Full opinion text
FINDINGS OF FACT, CONCLUSIONS OF LAW ORDER FOR JUDGMENT AND MEMORANDUM RENNER, District Judge. The above entitled matter came on for trial before the undersigned, without a jury, on the 26th day of January, 1987 and continued through February 13, 1987. Final arguments were presented to the Court on March 25, 1987. PROCEDURAL BACKGROUND On August 13, 1982, plaintiffs filed a complaint and motion for preliminary injunction seeking to prevent the U.S. Department of Housing and Urban Development (“HUD”) from foreclosing the mortgage on the Little Earth Housing Project. The parties thereafter stipulated to the entry of a preliminary injunction enjoining the scheduled foreclosure sale. The injunction was subsequently extended by the Court upon further agreement of the parties. On May 11, 1983, the Court heard the federal defendants’ motions for summary judgment and for appointment of a receiver, as well as plaintiffs’ cross-motions for partial summary judgment and declaratory and injunctive relief. The complaint then at issue contained numerous allegations. For ease of discussion, the Court characterized these as “administrative action claims,” and “civil rights claims.” By Order dated June 27, 1983, the Court granted defendants summary judgment on the administrative action claims and took the civil rights claims under advisement pending further review. Little Earth of United Tribes v. U.S. Dept. of HUD, 584 F.Supp. 1287, 1292 (D.Minn.1983). Plaintiffs’ motions for partial summary judgment and injunctive relief were denied as moot. On August 4, 1983, plaintiffs appealed this Court’s Order of June 27, 1983 to the Eighth Circuit Court of Appeals. On July 5, 1984, the Eighth Circuit dismissed the appeal on grounds that the June 27 Order was improperly certified as a final order under Rule 54(b). 738 F.2d 310 (8th Cir. 1984). Without commenting on the merits of plaintiffs’ appeal, the Circuit Court suggested that this Court supplement the trial record by making a determination as to whether, assuming reviewability, HUD’s denial of rent increases and flexible subsidy funds was proper. The Court has hereinafter done so. On August 15,1983, the Court addressed defendants’ request for summary judgment as to plaintiffs’ civil rights claims. The Court granted defendants summary judgment as to plaintiffs’ claims for money damages, and claims under 42 U.S.C. § 1983. However, the Court denied summary judgment with respect to the remaining civil rights claims which allege violations of the Fifth Amendment; Title VI of the Civil Rights Act of 1964, 42 U.S.C. § 2000d; Title VIII of the Civil Rights Act of 1968, 42 U.S.C. §§ 3601 et seq.; and 42 U.S.C. §§ 1981, 1982 and 1985(3). Little Earth of United Tribes v. U.S. Dept. of HUD, 584 F.Supp. 1292, 1300-01 (D.Minn.1983). Subsequently, by Order dated August 19, 1983, the Court granted plaintiffs’ motion for a preliminary injunction restraining a foreclosure sale pending resolution of the remaining civil rights claims. The Court also granted defendants’ motion for appointment of a receiver pendente lite. Little Earth of United Tribes v. U.S. Dept. of HUD, 584 F.Supp. 1301, 1305 (D.Minn.1983). On March 26,1984, plaintiffs filed a Supplemental Complaint dealing with HUD’s late 1983 rejection of a proposed work-out agreement involving a Transfer of the Physical Assets (“TPA”) of the Little Earth project to private entities. The Supplemental Complaint alleges that HUD’s rejection of the proposed TPA violated plaintiffs’ civil rights and was a “breach of trust and quasi-contract.” Supplemental Complaint at paragraph 9. On June 4,1984, the defendants amended their answer to include a counterclaim for judicial foreclosure. In their initial reply to the counterclaim, plaintiffs raised a claim for setoff based on HUD’s alleged breach of the interest reduction contract. Subsequently, on September 22, 1986, plaintiffs amended their reply dropping the claim for setoff and adding three recoupment claims. Two of these claims, respectively alleging breach of the interest reduction contract and improper denial of flexible subsidy funding, were dismissed by the Court by summary judgment on January 14, 1987. The third claim, alleging breach of the project’s Section 8 contract was dismissed on January 26, 1987. Plaintiffs have since moved to amend or restrict HUD’s counterclaim seeking 7% interest on the project’s loan principal balance from May 10, 1983 until paid. Plaintiffs contend a 1% interest rate is required. Plaintiffs have also moved the Court to reconsider its Order as to defendants’ motion for summary judgment on the recoupment claim involving the interest reduction contract, or, alternatively, to strike all testimony at variance with representations that the interest reduction contract reduces the mortgage interest rate from a 7% to a 1% effective rate. These pending motions, the plaintiffs’ civil rights claims, the plaintiffs’ “quasi-contract” claim regarding the proposed TPA and the defendants’ counterclaim for judicial foreclosure are addressed below. The Court, having heard the testimony and reviewed the exhibits, and based upon the arguments and briefs of the parties, hereby sets forth its Findings of Fact, Conclusions of Law, Order for Judgment and Memorandum: FINDINGS OF FACT 1. The Little Earth of United Tribes housing project (“Little Earth”) is a 212 unit low- and moderate-income townhouse and apartment complex located at 24th Street and Cedar Avenue in South Minneapolis. 2. Little Earth is the only major, urban housing project in the country run by American Indians. The project was built in the early 1970’s with the proceeds of a $4,521,500 loan insured by the Secretary of the Department of Housing and Urban Development (“HUD”) under Section 236 of the National Housing Act, 12 U.S.C. § 1715z-l. 3. The impetus for the construction of Little Earth came from a number of organizations concerned with the lack of affordable housing for American Indians. This concern led to the creation of the South High Nonprofit Housing Corporation (“South High”) in April, 1971, to develop and own the housing project. 4. The loan for the construction of Little Earth, then known as the South High project, was made on December 17,1971 by the Shelter Mortgage Corporation. (Defendants’ Exhibit 1). The note and mortgage were subsequently assigned by Shelter Mortgage Corporation to the Federal National Mortgage Association. 