Court Opinion

ID: 2769026
Source: CourtListenerOpinion
Date Created: 2015-01-12 21:00:53.709375+00
Date Added: 2024-06-11T10:46:17.006842
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
Nos. 14-1673 & 14-1808
EVERGREEN SQUARE OF CUDAHY,
GRANT PARK SQUARE APARTMENTS CO. and
WASHINGTON SQUARE APARTMENTS CO.,
                                   Plaintiffs-Appellants,

                                 v.

WISCONSIN HOUSING AND ECONOMIC
DEVELOPMENT AUTHORITY,
                          Defendant, Third-Party Plaintiff,
                               Appellee, Cross-Appellant,

                                and

JULIAN CASTRO, Secretary of the United States
 Department of Housing and Urban Development,
                                       Third-Party Defendant,
                                              Cross-Appellee.
                    ____________________

        Appeals from the United States District Court for the
                   Eastern District of Wisconsin.
         No. 2:13-cv-00743-JPS — J. P. Stadtmueller, Judge.
                    ____________________

  ARGUED NOVEMBER 5, 2014 — DECIDED JANUARY 12, 2015
               ____________________
2                                              Nos. 14-1673 & 14-1808

    Before BAUER, ROVNER, and TINDER, Circuit Judges.
    TINDER, Circuit Judge. We consider whether this case, a
breach-of-contract action related to the provision of federal-
ly-subsidized housing, presents one of the rare instances
when federal-question jurisdiction exists over a complaint
asserting only state-law causes of action.
     Plaintiffs-Appellants Evergreen Square of Cudahy, Grant
Park Square Apartments Company and Washington Square
Apartments Company are the owners of multifamily hous-
ing rental projects in Wisconsin that are assisted by the Unit-
ed States Department of Housing and Urban Development
(“HUD”) program under Section 8 of the United States
Housing Act of 1937, 42 U.S.C. § 1437f (“Section 8”). 1 Plain-
tiffs sued the Wisconsin Housing and Economic Develop-
ment Authority (“WHEDA”) in federal court alleging
WHEDA breached certain Housing Assistance Payments
(“HAP”) contracts by failing to approve annual rent increas-
es, as required by federal law, and by requiring Plaintiffs to
submit rent comparability studies as a prerequisite to receiv-
ing rent increases. WHEDA in turn filed a Third-Party Com-
plaint against HUD, alleging that, if WHEDA is found to
have breached the HAP contracts, then those breaches re-
sulted from WHEDA following congressional and HUD di-
rectives. Both Plaintiffs’ Amended Complaint (the operative
pleading) and WHEDA’s Third-Party Complaint alleged that

1  In order to aid families “in obtaining a decent place to live” and pro-
mote “economically mixed housing,” Section 8 authorizes rent subsidies
on behalf of low-income families living in rental housing owned primari-
ly by non-public entities such as Plaintiffs. 42 U.S.C. § 1437f(a).
Nos. 14-1673 & 14-1808                                           3

the district court had subject-matter jurisdiction pursuant to
28 U.S.C. § 1331.
    WHEDA filed a motion to dismiss seeking to obtain,
among other things, a dismissal of Plaintiffs’ Amended
Complaint. Although the motion did not invoke Federal
Rule of Civil Procedure 12(b)(1), WHEDA did mention, at
least in passing—in two paragraphs of its 30-page support-
ing memorandum—that the district court was obligated to
consider sua sponte the existence of federal jurisdiction, and
urged the district court to “specifically find that federal …
jurisdiction is present in this case before moving on to the
merits of this motion.” Perhaps lulled into complacency by
the brevity of WHEDA’s jurisdictional remarks and its fail-
ure to cite Rule 12(b)(1), Plaintiffs and HUD each filed briefs
without mentioning jurisdiction. The district court then is-
sued a short order dismissing Plaintiffs’ Amended Com-
plaint for lack of subject-matter jurisdiction, and dismissing
WHEDA’s Third-Party Complaint as being wholly depend-
ent upon the dismissed Amended Complaint. Plaintiffs filed
a notice of appeal, and WHEDA filed a cross-appeal seeking
reinstatement of the Third-Party Complaint in the event
Plaintiffs’ Amended Complaint is reinstated.
    The district court’s order, which was entered without the
benefit of the parties’ full briefing on jurisdiction, finds itself
without an ally on appeal. All parties agree the district court
erred and urge us to find that federal-question jurisdiction
exists over the claims raised in the Amended Complaint.
Technically, the parties’ united front is irrelevant since the
parties cannot confer subject-matter jurisdiction by agree-
ment, Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de
Guinee, 456 U.S. 694, 702 (1982), and federal courts are obli-
4                                         Nos. 14-1673 & 14-1808

