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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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,, PUBLISH :fiLED 

tJNJ:TED STATES COURT OJ' APPEALS Jnited StatA1D Goort of Appeals 

P'OR THE TENTH CI:RCUI:T Tenth Circuit 

TERRACE HOUS:ING ASSOCI:ATES, LTD. , and ROLLING GRZEN HOUSING ASSOCIATES, 

LTD. I 

Plaintiffs - Appellees, 

vs. 

HENRY G. CI:SNEROS, Secretary, 

Department of Housing and Urban 

Development, 

Defendant - Appellant, 

and 

OKLAHOMA CI:TY HOUSI:NG AUTHORITY, 

Defendant. 

ROLLING GREEN HOUSING ASSOCIATES I LTD. I 

and TERRACE HOUSING ASSOCIATES, LTD., 

Plaintiffs - Appellees, 

v. 

HENRY G. CI:SNEROS, Secretary, 

Department of Housing and Urban 

Development, 

Defendant, 

and 

OKLAHOMA HOUSI:NG PI:NANCE AGENCY, 

and OKLAHOMA CI:TY HOUSING AUTHORI:TY, 

Defendants - Appellants. 

) 

) 

) 

) 

) 

AUG 0. 9_ \994. 

) Nos. 93-6267, 93-6268 

) 

) (Appeals from the U. s. 

) District Court for the 

) Western District of 

) Oklahoma, D.C. Nos. CIV-

) 92-786T and CI:V 92-1372-T) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) Nos. 93-6272, 93-6276 

) 

) (Appeals from the u. s. 

) District Court for the 

) Western District of 

) Oklahoma, D.C. Nos. CIV-

) 92-1372-T and CIV-92-786-T) 

) 

) 

) 

) 

) 

) 

) 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 1 
WINDSONG HOUSING ASSOCIATES, LTD., 

Plaintiff - Appellee, 

vs. 

HENRY G. CISNEROS, Secretary, 

Department of Housing and Urban 

Development, 

Defendant - Appellant, 

and 

TULSA HOUSING AUTHORITY, 

City of Tulsa, Oklahoma, 

Defendant. 

) 

) 

) 

) 

) No. 94-5032 

) 

) (Appeal from the u.s. 

) District Court for the 

) Northern District of 

) Oklahoma, D.C. No. 

) 92-C-647-E) 

) 

) 

) 

) 

) 

) 

) 

APPEALS FROM THE UNITED STATES DISTRICT COURTS 

FOR THE NORTHERN AND WESTERN DISTRICTS OF OKLAHOMA 

Deborah Ruth Kant, Appellate Staff, Civil Division, Department of 

Justice, Washington, D.C. (Frank W. Bunger, Assistant Attorney 

General, Washington, D.C.; Vicki Miles-LaGrange, U. s. Attorney, 

Oklahoma City, Oklahoma, and Michael Jay Singer, Department of 

Justice, Washington, D.C., with her on the brief) for Henry 

Cisneros, Secretary, Department of Housing and Urban Development. 

Steven D. Gordon, Dunnells & Duvall, Washington, D.C., (Michael H. 

Ditton, also of Dunnells & Duvall, with him on the brief) for 

Appellees, Rolling Green Housing Associates and Terrace Garden 

Rousing Associates, Ltd. 

R. Steven Haught, Daugherty, Bradford, Haught & Tomkins, P. c., 

Oklahoma City, Oklahoma, submitted a brief on behalf of appellant 

Oklahoma City Housing Authority. 

Jack R. Lawrence, Lawrence & Ellis, P.A., Oklahoma City, Oklahoma, 

submitted a brief for appellant Oklahoma Housing Finance Agency. 

Before LOGAN and McWILLIAMS, Circuit Judges, and BROWN, Senior 

District Judge*. 

*The Honorable Wesley E. Brown, Senior District Judge, United states 

District Court for the District of Kansas, sitting by designation. 

-2-

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 2 
BROWN, Senior District Judge. 

Section 8 of the United States Housing Act of 1937, 42 u.s.c. 