5. Section 236 authorizes the Secretary of HUD to insure loans made for the purpose of building low- and moderate-income housing projects. The projects are privately owned, and the mortgages are held by private entities. If the borrower defaults on repayment of the loan, the insured lender may assign the mortgage to HUD in exchange for insurance payments, as provided in 24 C.F.R. § 207.255 et seq. Upon assignment of the mortgage, HUD assumes all rights of the original lender, including the right to foreclose if payments are not made. 6. Under a Regulatory Agreement with South High which was executed pursuant to Section 236, HUD controls the rents that South High (subsequently, Little Earth of United Tribes, Inc. (“LEOUT”)) charges tenants and prohibits the sale of the project to another owner without HUD’s permission. (Defendants’ Exhibits 3 and 4). 7. In addition to authorizing mortgage insurance, Section 236 also permits HUD to make monthly “interest reduction payments” directly to the insured lender. HUD makes these subsidy payments in order to reduce the amount of the owner’s monthly loan payments and, in turn, to enable the owner to maintain lower rents at the project. 12 U.S.C. § 1715z-l(a). The payments are made each month during the life of the loan, to the mortgagee who owns the mortgage at the time the payment is due. 24 C.F.R. § 236.510. 8. The effect of these payments is to reduce the interest payable by the mortgagor over the life of the loan to the equivalent of 1%. This does not mean, however, that each of the owner’s loan payments are calculated at a 1% interest rate. With respect to Little Earth, HUD has contracted to make interest reduction payments which range from $18,535.08 due each month in 1975 to $16,665.13 due each month in 2014, the last year of the mortgage. The amount of interest reduction payment that will be due each month was determined at the outset of the contract and is shown on the amortization schedule. (Defendants’ Exhibit 103). Thus, the actual interest rate varies from payment to payment, starting out at approximately 2.55% for the first payment and ending 40 years later with a negative interest rate. (Defendants’ Exhibit 115). 9. Interest reduction payments are not always applied against the interest due in the month the payment is made. Instead, the payments are applied “to the items and in the order set out in the mortgage.” 24 C.F.R. § 236.525. At Little Earth, as at other Section 236 projects, HUD applies interest reduction payments as follows: Each month, HUD calculates the amount of all sums due on the loan that month, including principal, interest at 7%, operating advances, tax escrows and all other costs which the mortgage requires LEOUT to pay. HUD then applies that month’s interest reduction payment against the sums due in the order called for in the mortgage. Interest on operating advances, operating advances, service charges and taxes have a higher priority than payment of interest and principal. (Defendants’ Exhibits 101 and 102). Only if the interest reduction payment is enough to pay all of the items that must be paid before interest, is the remainder of the payment applied against interest. 10. Uncontroverted evidence suggests HUD made all of the interest reduction payments due for the Little Earth project for the period between November, 1982 and February, 1987. (Defendants’ Exhibits 138 and 139). These payments have been applied as provided in the mortgage documents and HUD regulations. 11. The first residents moved into the project in February 1973. By late 1973, the project was fully occupied. In the early years of the project, the tenant population was racially mixed. This changed by the late 1970’s and, since then, almost all of the tenants in the project have been American Indians. 12. The beginning years of the project, under South High, were plagued with management troubles and problems of physical deterioration caused, at least to some degree, by project construction and design defects. Among other things, unfinished landscaping left bare soil in many places creating severe problems with run off and water leakage into basements. Improperly set toilets developed leaks into the floor and the areas below them. 13. The project defaulted on the initial loan payment due January 1, 1975. On February 25, 1975, the Area HUD Office informed the South High board of directors that it should change its “sponsorship” structure or face foreclosure by reason of the mortgage default. HUD sought to eliminate the diffusion of responsibility among the many sponsoring groups which appointed the board’s initial 25 members. Instead, HUD insisted that a single sponsoring organization take primary responsibility for selecting board directors and overseeing the project’s general operation. (Plaintiff’s Exhibit 149). 14. South High agreed to restructure itself. In a community meeting held later in 1975, attended by HUD officials, the South High board selected the American Indian Movement (“AIM”) as the project’s new sponsoring organization. Subsequently, in February, 1977, the name of the corporation was changed to Little Earth of United Tribes, Inc. (“LEOUT”). 15. When AIM accepted sponsorship of Little Earth, it was aware that the project had ongoing maintenance problems, that a number of units were vacant, and that rent collections were lagging. Although HUD held discussions with the new board and AIM representatives concerning the project’s future, HUD provided no absolute guarantees to recast the project mortgage or to provide specific subsidies. HUD apparently believed that the mortgage could only be recast as part of a comprehensive solution to all of the project’s difficulties, both physical and financial. 16. Since the initial default in January 1975, payments which have been received were not large enough to make the loan current. (Defendants’ Exhibit 138). The only time during the life of the mortgage when payments were regularly made was during 1978 and 1979. (Plaintiffs’ Exhibit 207). Between December 1980 and the filing of this suit, LEOUT made no mortgage payments whatsoever. (Plaintiffs’ Exhibit 207). 17. Because of the default, the mortgage was assigned in June 1975 to the Secretary of HUD, who paid more than $4,500,000 in insurance benefits. (Defendants’ Exhibit 13). The Secretary has been the owner of the mortgage at all times since and has had all rights of the mortgagee, including the right to foreclose for nonpayment of the mortgage loan. (Id.). 