Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. IP 82-C-1691 -- S. Hugh Dillin, Judge.
Cummings, Chief Judge, Cudahy, Circuit Judge, and Dumbauld, Senior District Judge.*fn*
The appellants in this class action are a group of prospective tenants in a housing project which the defendant Department of Housing and Urban Development ("HUD") sold to co-defendant Paul D. Toller without rental subsidies attached. The plaintiffs moved for a preliminary injunction to enjoin the sale, alleging that it violated Section 8 of the Housing Act, 42 U.S.C. § 1437f ("Section 8"). At the end of a hearing on the preliminary injunction, the district court consolidated the preliminary injunction hearing with a trial on the merits and entered final judgment for the defendants. We reverse and remand for a trial on the merits.
Stonekey II is an apartment complex in Indianapolis, Indiana, which was constructed in 1952. In 1967 Stonekey II was sold to Flanner House Homes, Inc.; the purchase, as well as a subsequent rehabilitation, was financed under the Housing Act, 12 U.S.C. § 1715z. A rent subsidy was attached to the project, which provided that HUD would pay 40% of the rent of each tenant who qualified for rent subsidies.
In 1974 HUD acquired Stonekey II upon foreclosure of Flanner House Homes' mortgage. HUD owned and managed the property from 1974 until its sale in August of 1982 to Paul D. Toller, co-defendant in this action. During this period, rent subsidies were still given to eligible tenants in the project.
After several years' study of possible alternatives, ranging from demolition to plans of varying costliness for rehabilitation and remodeling of the project, HUD ultimately approved the sale of Stonekey II without rent subsidies attached. Although federal regulations require that formerly subsidized projects be sold with subsidies attached if there is a need for low and moderate income housing in the community, 24 C.F.R. § 290.25, HUD approved a waiver of this regulation on the grounds that the cost to rehabilitate Stonekey II was excessive and that it was not needed as housing. A contract of sale between HUD and Paul D. Toller was executed on July 12, 1982.
On August 3, 1982, a complaint was filed on behalf of certain named plaintiffs and of two classes: (1) the present residents of Stonekey II and (2) residents of Indianapolis who would be eligible for Section 8 rent subsidies but who do not currently reside in subsidized housing.*fn1 In their suit, the plaintiffs charged that HUD had acted arbitrarily and capriciously and abused its discretion by failing to maintain Stonekey II in safe and decent condition during HUD's period of ownership, by failing to comply with the requirements of 24 C.F.R. § 290.1 et seq. in preparing the disposition analyses and recommendations and by failing to sell Stonekey II with rental subsidies despite the shortage of habitable housing for low-income tenants in Indianapolis. The plaintiffs sought a temporary restraining order enjoining the defendants from closing the sale of Stonekey II prior to a decision on the plaintiffs' motion for a preliminary injunction, and they also asked for preliminary and permanent injunctive relief to prohibit any disposition of Stonekey II until all the federal statutory and regulatory requirements were met. The plaintiffs also sought, inter alia, a declaratory judgment that HUD's processing and approval of the sale constituted a violation of national housing policy, as codified in various housing statutes, and asked for an order requiring HUD to reprocess the disposition of Stonekey II and directing that it not be sold without rental subsidies attached.
During the week which intervened between the filing of the complaint and the Consolidated Motion for a Temporary Restraining Order and Preliminary Injunction and the hearing on that Motion, the plaintiffs were authorized by the court to undertake expedited discovery; and they deposed the HUD Area Manager, the HUD Deputy Area Manager, the HUD Chief Property Officer, the HUD Property Manager and Mr. Toller, the prospective buyer. A hearing was held on the afternoon of August 12, 1982, and the morning of August 13, 1982, during which the court heard evidence on the Motion for a Temporary Restraining Order and Preliminary Injunction. At the close of the plaintiffs' evidence, the defendants moved to dismiss under Rule 41 of the Federal Rules of Civil Procedure, alleging that the plaintiffs had failed to prove irreparable harm. At the end of the hearing, the court ruled that the administrative record was sufficient to support the agency's determination and that the sale was proper. The judge then stated:
And under Rule 65, if that is the correct one -- the injunction rule -- I am using my discretion to consolidate the merits with the hearing on the preliminary injunction. And I find for the defendants in this case and against the plaintiffs. That is a final judgment.
Trans. at 265. The hearing was adjourned immediately after the judge made this statement.*fn2
On August 16, 1982, title to Stonekey II was transferred to defendant Toller. In December of 1982, Toller entered into a partnership agreement with four other persons under Indiana law, and in March of 1983 transferred ownership of the apartment complex to that partnership, Tee Harbor Associates.
The plaintiffs, in their appeal to us, not only challenge the trial court's ruling on the substantive legal issues of the case but also argue that the judge abused his discretion by consolidating the preliminary hearing with a trial on the merits without giving the plaintiffs notice or an opportunity adequately to present their case. Both HUD ...