1437f, set up a system of housing assistance payments to aid low 

income families in renting decent housing. There are several federal 

programs which provide Section 8 housing assistance and among them is 

the one involved in these cases -- the Moderate Rehabilitation 

Program, 42 U.S.C. 1437f(e) (2), hereafter referred to as the 

Program. 1 The appeals before us involve the efforts of the Secretary 

of the Department of Housing and Urban Development (HUD) to correct 

alleged overcharges and errors in contract rents negotiated for 

subsidized housing by public housing agencies and the private owners 

of such housing. 2 

The Secretary states that "as part of the ongoing effort to root 

out waste and fraud in the government-assisted housing programs," he 

discovered in 1992 that there were overcharges and errors in the 

initial contract rents set for the housing projects involved in these 

appeals, and he sought the rent rollbacks in order to recoup the 

government losses. The alleged errors resulted from the housing 

1 This Program has been repealed, effective October 1, 1991, 

but all projects with binding commitments before that date continue 

in effect. Pub.L. No. 101-625, §289(a) (4), (b). 

2 Prior to oral argument of the Terrace Housing Associates 

and Rolling Green Housing Associates cases, this Court ordered that 

the Windsong Housing Associates appeal be submitted with those two 

cases. Similar appellate issues are presented in all three 

appeals. 

3 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 3 
owners improperly including ineligible costs such as discount points, 

or inflated costs such as insurance charges, but it appears that the 

bulk of the errors came from change orders which increased 

rehabilitation costs. The Secretary found that since the changes were 

foreseeable, they should have been included in the original estimates 

of construction costs. 3 

The Secretary has directed that the initial contract rents set 

in 1987 be "rolled back" in order that alleged excess payments of 

housing subsidies may be recovered from the private owners. The 

owners filed these actions, claiming that a 1987 amendment to the 

United States Housing Act bars any kind of rent rollback. In each of 

the three cases now before us, the district court found that the 

amendment barred the rollbacks, and the Secretary has been enjoined 

from recovering the claimed overpayments. 4 

Under the statutory scheme, contract rates for rental units are 

set at the "fair market value" of such rentals in the particular 

housing area, but the low-income tenants pay rent according to their 

3 It does not appear that the Secretary relies upon any 

findings of actual fraud or wrongdoing in connection with the 

housing contracts involved in these actions. 

4 Terrace Housing Associates owns a complex of 206 apartments 

in Oklahoma City, purchased in 1987. The rent reductions ordered 

by the Secretary total $8,000 per month, or $96,000 per year. The 

alleged overpayments totaled $4 72,937, to be repaid in annual 

amounts of $67,592 for seven years. 

The plaintiff Rolling Green Housing Associates owns a complex 

of 166 apartments located in Edmond, Oklahoma, purchased in 1987. 

The alleged overpayments totaled $377,611 for the years 1988-1992. 

In 1987, the plaintiff Windsong Housing Associates borrowed 

over $5.8 million to purchase and rehabilitate its 292-apartment 

complex in Tulsa, Oklahoma. The rent reductions ordered in that 

complex total approximately $356,640. 

4 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 4 
incomes, and the federal government makes up the difference between 

actual rents paid and the fair market value of the rental units 

through funding of the local housing authorities. 

After rehabilitation of housing units is complete, the local 

housing authority inspects the property and enters into a "housing 

assistance payments contract" with the owner of the housing. Such a 

contract sets a "contract rent" for each unit according to space. 

These contracts are reviewed by HUD before they are signed by the 

local housing authority. 

Section 1437f(c) (1), 42 u.s.c., establishes the guidelines for 

setting initial contract rates according to the value of fair market 

rates. Section 1437f(c) (2) governs prospective annual adjustments in 

the contract rent to account for inflation and other changes in 

expenses. Section 1437f(c) (2) (A), which provides for annual adjustments in the contract rent, provides for these adjustments "to reflect 

changes in the fair market rentals established in the housing area . 

" Section 1437f(c) (2) (B) provides for annual adjustments due to 

increases in property taxes, utility rates, etc. , which are not 

otherwise covered by the annual increase of Section 1437f(c) (2) (A). 

Section 1437f(c) (2) (C) provides that adjustments described above 

"shall not result" in material differences in rent between open market 

rentals and subsidized rents. 

During the 1980's, it appears that HUD was relying on Section 

1437f(c) (2) (C) not only to deny annual rent increases but to reduce 

rents when the agency's studies indicated that market rents were lower 

than those being charged for assisted housing. In 1987, Congress 

5 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 5 
amended Section 1437f(c)(2) (C) to prevent the practice of reducing 

rents on that basis. 

