United States District Court, N.D. Illinois, Eastern Division
OPINION AND ORDER
CHARLES RONALD NORGLE, District Judge.
This eminent domain and Fair Housing Act ("FHA"), 42 U.S.C. § 3601, et seq., action between Plaintiff City of Joliet ("Joliet" or the "City") and Defendants New West, L.P New Bluff, L.P., et al. (collectively, "New West/New Bluff") began in 2005. The matter was removed to this Court on November 29, 2005. Following seven years of extensive litigation, including appeals to the Seventh Circuit and an unsuccessful petition for writ of certiorari before the United States Supreme Court, this case proceeded to bench trial on September 27, 2012. The bench trial lasted approximately one hundred days-spanning over 19, 000 pages of transcripts- and concluded on May 21, 2014, when the Court heard the parties' closing arguments. The parties submitted their proposed findings of fact and conclusions of law pursuant to the Local Rule Guidelines for Proposed Findings of Fact and Conclusions of Law, which the Court has considered together with witness testimony, and trial exhibits that were introduced into evidence. The Court declines to admit any and all evidence made by way of offers of proof which was submitted after the close of evidence at trial and which was previously rejected by the Court. The following constitutes the Court's Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a). For the reasons set forth below, the Court finds in favor of Joliet and against New West/New Bluff on all claims.
I. FINDINGS OF FACT
A. The Parties
This action arises out of Joliet's efforts to acquire the properties known as Evergreen Terrace I ("ET I") and Evergreen Terrace II ("ET II") (collectively. "ET" or the "property") by exercising its power of eminent domain. ET is a 356-unit apartment complex subsidized by the federal government under the United States Housing Act of 1937 ("Section 8"). It is owned by New West/New Bluff, subject to mortgages held by the United States Department of Housing and Urban Development ("HUD").
1. Plaintiff City of Joliet
Joliet is an Illinois municipal corporation organized and existing under the laws of the State of Illinois, including, inter cilia, the Illinois Municipal Code, 65 Ill. Comp. Stat. 5/1-1-1 et seq., and other applicable statutes of the State of Illinois. It is located approximately forty miles southwest of Chicago in an area referred to by the United States Census Bureau as the "Chicago-Joliet-Naperville Metropolitan Area." Joliet is located primarily in Will County, Illinois, but a small portion of its western border is in Kendall County. Downtown Joliet is located along the east side of the Des Plaines River, adjacent to ET, which is located on the west side of the river.
Joliet is a home rule unit of local government. See Ill. Const., art. VII, § 6. The Joliet city council is comprised of five district council members. three at-large council members, and the mayor, who is also elected at-large. Joliet also has a city manager who is appointed to oversee day-to-day operations of the City. On. October 4, 2005, the city council unanimously passed Ordinance No. 15298. authorizing the condemnation of ET I and ET II in order to eradicate what the City found to be blight at the property and to extend a pre-existing city park known as the Riverwalk through the property along the Des Plaines River. Three days later, on October 7, 2005, Joliet filed the instant eminent domain action in the Circuit Court of Will County, Illinois against the record owners of ET, New West/New Bluff. Shortly thereafter, on November 29, 2005, the case was removed to this Court.
a. New West/New Bluff
New West Limited Partnership ("New West") is an Illinois limited partnership and, at all times relevant to this action, has been the beneficiary of Mid-City National Bank of Chicago (n/k/a/ MB Financial Bank, N.A.) Trust No. 1252, which is the land trust that owns the real estate and property commonly known as ET I. New West was formed in 1980 to purchase and own ET I. One percent of New West is owned by general partners, which are Burnham Residential Venture I, L.P. and Burnham Residential Venture I Corp. These entities are controlled by Ronald Gidwitz and his cousin Ralph Gidwitz, who are limited partners and shareholders. The remaining ninety-nine percent of New West is owned by limited partners who are comprised of approximately thirty to forty individuals and trusts-many of whom include members of the Gidwitz family. The Gidwitz family real estate interests are managed by Ronald Gidwitz.
