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BRONSTEIN v. PHILADELPHIA FAIR HOUS. COMMN.

May 1, 1980

ROBERT BRONSTEIN, t/a R & B MANAGEMENT ASSOCIATES and WELSH-GRANT DEVELOPERS, a Limited Partnership
v.
THE PHILADELPHIA FAIR HOUSING COMMISSION, SHELLY FRIEDMAN, Office of Loan Management, United States Department of Housing and Urban Development, LAWRENCE B. SIMONS, Assistant Secretary, United States Department of Housing and Urban Development, PATRICIA HARRIS, Secretary of the Department of Housing and Urban Development, UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT



The opinion of the court was delivered by: LUONGO

This action challenges the authority of the Philadelphia Fair Housing Commission (FHC) to enforce the city's housing and fire code in a federally insured housing project by suspending rent increases that had been approved by the United States Department of Housing and Urban Development (HUD). Plaintiffs Robert Bronstein and Welsh-Grant Developers (Welsh-Grant) are, respectively, manager and owner-mortgagor of Woodhaven Gardens, the project affected by the FHC order. The complaint prays for injunctive and declaratory relief and includes a somewhat nebulous claim for damages. *fn1" Defendants are the FHC; HUD; former HUD secretary Patricia Harris; Lawrence B. Simons, assistant HUD secretary responsible for supervision of federally insured mortgages; and Shelly Friedman, assistant to defendant Simons in HUD's office of loan management. *fn2" Plaintiffs allege that the action arises under the Constitution (fifth and fourteenth amendments/due process); section 221 of the National Housing Act, 12 U.S.C. § 1715l (1976 & Supp. II 1978); and HUD regulations, 24 C.F.R. Part 403 (1978), promulgated pursuant to section 7(d) of the Housing and Urban Development Act, 42 U.S.C. § 3535(d) (1976). Jurisdiction is predicated on 28 U.S.C. § 1331(a) (1976).

The case is presently before me on motions by plaintiffs and the federal defendants. Arguing that HUD regulations preempt the FHC's authority to suspend federally approved rent increases as a means of code enforcement, plaintiffs move for summary judgment against the FHC. The FHC has interposed no objection to the entry of summary judgment against it. The federal defendants, however, vigorously contest plaintiffs' motion. HUD and the defendant federal officials have consistently adhered to their position that the regulations do not prohibit the action taken by the FHC. Indeed, they peg their motion for summary judgment on counts I, II and IV on that argument. In addition, the federal defendants, construing plaintiffs' prayer for "costs incurred in attempting to require the defendants to follow HUD's regulations . . ." as a claim for compensatory damages, move in the alternative to dismiss that aspect of counts I and II on the ground of sovereign immunity. Upon review of the memoranda submitted by the parties and after oral argument, I conclude that plaintiffs are entitled to summary judgment on the preemption issue but that the damages claim against the federal defendants must be dismissed.

 The Background of the Controversy

 Woodhaven Gardens, the target of the FHC order, is a 518 unit garden apartment and town-house complex with a federally subsidized mortgage granted pursuant to section 221(d)(3) of the National Housing Act, 12 U.S.C. § 1715l (d)(3) (Supp. II 1978). The first mortgages and first mortgage notes on the property are insured by the Federal Housing Administration (FHA) and are now held by the Federal National Mortgage Insurance Corporation. Because Woodhaven Gardens is a federally subsidized project, many aspects of its operations are regulated by HUD. One area of HUD control is the regulation of rents, and HUD approval is required before the owner-mortgagor may implement a rent increase.

 The seeds of this controversy took root in early 1977 when plaintiff Welsh-Grant applied for a rent increase at Woodhaven Gardens. As required by HUD regulations, 24 C.F.R. §§ 401.2 to .4 (1978), Welsh-Grant provided the tenants of Woodhaven Gardens with notice of its application to HUD, then submitted to HUD financial and other documentation in support of its application together with tenant comments regarding the requested increase. HUD subsequently authorized an 8.4% increase in rent effective July 1, 1977, and an additional 6.4% increase effective October 1, 1977.

