II. LEGAL STANDARD FOR MOTIONS TO DISMISS
In ruling on a motion to dismiss, the Court "must accept well
pleaded allegations of the complaint as true. In addition, the
Court must view these allegations in the light most favorable to
the plaintiff." Gomez v. Illinois State Board of Education,
811 F.2d 1030, 1039 (7th Cir. 1987). Although a complaint is not
required to contain a detailed outline of the claim's basis, it
nevertheless "must contain either direct or inferential
allegations respecting all the material elements necessary to
sustain a recovery under some viable legal theory." Car
Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.
1984), cert. denied, 470 U.S. 1054, 105 S.Ct. 1758, 84 L.Ed.2d
821 (1985). Mere conclusions, without supporting factual
allegations, are insufficient to support a claim for relief.
Cohen v. Illinois Institute of Technology, 581 F.2d 658, 663
(7th Cir. 1978), cert. denied, 439 U.S. 1135, 99 S.Ct. 1058, 59
L.Ed.2d 97 (1979). Dismissal is not granted "unless it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim that would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80
Defendants' first argument is that rescission is an
extraordinary equitable remedy which is not available absent
substantial nonperformance or breach by a party to the agreement.
Defendants claim that because Plaintiffs have not pled fraud
and/or mistake specifically pursuant to Federal Rule of Civil
Procedure 9(b), Plaintiffs' claim must be based upon a claim of
substantial nonperformance or breach of contract. As such,
Defendants argue that rescission is not appropriate because the
contract which was allegedly breached was between HUD and
Plaintiffs. Defendants state that they were not a party to the
contract between Wiley and HUD, so there is no privity of
contract. Therefore, rescission is not available.
Plaintiffs argue that HUD rules and regulations call for a
reconveyance of the property to Defendants if Plaintiffs' final
workout plan was not accepted by HUD. Therefore, the property
should be transferred back to Defendants if the Court finds that
there was no breach of the contract between Wiley and HUD.
Plaintiffs state that HUD rules and regulations were incorporated
into Plaintiffs' and Defendants' contract for the transfer of the
general partnership interest in St. Nicholas Apartments as a
matter of law. Additionally, Defendants claim that under
California law (the law which applied to their contract),
contracts can be construed together whether or not each of the
contracts were signed by all or only some of the parties to the
The issue to be determined by the Court is whether or not the
provision of the HUD Manual recited in paragraph 27 of
Plaintiffs' Amended Complaint should be given the force of law
and if so, to determine whether the provision has been
incorporated into the contract between Plaintiff Wiley and
Defendants ADP and FDIC.
As a general rule, "[l]aws which subsist at the time and place
of the making of a contract, and where it is to be performed,
enter into and form part of it, as fully as if they had been
expressly referred to or incorporated in its terms." Norfolk &
Western R.R. Co. et al. v. American Train Dispatchers' Assoc. et
al., 499 U.S. 117, 130, 111 S.Ct. 1156, 1164, 113 L.Ed.2d 95
(1991), quoting Farmers' and Merchants' Bank of Monroe v.
Federal Reserve Bank of Richmond, 262 U.S. 649, 660, 43 S.Ct.
651, 655-56, 67 L.Ed. 1157 (1923); see, Selcke v. New England
Ins. Co., 995 F.2d 688, 689 (7th Cir. 1993) (Illinois law); see
also Kern v. City of Long Beach et al., 29 Cal.2d 848, 850,
179 P.2d 799, 800 (Cal. 1947) (California law). Furthermore, HUD
regulations generally have the force of law. Wright v. City of
Roanoke Redev. and Hous. Auth., 479 U.S. 418, 431, 107 S.Ct.
766, 774, 93 L.Ed.2d 781 (1987).
However, not all administrative manuals, handbooks, and
circulars have the force of law. Thorpe v. Hous. Auth. of City
of Durham, 393 U.S. 268, 275-76, 89 S.Ct. 518, 522-23, 21
L.Ed.2d 474 (1969). In order for
a regulation to have the force and effect of law, it must create
substantive or legislative rules, not just suggest an
interpretation of a statute. Chrysler Corp. v. Brown,
441 U.S. 281, 301, 99 S.Ct. 1705, 1717, 60 L.Ed.2d 208 (1979); Cosby v.
Ward, 843 F.2d 967, 979 (7th Cir. 1988). "Likewise the
promulgation of these regulations must conform with any
procedural requirements imposed by Congress." Chrysler Corp.,
441 U.S. at 303, 99 S.Ct. at 1718; Cosby, 843 F.2d at 979.
"Federal agencies, however, are required to publish `substantive
rules of general applicability' in the Federal Register, even if
the rules are not first published for notice and comment." Id.
at 980; see First State Bank of Hudson County v. United States,
599 F.2d 558, 564 (3rd Cir. 1979) (generally, handbooks that have
not been published in accordance with the Administrative
Procedure Act, 5 U.S.C. § 500 et seq., are considered to be
non-binding instructions or internal operating procedures).