18. In addition to the mortgage insurance and interest reduction program, HUD provided additional financial assistance to the project by way of a rent supplement program under which tenants in 84 of the 212 units (40%) were charged only 25% of their income for rent. (Defendants’ Exhibits 5 and 6). 19. In 1976, HUD began to replace rent supplement subsidies with subsidies under the “loan management set-aside” program of Section 8 of the Housing Act of 1937, 42 U.S.C. § 14871 See 24 C.F.R. § 886. This program is structured similarly to the rent supplement program, in that tenants occupying subsidized units pay a percentage of their income for rent, and HUD pays a subsidy to the project equal to the difference between the rent paid by the tenant and the “contract” rent. The total income received by the project for any unit is the “contract rent.” The Section 8 program is available to families, as well as to elderly and disabled individuals. Under the program, the contract between HUD and project owners runs for a period of 5 years, and is renewable for as many as two more 5-year periods. 24 C.F.R. § 886.111. 20. On August 26, 1976, Little Earth and HUD executed a Section 8 contract which subsidized 128 of Little Earth’s 212 units. (Plaintiffs’ Exhibit 197). This initial Section 8 contract ran for a term of five years until 1981. A new Section 8 contract executed in September 1977 made subsidies available for all 212 units effective October, 1977. (Defendants’ Exhibit 15). No other section 236 project in the state of Minnesota receives Section 8 payments for 100% of its units. In fact, in 1976 and 1977 Little Earth received more than 2% of the Section 8 funding available nationwide for projects with HUD-held mortgages. 21. The contract rents determined by HUD provide all, or virtually all, of the income that is available for project operations. Little Earth could not raise the contract rent without HUD’s permission. In Section 8 programs other than the loan management set-aside program, the contract rents are raised each year by application of an automatic adjustment factor (“AAF”) published by HUD. However, this is not the case in the loan management set-aside program. Under applicable regulations, the AAF is applied only to the “maximum unit rents” (which are ceilings above which contract rents may not be raised), not to the contract rents under the loan management set-aside program. 24 C.F.R. § 886.112. Thus, the program staff of the Minneapolis HUD office were advised by their counsel not to give AAF increases in contract rents to any project receiving Section 8 subsidies under this program, and they apparently have never done so. (Defendants’ Exhibits 95 at pg. 4, 132 and 133). Instead, HUD’s policy is to grant contract rent increases only to permit the owner to meet documented increases in operating costs. 22. In 1980, HUD published new regulations with respect to the Section 8 program. These regulations permitted contract rents received by subsidized projects to rise above the maximum unit rent level. These regulations permitted, but did not require, HUD to adjust maximum unit rents either annually or more frequently. Rent adjustments could be done “(1) on the basis of a written request for a rent increase ... or (2) by applying ... the applicable Automatic Annual Adjustment Factor.” 45 Federal Register 59149 (Sept. 8,1980), amending 24 C.F.R. § 886. 23. Although HUD is not required to raise contract rents, HUD’s Insured Project Servicing Handbook requires that all rent increase requests be processed within 30 days and that mortgagors be promptly notified in writing of the approval or disapproval of the requests. The handbook also mandates that HUD cite the reasons for any disapprovals. (Plaintiffs’ Exhibit 95, pg. 1). 24. HUD requires certain bookkeeping entries of owners receiving Section 8 payments. 24 C.F.R. § 886.119. For example, HUD requires the owner to certify a family’s income when the family first moves into the project in order to determine the family’s eligibility for Section 8 benefits and to establish the amount the family must pay in rent. In addition, the owner must annually recertify every family’s income, composition and medical expenses to determine if the amount of rent the family can pay has changed. These requirements are to insure that the government makes subsidy payments only for families who are entitled to receive the benefit of those payments. They are also designed to ensure that eligible families receive the full benefits to which they are entitled. In order to determine the owner’s compliance with program requirements, HUD may review the owner’s operations as often as needed. 24 C.F.R. § 886.130. 25. The extended family structure in the American Indian community considerably complicated the work of preparing Section 8 vouchers. Family members would regularly move in and out of households, necessitating burdensome recertifications of income. 26. Little Earth’s prospective tenants were required to provide two written landlord statements and two credit references. Landlords were required to mail these statements directly to Little Earth. Phone verifications were not permitted. Tenants were not permitted to pick up the forms (even sealed) from the landlords and deliver them to Little Earth. Initially, HUD refused to permit electric or utility credit records as references, despite the fact that many low-income persons had no other credit history. HUD eventually changed this requirement and allowed such credit records as references. 27. If a Little Earth prospective tenant could not produce two landlord statements and two credit references, a guarantor was required to provide a notarized statement guaranteeing payment of the tenant’s rent. Guarantors were required to provide the same level of credit references as the prospective tenants. 28. With respect to income verification, HUD did not permit Little Earth’s management to use check stubs for income verification. If the tenant had no source of income, HUD required that potential sources of income be checked. As a result, Little Earth personnel routinely sent second or third requests to public assistance workers asking them to verify that someone not on their case load was not receiving income through their program. 