The 1987 amendment, 42 u.s.c. §1437f(c) (2) (C), provides in 

pertinent part that: 

The Secretary may not reduce the contract rents in effect 

on or after April 15, 1987, for newly constructed, 

substantially rehabilitated, or moderately rehabilitated 

projects assisted under this section. unless the 

project has been refinanced in a manner that reduces the 

periodic payments of the owner. (Emphasis supplied) 

In each of the cases before us in this appeal, the district court 

found that the plain meaning of this amendment bars any effort by the 

Secretary to rollback rents in the housing complexes. 

The Secretary contends that the amendment bars rent reductions 

only as to the annual prospective rent adjustments and not to the 

correction of errors in the establishment of the initial contract 

rents. In this respect, the contention is that the bar can only refer 

to the power of the Secretary to adjust rents and not to the power to 

establish the initial rents and to make corrections in those initial 

rents. The Secretary claims that the district court's reading of 

Section 1437f(c) "produces very harsh, inequitable results" for it 

would prevent him from correcting fraud and other serious errors in 

calculations. 

We find that the 1987 amendment explicitly prohibits all 

reductions of contract rents. There is no distinction made for 

"annual adjustments of rent" and "corrections of initial contract 

rents" and, contrary to the Secretary's contention, the amendment is 

not ambiguous. The district court in the Terrace Housing Associates 

6 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 6 
case recognized the absence of ambiguity in the 1987 amendment in 

these words: 

The court cannot conceive a more clear direction from the 

Congress that rent rollbacks such as those contemplated in 

this case are prohibited.... (The Secretary) argues that 

the statute does not refer to contract rents as initially 

set, but rather that it prohibits reductions in rents based 

on authorized annual adjustments. The argument is a 

credible one, but in the end, the plain language of the 

statutory prohibition draws no such distinction. (Slip 

opinion, p.S) 

In the factually similar case of Linden Housing Associates Ltd., 

v. Cisneros, Case No. CV-N-92-358-HDM (D.C. Nev. 1993), relied on by 

the district court in Terrace Housing Associates, the court found that 

rent rollbacks were barred, stating: 

After reviewing the history of the pertinent regulations, 

the Court is satisfied that the scope of HOD's "post audit" 

authority is limited to verifying the owner's cost and 

mortgage loan certifications, and recalculating the 

contract rents if any material errors are discovered in 

those certifications. However, this "post audit" authority 

is not a grant of plenary power to audit and redo 

calculations of contract rents based upon alleged errors 

unrelated to the verification of the owner's cost and 

mortgage loan certifications. 

In this case, HUD is not attempting to rollback the 

rents based on alleged errors in the owners• 

certifications. Instead, HUD contends that an alternative 

methodology should have been applied to determine the 

initial contract rents, and it is attempting to invoke the 

"post audit" authority to recompute the rents using that 

alternative formula. However, the "post audit" authority 

conferred by HUD' s regulations and by the corresponding 

provision in the ... Contract does not extend this far. 

Accordingly, the rent rollbacks are unauthorized and are 

void for that reason. 5 (Slip opinion at p.4) 

5 The Linden Housing court, noting that 24 C.F.R. §882.507(c) 

pertains to post audits "but only for the purpose of verifying the 

owner's cost and mortgage loan certificates," held that "(c)orrection of errors by recalculations based on other criteria, i.e., 

'methodologies,' are not contemplated." 

7 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 7 
Most recently, in Atlantic Terrace Limited Partnership v. 

Cisneros, (Civil Action No. 94-0051, May 23, 1994), the District of 

Columbia court, which was presented with facts identical to those now 

before us, ruled that the plain meaning of the 1987 amendment barring 

rent rollbacks must prevail. In so doing, the Court relied upon 

Connecticut Nat'l Bank. 112 s. Ct. 1146, at 1149 (1992), which found 

that: 

canons of construction are no more than rules of thumb that 

help courts determine the meaning of legislation and in 

interpreting a statute a court should always turn first to 

one, cardinal canon before others (C) ourts must 

presume that a legislature says in a statute what it means 

and means in a statute what it says there. 

