United States District Court - NHLP



United States District Court

District of Minnesota

|Albany Apartments Tenants' Association (AATA), ) Julietta Austing, Elaine |Civil Action No.__________ |

|Schleutter, Evelyn ) | |

|Leuthmers, Melanie A. Doll, Trevor Zimmerman, ) | |

|Kristin Pendzimas, Angela Ramsey, Nicole Gilsrud, ) | |

|Diane Pendzimas, Julio Cesar de Dios, Jose ) | |

|Cardenas Romero, Patricio Guzman, Roy Kranz Jr., ) and Brent LaVoi, ) | |

|) | |

| Plaintiffs, ) | |

| ) | |

|v. ) | |

| ) | COMPLAINT |

|Ann Venneman, in her official capacity as Secretary ) | |

|of the United States Department of Agriculture, ) | |

|and Infinity Holdahl-Albany LLC, a Minnesota ) | |

|limited liability company, ) | |

| ) | |

| Defendants. ) | |

I. INTRODUCTION

1. Plaintiffs bring this action to challenge the failure of the defendants to maintain restrictions which will keep plaintiffs' apartments affordable, as required by federal law. Plaintiffs reside in the Albany Apartments, a 24 unit apartment building in Albany, Minnesota, which was subject to rent restrictions to keep the units affordable until defendants terminated the restrictions in April 2001.

2. Under the Rural Housing Service (RHS) Section 515 program, the owners of the Albany Apartments received a subsidy on the interest rate on their 40 year mortgage, in return for defendant owners' agreement to maintain their units as affordable for the full term of the mortgage, which would have expired in 2017. At least as of 1997, the owners began expressing interest in removing the Albany Apartments from the Section 515 program and converting the units to market rate rents. However, Congress had enacted an elaborate statutory and regulatory process designed to restrict owner rights to prepay their mortgage and escape the program, and to provide protections to tenants from resulting rent increases. 42 USC § 1472(c). Rather then apply to Rural Housing Service and submit itself to the prepayment application process, however, the owners defaulted on their mortgage. This led to a decision by Rural Housing Service to accelerate the remaining balance on the Section 515 loan. In response, the owners paid off the mortgage in full on April 10, 2001, and removed the property from the Section 515 program. Because the owner was prepaying the mortgage in response to a notice of acceleration rather than a prepayment application, RHS permitted the owner to escape the program without placing any restrictions on rents to protect tenants, in violation of 42 USC § 1472(c), 42 USC § 1471(g), 5 USC § 706, and the Equal Protection clause of the Fifth Amendment to the United States Constitution

3. As a result, as of October 1, 2001, tenants whose residency precedes the owner's exit from the Section 515 program face huge rent increases, ranging from 42% to 1233%. Tenants who have moved in since that time are paying substantially more than they would have paid if the restrictions were in place. Many of the plaintiffs are very low income and will face either substantial hardship or displacement as the result of the loss of these rent restrictions. Several have lost rent subsidies because of the prepayment. Plaintiffs seek declaratory and injunctive relief to provide for the imposition of statutory protections to which they are entitled under the prepayment process, and damages or equitable restitution for any excess rent paid.

II. PARTIES

4. Plaintiff Albany Apartments Tenants' Association (AATA) is an association of tenants in the Albany Apartments, formed in response to the loss of affordability protections for their apartments. The AATA represents the interests of current and future tenants, in order to preserve the affordability and physical condition of their members' units. Defendants' actions have harmed both AATA as an organization and its members.

5. Plaintiff Julietta Austing has resided in a one bedroom apartment at the project since 1993. Upon prepayment, her Rental Assistance (RA) was terminated so she now faces a rent increase from $30 per month to $400 per month, a 1233% increase.

6. Plaintiff Elaine Schleutter has resided in her two bedroom apartment since January 1983. She also saw her RA terminated as of the owner's prepayment, and is now faced with a rent increase from $176 per month to $425 per month, a 141% increase.

7. Plaintiff Evelyn Leuthmers has lived in the project since 1991. She also received RA which has since been terminated. Her rent is increasing from $236 per month to $420 per month, a 78% increase.

8. Plaintiff Melanie A. Doll has resided at the Albany Apartment since 1996. Her rent is increasing from $287 per month to $425 per month, a 48% increase.

9. Plaintiff Trevor Zimmerman and Kristin Pendzimas shared an apartment at the Albany Apartments since August 2000 when they moved in. Their rent is increasing from $301 per month to $425 per month, a 41% increase.

10. Plaintiff Angela Ramsey moved into the Albany Apartments on July 15, 2000. Her rent is increasing from $301 per month to $425 per month, a 41% increase.