Publication in the Federal Register is unnecessary, though, if
"persons subject thereto are named and either personally served
or otherwise have actual notice thereof in accordance with law."
5 U.S.C. § 553(b).*fn1
The HUD regulation quoted in paragraph 27 of Plaintiffs'
Amended Complaint is set forth in HUD Notice 84-37, commonly
referred to as the "TPA Handbook." United-Parker Square Limited
Partnership v. Kemp, 1992 WL 52556, at *1 (D.D.C. 1992)
(unpubl). In the instant case, the TPA Handbook has not been
published in either the Code of Federal Regulations ("CFR") or
the Federal Register, and Plaintiffs have offered no evidence
that HUD intended the Handbook to carry the force of a
substantive rule or regulation without first being published in
the C.F.R. or the Federal Register.
An inspection of the case law throughout the country reveals
that, generally, manuals such as the one involved in the instant
case have not been given the force of law: Reynolds Assoc. v.
United States, 31 Fed.Cl. 335, 338-40 (1994) (HUD project
servicing handbook does not rise to the level of an executive
regulation); Roberts v. Cameron-Brown Co., 556 F.2d 356, 362
(5th Cir. 1977) (HUD handbook held not to be intended to have the
force of law); Cosby, 843 F.2d at 980-81 (Department of Labor
letters not intended to have the force of law); First State Bank
of Hudson County, 599 F.2d at 564 (FDIC manual does not create
an enforceable duty on the part of the FDIC to inform a bank
about misapplication of its funds by the bank's president);
Schweiker v. Hansen, 450 U.S. 785, 789, 101 S.Ct. 1468, 1471,
67 L.Ed.2d 685 (1981) (Social Security Administration claims
manual held to be without legal effect); Powderly v. Schweiker,
704 F.2d 1092, 1098 (9th Cir. 1983) (Social Security
Administration claims manual held to be without impact on any
substantive rights); Gatter v. Nimmo, 672 F.2d 343, 347 (3rd
Cir. 1982) (Veterans Administration manuals held to be without
the force of law); and Brennan v. Ace Hardware Corp.,
495 F.2d 368, 376 (8th Cir. 1974) (field operation handbooks held to be
without the force of law). Accordingly, the Court finds that the
TPA Handbook in the instant case did not have the force of law.
Furthermore, Defendants were not given actual notice of the HUD
regulation. Title 5 U.S.C. § 553(b) allows enforcement of an
administrative rule without first being published if the notice
includes "(1) a statement of the time, place, and nature of
public rule making proceedings; (2) reference to legal authority
under which the rule is proposed; and (3) either the terms or
substance of the proposed rule or description of the subjects and
issues involved." There is no evidence to show that Defendants
had actual notice or were personally served with notice of the
TPA Handbook. Cosby, 843 F.2d at 980. Accordingly, the Court
finds that the HUD manual was not incorporated into the contract
as a matter of law.
In addition, the Court finds that the HUD manual was not
incorporated into the contract
(Exhibit 1 to the Amended Complaint) between Plaintiff Wiley and
Defendants FDIC and ADP by the contract's terms.*fn2 Within the
four corners of the contract, there are four references to HUD
rules and regulations. Paragraph 4 states that "GBW (Plaintiff)
will pay the legal costs associated with obtaining HUD approval."
Paragraph 5 (viii) states that GBW "will provide to HUD and the
Sellers . . . monthly pro forma income and expense reports. . .
." Clearly, neither of these references are a sufficient basis to
incorporate the TPA Handbook's provision into the contract.