New Bluff Limited Partnership ("New Bluff") is an Illinois limited partnership and, at all times relevant to this action, has been the beneficiary of Mid-City National Bank of Chicago (n/k/a MB Financial Bank N.A.) Trust No. 1335, which is the land trust that owns the real estate and property commonly known as ET II. New Bluff was formed in 1982 for the purpose of purchasing and owning ET II. The general partners of New Bluff, Burnham Residential Venture VII, L.P. and Burnham Residential Venture VII, Corp., own one percent of the interests in New Bluff These entities are controlled by Ralph and Ronald Gidwitz, who are limited partners and shareholders. As with New West, the remaining ninety-nine percent of New Bluff is owned by limited partners who consist of a combination of individuals and trusts, including numerous members of the Gidwitz family.
Burnham Management Company ("Burnham") is an Illinois corporation which is owned by eight members of the Gidwitz family, including Ronald Gidwitz. HUD considers Burnham to be an identity-of-interest management company because of the overlap in the ownership of ET's management company and the owners of the property-namely, the Gidwitz family. Since the early 1980's, Burnham has served as the property manager for ET I and ET II. Burnham is also the property manager for five other project-based Section 8 properties, in addition to other commercial and residential properties throughout the Chicago metropolitan area that are owned by the Gidwitz family interests. Of the five other Section 8 properties managed by Burnham, three provide housing for elderly and disabled residents and contain forty-three, fifty-two, and 100 units, respectively. The remaining two provide housing for families, one of which contains twenty-seven units, and the other which contains ninety-nine units. Even combined. these five other Section 8 properties managed by Burnham contain less than the 356 units at ET. Each year, Burnham is paid approximately $300, 000 for the management of ET. which is greater than the management fees that it collects on all of its other properties.
Jake Paschen ("Paschen") has been the president of Burnham since 2010, and he attended almost every day of the lengthy trial as the corporate representative of New West/New Bluff. Paschen reports directly to the general partners of New West/New Bluff. Prior to 2010, Herbert Halperin ("Halperin") had been the president of Burnham for approximately twenty years. New West/New Bluff are the only remaining defendants in this condemnation action. They have raised affirmative defenses pursuant to the FHA to oppose Joliet's attempts to condemn the property, arguing that Joliet acted with a discriminatory intent or effect through its use of eminent domain.
On March 9, 2006, the Court granted New West/New Bluff's motion to join HUD as a necessary party pursuant to Federal Rule of Civil Procedure 19(a). HUD holds mortgage and reversionary interests in ET l and ET II by virtue of two mortgages and incorporated regulatory agreements, which were recorded by the Will County, Illinois Recorder of Deeds on November 6, 2006. These agreements, in conjunction with several federal statutes and regulations, govern the operation of ET. During HUD's tenure in this lawsuit, it opposed Juliet's attempt to acquire the property by, inter atria, raising FHA defenses. On November 12. 2013, HUD was dismissed front this action pursuant to a settlement agreement entered into between the federal government, HUD and Joliet. The comprehensive HUD settlement agreement was entered into evidence during the bench trial,
c. The Named-Tenants
On January 31, 2008, the Court granted a motion to intervene brought by several lowincome tenants who resided at ET pursuant to leases and benefited from federal Section 8 subsidies provided for their units. Some of the original named-tenants withdrew during the pendency of the lawsuit and were replaced by other tenants of ET. At the time of trial, there were four named-tenant defendants: Teresa Davis, Elvis Foster, Arnetris Renee Griffin, and Alfreda Eubanks. Of the four named-tenants, only Teresa Davis and Elvis Foster had been residents of ET since the beginning of the lawsuit in 2005. Like New West/New Bluff and HUD, the named-tenants opposed Joliet's eminent domain action and raised affirmative defenses pursuant to the FHA. On January 10, 2014, the Court entered an agreed order of dismissal pursuant to a settlement agreement between Joliet and the named-tenants, wherein Teresa Davis, Elvis Foster, Arnetris Renee Griffin, and Alfreda Eubanks were dismissed from this action with prejudice.
B. The Property
ET consists of eight buildings on approximately 9.5 acres of land located on the west side of the Des Plaines River in Joliet, Illinois. ET I is currently comprised of four residential buildings, one administrative office building, and a guard building known as the "welcome center" that is staffed by security officers. Those buildings are located at 350, 358, 362, 363, and 366 North Broadway Street. ET II consists of three residential buildings located at 300, 301, 311, and 316 North Bluff Street.
