UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-20181

CHRISTOPHER VILLAGE, LIMITED PARTNERSHIP;

WILSHIRE INVESTMENTS CORPORATION,

Plaintiffs-Appellants,

v.

NICHOLAS P RETSINAS; ET AL,

Defendants,

NICHOLAS P RETSINAS; ALBERT CASON, Director Multifamily

Housing Management; THE HONORABLE ANDREW M CUOMO,

Secretary of Housing and Urban Development; HENRY CISNEROS,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Texas

September 15, 1999

Before JONES, SMITH, and EMILIO M. GARZA, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Appellants Christopher Village, Ltd. and Wilshire

Investments (collectively “Village”), owned and managed a federally

subsidized low income housing complex in Bryan, Texas. They filed

thi s suit contending that the Department of Housing and Urban

Development (HUD) caused Village to default on its obligation to

maintain the property by denying necessary rent increases and

illegally demanded a multimillion-dollar equity contribution from2

Village. As the suit progressed, HUD reacquired and sold the

property at f oreclosure, and the apartment complex has been torn

down. Nevertheless, as to the part of this case which is not moot,

we hold that HUD’s actions were arbitrary and capricious. Village

is entitled to a partial declaratory judgment in its favor.

BACKGROUND

1. HUD Regulatory Scheme

The National Housing Act was enacte d (and subsequently

amended) to “assist private industry in providing housing for low

and moderate income families and displaced families.” 12 U.S.C.A.

§ 1715 l (a) (West 1989). To foster private investment, the Act

authorizes HUD to insure private mortgage loans used to construct

low income housing. S ee 12 U.S.C.A. § 1715 l (d)(3) (West 1989). In

addition, the Act and HUD regulations encourage private investment

by allowing owners to borrow money at reduced inter est rates,

reducing a borrower’s equity requirements, permitting owners to

sign non-recourse notes, and, prior to the 1986 tax code changes,

granting owners and investors generous tax benefits. S ee

generally

, Kargman v. Sullivan

, 552 F.2d 2, 4 (1st Cir. 1977). By

granting owners these benefits, Congress sought to reduce the

financial risk associated with operating low income housing by

“reducing the rentals necessary to service the landlord’s debt

obligation.” H ahn v. Gottlieb

, 430 F.2d 1243, 1245 (1st Cir.1 Section 221(d)(3) requires owners to be “regula ted or

supervised . . . by the Secretary under a regulatory agreement or

otherwise, as to rents, charges, and methods of operation, in such

form and in such manner as in the opinion of the Secretary will

effectuate the purposes of this section.”

2 HUD may exercise thes e remedies only if it holds the note.

If the lender st ill holds the note, HUD can notify the lender of

the default and request that it accelerate the mortgage and

foreclose, or request that the note be assigned to HUD so it can do

so.

3 1970); see also Beck Park Apartments v. United States Dep’t of

Hous. and Urban Dev. , 695 F.2d 366, 368 (9th Cir. 1982).

In exchange for these financial benefits, HUD requires

low income property owners to enter into “Regulatory Agreements”

that give HUD extensive regulatory authority over the operation and

maintenance o f the property. S ee 12 U.S.C.A. § 1715 l (d)(3). 1

Under a standard Regulatory Agreement, an owner must dedicate the

property for medium or low income tenants, must remain a sole asset

entity (i.e., may not engage in any business other than owning and

operating the property), may not take a profit distribution over

six percent per year, must adequately mai ntain the property, and

may not increase rents without approval from HUD. S ee Kargman

, 552

F.2d at 4. If an owner violates the Regulatory Agreement, HUD may

declare the property in default, accelerate the mortgage, and

foreclose on the property. 2 HUD also sets the maximum allowable

rent an owner can charge its tenants. In doing so, HUD is supposed

to provide owners with sufficient funds to operate and maintain the

property, service the debt, pay taxes, cover va rious reserve3 12 U.S.C.A. § 1747c states:

Pri or to approving the initial or any subsequent rent

schedule pursuant to this section, the Secretary shall

find that such schedule affords reasonable assurance that

the rents to be established thereunder are (1) not lower

t han necessary, together with all other income to b e

derived from or in connection with the project, to

produce reasonably stable revenues sufficient to provide

for the payment of the operating expenses, the minimum

annual amortization charge, and the minimum annual

return; and (2) not higher than necessary to meet the

need for dwellings for families of moderate income.

