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Langevin v. Chenango Court Inc.

decided: July 23, 1971.

FRANCIS M. LANGEVIN ET AL., APPELLANTS,
v.
CHENANGO COURT, INC., AND ROBERT J. SMITH, DEPUTY DIRECTOR OF THE FEDERAL HOUSING ADMINISTRATION, APPELLEES



Friendly, Chief Judge, and Hays and Oakes, Circuit Judges. Oakes, Circuit Judge (dissenting).

Author: Friendly

FRIENDLY, Chief Judge:

I.

Since 1934 Congress has provided various forms of federal assistance to housing. Our concern here is with § 221 of the National Housing Act. As enacted in 1954, 68 Stat. 599, this was limited to the grant of federal mortgage insurance to certain types of nonprofit mortgagors on housing for rental to persons displaced by urban renewal projects or as a result of other governmental actions. In 1961 the program was greatly expanded, 75 Stat. 149. Its design was declared to be "to assist private industry in providing housing for low and moderate income families and displaced families," § 221 (a), 12 U.S.C. § 1715 l (a).*fn1 The mortgagor could be "a limited dividend corporation (as defined by the Secretary)," § 221(d) (3), 12 U.S.C. § 1715 l (d) (3).*fn2

The mortgages were to bear belowmarket interest of approximately 3%, 12 U.S.C. § 1715 l (d) (5); it was contemplated they would be purchased by the Federal National Mortgage Association. The amended statute provided, as did its predecessor, that the mortgagor must be "regulated or supervised under Federal or State laws or by political subdivisions of States, or agencies thereof, or 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."*fn3

The FHA has implemented the § 221(d) (3) program by extensive regulations, 24 C.F.R. § 221.501 et seq. With respect to supervision of rents, the applicable regulation provides:

Rents and charges. In approving the allowable rents and charges and in passing upon applications for changes, consideration will be given to the following and similar factors:

(1) Rental income necessary to maintain the economic soundness of the project;

(2) Rental income necessary to provide a reasonable return on the investment consistent with providing reasonable rentals to tenants. 24 C.F.R. § 221.531(c).*fn4

Defendant Chenango Court, Inc., was organized as a limited dividend corporation under New York law to construct Countrytowne, a housing complex of some 255 rental units in Binghamton, New York, with federal assistance under § 221(d) (3). It entered into the standard regulatory agreement with the FHA under which it covenanted that:

No increase will be made in the amount of the gross monthly dwelling income for all units as shown on the rental schedule unless such increase is approved by the Commissioner, who will at any time entertain a written request for an increase properly supported by substantiating evidence and within a reasonable time shall:

(1) Approve a rental schedule that is necessary to compensate for any net increase, occurring since the last approved rental schedule, in taxes (other than income taxes) and operating and maintenance expenses over which Owners have no effective control, or

(2) Deny the increase stating the reasons therefor.

The history of the project has not been a happy one. Since its inception in 1963, Chenango's investors have received no dividends and Chenango has received no management fees. During the year ended July 31, 1970, it lost more than $122,000. Shortly thereafter it defaulted on payments due under the mortgage and on certain real estate taxes, and the United States instituted a foreclosure ...


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