As recipients of Section 8 project-based assistance, HUD requires New West/New Bluff to limit admission at ET to only low-income families. Thus, all tenants of ET must qualify under HUD's definition for.low income, " "very low income, " or "extremely low income." 24 C.F.R. § 5.603, 5.653. Pursuant to the HUD program. no less than forty percent of the units at ET must be available for extremely low-income families. 24 C.F.R. § 5, 653(c).
For more than a decade, ninety percent of the tenants living at ET have been, and are, young, female, African-American heads-of-households with children. There is no evidence that New West/New Bluff have ever marketed the property in such a way as to achieve a less racially segregated resident population. At any given time, there are between 400 and 600 children living at ET I and ET II. At present, there are approximately 780 residents listed on lease agreements as tenants of ET. The property is currently at a ninety-nine percent occupancy level, and has a lengthy waiting list for prospective low-income tenants. Notwithstanding the high occupancy level, the property has a tenant-turnover rate of approximately twenty-five percent each year.
The property was originally constructed in the late 1960's and operated for ten years as a low-income subsidized housing project. By the mid to late-1970's however, the original owners defaulted on their mortgage and the property went into foreclosure. The original owners identified the following problems that led to their ultimate failure with the project: crime, a high number of calls to the police and fire departments, vandalism, a related difficulty in attracting lease compliant tenants, their acceptance of any tenants in an effort to maintain occupancy, code violations, a lack of building maintenance and deferred maintenance, inadequate management and security, and excessive density. Pl.'s Ex. 90, at pp. 3-11 see also Trial Tr. vol. 2, 207, 233, City of Joliet v. Mid-City Nat'l Bank of Chi., No. 05-6746 (N.D. Oct. 4, 2013) (testimony of John Mezera). The City then solicited proposals for redevelopment of the project for use as. among other things, elderly and low-income housing.
On May 29, 1979, Joliet selected Burnham Development Company to acquire, redevelop, and manage the property. Shortly thereafter, New West and New Bluff were formed to purchase the property. HUD sold the two pieces of the property to New West/New Bluff for $1 each. New West/New Bluff then obtained $14 million from HUD to repair and rehabilitate the property, which would be developed into the two phases now known as ET I and ET II. During this time, Joliet granted all permits and zoning variances necessary for the redevelopment. While Joliet approved the plans for the existing building and unit sizes, at the time, the City believed that New West/New Bluff intended to redevelop the project as mixed-use housing for senior citizens, and moderate to low-income families-not solely for use as housing for low-income families with children. This intended mixed-use, with a majority of the units to be designated for elderly housing, was consistent with the Regulatory Use Agreements and Housing Assistance Payment ("HAP") Agreements that New West/New Bluff entered into with HUD.
The agreements with HUD provided for forty-year mortgages on ET I and ET II, as well as twenty-year HAP contracts. Under these agreements, New West/New Bluff received abovemarket rents for the units from HUD. Specifically, HUD paid New West/New Bluff monthly assistance payments, which was the difference between the contract rent contained in the HAP agreements and the tenant's share of the contract rent for a unit, based upon the tenant's income among other criteria. Because of the extremely low income of many tenants at ET, a large number of tenants pay nothing for their units and the entire rent is subsidized by HUD. Under the HAP agreements, New West/New Bluff are required to maintain the property in a safe, decent, and sanitary condition.
HUD serves as the HAP contract administrator for ET I, while Joliet served as the HAP contract administrator for ET II from 1982 to 2007. HUD issued the HAP contract assistance payments for ET II to Joliet, who would then distribute the money to New Bluff As contract administrator for ET II. Joliet was required to inspect the units at ET II on an annual basis and identify violations that needed to be corrected. Joliet would then certify to HUD that the units had been inspected and that the payments made to New Bluff were in accordance with HUD's regulations and requirements. Irrespective of these yearly certifications, Joliet communicated its concerns to both HUD and New West/New Bluff as to the numerous code violations at ET I and ET II, and ET II's failure to meet HUD's standards. Indeed, even HUD, as contract administrator for ET I, continued to provide funds when it knew that the entire property was in violation of its standards, having failed its Real Estate Assessment Center ("REAC") inspections in numerous years, including 2002, 2003, and 2012. HUD REAC conducts physical inspections of properties subsidized by HUD to ensure that families have housing that is decent, safe, sanitary, and in good repair.