4 r equirements, and provide the owner a reasonable return on

investment. S ee

, e.g.

, 12 U.S.C.A. § 1747 c (West 1989). 3 If

rental revenues fail to cover these costs, an owner can request a

rental increase from HUD. See 24 C.F.R. § 245.325.

Since most tenants of low income housing are on welfare

and cannot afford to pay the full contract rental price, Congress

created the Section 8 housing program to subsidize their rent. S ee

42 U.S.C.A. § 1437f (West 1994). “Under the program, tenants make

rental payments based on their income and ability to pay; [HUD]

then makes ‘assistance p ayments’ to the private landlords in an

amount calculated to make up the differen ce between the tenant’s

contribution and a ‘contract rent’ agreed upon by the landlord and

HUD.” C isneros v. Alpine Ridge Group

, 508 U.S. 10, 12, 113 S. Ct.

1898, 1900 (1993). Because the Section 8 program requires that a

tenant pay a maxi mum of 30% of the gross rent, if HUD approves a

rental increase, the majority of the increase is absorbed by HUD

via the Section 8 subsidy. The subsidy is implemented through5

Housing Assistance Payment (“HAP”) contracts entered into between

HUD and the property owners which extensively regulate an owner’s

management of the property. HAP contracts set the maximum

allowable rent an owner may charge and the subsidy amount paid by

HUD and require owners to maintain the property in a safe and

sanitary condition.

2. Factual and Procedural History

The property at issue in this case, Mockingbird Run

Apartments, was built in 1970 from the proceeds of a § 221(d)(3)

insured loan and was therefore subject to a Regulatory Agreement.

Because Mockingbird was receiving Section 8 subsidies, the property

was also subject to a HAP contract. When Village purchased

Mockingbird in 1983, it ass umed the obligations and benefits of

both agreements.

By 1995, Mockingbird’s physical condition had

substantially deteriorated and approximately $2 million was needed

to restore the property. HUD warned Village that a failure to

refurbi sh the property could result in abatement of Section 8

subsidies and constituted a default under the Regulatory Agreement.

The parties began negotiating plans to repair Mockingbird,

including the issue who would fund the needed repairs. Each of

several plans proposed by Village stipu lated that HUD would

increase the contract rent and Village would incur a large loan to

be repaid out of the property’s future rental revenues. HUD,4 On November 17, 1995, the original lender assigned the note

and mortgage to HUD and collected the insurance proceeds. Thus,

HUD had the same remedial rights as the original lender.

6 however, rejected the proposals, insisting instead that Village pay

all of the $2 million repairs without any assistance from HUD.

In June 1995, Vill age formally requested that HUD

increase its contract rent since Mockingbird’s rental revenues were

inadequate to reimburse its operating costs and the necessary

maintenance and repairs. Without approving or denying the request,

however, HUD re plied by letter dated August 25, 1995, demanding

that Village place the $2 million needed to pay for the repairs in

escrow withi n 60 days or face default. On September 6, HUD

reiterated its dem and, cautioning that, although Village’s rent

increase request was under review, “no action will be taken at this

time due to the provisions in the HU D letter dated August 25,

1995.” Finally, on September 14, HUD notified Village that, since

V illage had not complied with the August 25, 1995 demand for $2

million and because Village had “violated paragraph eight of the

Regulatory Agreement by not maintaining the mortgaged premises in

good repair and condition,” HUD would “pr oceed without further

notice to take whatever remedies are appropriate”. HUD intended to

accelerate the mortgage and foreclose on the property. Indeed, on

December 1, 1995, HUD assumed control of the property as a

mortgagee in possession. 4

Village sued various HUD officers seeking a declaratory5 T he court alternatively held that, even if reveiwable,

Village failed to show that HUD’s actions were arbitrary and

capricious.

6 The City of Bryan pai d $10 for the property. That HUD was

authorized to sell the property to the Cit y of Bryan is not in

dispute: “HUD may negotiate the sale of any project to an agency

of the federal, State, or local government.” 24 C.F.R. 290.13(a).

7 At oral argument, HUD represented to this court that it owned

the p roperty and had spent several million dollars renovating it

when, in fact, it had already transferred the property to the City

of Bryan several months before.