29. No waivers of income recertifica-tions were permitted, even if they resulted from a uniform raise in AFDC, Social Security, or other public benefits. Little Earth was not permitted to accept as verification the notice of percentage increase from public assistance plus a copy of a check in the new amount. A recertification mailed by the worker, not hand carried by the tenant, was required. If a person had been on Little Earth’s waiting list for over six months, HUD required a complete re-certification of eligibility. 30. There was evidence introduced to show that the bookkeeping requirements imposed on Little Earth were more onerous than at other HUD sponsored projects. For example, Myra Knudson, who from June 1980 to February 1983 managed Oak Grove Towers, a property including approximately 70 Section 8 units, testified that she did no credit checks beyond checking by telephone with a prospective tenant’s current landlords. She did not perform verifications of people on the waiting list. To verify income, Knudson relied on check stubs. If a person did not have a source of income, their word was accepted and verifications of potential public income sources were not required. While at Oak Grove, Knudson was never required to obtain a guarantor for a tenant. She was never advised that her practices were unacceptable. 31. Similarly, Janet Stately, who had served as assistant manager and manager of the Little Earth project, had screened tenants and done certifications with another project in Eliot Park during the summer of 1983. At that time, she was permitted by HUD to screen tenants by telephone, rather than by utilizing the extensive written credit checks which had been required of her at Little Earth. 32. Significantly, Knudson’s experience at Oak Grove and Stately’s experience at Eliot Park, however, are not directly analogous to Little Earth. Most of the Oak Grove tenants were elderly so there were relatively few changes in tenant income family composition. Unlike Little Earth, Oak Grove did not have ongoing management and financial problems. In fact, Knudson’s work was reviewed only once during her three year tenure. Stately worked at the Eliot Park project for only three months. During that period, only one new tenant moved into the project. Furthermore, Stately had no contact with HUD officials. 33. HUD granted increases in Little Earth’s Section 8 contract rents effective August 1976, March 1977, and June 1978 after determining that the additional subsidies were needed to pay increased operate ing costs. (Plaintiffs’ Exhibits 114 and 170; Defendants’ Exhibit 18). The rent increase of June 16, 1978 was the last increase which HUD approved for Little Earth prior to this Court’s appointment of a receiver. 34. By November 1978, HUD’s review of monthly payment vouchers and other documents submitted by LEOUT regarding the Section 8 payments had caused the Department to become concerned about LEOUT’s management practices and its compliance with Section 8 procedures. Between October 1977 and September 1978, LEOUT’s vouchers for Section 8 payments were consistently late and contained numerous inaccuracies resulting in over-payments by HUD. Also, a large number of required annual recertifications of tenants’ income were overdue. Moreover, there had been a recent turnover in LE-OUT’s management staff. 35. Because of these problems, Department employees visited Little Earth in November 1978 and again in March 1979 to review the project’s tenant files and occupancy procedures. (Defendants’ Exhibits 19 and 20). Their reviews were critical. The tenant files were in disarray, making it impossible to tell who lived in which units and who had left the project. Without this information, it was impossible to submit accurate Section 8 vouchers. Income recer-tifications had not been performed on time, and when they had been done, they were not done properly. HUD also was concerned that there was severe over- and under-utilization of units. In some cases, as many as six people were occupying an efficiency unit while two people occupied a three- or four-bedroom unit. Such conditions contribute directly to physical deterioration of the units, increase maintenance costs of the project, and jeopardize eligibility for Section 8 payments. 36. Because of the many problems found in the review, HUD could not be sure that its Section 8 payments were in the correct amounts or that tenants were receiving the proper benefits of the program. On May 29, 1979, HUD wrote to LEOUT’s on-site director outlining the deficiencies found in the project’s occupancy procedures and providing detailed instructions for correcting these procedures. (Defendants’ Exhibit 20). 37. In July, 1979, Howard Goldman became chief of the loan management branch of the loan management and property disposition section of the HUD area office. It was in this capacity that Goldman first worked directly with Little Earth. 38. In October 1979, HUD conducted a third review of LEOUT’s tenant records and occupancy procedures. This time, HUD employees spent three days at the project conducting the review. Once again, LEOUT’s management was found to be seriously deficient. Many of the problems that had been disclosed nearly a year earlier had not been corrected, and there were several new ones. (Defendants’ Exhibit 22) HUD was particularly concerned about the frequent use of the project for emergency and transient housing. The Indian community’s temporary housing demands caused overcrowding resulting in continual unit transfers. This complicated program management, and, presumably, contributed to deterioration of the physical plant. 39. According to plaintiffs, HUD’s refusal to acknowledge the special nature of the extended family in the American Indian community exacerbated the concern about persons moving in and out of the project for temporary housing. 40. In any event, HUD determined that the primary cause of project deficiencies was the lack of proper direction from project management, as opposed to lack of adequate rental income. Accordingly, on January 2, 1980, HUD wrote to LEOUT describing the results of HUD’s latest review and outlining in detail what steps LEOUT should take to correct the shortcomings disclosed by the review. (Defendants’ Exhibit 26). HUD did not receive a written response to this letter; none had been requested. 41. On December 21,1979, LEOUT submitted a proposed budget and retroactive rent increase request for the fiscal year August 1, 1979-July 31, 1980. (Defendants’ Exhibit 24). HUD contends that there was insufficient information about project operations to allow a determination of whether the rent increase was necessary. On January 4, 1980, HUD area director Thomas Feeney wrote to LEOUT requesting more information concerning the proposed budget. (Defendants’ Exhibit 27). Feeney’s letter, drafted by Douglas Strandness, did not request a written response. 