11. Plaintiff Nicole Gilsrud moved into the Albany Apartments in July 2001, after the prepayment, and has been paying a monthly rent of $425 out of a total income of $550 per month since that time.

12. Plaintiff Diane Pendzimas moved into the Albany Apartments just two weeks after the prepayment. Since that time, she has been paying rent of $425 per month out of a total monthly income of $537.

13. Plaintiff Julio Cesar de Dios and plaintiff Jose Cardenas Romero moved into the Albany Apartments in August 2001 and have been paying $425 per month.

14. Plaintiff Patricio Guzman moved into the Albany Apartments in May 2001 and has been paying $425 per month.

15. Plaintiff Roy Kranz Jr. moved into the Albany Apartments in August 2001 and has been paying rent of $425 per month since that time.

16. Plaintiff Brent LaVoi moved into the Albany Apartments three weeks after the prepayment, and has been paying rent of $425 per month since that time.

17. Defendant Ann Venneman is Secretary of the United States Department of Agriculture (USDA) and is sued in her official capacity. She is responsible for ensuring USDA's compliance with the laws of the United States, including the Rural Housing Service (RHS) administration of the Section 515 program preservation statute.

18. Defendant Infinity Holdahl-Albany LLC, is a Minnesota limited liability company and the current owner of the Albany Apartments.

III. FEDERAL JURISDICTION

19. This court has jurisdiction over plaintiffs' claims pursuant to 28 USC §§ 1331 and 1346. This action is authorized against the federal defendants by 5 USC § 702. Declaratory relief is authorized by 28 USC §§ 2201 and 2202. To the extent sovereign immunity is applicable to defendant USDA, it has been waived by virtue of 5 USC § 702.

IV. STATUTORY FRAMEWORK

20. The Rural Housing Service (RHS), formerly known as the Farmer's Home Administration (FmHA), is a division of the Department of Agriculture, and responsible for the administration of the Section 515 Multifamily Rental Housing Program. 42 USC § 1485. Pursuant to the Section 515 program, RHS provides mortgage loans for terms up to 50 years to encourage the development of rental housing for low and moderate income households. 42 USC § 1485. Under the Interest Credit Plan II Program, the private owners of the Section 515 projects also receive subsidies that reduce the effective interest rate on their mortgage to 1%. 42 USC § 1490(a)(1)B. In return, the owner is obligated to maintain rents at levels no higher then necessary to cover the cost of the debt service, a limited return, and the monthly operations of the project. The owner must limit occupancy to low and moderate income households.

21. Although the rents produced by the Interest Credit Program typically run substantially below market, these rents are often still not low enough to be affordable for the lowest income households in rural communities. Therefore, many Section 515 projects also receive project-based rent subsidies through the RHS Rental Assistance Program (RA). Under the Rental Assistance Program, low income households pay rent equal to no more than 30% of their income. RA ceases upon prepayment or termination of the mortgage.

22. Originally, no restrictions existed on the rights of Section 515 project owners to prepay their mortgages, and escape the program. Responding to increasing concern that owner prepayment would result in many projects converting to market rate rents and the negative effects on low income persons resulting from such conversion, Congress enacted detailed legislation in 1987 and 1992 to preserve Section 515 projects as affordable housing. 42 USC § 1472(c). Although at various times prepayment restrictions have varied depending on whether the project was initiated before December 21, 1979, or after, since 1992 the preservation statute has subjected both pre-79 and post-79 projects to largely the same restrictions and tenant protections (post-1989 projects cannot prepay).

23. Before an owner of either a pre-79 or post-79 project may prepay the mortgage and exit the Section 515 program, RHS must determine if the project is still needed as low income housing, and if prepayment would materially affect housing opportunities for minorities. § 1965.215. Depending on the findings that it makes, RHS must then advise the owner of the restrictions it will place on the owner's prepayment of the mortgage. 7 CFR § 1965.213.

24. If the housing is still needed as low income housing, but minority housing opportunities will not be affected by prepayment, the owner will be permitted to prepay but must agree to the imposition of use restrictions which will require the owner to protect all current tenants from displacement by retaining the same rent limitations and other tenants' rights that existed in the Section 515 program as long as such tenants choose to remain in the project. § 1965.215(c)(1)(ii), RD AN No. 3633 (4-10-01). If RHS determines that the housing is needed and that minority housing opportunities will be affected by prepayment, more elaborate protections are required. § 1965.215(c)(1)(i), RD AN No. 3633 (4-10-01). Both current and future tenants are provided the same protections they would have received if the project remained in the Section 515 program, and the owner will be obligated to offer the project for sale to nonprofit or public agencies who would intend to keep the project affordable for the long term.

