Unanimous U.S. Supreme Court Allows Affordable Housing Owners to Enforce Government Contracts, Reclaim Lost Income.

Business Editors & Legal Writers

MINNEAPOLIS--(BUSINESS WIRE)--June 10, 2002

High Court decision expected to have far-reaching impact in other

industries that conduct business with the federal government

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

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

In its decision, the High Court applied the same, ordinary principles of law to the U.S. government as it applies to U.S. citizens when it ruled that the owners could enforce contracts they entered into with the Farmer's Home Administration as long as 30 years ago.

The Supreme Court's decision in Franconia Associates, et. al. vs. United States is expected to impact not only Section 515 owners but also other industries that conduct business with the federal government and are affected by legislative, regulatory, and other changes involving contracts with the United States and its agencies.

"The Franconia Associates opinion today joins the ranks of the Supreme Court's recent significant decisions in Winstar and Mobil Oil Exploration in holding that when the United States government chooses to do business with its citizens, it must do so under ordinary principles of law," said Jeff Eckland, who argued for the petitioners before the High Court. "This case shows that when you change the rules in the middle of a deal -- even if you are the federal government -- you are still accountable to the same contract rules as everyone else."

The 9-0 decision was a victory for Franconia Associates, who argued that the owners should have the right to reclaim lost income from the date they decided to prepay their government mortgage and were denied the opportunity to do so -- not from the effective date (1988) of Congress' Emergency Low Income Housing Preservation Act (ELIHPA), the legislation that made it more difficult for owners to opt out of the program.

The U.S. Supreme Court sided with Franconia Associates, ruling that the statute of limitations did not start until the owners first decided to prepay their mortgages and learned from the government they could not. The owners had built their projects during or before 1979; the Court's decision, however, is also favorable to owners who built their projects through 1989.

Writing for the Court, Justice Ginsburg stated, "Once the United States waives its immunity and does business with its citizens, it does so much as a party never cloaked with immunity."

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

"Congress abandoned the owners, the tenants and the agency," he continued. "The tenants are stuck in aging housing; the owners are locked in an investment with minimal return; and the agency has little authority to build adequate new housing. This case is about the owners' right to be fairly compensated, but the victory here may mean better housing for tenants," Eckland said.

The legal team for Franconia Associates is headed by Jeff Eckland, a partner with Faegre & Benson LLP based in Minneapolis. With him on the briefs were William Roberts and Mark Blando. Ten attorneys have been working on the case during the Supreme Court appeal. The Franconia Associates case is one of eight affordable housing cases that Eckland's firm has filed since 1996.

Section 515 was designed to create rental housing in rural areas through private development and ownership. A key incentive for owners was the option to prepay their government mortgages at some point and convert their units to market-rate housing. Without this right to opt out of the program before their 50-year mortgage terms expired, none of the owners would have volunteered to participate in the program.

In 1988, however, Congress changed the rules midstream, saying that these same owners could prepay only under limited conditions. Eckland noted that the vast majority of owners were not aware of this change in legislation until they tried to prepay and instead found themselves locked into 50-year mortgages with minimal financial return.

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

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