7 judgment, an injunction, and mandamus, arguing that HUD unlawfully

refused to entertain its rent increase request, illegally demanded

$2 million, and made it impossible for Village to maintain the

property bec ause of insufficient rental revenues. The district

court, unmoved, ultimately denied all of Village’s requested relief

and granted summary judgment in fav or of HUD. According to the

court, HUD’s rent increase decisions are unreviewable 5

, and Village

had an absolute o bligation to maintain the property regardless

whether it received sufficient rents to cover repair costs.

After obtaining the favorable summary judgment, HUD

slated the property for foreclosure sale. Although Village moved

the district court to stay the sale pending appeal, the district

court, and subsequently this court, rejected the motion and allowed

the sale to proceed. HUD, as the only bidder, bought the property

at the auction and eventually “sold” 6 it to the City of Bryan

Housing Authority, allegedly to be demolished and red eveloped as

elderly and handicapped housing. 78 STANDARD OF REVIEW

This court reviews a grant of summary judgement de novo

,

applying the same standards as the district court. Summary

judgment is proper if “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with any

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to judgment as

a matter of law.” Fed. R. Civ. P. 56(c); s ee also Celotex Corp. v.

Catrett

, 477 U.S. 317 , 322-24, 106 S. Ct. 2548 (1986). All fact

questions are reasonable inferences draw therefrom are viewed in

the light most favorable to the non-movin g party. S ee Urbano v.

Continental Airlines, Inc. , 138 F.3d 204, 205 (5th Cir. 1998).

DISCUSSION

I. Mootness

Before considering the merits of this appeal, it is

necessary to determine whether Mockingbird’s foreclosure sale,

purchase by HUD, and subsequent transfer to the City of Bryan

mooted this appeal. “The mootness doctrine is grounded primarily

and originally in the appellate court’s inabi lity to fashion

relief.” Sullivan Cent. Plaza I, Ltd., v. BancBoston Real Estate

Capital Corp. (In re Sullivan Cent. Plaza, I, Ltd.)

, 914 F.2d 731,

733 -34 (5th Cir. 1990). Ordinarily, an appeal will be moot when

the property underlying the dispute has been sold at a foreclosure

sale because this court cannot fashion adequate relief, i.e.,9

cannot re verse the transaction. S ee id. at 733 (“If the debtor

fails to obtain a stay, and if the property is sold in the interim,

the district court will ordinarily be unable to grant any

relief.”); United States v. Blanche

, 169 F.3d 956, 957 (5th Cir.

1999); NCNB Texas Nat’l Bank v. Southwold Assocs.

, 909 F.2d 128,

129 (5th Cir. 1990).

The foreclosure sale and transfer to the city of Bryan

effectively mooted Village’s request for an injunction and mandamus

because of this court’s inability to fashion adequate relief. The

property has been sold at a foreclosure sale and is now held by a

party not before this court; the apartment complex has been torn

down. Thus, any request for relief that involves a transfer of

“the property” would amount to an impossible request for this court

to “unscramble the eggs”.

Although the injunction and mandamus requests are moot,

Village’s request for a declaratory judgment continues to present

a live dispute because this court can still provide adequate

relief. “Where several forms of relief are requested and one of

these requests subsequently becomes moot, the Court [can] still

consider[] the remaining requests.” P owell v. McCormack

, 395 U.S.

486, 496 n.8, 89 S. Ct. 1944, 1951 n.8 (1969); see also id. 395

U.S. at 499, 89 S. Ct at 1955 (“A court may grant declaratory

relief even though it chooses not to issue an injunction or

mandamus.”). A declaration that HUD violated its regulations and10

contracts grants Vi llage adequate relief because, even without

regaining title to the property, Village could use the declaration

as a predicate for a damages action against HUD in the Court of

Federal Claims. S ee id. (noting that “[a] declaratory judgment can

then be used as a predicate to further relief”); Globe, Inc. V.

United States

, 227 Ct.Cl. 784 (Ct. Cl 1981) (allowing plaintiff who

obtained a favorable declaratory judgment in federal district court

to sue the United States for damages in the Court of Claims). The

declaratory judgment aspect of this case is not moot.

