While Fisher marketed the cooperative, Jayson attempted to obtain financing for the purchase and rehabilitation of the property. Pursuant to terms of the Amended Plan, Jayson negotiated with Dean, Witter Housing and Real Estate Financing Corp. for a first mortgage, and applied to the City of Chicago for a low interest rate subordinated second mortgage. Although Jayson's application for funding from the City of Chicago was successful, Jayson's negotiations with Dean, Witter eventually broke down. Ultimately, however, Jayson secured a loan commitment from Cincinnati Mortgage Corporation ("CMC"), whom Jayson has joined as an involuntary plaintiff to this action. CMC issued its commitment on July 21, 1988. In the commitment, CMC agreed to make, and to coinsure with HUD under the § 221(d)(3) program, a mortgage loan in the amount of $ 6,390,100, subject to certain terms and conditions. One of those conditions was that at least 51% of the co-op units had to be sold prior to initial endorsement of the loan. After CMC's loan commitment issued, the bankruptcy court entered an order allowing modification of the Amended Plan to indicate that funding of the project would be through a loan from CMC, not Dean, Witter as the Amended Plan had indicated. The bankruptcy court's order further reflected that an additional loan from the City of Chicago in the amount of $ 3,295,380 would be secured by a second mortgage on the property.
In September 1988, Jayson designated the Michigan Beach Housing Cooperative ("the Cooperative"), whom Jayson has named as a nominal defendant to this action, as its "nominee" in connection with the Michigan Beach project. As Jayson's nominee, the Cooperative would acquire title to the Michigan Beach property. Jayson, however, would retain control over the implementation of the redevelopment project pursuant to a "Development Services Agreement" between Jayson and the Cooperative.
On September 22, 1988, Fisher, individually and on behalf of ICF, and Ruby C. Stevens, as president of the Cooperative, signed a document certifying, under penalty of perjury, that more than 51% of the cooperative units had been sold to bona fide purchasers. On the basis of Stevens' and Fisher's representation that the 51% presale figure had been achieved, the parties executed the initial closing of the project on September 29, 1988. On that date, Jayson caused title to the property to be conveyed to the Cooperative; the initial endorsement of the first mortgage took place; HUD received full payment of its indebtedness ($ 4,687,301); and HUD released its mortgage and security agreement.
After the September 1988 closing, Jayson followed through with the development project and substantially rehabilitated the property. By March of 1989, however, Jayson had discovered that, contrary to Stevens' and Fisher's representations, the 51% presale requirement had not been met. Around the same time, CMC also became aware that the 51% presale requirement may not have been satisfied and that the project was experiencing cash flow problems.
Shortly thereafter, Jayson and CMC became doubtful that the plan to turn Michigan Beach into a cooperative could be financially successful. Nevertheless, Jayson and CMC determined that the project could be saved financially if Michigan Beach was turned into a low-income rental building. Jayson claims that prior to the September 1988 closing, agents for HUD, including Clabault and Albert Sullivan, whom Jayson describes as "a HUD official," assured Jayson that in the event the cooperative failed, HUD would: (1) permit Jayson to convert the property into rental housing; and (2) cooperate in causing title to the property to be conveyed to Jayson for the purpose of effectuating the conversion.
Therefore, CMC and Jayson turned their efforts toward converting Michigan Beach into low-income rental housing.
In order to accomplish such a conversion, in February 1990 the Cooperative and Jayson entered into Transfer of Physical Assets Agreement ("TPAA"). Under the TPAA, the Cooperative agreed to transfer ownership of the Michigan Beach property to Jayson in order to allow Jayson to operate the project as a rental building. In return, Jayson agreed to reimburse the Cooperative for its investment in the project and to indemnify the Cooperative for any liability on its part associated with the building. Under federal regulations, the TPAA required HUD approval. See 24 C.F.R. Part 265. Therefore, Jayson and CMC applied to HUD in April 1990 for approval of the TPAA.
On July 3, 1990, Frank Brown, HUD's Director of Insured Multifamily Housing in Washington, D.C., replied to the request for approval of the TPAA. Brown's letter stated that the TPAA could be approved, and final endorsement of the project given, only with a debt service mortgage of $ 5,324,500. This amount is $ 1,065,600 less than the original $ 6,390,100 mortgage which HUD had agreed to coinsure with the property operating as a cooperative. The practical effect of HUD's willingness to issue approval of the TPAA only under this lower mortgage amount was that Jayson would have to pay down the mortgage by roughly $ 1 million before the TPAA could be approved and the property converted into rental housing.
Jayson balked at HUD's demand that Jayson come up with an additional $ 1 million for conversion of the property. CMC, Jayson, and HUD then conducted negotiations in an attempt to settle the matter, but the parties were unable to reach an accord. CMC and Jayson have refused to pay down the mortgage by more than about $ 500,000, while HUD has insisted on approximately a $ 1 million buy-down.