C. Exercise of the Power of Eminent Domain by the Joliet City' Council
1. Joliet's Discussions with HUD and New West/New Bluff During the Mark-to-Market Process Prior to Exercise of Eminent Domain
In early 2000. Juliet became aware that New West/New Bluffs contracts with HUD for ET were set to expire in 2002 and 2003. During this time period. Joliet's then-city manager, John Mezera ("Mezera") met with New West/New Bluff to discuss a possible sale of the property to Joliet. Upon discovering that New West/New Bluff were unwilling to sell the property for less than $5 million in excess of their existing mortgages on ET, Joliet ended negotiations.
Shortly thereafter, in 2001 and 2003, New West/New Bluff applied for a restructuring of their debt on ET and for an extension of the Section 8 contracts with HUD under HUD's Mark-to-Market ("M2M") program. M2M was created to carry out Congress' objectives pursuant to the Multifamily Assisted Housing Reform and Affordability Act of 1997. 42 U.S.C. § 1437f ("MAHRAA"). Among other things, MAHRAA provides for the reduction of rents subsidized by the federal government at project-based Section 8 housing when their contract terms expire. Under MAHRAA and M2M, the debts on Section 8 properties are to be restructured in order for projects to remain viable even with lowered rent subsidies paid to the owners. However, certain Section 8 properties, like ET, are incapable of operating on market-rate rents because the properties have an increased risk of defaulting on their debts and going into foreclosure, thereby increasing the FHA's insurance claims. Thus, under M2M, HUD has authority to use exception rents, which are above comparable market rents, in order to preserve certain projects. With respect to ET, New West/New Bluff and HUD agreed that the property could not be sustained on market-rate rents and would still require rent subsidies at above-market rates or exception rents in order to stay operable.
HUD manages the M2M program by using Participating Administrative Entities ("PAE") that provide evaluations and assessments of a property prior to determining whether it qualifies for M2M restructuring. HUD originally appointed the Illinois Housing Development Authority ("IHDA") as the PAE for ET I. Later, Heskin-Signet was appointed as the PAE for both ET I and ET II.
Joliet was considered a stakeholder in the M2M process, and as such, both HUD and the PAE solicited Joliet's input and consulted with the City during the restructuring process. To the extent that New West/New Bluff argue that Joliet attempted to "block" restructuring. the Court rejects that proposed finding as unsupported by the evidence. Although a stakeholder in the process, Joliet did not have the power to approve or prevent restructuring-that power belonged solely to HUD.
From the beginning of the process in 2002, up until the adoption of the eminent domain ordinance in 2005, Joliet made it known to HUD and the various PAE's that it opposed the restructuring of ET's contracts and mortgages. Joliet maintained that the proposed restructuring would be, and is, inadequate to address blight at the property due to, among other things, structural problems with the buildings, crime, and functional obsolescence. Joliet's position, as a stakeholder in the process, was that the property should be redeveloped into mixed-income housing or subsidized housing, only if it could be done in such a way as to avoid the reoccurrence of the problems that the property has continuously experienced in the past. Joliet consistently expressed its concern regarding the longstanding problems that it experienced with ET and the effects that it had on the surrounding area. Joliet also provided HUD with numerous plans for redevelopment of the property into a mixed-income community, which had been accomplished with projects in other cities all over the country, including in Chicago. See Order, Aug. 8, 2013 (Doc. No. 772) (taking judicial notice of facts concerning the relocation of the approximately 25, 000 residents of the former Robert Taylor Homes public housing project in Chicago following its demolition and redevelopment). Indeed, HUD specifically requested redevelopment plans from the City to address the potential relocation of ET's tenants in the event that the property was redeveloped.
