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ST. NICHOLAS APARTMENTS v. U.S.

November 8, 1996

ST. NICHOLAS APARTMENTS, A CALIFORNIA LIMITED PARTNERSHIP, T. MICHAEL WILEY, AND CHARLES A. YATES, ON BEHALF OF HIMSELF AND ON BEHALF OF THE CLASS OF ALL LIMITED PARTNERS OF THE ST. NICHOLAS APARTMENTS, PLAINTIFFS,
v.
UNITED STATES OF AMERICA, UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, HENRY G. CISNEROS, IN HIS OFFICIAL CAPACITY AS SECRETARY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, FEDERAL DEPOSIT INSURANCE CORP., AS RECEIVER FOR AMERICAN DIVERSIFIED SAVINGS BANK, AMERICAN DIVERSIFIED PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP, AND AMERICAN DIVERSIFIED INVESTMENT CORP., GENERAL PARTNER OF AMERICAN DIVERSIFIED PARTNERS, DEFENDANTS.



The opinion of the court was delivered by: Richard Mills, District Judge:

OPINION

Should a provision in a HUD Manual be given the force of law?

No.

I. FACTS ALLEGED IN AMENDED COMPLAINT

On or about December 1, 1981, the United States Department of Housing and Urban Development ("HUD") insured a first mortgage for St. Nicholas Apartments under Section 221(d)(4) of the National Housing Act, 12 U.S.C. § 1715 et seq., on a multifamily housing project located at 400 E. Jefferson Street, Springfield, Illinois. St. Nicholas Apartments is a California limited partnership whose general partner, at the time, was Ranbir S. Sahni ("Sahni"). St. Nicholas Apartments' only substantial asset is the multifamily housing project located in Springfield.

During the mid 1980s, Sahni bought a Savings and Loan and transferred his interest in St. Nicholas Apartments to American Diversified Savings Bank ("ADSB") which was a service corporation of Sahni's Savings and Loan. Thereafter, the general partnership interest in St. Nicholas Apartments was owned by American Diversified Partnership ("ADP"), a California limited partnership of which American Diversified Investment Corporation ("ADIC") was the general partner. A few years later, ADSB, like so many other Savings and Loan during the 1980s, folded. When the Federal Savings and Loan Insurance Corporation failed, the Federal Deposit Insurance Corporation ("FDIC"), in effect, inherited the general partnership interest in St. Nicholas Apartments along with ADP.

On or about October 27, 1988, the FDIC assigned St. Nicholas Apartments' mortgage to HUD because of a default in payments. The housing project had severe financial problems and was physically deteriorated. Therefore, the FDIC and ADP wanted to transfer the general partnership interest in St. Nicholas Apartments to another party. Plaintiffs state that in exchange for Plaintiff T. Michael Wiley's ("Wiley") agreement to become St. Nicholas Apartments' general partner, the FDIC and ADP proposed to assign to him a claim for $1,600,000.00 in advances owed to the general partner of St. Nicholas Apartments. However, those advances could not be paid to the general partner until the St. Nicholas Apartments achieved some measure of financial stability.

On December 16, 1988, Wiley, through "Group B.W. Holdings, Inc.", agreed to acquire the general partnership interest in St. Nicholas Apartments. Plaintiffs claim that the agreement stated that HUD's approval of the proposed transaction and HUD's acceptance of a workout arrangement were mandatory conditions precedent of the transfer of the general partnership interest.

Plaintiffs claim, but HUD denies, that HUD accepted a final workout agreement with Wiley. Plaintiffs claim that despite having entered into this agreement, HUD has announced its intentions to foreclose on St. Nicholas Apartments' mortgage. Plaintiffs argue that had HUD lived up to its agreement and followed its own rules and regulations, HUD would not be in a position to foreclose on the mortgage. For purposes of the present motion, Plaintiffs argue in Counts IV and V of their amended complaint that if the Court finds that the final workout agreement is not binding on HUD, the Court should rescind the transfer of St. Nicholas Apartments' general partnership interest from the FDIC and ADP to Wiley and should unwind all other transactions from January 18, 1990 to the present.

Accordingly, Plaintiffs ask the Court (1) to declare that Plaintiff Charles A. Yates may represent the class of limited partners and to certify the class, (2) to determine whether HUD is bound to comply with the terms of the final workout agreement, (3) to determine who owns the general partnership interest in St. Nicholas Apartments, (4) to rescind Wiley's general partnership interest and transfer it back to the FDIC and ADP, if necessary, (5) to order an accounting, if necessary, (6) to issue an injunction preventing HUD from foreclosing on St. Nicholas Apartments, and (7) to award attorneys' fees.

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 (1957).

III. ANALYSIS

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 ...


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