42. Instead, HUD staff discussed the budget with LEOUT representatives at a meeting held in February, 1980. (Plaintiffs’ Exhibit 251 at p. 5). HUD remained dissatisfied with the quality of information provided at the meeting. Contrary to the requirements of the agency’s own handbook, however, HUD never formally approved or denied in writing the proposed budget and rent increases. 43. In early 1980, while HUD was withholding action on Little Earth’s request for Section 8 contract rent increases, HUD entered into a “work-out” agreement with Cedar Square West, a project with all-white ownership and management. Cedar Square West, like Little Earth, was “self-managed,” in the sense that the management company was a subsidiary of the owner. 44. Cedar Square West had a history of management problems. On December 31, 1974, HUD had sent a letter to the owners of Cedar Square West requiring compliance with a number of items prior to HUD’s approval of a rent increase. (Plaintiff’s Exhibit 266). This letter resulted in part from a memorandum which set out a number of violations of both the management and regulatory agreements by Cedar Riverside, and which concluded that “it is apparent that Cedar Riverside does not consider either the Management Agreement or Regulatory Agreement to be of any importance. Their attitude indicates a lack of responsibility and understanding in the management of a multi-million dollar housing project.” (Id.) 45. As of September 1975, one of the Cedar Square West mortgages had been assigned to HUD. As of March 1976, three additional Cedar Square West mortgages had been assigned to HUD. 46. The assignment did not end financial irregularities of Cedar Square West. According to a HUD memorandum dated August 4, 1976, the management agent, which was affiliated with the owner, had taken $882,422 in advances on its management fees. (Plaintiffs’ Exhibit 269). The tenants’ security deposit account had been utilized for operating expenses and was underfunded by $55,625. Id. 47. HUD loan servicer Douglas Strandness testified that HUD viewed these irregularities as good-faith errors. In any event, these irregularities continued and the disagreement over unearned management advances had not been resolved by the time of the work-out. 48. Despite these financial and management problems at Cedar Square West, HUD approved a 10 percent rent increase in 1976; an additional 15 percent subsidy increase in July of 1977; entered into a one-year work-out agreement to postpone payment of mortgage delinquencies in August of 1977; and entered into another one-year provisional work-out in August of 1978. In April of 1980, when the mortgage delinquency was in excess of $5 million, HUD entered into an agreement permitting the repayment of the delinquency over a 15 year period; agreed to a section 8 rent increase; and committed itself to pay approximately $1.5 million in flexible subsidy funding over a three-year period. William Cooley, who, as Deputy Mayor of Minneapolis, had been involved in the work out negotiations with Cedar Square West testified, “HUD bent over backwards to accommodate the guys that were in ownership position on Cedar Riverside.” 49. In the spring of 1980, in response to HUD’s assertions of deficiencies in recerti-fications and financial record-keeping, LE-OUT hired accountant Daniel Knowland. LEOUT also hired a professional data processing service, ADP, to process its payrolls. 50. In late April, 1980, HUD occupancy specialist Sue Landais conducted the second comprehensive review of the project within six months. Over half of the 209 tenant files reviewed contained improper section 8 certifications. (Defendants’ Exhibit 28). Landais concluded that overall management quality was decreasing. 51. That same month Strandness indicated that he intended to complete review of Little Earth’s 1979 rent increase request and inspect the development in the near future. (Plaintiffs’ Exhibit 55). 52. However, in late April, Strandness turned over the Little Earth loan portfolio to Thomas Nagle. Before this time, Nagle had had no contact with anybody at Little Earth, or any direct involvement as part of his job duties with the Little Earth project. 53. When Strandness turned the LE-OUT portfolio over to Nagle, Strandness believed LEOUT’s financial problems could be solved. He had found the board to be cooperative. Strandness regarded Little Earth as being next on agenda to be put back on its feet. 54. In May 1980, HUD and LEOUT discussed the possibility that LEOUT might receive “flexible subsidy” funding for the project under Section 201 of the Housing and Community Development Amendments of 1978, 12 U.S.C. § 1715z-la. This was the first year in which funds were available under the program. 55. The flexible subsidy program is not an entitlement program. (Defendants’ Exhibit 120, Section 1-4). Accordingly, the area office of HUD, in making a flexible subsidy request, was required to find that several statutory criteria had been, or would be, met during the period in which the subsidy was to be made available. (Defendants’ Exhibit 120, Section 1-8). Among these criteria is the proper management of the project. (Defendants’ Exhibit 120, Section l-8d). 56. In June 1980, the area HUD office sent an application for flexible subsidy funding to the central HUD office. This application requested flexible subsidy funding in fiscal year 1981 for six Minnesota projects, the fourth in priority being Little Earth. (Plaintiffs’ Exhibit 76). Although HUD officials did not believe Little Earth’s management was acceptable in June 1980 when the local office requested flexible subsidy for the project, it did initially believe that LEOUT would make the necessary improvements before the funding became available. 