Unable to reach an accord with HUD on the terms of a rental conversion, Jayson and CMC apparently reevaluated the viability of the property as a cooperative. On July 13, 1990, they submitted to HUD a request that HUD proceed with its final endorsement of the property as a cooperative. Final endorsement by HUD is required in order to trigger HUD's mortgage insurance for the project. Three days after submitting its request to HUD for final endorsement, Jayson filed this lawsuit. The amended complaint asks the court to issue an injunction requiring HUD to execute final endorsement of the loan, and further requests the court to order HUD to allow the TPAA to proceed. CMC and the Cooperative have urged the court to grant the requested relief.
HUD has refused to execute final endorsement of the loan or to approve of the TPAA except under the terms outlined by Brown which, as indicated above, require a reduction of over $ 1 million in the amount of the mortgage to be coinsured HUD. HUD bases its refusal of final endorsement on the fact that misrepresentations were made concerning the 51% presale requirement. HUD contends, and Jayson has not contested, that HUD would not have executed the initial endorsement of the project if HUD had been aware that the 51% presale requirement was not satisfied. HUD further maintains that it is not required to give its approval of the TPAA.
Jayson and CMC advance several arguments in support of their position that HUD is required to execute final endorsement of the CMC mortgage and approve of the conversion of the Michigan Beach project from a cooperative to rental property. The court will address each of those arguments separately.
I. The Written Contract Concerning the Michigan Beach Project
Jayson first argues that HUD is contractually obligated to execute final endorsement of the CMC mortgage. There is no dispute that pursuant to the various documents outlining the details of the Michigan Beach project, including the modified Amended Reorganization Plan, the Amended Disclosure Statement, and the twice-amended Memorandum of Understanding, HUD agreed in writing to allow Jayson to purchase Michigan Beach and develop it as a cooperative. That contract contemplated Jayson's purchase of Michigan Beach through a loan from CMC, and HUD's coinsurance of the mortgage securing that loan. Final endorsement of the CMC mortgage is the last step required by HUD to provide such coinsurance. Thus, Jayson claims, final endorsement is required by HUD under the contract for the Michigan Beach project.
HUD's agreement to allow Jayson to purchase and develop Michigan Beach, however, was based on certain terms and conditions precedent. A condition precedent is a fact or event which the parties intend must exist or take place before there is a right to performance. Where the condition is not fulfilled, performance is not required. 5 S. Williston, A Treatise on The Law of Contracts, § 663 (3d ed. 1981); see also Godare v. Sterling Steel Casting Co., 103 Ill. App. 3d 46, 51, 430 N.E.2d 620, 624, 58 Ill. Dec. 588 (1981). One of the conditions precedent to the agreement concerning the Michigan Beach project is particularly important in the instant case. The modified Amended Plan and Amended Disclosure Statement specifically set forth that pursuant to the terms of CMC's loan commitment to Jayson, CMC was not obligated to issue its loan to Jayson, and HUD was not obligated to coinsure the mortgage securing that loan, unless 51% of the cooperative units had been sold by the date of the initial endorsement. The Amended Plan expressly provided that in the event the presale requirement was not met, the project would not go through and the property would return to the "status quo."
Although Fisher and Stevens certified prior to initial endorsement that the 51% requirement had been achieved, the record is clear in this case that the 51% presale requirement was, in fact, never satisfied. Solely because of that fact, HUD has refused to issue final endorsement of the CMC mortgage. Since, as noted above, the 51% presale requirement was clearly a material precondition to HUD's coinsurance of the mortgage, HUD's refusal to proceed with final endorsement does not amount to a breach of its agreement to allow Jayson to purchase and develop the Michigan Beach property.
II. HUD's Alleged Oral Representations Concerning Conversion of the Michigan Beach Project
A. Oral Contract
Jayson next claims that HUD is required to issue final endorsement based on the representations of Clabault and Sullivan, on behalf of HUD, that HUD would allow conversion of the Michigan Beach project to rental housing in the event the cooperative failed. Jayson describes these representations as follows:
On many occasions prior to December 17, 1986, HUD, acting by and through its authorized agents and attorneys including Albert Sullivan and William Clabault, made both oral offers to the principals of Jayson and made representations to them on behalf of HUD that if Jayson would act as developer of the Property and would work as sponsor of the project with the Cooperative, ICF, and SCCC, then HUD, if the cooperative conversion failed, would (1) permit Jayson to convert the property into rental housing and (2) would cooperate in causing title to the property to be conveyed to Jayson.
Amended Complaint at para. 12. Ordinarily, contracts which modify the interests of the parties in real estate must be in writing to be enforceable under the statute of frauds. Ill. Rev. Stat. ch. 59, para. 2 (1989). See Nelson v. Estes, 154 Ill. App. 3d 937, 940, 507 N.E.2d 530, 532, 107 Ill. Dec. 617 (1987). However, Jayson claims that even though HUD's representations were made orally, they created a contract because the representations were "clear and unequivocal." Jayson's Memorandum at 22 (citing Heitz v. Circle Four Realty Co., Inc., 191 Ill. App. 3d 727, 548 N.E.2d 11, 138 Ill. Dec. 781 (1989)).