II. REVIEWABILITY

The district court gra n ted summary judgment in part

because it found HUD’s actions judicially unreviewable in light of

HUD’s discretion to approve o r deny rent increase requests.

Village argues, however, that HUD’s actions are reviewable because

HUD violated its regulatory and contractual duty to entertain the

rent increase request.

The Administrative Procedure Act authorizes judicial

review of agency decisions except when the “age ncy action is

committed to agency discretion by law.” 5 U.S.C.A. § 701(a)(2).

An action is committed to agency discretion when “no judicially

manageable standards are available for judging how and when an

agency should exercise its discretion

. . . .” H eckler v. Cheney

,

470 U.S. 821, 830, 105 S. Ct. 1649, 1655 (1985).11 The circuit courts have unanimously agreed that because

Congress committed to HUD full discretion in determining whether to

grant or deny a rent increase request, the decision on the amount

of any increase is unreviewable. S ee Frakes v. Pierce

, 700 F .2d

501, 505 (9th Cir. 1983) (“[C]ourts are ill-equipped to superintend

economic and managerial decisions of the kind involve d here.”)

(quoting Hahn 430 F.2d at 1249); Langevin v. Chenango Court, Inc.

,

447 F.2d 296, 302-03 (2d Cir. 1971); Hahn

, 430 F.2d at 1249-51. In

determining rent increase requests, HUD must delicately balance the

competing interest s of the property owner, the tenants, and the

federal government as guarantor of the loan and payor of the

Section 8 sub sidy. HUD must also take into account factors that

bear on rental rates such as property taxes, utility rates, the

average rental rate in the area, estimates of future maintenance

needs, and vacancy rates. S ee 42 U.S.C.A. 1437 f (c)(2)(B). Because

of the lack of judicially manageable standards and HUD’s need for

a “flexible exercise of administrativ e discretion” in overseeing

its properties, Hahn

, 430 F.2d at 1246, courts should generally

refuse to review HUD’s substantive decisions regarding a rent

increase request.

The district court and HUD, however, misconstrue

Village’s argument. Village is not appealing HUD’s denial of its

requested rent increase; rather, it is appealing HUD’s refusal to

entertain the request and the alternative regulatory path taken by12

HUD

–- threatening foreclosure and demanding a multimillion-dollar

equity contribution from Village. The cases previously cited

universally recognize that a cou rt’s refusal to review HUD rent

decisions do es not necessarily obtain when HUD ignores “a plain

statutory duty, exceed[s] its jurisdiction, or commit[s]

constitutional error.” I d. at 1251. As Village’s allegations

involve these very issues, its claims are reviewable.

III. Village’s Request for a Declaratory Judgment

Village s eeks a declaratory judgment stating that HUD

acted arbitrarily and capriciously by (1) refusin g to consider

Village’s rent increase request; (2) declaring Village in default

and subsequently foreclosing on Mockingbird because Village failed

to adequately maintain the property; and (3) refusing to review its

rent increase request unless Village escrow ed $2 million for

repairs on Mockingbird.

Village argues that its obligation to maintain the

property was dependent upon HUD’s provid ing sufficient rent

revenues to pay for maintenance. According to Village, because HUD

r efused to approve a sufficient rental schedule, HUD acted

arbitrarily and capriciously in citing poor maintenance as the

reason for declaring Village in default. HUD counters that Village

had an absolute duty to maintain the property, regardless of its

rental income. This means that if Village’s rental income was

insufficient to pay all of its operating and maintenance costs,8 In fact, if Village’s mandamus request had not been mooted by

the transfer of Mockingbird to the City of Bryan, Village would

have been entitled to a mandamus to “require [HUD] to take action

upon [the] matter, without directing how it shall act.” F orest

Guardians v. Babbitt

, 174 F.3d 1178, 1190 (10th Cir. 1999) (quoting

Attorney General’s Manual on the Administrative Procedure Act, at

108 (1947)); see also 5 U.S.C. § 706(1) (“The reviewing court shall

. . . compel agency action unlawfully withheld or unreasonably

delayed.”); N.A.A.C.P. v. Secretary of Hous . and Urban Dev. 817

F.2d 149, 160 (1st Cir. 1987).

13 Village and its financial partners must either invest additional

equity to make up any deficiencies or risk default and foreclosure.