25. In order to implement these restrictions, owners must agree to the filing of restrictive use covenants against the property and the execution of a Restrictive-Use Agreement. See Exhibits to Subpart E following § 1965.250. Rents, other charges, and conditions of occupying will be set so that the effects will not differ from what they would have been had the project remained in the Section 515 program. See Exhibit A-4 to Subpt. E.

26. Other Section 515 program requirements are to remain in effect to protect tenants as well, such as the monetary limits set for security deposits, 7 CFR Pt. 1930, Subpt. C, Exh. B, VIII., H, and the substantial noncompliance and good cause requirements necessary for a termination and eviction. 7 CFR Pt. 1930, Subpt. C, Exh. B, XIV, A.

. 27. In the event an owner defaults on his obligations with RHS under the mortgage, RHS typically issues a Notice of Acceleration, declaring that the balance of the mortgage loan becomes due and payable within 30 days, or RHS will foreclose on the mortgage. 7 CFR § 1955.15(d)(2). In some instances, owners then pay off the remaining mortgage debt within the 30 days, thus prepaying their mortgage and exiting the Section 515 program.

28. For some time, RHS has recognized that this structure would allow owners to avoid the prepayment application process and its restrictions and escape the program unrestricted. In its 1988 Interim rule, FmHA provided for the attachment of restrictions to a prepayment in response to acceleration of the account. 7 CFR § 1965.90(d)(9). In its 1992 Final Rule, FmHA acknowledged the risk that an owner could intentionally circumvent the prepayment process by intentionally defaulting, but then proceeded to protect tenants by attaching restrictions in pre-79 projects only if the owner had initiated a prepayment application within the preceding year. 58 Fed Reg. 38931 (7-21-93); 7 CFR § 1965.223(a). In addition, in an Administrative Notice adopted April 10, 2001, RHS directs its state officers to consider the possibility the borrower is forcing an acceleration to circumvent the prepayment process. RD AN No. 3633 (4-10-01).

29. In its current regulations, RHS treats prepayment in response to acceleration as a prepayment under the statute. However, RHS imposes restrictions on prepayment in response to acceleration differently depending on whether the project is a pre-79 project or a post-79 project. 7 CFR 1965.223(a). In the case of a post-79 project, the regulation provides that any loan prepaid in response to acceleration will be required to have the appropriate restrictive use language inserted in the deed of release or satisfaction, as appropriate upon the advice of the Office of General Counsel. In the case of a pre-79 project, however, restrictions will only be imposed if the payment occurs within one year after the borrower had initiated a request to prepay the loan. This differential treatment occurs in the regulations for pre-79 and post-79 projects despite the fact that the statutory prepayment process applies in the same way to both pre-79 and post-79 projects.

30. In the instance where an owner prepays his loan in response to acceleration, there are two other limited benefits that RHS provides to tenants. RHS will provide Letters of Priority Entitlement (LOPE), which allow tenants who feel they cannot stay and pay the increased rent to obtain a priority for vacant units in other RHS properties in the area. § 1965.215(e)(4). In addition, RHS imposes upon the owner the obligation to extend current leases for 180 days. 7 CFR § 1955.15(d)(2)(v). However, in the absence of restrictive covenants, owners are free to increase the rent to any level after 180 days. In addition, prepayments result in the termination of RA by RHS, meaning the lowest income tenants lose their rent subsidies and face the largest rent increases.

31. RHS is obligated to administer programs such as the Section 515 program "consistent with program goals and objectives, so that the involuntary displacement of families and businesses is avoided." 42 USC § 1471(g).

IV. FACTS

32. Albany Apartments, formerly named the DeWolf Apartments, is a 24 unit apartment complex in Albany, MN, that was built in 1977 with a loan provided by the Farmers Home Administration pursuant to the Section 515 Program (a "pre-79" project). This development is covered by the RHS Interest Credit Plan II program, so that the original owner's mortgage interest rate was subsidized, to an effective interest rate of 1%, in order to obligate and enable the owner to charge lower rents for low and moderate income tenants.

33. In addition to offering below market rate rents for eligible tenants, this development also received Rental Assistance (RA) throughout most of its history with the number of units receiving RA varying between 24 units and 6 units at any given time, depending upon demand.

34. In recent years, RHS documented repeated instances in which the owners did not comply with RHS regulations. In 1999, the owners transferred the property to new ownership, through a substitution of partners, with the announced intention to provide "more effective management". However, even after the transfer, RHS continued to document repeated rule violations by the owner, particularly for matters completely within the owners' control, such as complying with paperwork requirements and necessary certifications.