On March 28, 2003, IHDA submitted a M2M restructuring plan to HUD with respect to ET I, despite Joliet's objections. On May 16, 2003, HUD accepted the plan and initially moved forward by issuing a M2M restructuring commitment to New West for ET I. Before learning that IHDA's plan had been approved, Joliet expressed its opinion that the plan was completely inadequate and did not sufficiently address the large amount of repairs needed, nor did it appropriately provide for the cost of operating the property, including security and maintenance. HUD later agreed with Joliet and abandoned IHDA's restructuring plan. HUD eventually appointed a new PA E, Heskin-Signet, for ET to provide a more realistic restructuring plan.
On July 16, 2003, HUD met with Joliet to discuss the problems at ET and the issues that the City had with the deficiencies in IHDA's restructuring plan. During this meeting, HUD discussed the variety of options available to Joliet with respect to the property. including: (1) purchasing ET from New West/New Bluff and opting out of the HAP contracts, which would result in the issuance of HUD Section 8 Housing Choice Vouchers to the residents; (2) exercising its right of eminent domain to acquire ET; or (3) finding a third party or non-profit entity to acquire ET from New West/New Bluff.
In September of 2003. Joliet once again met with HUD officials, including then-Secretary of HUD, Mel Martinez, to discuss ET. At that time, HUD officials indicated that they would stop the IHDA restructuring from going forward if they were legally able to do so. However, because HUD had already issued a restructuring commitment to New West months earlier for ET I, it determined that it was legally obligated to go forward with a restructuring. Recognizing the deficiencies in IHDA's plan. HUD assigned Heskin-Signet to redo a due-diligence examination of the property and to address more of the physical and operational problems.
By July of 2005. Charles Williams of HUD called Mezera. joliet's then-city manager, to inform the City that Heskin-Signet's M2M restructuring plan was going to be approved. On July 13, 2005, a letter was sent to then-Secretary of HUD, Alphonso Jackson, from Illinois Senators Barack Obama and Richard Durbin and Congressman Jerry Weller, the representative of the district in which Joliet is located. The letter provided, inter alia, "We know that [HUD] is currently considering [M2M] designation for [ET]. We believe that designation would reward cinTolt management with an undeserved opportunity to retain management control. We ask that you meet with us to discuss and reconsider that designation." Pl.'s Ex. 577. Shortly thereafter, then-Senator Obama, Congressman Weller, and representatives sent on behalf of Senator Durbin met in Washington. D.C. with HUD officials, including Charles Williams and then-Secretary Alphonso Jackson. At the meeting, the participants discussed the options that Joliet had in light of the M2M restructuring plan that had been accepted-namely, that Joliet could allow the restructuring to go forward, acquire ET through eminent domain, purchase ET from New West/New Bluff, or find a third-party to purchase the property from New West/New Bluff.
On August 1, 2005, Senators Obama and Durbin and Congressman Weller sent a letter to Joliet's then-mayor, Art Schultz, informing him that they had met with HUD and were told that HUD considered itself legally bound to go forward with the M2M for ET, and would do so by the end of the month if Joliet did not present another viable alternative, i.e., an offer by the City or other third-party to purchase the property, or the City's exercise of eminent domain. HUD official Charles Williams testified that on August 11, 2005, a conference call was held between Joliet. HUD, and Congressman Weller's officer as a follow-up to the meeting held in. Washington, D.C. The information exchanged in this meeting was memorialized in a letter written by Joliet city manager, Mezera, to Williams, dated August 12, 2005. The letter stated that the parties once again discussed the three options available to Joliet in light of HUD's intention to move forward with the restructuring, and that HUD indicated that if Joliet condemned the property, HUD would provide Housing Choice Vouchers or portable vouchers to all eligible ET residents. After eliminating all other options, Joliet initiated steps to take the property by eminent domain.
