cir. May 12, 2005) (rejecting government's assertion of waiver doctrine).17 Seemingly, defendant cannot have it both ways to urge conduct in this case that it would seek to penalize elsewhere. And, of course, these and other issues must be judged not from damning hindsight, but rather "`in the light of one viewing the situation at the time the problem was presented.'" Franconia, 61 Fed. Cl. at 741 (quoting In re Kellett Aircraft Corp., 186 F.2d 197, 198 (3d Cir. 1950)). Ultimately, however, while both Franconia and Koby suggest that defendant will face rough waters in proving that plaintiff should have readily accepted the alternate adjustment mechanism, that issue must be resolved based only upon a full evidentiary record. Left unresolved by this approach is whether the timing limitations of HUD Notice 95-12 are valid. Under the mitigation approach, the court need not reach the issue the question, rather, is whether plaintiff acted reasonably in not filing its requests and studies within the time periods prescribed by the notice and its successors. Contrary to defendant's importunings, to approach the issue in this fashion is not effectively to grant plaintiff a perpetual license to ignore the notice requirements. Assuming arguendo those requirements are valid, plaintiff must comply with them if it wishes to receive rent increases in the ordinary course; if it chooses instead to litigate, it will face a mitigation defense which stature will only grow over time. This will be so because even if CMHA's failure to comply with the new regime is deemed reasonable in this case, there is no assurance that, with the passage of time and the clarification of its rights, its further refusal to comply will be deemed reasonable in futuro. Plaintiff's actions in filing requests for increases under the new regime prior to filing these lawsuits albeit in defendant's view, belatedly suggest that it understands this. At all events, this court perceives no reason why the breaching procedural rules adopted by HUD should fare any better than breaching statutes enacted by Congress in accordance with the decisional law, neither should be given effect in calculating expectation damages, except, of course, in evaluating mitigation. (2) The Overall Limitation
The parties next vigorously disagree as to the meaning of the overall limitation contained in the HAP contracts, an issue that significantly impacts the amount of rents recoverable. Recall, section 1.8d of those contracts defines what is denoted as an "overall limitation," stating that "[n]otwithstanding 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." As noted previously, this limitation closely
17
Arguing that CMHA did not act reasonably, defendant harps that "Cuyahoga's failure to submit comparability studies in a timely manner has resulted in complex and time-consuming litigation that might not have been necessary had it submitted its studies in time." One might note that this litigation also would have been unnecessary had defendant not repudiated the HAP contracts and forced plaintiff to litigate not only that question, but its entitlement to the costs of the relevant comparability studies. Notably, defendant did not concede that the latter costs were recoverable (and then, only in part) until it briefed the pending motions. -18-
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tracks the 1937 Housing Act, which provides that "[a]djustments in the maximum rents," whether based on market surveys or on a reasonable formula, "shall not result in material differences" between Section 8 rents and the rents for comparable housing on the private market. 42 U.S.C. § 1437f(c)(2)(C). Similar language has long been incorporated in HUD's regulations. See 24 C.F.R. § 880.609(c); see also 40 Fed. Reg. 18,687 (1975) (promulgating the original version of this regulation, 24 C.F.R. § 880.110(d)). Unfortunately, these sources provide little guidance as to what is meant by a "material difference," leaving the parties room to dispute, for damage calculation purposes, whether a material difference exists between any of the adjusted rents at issue here and those charged for comparable unassisted units. a. "Material Difference"
While judicial constructions of the "overall limitation" language abound, no case has addressed the precise question at hand. As defendant notes, the Supreme Court has made clear that the contract language particularly, the phrase "as determined by the Government" as well as the underlying statute, affords HUD discretion both in comparing the rents of assisted and unassisted units and in determining "whether there exist material differences between the rents charged for assisted and comparable unassisted units." Alpine Ridge, 508 U.S. at 21; see also Fed. Housing Partners IV v. Cisneros, 55 F.3d 362, 368 (8th Cir. 1995) (discussing this discretion); Park Village (Park Village II), 32 Fed. Cl. 441, 447 (1994) ("Hence, the overall limitation grants HUD discretion in determining which units are comparable, what rents are charged for those comparable units, and whether AAAF-based adjustments would result in differences between assisted and comparable unassisted rents that are `material.'"). Owing to this grant of discretion, HUD was authorized to adopt, and apply within the context of the HAP contracts, a reasonable interpretation of the "material difference" requirement that is consistent with the Housing Act. See Chevron U.S.A. v. National Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984); Morton v. Ruiz, 415 U.S. 199, 231 (1974) ("The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress."). One of HUD's earliest constructions of the overall limitation occurred in a 1986 memorandum from the Office of the Assistant Secretary for Housing to HUD field offices. This memorandum sets forth two ways for determining whether a difference between an adjusted Section 8 rent and comparable rents is "material." First, it indicates that "[a] material difference exists whenever the adjusted Section 8 rent would exceed 120 percent times the sum of the comparable rent and the initial difference." Second, it states So long as the adjusted Section 8 rent would NOT exceed 120 percent times the sum of the comparable rent and the initial difference, the difference between a Section 8 rent and a correlated unassisted rent is "material" only if BOTH of the following conditions are met.