HUD’s argument woul d perhaps be convincing if it had

undertaken to review Village’s rental increase request and to rule

upon it. Both the Regulatory Agreement and HUD’s regulations

require HUD at le ast to entertain a rent increase request. 8 S ee

Regulatory Agre ement, ¶4(g) (stating that HUD “will at any time

entertain a written request for [a rent] increase”); 24 C.F.R. §

886.312(b) (stating that once HUD rece ives a request, it “ s hall

approve a rental schedule

. . . or shall deny the increase stating

the reasons there for”) (emphasis added). HUD violated its

contractual and regulatory duty to consider the rent request. This

defect renders suspect HUD’s other actions, particularly when the

full regulatory context is considered.

Village certainly had the duty to maintain Mockingbird

“so as to provide decent, safe and sanitary housing.” HAP

Contract, § 14(a); see also Regulatory Agreement, § 7 (“Owners

shall maintain the mort gaged premises . . . in good repair and

condition.”). Village’s duty, however, was not absolute. Nothing9 Albert Cason, HUD’s Houston Director of Multi-Family Housing,

testified that rental revenues pay for the costs of complying with

the Regulatory Agreem ent, including 1) the reserve fund for

replacements, Regulatory Agreement 2(a); 2) the residual receipts

fund, id. at 2(c); 3) the cost of produ cing and submitting the

property’s annual financial report, id. at 9(e); and, 4) the costs

of the management contract, id. at 9(a).

14 in the National Hou sing Act, HUD’s regulations, the Regulatory

Agreement, or the HAP contract requires Village, as a low income

property owner, to absorb or subsidize operating and maintenance

d eficiencies. Instead, the programs are designed to ensure that

HUD establishes rental rates so that property owners receive enough

revenue to cover all of the property’s expenses including

maintenance, repairs, debt service, taxes, and a six percent return

on invest ment. S ee 12 U.S.C.A. § 1747 c

. Thus, the HUD

reimbursement scheme resembles cost-plus contracts or public

utility regulation, in either of which situations the private party

who performs the work is assured of recovering reasonably incurred

costs as well as a reasonable return on investments.

That the cost of operating and maintaining the property,

in addition to the cost of complying with the Regulatory

Agreement, 9 must be paid for out of the regulated rental revenues

is reinforced in several ways. First, HUD’s internal

interpretation of its regulations indicates tha t operating and

mainten ance costs are to be derived from the rental revenues.

Albert Cason, the Director of Multifamily Housing (Houston, Texas

Office) and t he HUD official who oversaw Mockingbird, testified15

that “[e]verything that comes from the project’s operation is paid

from the rents,” and “[w]e’ve all agreed that the operation and

maintenance of the property comes out of the rents.” Similarly,

HUD’s handbo ok states that “[i]n reviewing requests from owners

concerning rents and charges, the Field Office should be guided by

the fact that these rents and fees should and must provide

sufficient and adequa te funding to operate the projects.”

Multifamily Asset Management and Project Servicing, United States

Department of Housing and Urban Development, Handbook 4350.01 Rev1,7 -1 (September 1992); s ee also 42 U.S.C. § 1437 f (c)(2)(B)

(stating that HUD shall adjust the HAP contract to provide for

sufficient monthly rents “to reflect increases in the actual and

necessary expenses of owning and maintaining the units”); 12 U.S.C.

§ 1747 c .; Beck Park

, 695 F.2d at 371 (“HUD has the duty to maintain

reasonable rents, based on operating costs, and to allow project

owners a reasonable return on their investment.”).

Second, HUD forced Villag e to be organized as a single

asset entity, which can neither own or operate any other property

nor conduct any other business besides owning the property. S ee

Regulatory Agreement § 6(f) (prohibiting Village from engaging “in

any other business or activity, including the operation of any

other rental project”). Because of this requirement, Village had

no source of income to maintain the property other than the rental

revenues. The only way for it to obtain a sufficient amount of16

money to pay for the needed repairs was by seeking a rent increase.

HUD’s refusal to consider a rent increase effectively forced

Village either to default or, as HUD well knew, to seek additional

equity or debt financing without assurance that these investments

would be recouped.