57. In the June, 1980 flexible subsidy application, the area HUD office explicitly recognized that “without flexible subsidy assistance this project cannot be made physically, and concurrently, financially viable, and foreclosure by HUD will result.” In the same application, HUD also indicated the need for, and the propriety of, amortizing the current delinquency over the remaining mortgage term. (Id.) 58. The area HUD office did not characterize the Little Earth board of directors as difficult or obstructionist. The flexible subsidy application said “management has been cooperative with us in the past.” The application expressed confidence “that our [HUD’s] concerns ... can and will be corrected and the necessary changes implemented.” The application stated “we also require that members of the Board of Directors devote a larger part of their time and effort to personal involvement in the day-to-day operations of the project.” The statement suggests that HUD was not at that time worried about the board’s excessive interference in successful management. On the contrary, HUD seemed to advocate additional board involvement. 59. By late 1980, local HUD officials had completed their Little Earth management review and financial audits and decided that LEOUT did not, or would not, meet the statutory requirement of acceptable management. 12 U.S.C. § 1715z-la(d)5. (Defendants’ Exhibit 42). This conclusion was substantiated by evidence introduced at trial. 60. Accordingly, in a January, 1981 letter, HUD told LEOUT that the area office had applied for a Flexible Subsidy Program grant of approximately $1.6 million but conditioned Little Earth’s receipt of any of said funds upon “transfer [of] the ownership of LEOUT to a sponsoring organization acceptable to HUD.” (Defendants’ Exhibit 46). 61. During this period, Thomas LaSalle, Little Earth’s outside management consultant since late 1975, found it increasingly difficult to work with the Little Earth board. LaSalle resigned in January, 1981. At this time, he characterized the project as in deep trouble because of inflation and denial of rent increases. 62. HUD never offered flexible subsidy funding to the Little Earth project, except in the context of HUD’s demand that the Little Earth board transfer project control to an entity acceptable to HUD. HUD regional consultant Robert Rohlwing testified he was unaware of any HUD subsidized project besides Little Earth, where HUD had conditioned the availability of flexible subsidy funding on such transfer of control. 63. The Minneapolis HUD office was notified in February, 1981 of the amount of flexible subsidy funds that had been allocated to it. In May, 1981, additional funds were allocated to the office. (Defendants’ Exhibits 121 & 122). The local office did not get all of the money for which it had asked. Moreover, in order to avoid recapture by the HUD central office, funds had to be under contract by June 30, 1981. Local HUD officials determined that Little Earth could not meet the program requirements by June, so they did not give any flexible subsidy funds to the project. 64. Cedar Square West received all of the $960,000 which had been requested on its behalf. HUD was obligated to provide these funds under its April 1980 work-out agreement with the owner of Cedar Square West. Three other projects on the June 1980 application received flexible subsidy grants. Lonnie Atkins Court, a project which was not even listed in the June 1980 flexible subsidy application nevertheless received a flexible subsidy grant. (Compare Plaintiffs’ Exhibit 76 with Plaintiffs’ Exhibit 251, pg. 7). 65. Of the projects included in the Area HUD office flexible subsidy application of June 12, 1980, the only one besides Little Earth which did not receive assistance was Hopkins Village, for which HUD had requested money to replace fogged window panes. 66. Of the projects which did receive flexible subsidy funding from the Area HUD office in 1981, all were considered troubled, and two were described by HUD as having had bad management. (Compare Plaintiffs' Exhibit 251, pg. 6-7, with Plaintiffs’ Exhibit 256, pp. 9-11 and Plaintiffs’ Exhibit 255, pg. 13). 67. Shortly after Thomas Nagle assumed responsibility as loan servicer for the Little Earth project, he determined that rental subsidies to the project would not be increased until completion of a full-scale review of Little Earth’s management and operations. Howard Goldman concurred in this decision. This decision was not unreasonable. 68. Both of these men were aware that the last rental increase for the Little Earth project had been in June of 1978 and were aware that a rent increase had been requested in 1979 but had not been granted. They did not, at this time, inform the Little Earth project that they had decided that rent increases would be withheld pending the results of these inspections. This decision should have been communicated to the LEOUT board. 69. In May and June, 1980, HUD conducted a comprehensive review of Little Earth’s management and physical condition. The physical inspection occurred on May 19,1980; the management review was carried out from May 28 to June 4, 1980. 70. A report of physical condition and estimate of repair costs was finalized and signed on June 13, 1980. Using a three point scale, thirty-seven individual exterior, interior and miscellaneous items were rated. Thirteen items were deemed acceptable. Twenty-four were noted as requiring maintenance within one year. No items were rated as requiring immediate attention. The project’s maintenance operation was rated unsatisfactory. (Defendants’ Exhibit 44). 71. The June 13, 1980 management review report was signed by Thomas E. Na-gle and Douglas Strandness. (Plaintiffs’ Exhibit 76). This report rated Little Earth’s management on 39 individual items and five summary items. Of the individual items, eleven were rated as requiring immediate action and 22 were rated as needing correction within one year. The overall management was deemed unsatisfactory. 72. Based on these reports, the area HUD office justifiably concluded that the project was in serious financial and physical trouble. According to HUD’s evaluations, the physical plant was deteriorating and LEOUT had inadequate maintenance, security, and tenant selection programs. The reports also noted that bookkeeping was inadequate, bills were not being submitted to HUD, tenant security deposits were not properly credited with interest as required by state law, and the project’s staff were not receiving adequate training before assuming their responsibilities. Many tenants were behind in their rents, but few, if any, were ever evicted. 