HUD's Decision to Terminate HAP Contract Deemed Valid

Facts: On March 12, 2013, a site owner entered into a contract to purchase a 10-unit residential apartment building. Since 2008, the previous owner had received subsidy payments from HUD to assist low-income families living in the apartments. These payments were pursuant to a Housing Assistance Payment (HAP) contract. The new owner claimed that it relied on the existence of the HAP contract in deciding to purchase the site, and anticipated that the HAP contract would be assigned from the prior owner to him.

The HAP contract provided that HUD would approve a change of ownership only if the purchaser demonstrated, to HUD’s satisfaction, an ability to administer the HAP contract and agreed to carry out all terms of the contract.

The site failed inspections in 2007 and 2008. As a result, the site was referred to the HUD’s Enforcement Center, and the owners of the site were required to certify that all of the deficient conditions were corrected. The site failed another inspection in January of 2010. And on April 22, 2010, HUD notified the prior owner it was in default of the HAP contract for failing to maintain the site in a decent, safe, and sanitary condition. In order to avoid termination of the HAP contract, HUD specified numerous corrective actions. The prior owner later certified that it had corrected all of the deficiencies. On June 16, 2011, HUD sent correspondence notifying it that the HAP contract would be renewed for a three-year period.

On March 27, 2013, the prior owner notified HUD via email that he was set to close on the sale of the site the next day and sought information regarding the forms necessary for the new owner to change the deposits for the HAP. A HUD representative responded incredulously and stated that they had received no information relative to the proposed new owner (2530s for owner and agent, management documents, sales agreement, organization structure of the proposed purchaser, proposed deed, HAP Assignment, plan for physical repairs/improvements due to last REAC being under 60, certification that accounts payable are cleared, sources and uses of funds, proposed owner resume, etc.). The representative then sent a second email stating that they cannot process a new direct deposit form without the HAP Assignment process being completed.

HUD inspected the property on May 22, 2013. The inspection identified missing or inoperable smoke detectors, a blocked storm drain, an inoperable lock on the front door, holes in the ceiling, an inoperable ventilation system, leaking pipes, mold, and cockroaches. The site’s overall score was 13 out of 100. In a cover letter dated May 22, 2013, HUD explained that because the site failed the inspection by scoring below 60, the inspection had been referred to the Department Enforcement Center for enforcement action. The letter also explained that “[p]roperties scoring below 60 have physical deficiencies that do not meet the contractual obligations to HUD.” In addition, the letter explained: “[i]f you fail to correct the physical deficiencies, fail to correct the EHS violations, or fail to provide HUD with the required certification within the required timeframes, or falsely certify to repairs made, these noncompliance issues may adversely affect your eligibility for participation in HUD programs.” The new owner was also provided a list of Exigent Health and Safety deficiencies, which had to be corrected within three days. On May 24, 2013, the new owner provided a certification that all of the Exigent Health and Safety deficiencies had been repaired or eliminated.

Eventually, in a letter dated July 11, 2013, the Director of Multifamily Project Management in HUD’s Columbus Office wrote that they would not allow an assignment of the HAP contract. There was insufficient information given to HUD regarding the timeline of needed repairs and information regarding acceptable sources and uses of funds necessary to complete necessary repairs found in the 2013 REAC inspection. The property had been sold without HUD approval. And the HAP contract of record remained between the prior owner and HUD. The director stated that HUD would “proceed with enforcement actions, including but not limited to, the suspension, abatement, and/or termination of the HAP contract.”

The new owner asked the court to review and overturn HUD’s decision. And HUD asked the court for a judgment without a trial in its favor.

Ruling: An Ohio district court granted HUD’s request.

Reasoning: The court found that HUD’s actions were not arbitrary or capricious in violation of the Administrative Procedures Act (APA). The new owner claimed that HUD violated the APA when it abated and withheld payments due under the HAP contract and when it terminated the HAP contract. However, the current owner wasn’t a party to the HAP contract, and therefore, to the extent that the new owner sued based on a breach of the HAP contract itself, that claim cannot serve as the basis for a claim under the APA.

The HAP contract provides the requirements for assignment: “HUD will approve a change of ownership during the term of this Contract only if the purchaser demonstrates, to HUD’s satisfaction, an ability to administer this Contract and agrees to carry out all terms of this Contract.” In its request for judgment, HUD maintained that the new owner failed to demonstrate to HUD’s satisfaction that it would be able to administer the HAP contract and carry out all the terms of the HAP contract. HUD pointed out that by late April 2013, the new owner hadn’t yet submitted the required information to HUD. HUD explained that a June 2013 email shows that the new owner still hadn’t submitted a plan for physical repairs or improvements to the property. HUD maintained that when the plan was finally submitted, it was comprised of a single page and failed to identify the specific items that would be repaired and replaced, didn’t provide a time frame for completion, and didn’t provide any documentation of what available funds would be used to complete the necessary repairs. HUD also noted that the plan stated that the owner wouldn’t implement the plan until after HUD approved assignment of the HAP contract and began paying the Section 8 housing subsidies to the new owner.

Given the evidence of the notice the owner received regarding the requirement to submit the requested information, the court decided that it could not conclude that HUD’s decision to terminate the HAP contract based on the failure to submit required annual financial statements was arbitrary and capricious. Also, HUD said the second reason for its decision to terminate the HAP contract was the failed REAC inspections.

• Global Wealth Investments, Inc. v. HUD, September 2016