The court disagrees. The terms of HUD's purported representations are so vague that this court cannot possibly conclude that Jayson has sufficiently plead the existence of an enforceable contract. HUD's obligations under the purported contract are apparently triggered only if the cooperative "fails." This term is totally ambiguous. There are no parameters for what constituted "failure" of the cooperative, when it is to be determined whether the cooperative "failed," and who is to make that determination. Moreover, if the cooperative "fails," HUD is purportedly obligated to "permit" Jayson to convert the property to rental housing. What constitutes "permission" -- that is, the specific terms under which HUD must allow conversion -- is also vague and ambiguous. Arguably, by agreeing to allow the conversion under a $ 1 million dollar buy-down, HUD has already agreed to "permit" such a conversion to take place. Thus, the court finds that the terms of the alleged oral contract are too ambiguous to be enforced.
Furthermore, in addition to its ambiguity, Jayson's oral contract claim suffers from another obstacle. Where procedures and guidelines have been established for the creation of a contract with a government agency, those criteria must be satisfied in order to create a binding contract with the government. See Frangella Mushroom Farms, Inc. v. United States, 229 Ct. Cl. 578, 581-82 (1981); Empresas Electronicas Walser, Inc. v. United States, 223 Ct. Cl. 686, 688, 650 F.2d 286 (1980). In addition, "the government officer whose conduct is relied upon must have had actual authority to bind the government in contract." ATL, Inc. v. United States, 4 Cl. Ct. 672, 675 (1984) (citing Pacific Gas & Electric Co. v. United States, 3 Cl. Ct. 329, 338-39 (1983)), aff'd, 735 F.2d 1343 (Fed. Cir. 1984).
In the instant case, specific federal regulations govern the rental conversion which Clabault and Sullivan allegedly promised HUD would permit. See 24 C.F.R. Part 265. Among other things, these regulations provide that such a conversion can only occur where a written application for such a transfer is made (§ 265.9), where certain criteria for approval are satisfied (§ 265.10), and where HUD issues written approval of the conversion (§ 265.5). It is undisputed that these requirements were not satisfied prior to Clabault's and Sullivan's alleged promises to allow conversion. Thus, Clabault and Sullivan clearly did not have the authority to bind HUD in an oral contract to allow conversion. As a result, Jayson's oral contract claim must be rejected.
Jayson claims that even if the statements of Clabault and Sullivan did not create an oral contract, those statements estop HUD from refusing to issue final endorsement of the CMC mortgage and from refusing to approve of the conversion of the Michigan Beach project to rental housing.
Just last term, the Supreme Court was confronted with a case involving an estoppel claim against the federal government: Office of Personnel Management v. Richmond, 496 U.S. 414, 110 L. Ed. 2d 387, 110 S. Ct. 2465 (1990). In that case, the Court acknowledged that federal courts have not uniformly resolved the issue of what circumstances, if any, justify allowing an estoppel claim to proceed against the federal government or its agencies. Id. 110 S. Ct. at 2470. The Court, however, did not remedy this confusion. The Solicitor General advocated an across-the-board rule barring estoppel claims against the government, but the court refused to issue such a broad ruling, stating, "We leave for another day whether an estoppel claim could ever succeed against the government." Id. at 2471. Instead, the court narrowly ruled that an estoppel claim does not lie against the government where the plaintiff seeks to recover money to be paid out of the Treasury in violation of a federal statute. Id. at 2476. Thus, aside from this narrow holding, after Personnel Management federal courts must continue to struggle with the appropriate parameters of estoppel claims against the federal government.
In this Circuit, our appellate court has acknowledged the general rule that principles of estoppel are not applicable against the federal government or its agencies. Edgewater Hospital, Inc. v. Bowen, 857 F.2d 1123, 1138 (7th Cir. 1988); Crown v. United States Railroad Retirement Board, 811 F.2d 1017, 1021 (7th Cir. 1987). At the same time, however, our Circuit Court has held that under certain "narrowly-defined" circumstances, principles of estoppel may be invoked to prevent the government from refusing to fulfill the unauthorized promises of its agents. Id. In Portmann v. United States, 674 F.2d 1155 (7th Cir. 1982), the court held that an estoppel theory may be asserted against a government agency only where the following elements are present:
First, the party to be estopped must know the facts. Second, this party must intend that his conduct shall be acted upon, or must so act that the party asserting estoppel has a right to believe it is so intended. Third, the party asserting estoppel must have been ignorant of the facts. Finally, the party asserting estoppel must reasonably rely on the other's conduct.