After reviewing case law, the Atlantic Terrace court found that 

five other courts, which decided six similar cases, had ruled that the 

plain meaning of the statute must prevail, while only one agreed with 

the position of the Secretary. 6 

As noted by the court in Atlantic Terrace, the only case 

sustaining the Secretary's position is 2255 New York Ave., Ltd. v. 

Cisneros, 842 F. Supp. 924,931 (N.D. Tex 1994), where the court found 

"that the most reasonable reading of §1437f(c) (2) in its entirety is 

6 The six cases in which the courts ruled that the plain 

meaning of the amendment must prevail are the three actions now 

before us, Terrace Housing Associates, Rolling Green Housing 

Associates, and Windsong Housing Associates, and Linden Housing 

Assocs., Ltd. v. Cisneros, supra, appeal pending, Nos. 93-15899 and 

93-15903 (lOth Cir.), and Foxglenn Investors Ltd. v. Housing 

Authority, 844 F. Supp. 1078, 1084 (D.C. Md. 1993), appeal 

docketed, No. 94-1276 (4th Cir. Feb. 22, 1994). 

In the Foxglenn case, the district court found that "the 

language of the statute unequivocally eliminates HUD's authority to 

implement rent rollbacks." 

8 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 8 
that the statutory language upon which plaintiff relies applies only 

to adjustments in contract rents of those kinds contemplated by 42 

U.S.C. §1437f(c) (2) (A) and (B)" and not to the initial contract rents. 

The Secretary contends that there are two regulations which 

authorize the rent rollbacks here. In the first instance, it appears 

that 24 C.F.R. §882.408(d) (1) (v) allows HUD to rollback rents "(w)hen 

necessary to correct errors in computation of the base and Contract 

Rents to comply with the HUD requirements." However, our review of 

that section reveals it is entitled "Changes in Initial Contract Rents 

during rehabilitation." (emphasis supplied). It is clear that that 

section does not apply here because rehabilitation was completed long 

ago. See 2255 New York Ave. Ltd., supra, 842 F. Supp. at 931-32, 

Foxglenn Investors, supra, 844 F. Supp. at 1085, and Atlantic Terrace, 

Ltd. at p. 11, slip opinion. As noted by the Atlantic Terrace court: 

Section 882.408(d)(1) (v) is ambiguous at least as to the 

time frame in which it applies. It is improbable that 

Congress intended to grant HUD an indefinite power to 

correct errors; at some point the errors must become final. 

The heading clarifies this ambiguity by providing the 

necessary time frame. 

The Secretary also claims that contract rates are always subject 

to reduction because they are reviewing during a post audit, provided 

by 24 C.F.R. §882.507(c). such argument was also rejected by the 

Atlantic Terrace court which noted that : 

HUD claims that the review conducted by its investigators 

constitutes the "post audit" within the meaning of this 

regulation. HUD does not explain the breadth of its "post 

audit" authority, however, and no court has found this 

authority as sweeping as HUD claims. 

9 

Appellate Case: 93-6268 Document: 01019290222 Date Filed: 08/09/1994 Page: 9 
• 

The courts in Linden Housing, 2255 New York Avenue, and Atlantic 

Terrace, have agreed that the scope of the Secretary's "post audit" 

authority is limited: 

(T)he scope of HUD's "postaudit" authority is limited to 

verifying the owner's cost and mortgage loan certifications, and recalculating the contract rents if any material 

errors are discovered in those certifications. However, 

this 11 postaudit" authority is not a grant of plenary power 

to audit and redo calculations of contract rents based upon 

alleged errors unrelated to the verification of the owner's 

cost and mortgage loan certifications. (Linden Housing 

Assocs. Ltd. as quoted in 2255 New York Avenue Ltd., 842 F. 

supp. at 932. 

We agree with the findings of the district courts in each of the 

cases before us in these appeals. There is no ambiguity to the 

prohibition which appears in 42 u.s.c. §1437f(c) (2) (C), and the plain 

meaning of that amendment must prevail. "The Secretary may not reduce 

the contract rents in effect on or after April 15, 1987 ... unless 

the project has been refinanced in a manner that reduces the periodic 

payments of the owner. 11 None of the projects in question were 

refinanced in a manner that reduced the periodic payments of the 

owner. Therefore, the judgments in these appeals are AFFIRMED. 

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