gated to inquire into the existence of jurisdiction sua sponte,
Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 593
(2004). While we applaud the district court’s vigilance in po-
licing jurisdiction, see id., a court in doubt of its own jurisdic-
tion generally is well-advised to solicit the parties’ views on
the subject prior to ruling.
    We review de novo a district court’s dismissal of a com-
plaint for lack of subject-matter jurisdiction. Commonwealth
Plaza Condo. Ass’n v. City of Chicago, 693 F.3d 743, 745 (7th
Cir. 2012). Plaintiffs invoked jurisdiction pursuant to 28
U.S.C. § 1331, which grants district courts “original jurisdic-
tion of all civil actions arising under the Constitution, laws,
or treaties of the United States.” A case may “aris[e] under”
federal law in two ways. Gunn v. Minton, --- U.S. ----, 133 S.
Ct. 1059, 1064 (2013). “Most directly, a case arises under fed-
eral law when federal law creates the cause of action assert-
ed.” Id. This “accounts for the vast bulk of suits that arise
under federal law,” id., but it does not apply to the state-law
breach-of-contract claims asserted in Plaintiffs’ Amended
Complaint. “[E]ven where a claim finds its origins in state
rather than federal law,” the Supreme Court has “identified
a special and small category of cases in which arising under
jurisdiction still lies.” Id. (internal quotation marks omitted).
    In order to decide whether a case falls within this slim
category, we must ask whether the “state-law claim neces-
sarily raise[s] a stated federal issue, actually disputed and
substantial, which a federal forum may entertain without
disturbing any congressionally approved balance of federal
and state judicial responsibilities.” Grable & Sons Metal
Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005).
Stated differently, “federal jurisdiction over a state law claim
Nos. 14-1673 & 14-1808                                            5

will lie if a federal issue is: (1) necessarily raised, (2) actually
disputed, (3) substantial, and (4) capable of resolution in
federal court without disrupting the federal-state balance
approved by Congress.” Gunn, 133 S. Ct. at 1065. “Where all
four of these requirements are met, … jurisdiction is proper
because there is a ‘serious federal interest in claiming the
advantages thought to be inherent in a federal forum,’ which
can be vindicated without disrupting Congress’s intended
division of labor between state and federal courts.” Id. (quot-
ing Grable, 545 U.S. at 313–14); see also Grable, 545 U.S. at 312
(“The doctrine captures the commonsense notion that a fed-
eral court ought to be able to hear claims recognized under
state law that nonetheless turn on substantial questions of
federal law, and thus justify resort to the experience, solici-
tude, and hope of uniformity that a federal forum offers on
federal issues.”) (citation omitted). This inquiry rarely results
in a finding of federal jurisdiction. See Hartland Lakeside Joint
No. 3 Sch. Dist. v. WEA Ins. Corp., 756 F.3d 1032, 1033 (7th Cir.
2014). However, “‘[r]arely’ differs from ‘never.’” Id.
     In Grable, the Internal Revenue Service seized real prop-
erty owned by the petitioner to satisfy a federal tax delin-
quency and gave notice of the seizure to the petitioner by
certified mail before selling the property to the respondent.
545 U.S. at 310. Five years later, the petitioner brought a qui-
et title action in state court claiming that the respondent’s
title was invalid because a federal statute required the IRS to
give notice of the seizure and sale by personal service rather
than by certified mail. Id. at 311. The respondent removed
the case to federal district court on the basis that the peti-
tioner’s title claim depended on the interpretation of federal
tax law. The Supreme Court held that federal “arising un-
der” jurisdiction existed over the petitioner’s state-law quiet
6                                        Nos. 14-1673 & 14-1808

