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Evergreen Terrace, which contained 356 apartments, participated in the § 8 and § 221 programs since 1960, however in the late 1970’s the owner was in default on the mortgage loans and the Department of Housing and Urban Development (“HUD”) paid off the lenders and became the mortgage holder, foreclosed, and took title.  New West (“Defendant”) purchased part of the complex in 1980 promising both the lenders and HUD that it “would not permit or suffer the use of any of the property for any purpose other than the use for which the same was intended at the time this Mortgage was executed.”  In 2001, Defendant asked HUD to restructure the mortgages under the 1997 Act, reducing the monthly payments and it was reported to HUD that the 600 residents at Evergreen Terrace had no other available low-income housing options.  HUD approved the restructuring in 2006, paid off the lenders and became the lender and mortgage holder.  Defendant promised that for the following 30 years, the property “shall be used solely as rental housing with no reduction in the number of rental units unless approved in writing by HUD.”  A new 20 year agreement with HUD for § 8 subsidies was also entered into, under which it was agreed that no transfer, assignment, or encumbrance on the property would be undertaken without HUD’s approval.  The City of Joliet, Illinois (“Plaintiff”) had been trying to acquire Evergreen Terrace for several years because the city believed that its rundown state constituted a public nuisance.  The City commenced eminent domain proceedings in state court and the Defendant removed to federal court, seeking injunction and damages. 

At issue in this case is whether a state or local law can be preempted by the “findings” and “purposes” clauses of a federal statute, even though the state or local law does not conflict with any rule of law established in the federal statute.  HUD alleged that local condemnation powers of the Defendant were incompatible with federally subsidized financing designed to achieve a federal goal.  Three federal statutes were involved: § 8 of the Housing Act, which provides federal rent subsidies to low-income tenants, which as observed in 2007 does not preempt any state or local law; § 221 of the National Housing Act, which creates a program under which the federal government insures mortgages on privately owned, multifamily properties, and HUD has established criteria that owners must meet before being able to insure a loan, and HUD is also authorized to pay off the private lenders and become a direct lender; and the Multifamily Assisted Housing Reform and Affordability Act of 1997, which allows HUD to renegotiate mortgages insured or assumed under § 221.  HUD argued that condemnation of Evergreen Terrace would interfere with the purposes of § 221 and the 1997 Act, because if condemned, the low-income tenants would no longer have housing, nor any readily available alternative, undermining achievement of national purposes and therefore, as HUD alleged, was preempted.  The Court reasoned that because private owners are entitled to withdraw their properties from the program at any time, simply by paying off their federally insured loan, then state or local governments should be able to effect the same. 

The Court noted that 24 C.F.R.  § 245.405, § 970.3 does not require HUD’s approval for changing a property’s use when the change is resulting from eminent domain and also, the documents signed by New West contemplated condemnation.  The Court stated that although HUD dismissed all regulations, even its own because they were not under the 1997 Act, there was still no affirmative declaration of preemption in any statute or rule, and no conflict between condemnation and the 1997 Act.  HUD was also unable to point to any Supreme Court decision that held a state or local law preempted by broad goals.  The Court determined that because there is no “clear statement” of a national decision to displace eminent domain and that Congress had not exercised its authority to prevent state or local governments from condemning low income housing, that they could not find anything contrary to the principle that general statements of national policy do not preempt concrete laws.  The Court stated that it takes a federal command to preempt a state or local law and it was clear that Congress’ objective was not preemption regarding the statutes at issue.  The Court ultimately held that there was no case of which they were aware that held that the Property Clause or any other part of the Constitution that allows or treats a federal loan as immunity for the borrower against state regulation (including eminent domain) on the theory that the state was “really” regulating the federal interest as a lender.  The Court drew an analogy of if New West owed taxes and the IRS placed a lien on the property that the lien would prevent the City from using eminent domain.  The Court then affirmed the judgment of the lower court and entrusted it to reach a speedy conclusion.

City of Joliet, Illinois v. New West, L.P., et al., 2009 WL 937250 (C.A.7 (Ill.) 4/9/2009).    

The opinion can be accessed at: http://www.iml.org/dbs/imllegal/files/fedcir07-08-3032.pdf

Read a summary on the Illinois Municipal League website at: http://www.iml.org/dbs/imllegal/dyncat.cfm?catid=2581