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JAYSON INVS. v. KEMP

September 18, 1990

JAYSON INVESTMENTS, INC., an Illinois corporation, as general partner of MICHIGAN BEACH COOPERATIVE PARTNERS LIMITED PARTNERSHIP, an Illinois limited partnership; and CINCINNATI MORTGAGE CORPORATION, a foreign corporation, Plaintiffs,
v.
JACK KEMP, Secretary of Housing and Urban Development; and MICHIGAN BEACH HOUSE COOPERATIVE, an Illinois non-for-profit corporation, Defendants



The opinion of the court was delivered by: BUA

 NICHOLAS J. BUA, UNITED STATES DISTRICT JUDGE

 Plaintiff Jayson Investments, Inc. ("Jayson") filed the instant action seeking to compel the Department of Housing and Urban Development ("HUD") to perform certain acts relating to the financing and operation of a particular real estate project in which Jayson has a substantial financial interest. First, Jayson seeks to compel HUD to issue its final endorsement of a mortgage securing a loan to Jayson for the development of cooperative housing at a building known as the Michigan Beach Apartments. HUD's final endorsement is required to trigger HUD's coinsurance of the mortgage. Second, Jayson seeks to require HUD to issue its approval of the conversion of the Michigan Beach project from cooperative housing to rental property. Under federal regulations, HUD's approval is required before such a conversion can take place.

 FACTS

 On May 24, 1985, the owner of the multifamily apartment building known as the Michigan Beach Apartments *fn1" filed a Chapter 11 petition in bankruptcy. In Re Michigan Beach Apartments, An Illinois Limited Partnership, 85 B 6614. HUD, the holder of the mortgage on the Michigan Beach property, was the sole secured creditor in the bankruptcy proceedings. At some point during the pendency of bankruptcy proceedings, Jayson became interested in purchasing Michigan Beach. Jayson, an Illinois corporation owned by brothers Scott and Jay Canel, was formed in 1986 to engage in the business of real estate investment.

 Jayson claims it was solicited by HUD to buy the Michigan Beach property and develop it as a cooperative. HUD contends that developing the property into a cooperative was Jayson's own idea from the start. Whether the cooperative was initially HUD's idea or Jayson's, however, one thing is clear -- HUD and Jayson reached an accord on a plan of reorganization for the property pursuant to which Jayson was to purchase the property and develop it as a cooperative. Under the terms of the initial agreement between HUD and Jayson, HUD's mortgage would be paid in full out of the proceeds of an FNMA Housing Cooperative Loan to be obtained by Jayson from the National Consumer Cooperative Bank. As a precondition to the release of the FNMA loan to Jayson, at least 50% of the Michigan Beach cooperative units had to be sold in advance.

 On June 23, 1986, HUD filed its Plan of Reorganization in the bankruptcy court containing the specific details of its agreement with Jayson, including the terms outlined above. HUD also filed a Disclosure Statement with the bankruptcy court in which HUD stated its belief that "the best interests of all parties dictates that the Project be sold to Jayson, Inc. and the Debtor's assets be liquidated as soon as practicable in the current Chapter 11 case and distributed according to the Plan." One day after HUD submitted its Plan to the bankruptcy court, Jayson and HUD executed a "Memorandum of Understanding" which, by its own terms, "sets forth the agreement between Jayson . . . and [HUD] concerning the proposal by Jayson to acquire the [Michigan Beach] property." The Memorandum states that it is intended to supplement the April 16, 1986 letter from Scott Canel to William T. Clabault, the Assistant United States Attorney who represented HUD in the Michigan Beach bankruptcy proceedings. In that letter, Canel had first outlined for HUD the specific terms of Jayson's plan to purchase the property and turn it into a cooperative through extensive ($ 1.75 million) rehabilitation.

 After the original Reorganization Plan and Disclosure Statement were submitted to the bankruptcy court, Jayson and HUD mutually agreed to alter the terms of their agreement in several respects. To reflect those changes, HUD filed an Amended Reorganization Plan and an Amended Disclosure Statement on December 17, 1986. The Amended Plan stated that HUD would take part in financing the project by coinsuring Jayson's first mortgage for the project. Specifically, the Amended Plan indicated that "Jayson, Inc. will satisfy the claim of HUD out of the proceeds of either a GNMA Mortgage backed security or an IDHA taxable bond issue insured under FHA Program 221(d)(3), 12 U.S.C. Section 17151(d)(3), coinsured by Dean, Witter Housing and Real Estate Finance Corp. This loan will require a 50% to 70% presale of cooperative units before funding will be released." *fn2" The Amended Disclosure Statement revealed that in addition to the loan from Dean, Witter, Jayson would be financing the project in part through a loan from the City of Chicago. The Amended Disclosure Statement also stated that after confirmation of the Amended Plan, a company called Services for Cooperative Condominium Communities, Inc. ("SCCC") would be appointed to manage the property.

 In May 1987, Jayson and HUD also amended their initial Memorandum of Understanding -- twice. Neither amendment, however, changed the general substance of the parties' agreement. The first amendment merely modified the schedule by which Jayson was to complete its presale of the cooperative units in order to have financing released; the second amendment revised conditions pertaining to the management of the property.

 On May 27, 1987, the bankruptcy court entered an order confirming HUD's Amended Plan of Reorganization. Although the order approves the sale of the Michigan Beach property to Jayson for development as a cooperative, the order also states that if Jayson is unable to complete presale of the cooperative units or to obtain permanent financing to satisfy HUD's claim in full, then the Chapter 11 case and the property other than the cash collateral were to be returned to the "status quo." In that event, the order further provided, Jayson would have no right, title, or interest in the property, and Jayson could bring no claim against HUD in connection with the Chapter 11 case. The bankruptcy court order was the first document concerning the Michigan Beach project which set forth what would happen in the event that Jayson was unable to obtain sufficient financing or sales to allow the cooperative to proceed. None of the other documents to which Jayson and HUD were privy -- including the original and amended Reorganization Plan, the original and amended Disclosure Statement, and the original and twice amended Memorandum of Understanding -- contained any provision regarding the rights or duties of the parties in the event the cooperative failed.

 After the bankruptcy court approved the Amended Plan, SCCC was appointed to manage the property in accordance with that Plan. In addition, Ida Curtis Fisher began marketing the property as a cooperative. Fisher is president of ICF Development Corporation, a company in the business of providing marketing and development services to housing cooperatives. Fisher and ICF had been involved in the planning of the cooperative project from the start. According to Jayson, it was Fisher who initially proposed the idea of turning Michigan Beach into a cooperative as an investment opportunity for Jayson. Upon the approval of the Amended Plan, Fisher marketed the property as Jayson's agent. *fn3"

 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. *fn4" 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. *fn5" 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. *fn6"

 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, ...


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