35. By late 2000, RHS was preparing to declare the owner in default under the mortgage and to issue a Notice of Acceleration of the loan. At that time, RHS suspected the owner, a partnership known as DeWolf Apartments, may have been deliberately attempting to circumvent the prepayment process by provoking a Notice of Acceleration, which would allow it to prepay without restrictions. However, on January 25, 2001, RHS proceeded anyway and issued a Notice of Acceleration to the Albany Apartments ownership, declaring that the remaining balance of the mortgage would have to be paid within 30 days or RHS would initiate foreclosure.

36. Upon information and belief, the owners exercised their appeal rights to effectively extend the deadline for prepayment of their mortgage. On April 10, 2001, the owners paid off their mortgage balance and were released by RHS from the Section 515 program. On that same day, the owners, DeWolf Apartments partnership, conveyed its interest in the project to defendant Infinity Holdahl-Albany LLC. The ownership at least partially overlapped, as the four partners in the DeWolf Apartments were Robert Yeager, Olaf Holdahl, Stephen R. Upgren, and Barbara A. Lundberg (general partner), while the two members of defendant Infinity Holdahl-Albany LLC listed on the mortgage are Barbara Lundberg and Olaf Holdahl.

37. The only restriction imposed by the agency upon the owner's prepayment was the imposition of a requirement that current leases be extended 180 days from the date of the prepayment. The only other action taken by RHS to protect the tenants was the issuance of Letters of Priority Entitlement (LOPE) for admission to other RHS projects in the area around Albany.

38. No restrictive covenants were imposed upon defendant owner, leaving the owner free to charge market rate rents as of October 1, 2001. All Rental Assistance (RA) was terminated as well, meaning six tenants lost the benefit of that subsidy at the Albany Apartments. The owner promptly issued a notice increasing rents effective October 1. The rent on many of the two bedroom units has now increased from $301 per month to $425 per month, a 42% increase. For others, the increase has been even greater.

39. Had RHS complied with the law, RHS would have had to make a determination as to whether the Albany Apartments were still needed as low income housing. A number of tenants in the building are in fact low income, and RHS would necessarily have had to conclude that the project was needed as low income housing. As a result, had RHS followed the prepayment statute, this prepayment would necessarily have required the imposition of a restrictive covenant protecting current tenants from rent increases of the kind proposed by defendant owners. Plaintiff tenants would have also benefited from eviction protections and other provisions of the Section 515 lease which have been eliminated as the result of the owners' actions and the government's failure to attach protections.

40. Had RHS complied with the law, RHS would also have had to make a determination about whether the owners' prepayment in this instance would have had a material effect on minority housing opportunities. If RHS had made that determination they would have found that minority tenants occupy a significant number of the Albany Apartment units, thus necessitating a conclusion that minority housing opportunities would be affected by a prepayment. In addition, based upon this finding, defendant owners would be required to offer the project for sale to a nonprofit or public agency interested in retaining the project as affordable housing for the long term.

41. Defendant Venneman and RHS not only failed to make statutory findings with respect to minority housing opportunities, but the agency failed to consider in any way the implications of its actions or inactions in addressing this prepayment, with respect to impact upon minorities in the town of Albany.

42. Because defendant owners have circumvented the prepayment process, and because RHS has failed to impose statutory protections for tenants, the individual plaintiffs and members of the Albany Apartments Tenants' Association are facing significant financial hardship and the prospect of being displaced from the Albany Apartments as the result of the substantial rent increase being initiated by defendant owners.

VI. CAUSES OF ACTION

FIRST CAUSE OF ACTION

43. By permitting defendant owners to prepay the Section 515 mortgage without the imposition of restrictive covenants protecting the tenants, defendant Venneman and RHS have violated the Section 515 prepayment preservation statute, 42 USC § 1472(c), entitling plaintiffs to relief under the Administrative Procedures Act (APA), 5 USC § 706.

SECOND CAUSE OF ACTION

44. By choosing to permit defendant owners to prepay the Section 515 mortgage without the imposition of restrictive covenants protecting the tenants, defendant Venneman and RHS have violated their statutory obligation to administer the Section 515 program so as to avoid displacement of families, pursuant to 42 USC § 1471(g), entitling plaintiffs to relief under the APA, 5 USC § 706.

THIRD CAUSE OF ACTION

45. By providing more limited protection in its regulations against prepayments in response to acceleration of the loan in instances where the loan was initiated prior to 1979, as opposed to after 1979, defendant Venneman and RHS have acted arbitrarily and capriciously, entitling plaintiffs to relief under the APA, 5 USC § 706.