73.On June 16, 1980, the physical condition and management review reports were submitted to HUD’s central office in connection with the area office’s application for flexible subsidy funding. (Plaintiffs’ Exhibit 76). Notwithstanding the fact that the reports indicated that a number of items needed action, HUD did not release the reports to LEOUT for six months. HUD’s delay in submitting the results of its inspection was assertedly due to the press of other business, the resignation of a key area office employee who was intimately acquainted with Little Earth, the disruption caused by relocating the HUD office, and a desire to wait for the results of the financial audit performed by HUD’s office of inspector general. Such delay is disturbing because it reduced LEOUT’s opportunity to respond to negative review findings. 75. Even more disturbing is the fact that when the reports were finally released to LEOUT on January 15, 1981, HUD produced a different version of the management report, ostensibly based on the same May 28 — June 4, 1980 review. In this version of the management report, signed by Nagle and Goldman, as opposed to that signed by Nagle and Strandness, each of the 22 items which the original management report indicated could be corrected within one year were now listed as requiring immediate attention. As in the earlier report, the overall management operation was deemed unsatisfactory. (Defendants’ Exhibit 43). 76. The Court is not willing to conclude, as plaintiffs suggest, that HUD deliberately falsified the later version merely to justify its foreclosure decision. For one thing, even the initial version of the report was sufficiently critical to support a foreclosure decision. Moreover, it appears likely that the more critical January report reflects the results of HUD’s intervening independent financial audit. To the extent this is correct, HUD should have so informed LE-OUT. It did not. 77. On July 3, 1980, Ronald Melchert, chairman of the LEOUT board, wrote to Thomas Nagle, asking for an explanation of the delayed approval of the proposed 1980 budget. (Defendants’ Exhibit 80). HUD never responded in writing. Moreover, Melchert testified that although he spoke several times with Nagle, Nagle never orally explained the basis of HUD’s denial or withholding of the rent increase requests. 78. LEOUT next asked for a rent increase of $80 per unit per month on September 3, 1980, in connection with a proposed budget for the fiscal year ending on July 31, 1981. (Defendants’ Exhibit 32). The requested rent increase was calculated to permit operation of the project at a break-even point. Fifteen dollars of the requested per unit per month increase was solely to cover tax increases. 79. HUD officials neither approved nor denied the rent increase request. Nagle testified that the request was incomplete because it did not propose a rent schedule. However, Nagle admitted, and Strandness also testified, that an incomplete submission alone would be an insufficient basis for denying a rent increase. 80. In any event, no HUD official explained the inaction to LEOUT. By this time, Nagle and other HUD officials had concluded that the project was not being properly managed and rent increases could not be justified. These conclusions were bolstered by an audit of LEOUT’s financial records prepared by HUD's Office of Inspector General shortly after HUD conducted the management and physical conditions review. 81. The financial audit, begun on July 14 and completed on September 29, 1980, covered the period from July 1, 1978 to June 30, 1980. Tentative results were discussed with LEOUT staff at an exit conference on September 17, 1980; a final audit report was issued on October 22, 1980 and released to LEOUT on November 19, 1980. (Defendants’ Exhibit 38). The audit made ten specific findings and recommendations. Specifically, the audit noted there were unreliable books of account, poor administrative controls over cash received, improper use of project funds for non-project operations, inadequate documentation to support project disbursements, questionable payments to consultants, questionable administrative expenses, inadequate control over fixed assets, inadequate payroll records, improper documentation of tenant eligibility and inaccurate completion of Section 8 vouchers. 82. On January 2, 1981, LEOUT responded to each of the findings by letter. (Defendants’ Exhibit 40). LEOUT attempted to justify existing procedures with respect to certain audit findings, and accepted HUD recommendations with respect to others. By the end of 1980, LEOUT began the process of inventorying all of the project’s physical assets unit by unit. Based on HUD’s recommendations, the LE-OUT board ceased payment of community service program expenses from the Little Earth account, discontinued stipends paid to board members for child care and other expenses related to attending board meetings, and eventually required that residents pay their rent by check or money order as opposed to cash. 83. In a letter dated January 15, 1981, HUD notified LEOUT of the results of the June, 1980 management review. (Plaintiffs’ Exhibit 8). HUD’s letter stated that, because of the physical and managerial problems at Little Earth and the mounting mortgage deficiency, foreclosure of the project’s mortgage could only be avoided if two conditions were met: (1) transferring control of LEOUT to an organization which could conduct its affairs in a businesslike way; and (2) hiring a professional property management firm to manage the project. (Plaintiffs’ Exhibit 8). 84. HUD’s statement that LEOUT could avoid foreclosure by transferring control of the project to an organization capable of running its affairs in a businesslike manner was not meant as a demand that the project be transferred out of American Indian control. The statement itself places no limits at all on the identity of the new sponsor, other than that it have a successful history of conducting its affairs in a businesslike manner. In fact, several HUD officials testified they considered the Indian Health Board a good sponsor candidate. 85. The letter of January 15, 1981, acknowledged that substantial expenditures — estimated between $1 and $1.6 million — were needed to return the Little Earth project to acceptable physical condition. The letter also indicated that Little Earth had a mortgage delinquency in excess of $700,000. The letter indicated that physical rehabilitation and curing the delinquency could be resolved only through a combination of flexible subsidy funding and a formal work-out agreement providing for the reamortization of delinquent principal and interest. However, the letter stated: “HUD will consider neither flexible subsidy funding nor a workout agreement unless the actions outlined above are taken.” (Id.) 86. HUD’s January 15, 1981 letter did not condition flexible subsidy funding, mortgage recasting, and continued Section 8 monies upon management practices but upon the structure of management and the structure of ownership. 