However, paragraphs 5(i) & (ii) state that the Seller's
obligation to consummate the deal will be based upon the
conditions precedent of "obtaining HUD's approval of the
transactions contemplated hereby; [and] the Partnership's
entering into a workout arrangement for the existing HUD-insured
mortgage loan on terms and conditions that are acceptable to the
lender for such loan and HUD, Seller and GBW." While it could be
argued that these provisions provide for an incorporation the TPA
Handbook's provision into the contract, the Court cannot say that
the HUD manual and its provision at issue in this case have been
incorporated into the contract by the contract's express
Because the HUD manual has not been given the effect of law,
the contract must incorporate or reference the HUD manual by
express language. Reynolds Assoc., 31 Fed. Cl. at 339.
Plaintiffs' Amended Complaint fails to reference, incorporate, or
set forth in any way that the agreement is to be subject to the
HUD TPA Handbook. Id.; Texas v. United States, 537 F.2d 466,
470-71, 210 Ct.Cl. 522 (1976). Accordingly, the Court finds that
the HUD manual was not incorporated into the agreement by the
terms of the contract between Wiley and Defendants FDIC and ADP.
Finally, just because the FDIC and HUD are both a part of the
United States Government does not mean that the FDIC had actual
notice of HUD's manual pursuant to 5 U.S.C. § 553(b). Title
12 U.S.C. § 1819(b)(1) grants the FDIC government administrative
agency status "for the purposes of section 1345 of Title 28."
Title 28 U.S.C. § 1345 is a jurisdictional statute giving the
district courts original jurisdiction over all civil actions
commenced by the United States, its agencies, or officers. Title
28 U.S.C. § 1819 does not indicate that the FDIC has federal
agency status for all purposes. On the contrary, the FDIC has
agency status only for purposes of 28 U.S.C. § 1345. Bank of New
England Old Colony, N.A. v. Clark, 986 F.2d 600, 603 (1st Cir.
The Court cannot say that the FDIC, even if labeled a
Government agency for purposes of this case, had actual notice
(as that term is used in 5 U.S.C. § 553(b)) of the HUD manual
which would make it responsible for complying with that manual's
provisions. HUD and the FDIC are both large entities with
extensive rules and regulations. It is unrealistic to believe
that just because both are Government agencies that each will
know of the others rules and regulations without those rules or
regulations having first been published or without the notice
requirements set forth in 5 U.S.C. § 553(b) having first been
met. Accordingly, the FDIC did not have actual notice of the
provisions of the HUD manual, and therefore, its terms were not
incorporated into the contract between Wiley and Defendants FDIC
While Plaintiffs argue that equitable rescission is but one of
the remedies sought in Count IV of their Amended Complaint,
equitable rescission is the basis for all other remedies sought
in Count IV. Therefore, if there is no equitable rescission of
the contract between Plaintiff Wiley and Defendants
FDIC, ADP, and ADIC, then there are no grounds upon which relief
may be granted. Likewise, Count V is premised upon Count IV.
Count V's basis for relief is directly linked to the relief
sought in Count IV, that is, a finding that Plaintiff Wiley does
not own the general partnership interest in St. Nicholas
Apartments. Because the Court has found that the general
partnership interest cannot be reconveyed back to Defendants
FDIC, ADP, and/or ADIC, Count V does not state a claim upon which
relief may be granted.
In summary, the Court finds that even under the broad standards
of notice pleading and taking the facts in a light most favorable
to Plaintiffs, Plaintiffs have failed to state a claim upon which
relief may be granted. Fed.R.Civ.Pro. 12(b)(6). The provision
from the HUD manual set forth in paragraph 27 of Plaintiffs'
Amended Complaint does not have the force or effect of law and
was not expressly incorporated into the contract between Wiley
and FDIC, ADP, and ADIC by the contract's express terms.
Accordingly, there are no grounds upon which to reconvey the
general partnership interest in St. Nicholas Apartments from
Wiley back to said Defendants. In short, Plaintiffs have failed
to state a claim upon which relief may be granted against
Defendants FDIC, ADP, and ADIC. Because the Court has found that
Counts IV and V should be dismissed for failure to state a claim
upon which relief may be granted, it will not consider
Defendants' other arguments or their arguments in the
Ergo, Defendants Federal Deposit Insurance Corporation's, as
receiver for American Diversified Savings Bank, American
Diversified Partners', and American Diversified Investment
Corporation's Motion to Dismiss Amended Complaint as Against said
Defendants is ALLOWED.
Counts IV and V of Plaintiffs' Amended Complaint are DISMISSED.
Defendants Federal Deposit Insurance Corporation, as receiver
for American Diversified Savings Bank, American Diversified
Partners, and American Diversified Investment Corporation are
DISMISSED WITH PREJUDICE.