FOURTH CAUSE OF ACTION

46. By providing more limited protection in its regulations against prepayments in response to acceleration of the loan in instances where the loan was initiated prior to 1979, as opposed to after 1979, defendants Venneman and RHS have denied plaintiffs Equal Protection of the law in violation of the Fifth Amendment to the United States Constitution, entitling to plaintiffs to relief thereunder and under 5 USC § 706.

FIFTH CAUSE OF ACTION

47. By failing to consider the implications of its actions or inactions in permitting this prepayment with respect to minorities in the town of Albany, defendant Venneman and RHS violated their duty to administer their programs so as to affirmatively further fair housing pursuant to 42 USC § 3608(d), entitling plaintiffs to relief under the APA, 5 USC § 706.

SIXTH CAUSE OF ACTION

48. By circumventing the prepayment application process by defaulting on its obligations so as to provoke RHS into accelerating the note and providing a prepayment opportunity without restrictions, defendant owners have violated the prepayment preservation statute, 42 USC § 1472(c), entitling plaintiffs to relief.

SEVENTH CAUSE OF ACTION

49. By seeking to benefit from both a mortgage prepayment which did not comply with federal law, and from the actions of federal defendants in permitting such prepayment, defendant owners violated 42 USC § 1472(c).

VII. RELIEF REQUESTED

50. Therefore, plaintiffs seek the following relief:

A. A declaratory judgment, issued pursuant to 28 USC § 2201, that:

1. By permitting defendant owners to prepay the Section 515 mortgage without the imposition of restrictive covenants protecting the tenants, defendants Venneman and RHS have violated the Section 515 prepayment preservation statute, 42 USC § 1472(c), entitling plaintiffs to relief under the Administrative Procedures Act (APA), 5 USC § 706;

2. By choosing to permit defendant owners to prepay the Section 515 mortgage without the imposition of restrictive covenants protecting the tenants, defendant Venneman and RHS have violated their statutory obligation to administer the Section 515 program so as to avoid displacement of families, pursuant to 42 USC § 1471(g), entitling plaintiffs to relief under the APA, 5 USC § 706;

3. By providing more limited protection in its regulations against prepayments in response to acceleration of the loan in instances where the loan was initiated prior to 1979, as opposed to after 1979, defendant Venneman and RHS have acted arbitrarily and capriciously, entitling plaintiffs to relief under the APA, 5 USC § 706;

4. By providing more limited protection in its regulations against prepayments in response to acceleration of the loan in instances where the loan was initiated prior to 1979, as opposed to after 1979, defendants Venneman and RHS have denied plaintiffs Equal Protection of the law in violation of the Fifth Amendment to the United States Constitution, entitling to plaintiffs to relief thereunder, and under 5 USC § 706;

5. By failing to consider the implications of its actions or inactions in permitting this prepayment with respect to minorities in the town of Albany, defendant Venneman and RHS violated their duty to administer their programs so as to affirmatively further fair housing pursuant to 42 USC § 3608(d), entitling plaintiffs to relief under the APA, 5 USC § 706.

6. By circumventing the prepayment application process by defaulting on its obligations so as to provoke RHS into accelerating the note and providing a prepayment opportunity without restrictions, defendant owners have violated the prepayment preservation statute, 42 USC § 1472(c), entitling plaintiffs to relief.

7. By seeking to benefit from both a mortgage prepayment which did not comply with federal law, and from the actions of federal defendants in permitting such prepayment, defendant owners violated 42 USC § 1472(c);

8. That as a result of the violations set out above, plaintiffs have paid rent in excess of their legal obligation, in an amount to be determined.

B. For preliminary and permanent injunctive relief directing defendant Venneman and RHS to impose, and directing owners to accept such restrictive covenants as plaintiffs are entitled pursuant to 42 USC § 1472(c), and for preliminary relief enjoining any rent increase or evictions which may result from such increases;

C. For an award of a judgment, or in the alternative equitable restitution, against defendant owners, in favor of each of the Albany Apartments tenants that have been required to pay rent in excess of that which should have been required pursuant to the preservation statute.

D. An award of costs and disbursements and attorney's fees pursuant to 28 USC § 2412;

E. For such other relief as the court may deem just and equitable, including any relief available pursuant to 28 USC § 2201 and 2202.

Dated: ____________________ HOUSING PRESERVATION PROJECT

________________________

John Cann (No. 174841)

Timothy L. Thompson (No. 0109447)

Ann M. Norton (No. 79087X)

Christine R. Goepfert (No. 0303252)

570 Asbury Street, Suite 103

St Paul, MN 55104

651-642-0102

Attorneys for the Plaintiffs

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