title action. Id. at 320. The Court found that whether the peti-
tioner was given notice within the meaning of the applicable
federal statute was “actually in dispute” and an “essential
element” of the petitioner’s quiet title action, and was “an
important issue of federal law that sensibly belongs in a fed-
eral court.” Id. at 315. The Court stated that the federal gov-
ernment “has a strong interest in the prompt and certain col-
lection of delinquent taxes,” and “because it will be the rare
state title case that raises a contested matter of federal law,
federal jurisdiction to resolve genuine disagreement over
federal tax title provisions will portend only a microscopic
effect on the federal‐state division of labor.” Id. (internal quo-
tation marks omitted).
    Prior to applying the Grable inquiry to the breach-of-
contract claims raised in the Amended Complaint, we re-
view two cases which have trod on similar ground. In Price
v. Pierce, 823 F.2d 1114 (7th Cir. 1987), we held that prospec-
tive Section 8 tenants’ claims for breach of a HAP contract
against a property owner and a state housing agency fell
within the scope of federal-question jurisdiction. Id. at 1120–
21. We stated that the “argument for a federal rule is particu-
larly strong in these housing cases,” since “it would be odd
to think that a suit by tenants and applicants for federally
subsidized housing against developers of such housing for
breach of contracts approved by HUD and fundamental to
the achievement of HUD’s objectives under [42 U.S.C.] sec-
tion 1437f would have to be brought in state court and de-
cided in accordance with state contract law.” Id. at 1120.
    The First Circuit in One & Ken Valley Housing Group v.
Maine State Housing Authority, 716 F.3d 218 (1st Cir. 2013),
relied upon Price in deciding that federal “arising under”
Nos. 14-1673 & 14-1808                                         7

jurisdiction existed over claims that were remarkably similar
to the claims raised by Plaintiffs in this case. As in this case,
the Ken Valley plaintiffs were apartment owners alleging that
a state housing agency breached HAP contracts by refusing
to grant annual rent increases pursuant to Section 8. Id. at
220. The First Circuit held that the following “federal ingre-
dients,” in combination, satisfied Grable’s requirements for
federal jurisdiction: the dispute involved a federal contrac-
tor’s implementation of a federal program; the HAP con-
tracts were drafted and approved by HUD and signed by a
HUD official; and the plaintiffs alleged that the federal con-
tractor (i.e., the state housing agency) was in breach of the
HAP contract by following a guideline promulgated by
HUD pursuant to a federal statute. Id. at 224. The Ken Valley
court noted that “other Section 8 landlords have brought al-
most identical actions elsewhere,” and the “outcomes of the
legal questions in these cases will dictate whether HUD
and/or the public housing agencies that administer Section 8
must pay millions of dollars in additional rents to landlords,
which—in turn—could require the agencies to scale back the
scope of the Section 8 program.” Id. at 225. This issue “‘is po-
tentially so important to the success of the [Section 8] pro-
gram—since on its resolution may turn the amount of lower-
income housing actually provided—that we believe that
Congress, had it thought about the matter, would have
wanted the question to be decided by federal courts apply-
ing a uniform principle.’” Id. (quoting Price, 823 F.2d at 1119–
20).
   We find Ken Valley’s application of the Grable inquiry to
be persuasive. The resolution of this case turns on issues of
federal law—specifically, the application of 42 U.S.C. § 1437f
and related regulations and notices promulgated by HUD,
8                                       Nos. 14-1673 & 14-1808