2. Juliet's Initiation of Eminent Domain Procedures.
On August 17, 2005, the Joliet city council passed Resolution No. 5655 with respect to ET, which declared that it was authorized and appropriate for the City to use its eminent domain authority to eliminate the blighted conditions existing at Evergreen Terrace. Pl.'s Ex. 2. Among other things, Resolution No. 5655 provides the following:
WHEREAS, the buildings, improvements and grounds of the real property commonly known as [ET I and ET II] have become extremely dilapidated, unsafe and dangerous, unsanitary, crime-infested and a substantial threat to the health. safety and welfare of the residents of [ET] and their families and guests; and
WHEREAS, the conditions at [ET] unreasonably interfere with the lawful use of nearby private and public properties, divert important public resources such as police protection, fire protection and emergency medical services, impair the orderly development of nearby properties, depress property values, increase the cost of public services and adversely affect the tax base of the City, local schools and other public agencies; and
WHEREAS, the City Manager, the Police Chief, the Fire Chief, the Director of Community and Economic Development, the Director of Inspection Services and other City officials have inspected [ET] and nearby properties and have prepared reports documenting the deplorable conditions existing at and near the property; and
WHEREAS, based on the foregoing, the Mayor and City Council hereby find and declare that [ET] is unsafe and dangerous, a public nuisance and a blighted area....
Id. The city council further found that in order to abate the public nuisance and eliminate the blight at ET, the City would need to acquire the property through purchase, condemnation, or otherwise. Id . Following this action by the city council, on September 1. 2005, Senators Obarna and Durbin and Congressman Weller sent another letter to the Secretary of HUD, informing him that Joliet had initiated eminent domain proceedings for ET, which was one of the options that had been discussed in meetings with HUD. The letter also requested additional time for Joliet to negotiate a purchase with the owners or to file its eminent domain case.
On August 26, 2005, just over one week after the city council passed Resolution No. 5655, New West/New Bluff sent Joliet a non-binding summary of key terms for the purchase of ET. In the summary, New West/New Bluff proposed a purchase price of $24 million. Pl.'s Exs. 243-244. This proposed price was more than double the amount of the existing mortgages on the property at the time, which amounted to over $10 million. While New West/New Bluff did not submit an accompanying appraisal along with their proposed demand, appraisals of ET conducted by HUD less than a year earlier in November of 2004 indicated a value of $3, 327 million for ET land $1.92 million for ET II, for a total value of $5.247 million for the property.
Meanwhile, Joliet obtained its own appraisal of ET in order to make a good faith offer of purchase to New West/New Bluff. This appraisal, however, was not included with the eventual offer made to New West/New Bluff. On or about September 21, 2005, Joliet submitted its offer of $7.! million for ET I and $3.6 million for ET II, for a total. of $10.7 million for the property to New West/New Bluff, free and clear of all HUD interests. Although this offer exceeded Joliet's appraised value of the property, it was rejected by New West/New Bluff because it was less than the amount of the remaining mortgages on the property and thus insufficient to compensate the owners. After the City's good faith offer of purchase was rejected, the City proceeded with eminent domain.
In the interim, HUD issued a new M2M restructuring commitment for ET I based on the Heskin-Signet plan in September of 2005. On October 24, 2005. HUD issued a M2M restructuring commitment for ET II based on the Heskin-Signet plan, which was fully executed on November 11, 2005. The financing for the restructuring and maintenance of ET I and ET II, however, was not completed for another year.
In September of 2006, HUD issued amended M2M restructuring commitments to New West/New Bluff so that the restructuring transactions for ET could proceed without a private or third party lender providing the first mortgages. Pursuant the amended restructuring commitments, there would be two closings each for ET I and ET II-the first consisting of direct loans from HUD sufficient to pay off the existing mortgages, and the second to be reserved for after the culmination of the instant condemnation proceeding to consist of first mortgages on the property from private or third party lenders, insured by HUD.
As part of the new M2M plan, HUD required New West/New Bluff to provide $1, 553, 671.69 of their own money up front to help finance the renovations. HUD promised to repay this money to New West/New Bluff plus interest at a rate of 7.5%. The first phase of the closings for ET I and ET II occurred on November 4. 2006, when the M2M and HAP contracts were finalized, and became effective on December 1, 2006. The approved maintenance and repairs for ET did not begin until January of 2007 and were not completed until April of 2012. Throughout this time period. HUD maintained oversight and guidance of the process through frequent telephone conferences with New West/New Bluff
3. Eminent Domain Ordinance and Lawsuit
On October 4, 2005, Joliet's mayor and city council unanimously adopted Ordinance No, 15298, authorizing the acquisition of ET through eminent domain. ...