 Prior to and following the escrow directive, there was also a volley of communication flowing between plaintiffs, the FHC, and HUD officials. On August 11, 1977, defendant Friedman advised the acting director of HUD's Philadelphia area office that HUD regulations at 24 C.F.R. Part 403 did not preempt the jurisdiction of the FHC, and the acting director relayed Friedman's position to the Philadelphia city solicitor by letter dated August 15, 1977. Id. P 25 & Exhibit C. These HUD officials had concluded that the power of the FHC related to code enforcement as opposed to rent control and that, consequently, the FHC order had only an indirect impact on rents. Id., Exhibit C. HUD's position on the preemption issue articulated in the August 15 letter prompted a letter from plaintiffs' counsel on August 26, 1977, requesting HUD's acting regional administrator to review the regulations and reconsider the agency's stand on the jurisdiction of the FHC. Id., Exhibit D. Having received no response from the regional administrator, plaintiffs' counsel communicated directly with defendant Simons. In letters dated November 16 and December 6, 1977, plaintiffs again requested HUD to reassess its stance on the preemption issue. Id., Exhibit E. On December 28, 1977, defendant Simons replied that HUD had not yet formulated a final position with respect to the proceedings before the FHC. Id., Exhibit E.

 The FHC held a second hearing on January 25, 1978. After argument on the preemption issue, the FHC entered an order continuing the escrow arrangement and prohibiting the enactment of future rent increases until HUD reached a decision (presumably on the preemption issue); the order also conditioned the implementation of the approved increase upon correction of the code violations cited. Id., Exhibit H. *fn3" On February 2, 1978, the FHC rescinded the existing order and issued in its place the following order:

 
There will be no Rent Increase until all the violations are complied with (sic) and a Clearance Certificate obtained. The next rental due date after this, the Rent Increase will take effect.
 
All rent monies held in Escrow by the Urban League will remain there until this issue is resolved by H.U.D.
 
Id., Exhibit J.

 By letter dated April 24, 1978, the director of housing management in HUD's Philadelphia area office notified plaintiff Bronstein that the release of the escrow funds held by the Urban League was a matter between plaintiffs and the FHC. Id., Exhibit K. A letter issued on May 1, 1978, to plaintiffs' counsel by the chairman of the FHC in effect reaffirmed the February 2 order and advised that the release and disposition of the money held in escrow was contingent upon a final determination by HUD. Id., Exhibit L. This action was filed on May 8, 1978. To date, the money has remained in escrow.

 The Preemption Issue

 The controversy at bar revolves around a single legal issue, namely, whether HUD regulations preempt the authority of the FHC to suspend a HUD-approved rent increase in the name of code enforcement. Section 403.1(a) of the regulations, which defines the scope and effect of HUD's authority, states that "(t)he regulation of rents for projects coming within the scope of "Subpart C Subsidized Insured Projects' is preempted in its entirety by the promulgation of these regulations." 24 C.F.R. § 403.1(a) (1978). Section 403.9, which applies to subsidized insured projects, reiterates that intent. After noting the desirability of minimizing defaults by the mortgagor, preserving the viability of the projects as a source of low-income housing, and protecting the government's substantial economic interest, HUD states its intent to preempt "the entire field of rent regulation by local rent control boards . . . or other authority, acting pursuant to state or local law as it affects projects covered by this subpart." Id. § 403.9.

 Plaintiffs argue that the regulations unequivocally and totally prohibit any interference by the FHC with the federally approved rent structure for Woodhaven Gardens. The federal defendants, on the other hand, contend that the regulations preempt only the control of rents by local rent control boards. They argue that the FHC is not a rent control board but simply a municipal body charged with the enforcement of the city's fire and housing codes; hence, its authority is not preempted by the regulations upon which plaintiffs rely. Plaintiffs do not dispute the federal defendants' assertion that the FHC is not a rent control board. They do contest the federal defendants' contention that the FHC is not an "other authority" subject to the strictures of the regulations.

 The federal defendants advance a relatively restrictive definition of "other authority." Emphasizing the language of section 403.1(a) of the regulations that speaks of the "local rent control board or other authority regulating rents pursuant to state or local law," the federal defendants would limit the preemptive intent of the regulations to authorities that regulate rents in the same manner as local rent control boards. The federal defendants distinguish the power of the FHC, differentiating the power to freeze rents until code violations are corrected from the power to "regulate" rents. To the federal defendants, the ...


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