see 24 C.F.R. § 883.101, et seq. These issues are necessarily
raised, actually disputed, and substantial. While state law
may create the breach-of-contract causes of action, the only
disputed issues involve the proper interpretation of Section 8
and HUD’s implementing guidance. Cf. Hartland, 756 F.3d at
1033–34 (applying the Grable inquiry and finding no jurisdic-
tion because, in part, “even from [plaintiff’s] perspective, the
case contains non-trivial issues” of state law); Bennett v. Sw.
Airlines Co., 484 F.3d 907, 909 (7th Cir. 2007) (same, when
“everything will depend on a fact-bound question” and the
“meaning of federal statutes and regulations may play little
or no role”). In particular, Plaintiffs and WHEDA dispute
how HUD-promulgated “Automatic Annual Adjustment
Factors” should be applied to adjust rents at Plaintiffs’ prop-
erties, and which party bears the burden of producing a rent
comparability study pursuant to § 1437f and HUD’s regula-
tions and notices.
    These issues are “capable of resolution in federal court
without disrupting the federal-state balance approved by
Congress.” Gunn, 133 S. Ct. at 1065. Unlike a typical breach-
of-contract case, the HAP contracts at issue are ones to which
HUD, a federal agency, prescribes both the form and content.
The HAP contracts must be approved by HUD and their
terms are administered pursuant to federal laws and regula-
tions. WHEDA expressly contends that, if there was any
breach of contract, then federal law required it. See Hartland,
756 F.3d at 1034 (“Many things comply with federal law but
violate state law. To displace state law, federal law must re-
quire a particular course of action at odds with state
rules….”). Similar lawsuits have been brought nationwide
by Section 8 property owners. Ken Valley, 716 F.3d at 225 &
n.5. In the aggregate, these cases have the potential to sub-
Nos. 14-1673 & 14-1808                                         9

stantially influence the scope and success of the Section 8
program. See id. at 225. Accordingly, the federal government
has a strong interest in these issues being decided according
to uniform principles. The “desirability of a uniform inter-
pretation of these contracts … will best be achieved by al-
lowing suit in federal courts.” Price, 823 F.2d at 1120. We find
that this case fits within the “special and small category of
cases” in which federal “arising under” jurisdiction lies over
a complaint raising state-law causes of action. Gunn, 133 S.
Ct. at 1064 (internal quotation marks omitted).
    We pause to remark upon an issue raised by WHEDA. If
Plaintiffs had initially filed their complaint in Wisconsin
state court, and WHEDA in turn filed its third-party com-
plaint against HUD, then HUD would likely have removed
the state-court action to federal district court pursuant to 28
U.S.C. § 1442(a). In such a situation, there would have been
no question about federal jurisdiction. In this case, if we
were to affirm the district court’s dismissal for lack of sub-
ject-matter jurisdiction, this same outcome would likely re-
sult. All of the parties would wind up back in federal court
where they began, with nothing to show for their troubles.
In short, WHEDA contends that considerations of judicial
economy militate against affirming a “pointless” dismissal.
See City of Joliet v. New W., L.P., 562 F.3d 830, 833 (7th Cir.
2009) (noting it would be “pointless to order this suit re-
manded, only to have HUD re-remove it in a trice”). The
snag in this line of reasoning is that federal courts possess
only that power authorized by Constitution and statute, Kok-
konen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994),
and considerations of judicial economy alone may not ex-
pand federal jurisdiction. Cf. City of Joliet, 562 F.3d at 833
(finding the presence of subject-matter jurisdiction, apart
10                                           Nos. 14-1673 & 14-1808

from concerns about judicial economy). Happily in this in-
stance, both considerations of judicial economy and the ju-
risdictional reach of 28 U.S.C. § 1331 direct the same out-
come.
    Finally, we consider WHEDA’s request that we affirm on
alternate grounds by finding in its favor on the merits. The
district court did not reach the merits, but WHEDA again
resorts to what it contends are considerations of judicial
economy. Plaintiffs oppose WHEDA’s request, contending
that they have not been afforded a sufficient opportunity to
present all of their arguments. After review of the record, we
find that, regardless of what considerations of judicial econ-
omy might counsel, overriding considerations of justice dic-
tate that we remand for decision on the merits in the first in-
stance by the district court.2 We make the same finding with
respect to HUD’s request that we reach the merits of
WHEDA’s Third-Party Complaint.
    For the foregoing reasons, we REVERSE the decision of
the district court and REMAND with instructions to rein-
state Plaintiffs’ Amended Complaint and WHEDA’s Third-
Party Complaint.

2  Although we have found the reasoning of Ken Valley to be persuasive
on the jurisdictional issue, we express no opinion about the persuasive-
ness of Ken Valley’s reasoning on the merits.