Federal Court Refuses to Resolve Dispute Over HUD Grant

August 23, 2009

Facts: In 1987, HUD awarded the City of Kalamazoo a grant under the Housing Development Grant Program for the construction of a private 150-unit multifamily rental housing development, with 60 units to be reserved for 20 years for occupancy by low-income families. Under the HUD grant program, which Congress ended in 1991, development owners had to repay the funds to the grantee—in this case, Kalamazoo. In 1987, a private developer executed a promissory note of $3.2 million in favor of the city and a second mortgage on the development securing repayment of the promissory note.

Facts: In 1987, HUD awarded the City of Kalamazoo a grant under the Housing Development Grant Program for the construction of a private 150-unit multifamily rental housing development, with 60 units to be reserved for 20 years for occupancy by low-income families. Under the HUD grant program, which Congress ended in 1991, development owners had to repay the funds to the grantee—in this case, Kalamazoo. In 1987, a private developer executed a promissory note of $3.2 million in favor of the city and a second mortgage on the development securing repayment of the promissory note. In 2009, the owner of the HUD-assisted multifamily complex went to court to have its indebtedness erased, arguing that the amount of the debt under the note and program regulations had been reduced to zero.

Decision: The U.S. District Court for the Western District of Michigan concluded that the case did not belong in federal court and dismissed it.

Reasoning: The court ruled that the case did not present a substantial federal issue. The court said that the dispute is over the terms of the promissory note and the second mortgage, not the HUD regulations involved. The promissory note and mortgage establish the owner's obligation to repay the city and they should be interpreted in state court. Congress did not intend for federal courts to determine possible violations of this grant program's regulations unless a federal agency was directly involved in the case.

  • West Michigan Woods Limited Dividend Housing Association LP v. City of Kalamazoo, August 2009

LESSON LEARNED: If a dispute involves the interpretation of federal regulations, the matter does not necessarily have to be resolved in federal court.

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