Third, Village signed a non-recourse note, guaranteed by

HUD. From the inception of HUD’s program, therefore, Village was

not required to support the property financially after its initial

investment. Had Village not obtained a non-recourse loan, then

either Village as an entity or perhaps its investors could have

been made responsible to the lender (and HUD) for failure to repay

or comply with terms of the loan. One HUD official put it this

way: “[HUD} does not require owners to make outright cash gifts to

the projects they own. After final endorsement of a mortgage,

there is no requirement of owners to provide additional funds to a

project.” Letter from Dean K. Reger, Deputy Director of

Multifamily Housing Management, to Mr. Streuby L. Drumm, Jr.

(October 21, 1994).

The interplay among these aspects of the regulat o ry

program makes clear that all of the expenses of operating and

maintai ning a low income housing project must be paid out of the

rental revenues, which in turn are subsidized by HUD. The

regulatory scheme does not contemplate that property owners must

bear the risk of maintaining properties based on insufficient

ren tal revenues. HUD could understandably refuse to provide1 0 In January 1988, a HUD inspection indicated that the HUDapproved rent schedule was in sufficient to satisfy Mockingbird’s

needs. S ee Management Review Ques tionnaire, January 27, 1988.

Seven years later, (and one month before Village requested the rent

increase request involved in this case), a HUD Management Re view

Repor t also stated that the HUD-approved rent schedule was

insufficient to meet Mockingbird’s nee ds. S ee Management Review

Summary Sheet, May 3, 1995.

1 1 In 199 0, Village requested a 15% rent increase, but HUD

approved a 10.4% increase. In 1993, Village requested an 18%

increase, but HUD approved only a 12% increase. In 1994, Village

requested a 15% increase, but HUD granted only a 7% increase. The

last time Village requested a rent increase, in 1995, Village

requested a 29% increase, but HUD refused to consider the request

unless Village first escrowed $2 million.

17 financial assistance to an owner that has misappropriated funds,

mismanaged the property, taken a profit instead of maintaining the

property, or been negligent in its management in some other regard.

When those elements are absent, however, the statutes provide that

HUD must ensure that the owner receives rents sufficient to meet at

least the operating and maintenance expenses of the property.

There is no statutory or regulatory basis for imposing on a

conscientious low-income housing operator the risk of uncompensated

dilapidation or deterioration; the federal government, not the

private contractor, is charged with funding the public program.

In the case at hand, it is alleged that rental revenues

approved by HUD were consistently insufficient to cover the cost of

operating and maintaining the property. 10 Village sought several

rental increases over the course of its ownership of Mockingbird,

but it never received the full amount requested, nor the amount it

thought was necessary to maintain the property. 11 Annual financial1 2 Although HUD now accuses Village of poorly maintaining

Mockingbird, there is a dearth of evidence to support its claim.

At most, the record reflects a concern by HUD that Mockingbird’s

maintenance staff was inexperienced. The record does not evince,

however, th e sort of wide-spread mismanagement suggested by HUD.

In fact, the record reveals the opposite. For instance, in a

letter written to Village less than two weeks before HUD became a

mortgagee in possession, HUD conceded that it “has no current

problems with the performance of the Management Company because it

was presumed the company was not p roperly funded to effect

appropriate repairs.” Letter from Albert Cason, H UD Director of

Multi-Family Housing

, to Dean Earle Ross, General Partner,

Christopher Village Limited Partnership (November 20, 1995); s ee

also Deposition of Albert Cason, 286 (October 24, 1996)

(testifying that the cause of Mockingbird’s decline was not the

management, but the lack of money to repair the property); HUD

Management Review, Part A, A-1 (May 3, 1995) (finding that,

although Mockingbird is in poor conditi on, “on-site management

appears to be earnestly trying to make corrections with the funds

and training allocated”).

18 audits appear to ha ve routinely showed, moreover, that Village

never misappropriated funds or squandered its revenues. Village

never recei ved a profit from Mockingbird and appears to have

applied all of its revenues to cover costs of operating and

maintaining the property. In addition, there was no evidence that

the property was mismanaged, 1 2 nor did HUD ever attempt to remov e

the management company as it had a right to do. S ee Regulatory

Agreement, 9(a) (“Any management contract entered into by Owners

.

