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UNITED STATES v. FLAKE

January 29, 1992

UNITED STATES OF AMERICA, Plaintiff, against FLOYD FLAKE, WILBURN HOLLAND, ALLEN A.M.E. HOUSING DEVELOPMENT FUND CORPORATION, ALLEN A.M.E. CHURCH, AND ALLEN CHRISTIAN SCHOOL INC., Defendants.

Nickerson


The opinion of the court was delivered by: EUGENE H. NICKERSON

NICKERSON, District Judge

 The United States brought this action to recover Funds transferred from a federally-funded Department of Housing and Urban Development ("HUD") housing project to a church school. This court has jurisdiction under 28 U.S.C. §§ 1331, 1345

 Defendants move to dismiss the complaint on the grounds that it fails to state a claim and is time barred. In accordance with Federal Rule of Civil Procedure 12(b)(6) the court treats the motion as one for summary judgment under Rule 56 and has considered matters outside the pleadings. Both parties had notice that the court would do so, and neither party objects.

 I.

 There are five defendants. Defendant Allen A.M.E. Housing Development Fund Corporation ("Allen Housing") is a non-profit corporation located in Jamaica, New York. Defendant Allen A.M.E. Church ("Allen Church") is a religious corporation also located in Jamaica, New York. Defendant Allen Christian School Inc. ("Allen School") is a corporation owned and controlled by Allen Church. Defendant Floyd Flake ("Flake") was chairman of Allen Housing and Pastor and a Trustee of Allen Church. Defendant Wilburn Holland ("Holland") was vice chairman of Allen Housing and a Trustee of Allen Church.

 Under Section 202 of the Housing Act of 1959, as amended, 12 U.S.C. § 1701q, the Secretary of HUD may lend money to nonprofit corporations to provide housing and "related facilities" for the elderly or handicapped. 12 U.S.C. § 1701q(a)(1). The statute defines "related facilities" to include various "essential service facilities." 12 U.S.C. § 1701q(d)(8). The Secretary determines how the loans will be secured. HUD requires a valid first mortgage lien on the project, and each borrower must execute a Regulatory Agreement specifying the parties' rights and obligations under the statute and regulations. 24 CFR § 885.415.

 In 1979 Allen Housing applied to HUD for funds to build a housing project for the elderly. On May [ILLEGIBLE TEXT] 1979, Allen Housing and HUD entered into a Regulatory Agreement governing the terms of the loan. HUD received a mortgage on the project, the income and assets of which were assigned to HUD as security. Pursuant to the statute and regulations, HUD required all receipts of the project to be deposited in the name of the project in a federally insured bank and removed only for project expenses.

 Between 1980 and 1982, defendants withdrew approximately $ 532,000 from Allen Housing and lent it to Allen Church. At the same time Allen Housing lent Allen Church an additional $ 15,800 to purchase a minivan. Allen Church in turn loaned the $ 532,000 to Allen School to help fund the construction of a multipurpose center, to be used by the school during school hours. Defendants claim that elderly persons use this center at other times. But the record does not make clear the extent of this use.

 In 1984 Flake talked to Alexander Naclerio, then Director of Housing of HUD in New York, about the possibility of exempting the Allen School from repayment of the $ 532,000. On January 23, 1984, Flake confirmed these discussions and wrote to Naclerio formally requesting the exemption. Flake explained that the multipurpose facility was planned as a place where senior citizens could sponsor events, activities, and programs to enhance their living in the community, in particular to allow them to work with students within the complex.

 The United States admits that Naclerio approved this request some time in June 1984. Because the letter confirming the approval apparently contained a misprint, a second letter, this one dated September 21, 1984 and signed by David F. Buchwalter, a subordinate of Naclerio and Chief of the Loan Management Branch, was sent to Flake confirming the approval. Allen Housing formally forgave the loan in 1985.

 On December 20, 1988, the acting Director for Housing of HUD in New York wrote Allen Housing referring to the fact that by the September 21, 1984 letter "HUD approved a request" that the $ 532,000 not be repaid but saying "upon consideration of the information provided to this office, it appears that the funds in question should not have been advanced" to the Allen School. The letter instructed Allen Housing to "have these funds restored" to the project and "assure that they are used for the purposes authorized by the Regulatory Agreement."

 On November 26, 1990, the United States Attorney brought this action alleging five claims. The first and second claims allege violations of 12 U.S.C. § 1701q, the applicable regulations, and the Regulatory Agreement. Claim Three alleges breach of a contract, presumably the Regulatory Agreement, and conspiracy to breach a contract. Claim Four alleges unjust enrichment, and Claim Five seeks a constructive trust against Allen Church and Allen School.

 The complaint demands (1) twice $ 532,000, plus interest, plus plaintiff's auditing fees, plus costs including attorney's fees, and (2) a judgment declaring that Allen Church and Allen School hold in trust "for the benefit of HUD and the project" $ 532,000 plus interest, and directing that no property bought or improved with the use of project funds be conveyed or further encumbered.

 Defendants' motion for summary judgment urges that (1) the transfer to the Allen School was proper under the statute, (2) in any event Naclerio's approval waived any impropriety, and (3) the claims are barred by the statute of limitations or by estoppel.

 II.

 While there may be instances in which the government will be estopped from making a claim, this is not one of them. Estoppel would be particularly inappropriate to allow expenditures of public funds that are not authorized by statute. Office of Personnel Management v. Richmond, 496 U.S. 414, 110 S. Ct. 2465, 110 L. Ed. 2d 387 (1990). Here, estoppel would leave unredressed an alleged unauthorized diversion of federal funds that the law allocated to benefit elderly and handicapped families. Even where federal funds have been paid out, the United States is not estopped from seeking to restore them to their proper use. See, e.g., United ...


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