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1.
The adjusted Section 8 rent would exceed the correlated unassisted rent for comparable units by more than the initial difference for that unit type. . . . [and] The adjusted Section 8 rents would exceed the amount needed to "operate" comparable projects.
2.
(Emphasis in original). Under the latter formulation, a material difference could exist even if the adjusted rent did not exceed 120 percent times the sum of the comparable rent and the initial difference. Indeed, if the adjusted rent exceeded the amount necessary to operate a comparable project, a difference could be "material" simply because the adjusted rent exceeded the comparable rent plus the initial difference. In 1992, HUD proposed a regulation that took a somewhat different tack. That regulation stated that "[a] material difference between the assisted and comparable unassisted rent is defined as a dollar amount equal to five percent of the comparable rent plus one dollar, or the initial difference plus one dollar, whichever is greater." 57 Fed. Reg. 49,120, 49,125 (proposed Oct. 29, 1992) (to have been codified at 24 C.F.R. § 888.205(c)(1)). But, this regulation was never adopted, perhaps overtaken by the passage of the 1994 amendments. To effectuate the latter amendments, HUD instead issued Notice 95-12, in which it employed yet another formulation of the "material difference," albeit without specifically mentioning the phrase. There, it stated: Once the initial difference is determined for each unit type, . . . , it should be added on to the comparable rent for each unit type to determine what is the maximum permissible rent level allowed for each unit. This will be referred to as the Adjusted Comparable Rent. This rent level will then be compared to the rent level adjusted by the Table One [AAAF], for each unit type. The lower of the two rent levels will become the new effective rents (unless this would require a rent reduction, then the current contract rent level will be maintained). This last formulation echoes the 1986 memorandum in concluding that a "material" difference exists provided there is any difference between the adjusted rent and the sum of the comparable rent plus the initial difference; it differs, however, significantly from the 1992 proposed regulation which, at a minimum, treated a difference of five percent of the comparable rent as being material. Invoking this 1995 notice, defendant argues that a material difference exists under the HAP contracts if the adjusted rent would exceed the comparable rent plus the initial difference. Under this formulation, the material difference corresponds to the initial difference the addition of the initial difference to the comparable rent is presumed to result in a figure materially different than the comparable rents. By comparison, plaintiff asseverates that there must be a material difference beyond that attributable to the initial difference that the contract and the statute anticipate that a material difference would arise only if the adjusted rent exceeded the -20-
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product of the sum of the comparable rent plus the initial difference times some other factor creating a material distinction. Citing various authorities, plaintiff asserts that the latter factor is 1.2, that is, that a material difference exists only if the adjusted rent exceeds the sum of the comparable rent plus the initial difference by 20 percent or more.18 Where the initial difference is significant, defendant's construction of the contract and the underlying statute seems, at least at first blush, reasonable. After all, neither the contract nor the statute requires that there be a material difference between the adjusted rent and the sum of the comparable rent plus the initial difference; rather, by their terms, both require merely that the adjustment "not result in material differences between the rents charged for assisted and comparable unassisted units." Defendant's construction of the overall limitation works as long as the "initial difference" is sufficiently large so that its addition to the comparable rents results in a sum materially greater than the comparable rents themselves. But, what if the facts are otherwise, that is, if the initial difference is de minimis or nonexistent? Then, defendant's formulation of the "overall limitation" collapses, yielding a limitation that is not materially greater than the comparable rents, thereby seemingly violating both the contracts and the statute. Indeed, where there is no initial difference, HUD's notion of materiality evaporates in a puff even under the most strained definition of the term, one simply cannot talk about a "material" difference of zero. HUD apparently recognized this in crafting the 1992 proposed regulation, which stated that the material difference would be the "greater" of the "initial difference plus one dollar" or "five percent of the comparable rent plus one dollar." Under this formulation, the material difference could never fall below "five percent of the comparable rent plus on