. . involving the project shall contain a provision that it shall

be subject to term ination, without penalty, and with or without

cause, upon written request by the Commissioner addressed to the

Owners.”).13 Furthermore, HUD’s motive in refusing to consider Village’s

rent request was suspect. Internal HUD e-mail showed that, for

several months prior to declaring Village in default, HUD officials

planned to force Mockingbird into defa ult and thus obtain the

property. Responding to one suggested course of action, one HUD

official stated:

I don’t think these are the same courses of action, but

are parallel. They’ll attempt possession through a deed in lieu;

conduct the inspection and not ice the owner in case they need a

regulatory default and begin foreclosure as soon [as] the loan is

assigned (if it[‘]s not). Whichever action is completed first will

have accomplished the desired goal: possession of the property, the

quickest way possible.

E-Mail from Albert B. Sullivan to Kenneth F. Hannon et

al. (April 24, 1995).

19

These facts reinforce Village’s contention that HUD’s $2

million deman d was arbitrary and capricious. As noted s upra

,

instead of considering Village’s rent request, HUD determined that

“no action” would be taken unless Village first escrowed $2

million. HUD cannot point to any statute, regulation, or agreement

with Villa ge giving it the discretion to table Village’s rent

increase request and use it as leverage to demand $2 million new

equity for repairs. 13

Because HUD acted without statutory or regulatory

authority, the agency arbitrarily and capriciously demanded

Village to escrow $2 million before it would consider the rent

request.

HUD argues that a holding in Village’s favor would mean

that HUD ha s the duty to pay for all of a property’s maintenance

expenses, thus giving owners the incentive to neglect the20

maintenance needs of their property. We disagree. This decision

has no bearing on those cases where a property owner has

negligently permitt ed the property to deteriorate or has misused

its rental income in a way that has caused the maintenance problem.

As noted supra

, rental increase decisions are discretionary and are

generally unreviewable by the courts. In this case, however, HUD

acted arbitrarily and capriciously when it refused to abide by its

legal obligation to consider a rental increase request from a nonnegligent owner and instead demanded a $2 million cash infusion and

then declared the property in default for those very reasons.

IV. DUE PROCESS VIOLATION

Village also argues that H U D officials violated due

process by abating a single Section 8 subsidy payment. In May

1995, a HUD inspection of Mockingbird revealed that 173 out of 200

units failed HUD’s Housing Quality Standard (“HSQ”) review.

Consequently, HUD gave Mockingbird 30 days to repair the units or

face abatement of its Section 8 subsidies. A follow-up inspection

revealed that all but 19 of the units were repaired; thus, HUD

abated its subsidy accordingly. The abatement, which totaled $

7,594, lasted only one month (August 1995) as the remaining 19

units later passed inspection. According to Village, HUD officials

falsified the inspection reports tha t formed the basis of HUD’s

decision to abate. In addition, Village claims that “[n]one of the

cited deficiencies justified abating the Section 8 payments.”1 4 The documents that V illage proffers as proof of falsified

reports are immaterial. HUD could not have possibly relied upon

these documents in deciding to abate the August payment because all

of the documents pre-date HUD’s June 15, 1995, re-inspection that

formed the basis of the abatement.

21 The HAP contract gives HUD complete discretion regarding

decisions to reduce Village’s Section 8 subsidy. S ee Housing

Assistance Payments Contract, § 26 (b)(2)(b) (stating that HUD may

“[r]educe or suspend housing assistance payments until the default

under this Contract has been cured to the satisfaction of HUD”).

As with decisions whether to grant or deny rent increase requests,

see supra

, HUD’s exercise of discretion with respect to HUD’s

abatement decision is unreviewable. 14 The district court correctly

granted summary judgment for HUD on this issue.

CONCLUSION

Village’s request for an injunction and mandamus is now

moot because Mockin gbird was sold at a foreclosure sale,

transferred to the City of Bryan, and razed. Village’s declaratory

judgment r e quest, however, still presents a live controversy.

Because we find that HUD acted arbitrarily and capriciously in

declaring Village in default after it demanded that Village pay $2

million before considering Village’s rent incre ase request, we

reverse the district court’s grant of summary judgment. Upon

remand, the dist rict court should issue Village’s requested

declaratory judgment consistent with this opinion.22 Appeal DISMISSED AS MOOT in part, AFFIRMED in part, and

REVERSED in part.