87. HUD officials testified that mere changes in management policies or the hiring of a professional management agent alone would not have satisfied the demands made in the January 15, 1981, letter. Only the transfer of control of ownership to another sponsoring organization acceptable to HUD would have been regarded as full compliance with the conditions set forth in the January 15, 1981, letter. 88. Howard Goldman testified that HUD could have “qualified” Little Earth to get flexible subsidy in early 1981 if Little Earth had met HUD’s conditions — that is, for the Little Earth board of directors to divest control of the property to another organization acceptable to HUD. 89. HUD had the option of insisting on Little Earth’s hiring a management agent without the board’s transferring ownership. However, HUD never made this request except in connection with the demand that the Little Earth board transfer ownership to another entity acceptable to HUD. 90. HUD officials assumed, in sending their January 15 letter to the Little Earth project, that the board would interfere with or make impossible the efforts of an independent manager to run Little Earth. 91. The St. Paul-Minneapolis HUD Area Office had, prior to Little Earth, made only one other demand of a project owner requiring the transfer of control of ownership to another entity acceptable to HUD. 92. This was at Torre de San Miguel in July, 1980, where the tenants were predominantly Hispanic, and where the board was at the time of the demand predominantly Hispanic. (Plaintiffs’ Exhibit 253, p. 10). HUD contended the project was experiencing financial and management problems and its physical condition was deteriorating. 93. HUD Undersecretary Philip Abrams indicated that, besides the Little Earth project, he could not name another instance where HUD informed a project owner that flexible subsidy monies would be available, but only upon condition that the owner would have to transfer the project to another entity. (Abrams deposition, pp. 38-39.) 94. While the demand for a change of control was exceptional, the record does not establish that it was unjustified. First, the demand came some six years after the project’s initial mortgage default. Second, the agency’s on-site inspections, comprehensive management reviews and financial audit detailed recurring problems that were not being adequately remedied. 95. The January 15 letter also stated that Little Earth’s existing subsidies (the annual interest reduction payments of approximately $220,000 and the annual Section 8 assistance contract of $530,000) would be jeopardized if the steps demanded were not taken. 96. Absent from the letter was any indication of why HUD had not acted on the pending 1979 and 1980 rent increase requests. Nor did the letter suggest actions which could be taken to obtain such increases or any future increase. 97. Officials of the area HUD office were aware that HUD’s failure to respond to Little Earth’s requests for Section 8 rent increases in 1979 and 1980 had made less money available to the project. Yet, at the time of the letter, no HUD official had performed any analysis to learn what amount of Little Earth’s mortgage deficit was due to HUD’s inaction upon Little Earth’s requests for contract rent increases. 98. On January 22, 1981, a letter, over the name of area manager Feeney, was sent to the consultant for the Little Earth project, which asked that Little Earth execute and return an enclosed “counterpart” of the Little Earth Section 8 contract. (Plaintiff’s Exhibits 17 and 23). By calling this a “counterpart,” HUD implied that it was similar to the contract earlier executed. 99. In fact, this purported “counterpart” would have made extensive changes to Little Earth’s Section 8 subsidy contract with HUD. First, it would have cut short the term of the subsidy contract by about one year. Second, the level of contract rents (and therefore operating income for the project) would have been significantly lowered as to each apartment and townhouse at Little Earth. 100. Through its attorney, Little Earth returned the substitute document, unsigned, to HUD area director Feeney. (Defendants’ Exhibit 45). 101. The HUD files of the 187 multiple unit housing projects in Minnesota other than Little Earth which received direct payments, direct low-interest loans, or mortgage subsidies through the Section 236 or Section 221(d)(3) programs between June 16, 1978 and April 25, 1984 (Plaintiffs’ Exhibits 249 and 258) indicate that none includes proposed amendatory contracts which would have reduced the amount or the length of a subsidy period. 102. HUD contends, and the Court accepts, that the counterpart contract was sent in error, because of confusion in HUD’s records regarding the date Little Earth’s 1977 contract was to be renewed. 103. On February 25, 1981, in response to HUD’s letter of January 15, 1981 and the management review submitted in connection with it, the Little Earth board of directors submitted a lengthy and detailed proposed management plan and response to HUD’s concerns regarding its financial management. Little Earth’s accountant Daniel Knowland, together with a number of members of the board of directors, joined in its preparation. The report replied to the individual items addressed in HUD’s management review report. LE-OUT’s response did not, however, disclose any willingness to meet either of HUD’s two conditions for avoiding foreclosure. In connection with this submission, Clyde Bel-lecourt of the Little Earth board of directors addressed a letter to Thomas Fee-ney inviting him to meet regarding the issues raised in HUD’s management review report and Little Earth’s response to them. (Defendants’ Exhibit 46). 104. Feeney responded on April 28, 1981 by scheduling a follow-up review to determine if LEOUT’s corrective actions adequately cured the problems outlined in the management review. (Defendants’ Exhibit 48). 105. HUD conducted a second management review in June and July, 1981. HUD did not, however, provide LEOUT with the written results of this review until it sent a letter on September 25, 1981, indicating that the local office would be recommending foreclosure of the Little Earth Project. (Defendants’ Exhibits 57-59). By the time LEOUT received the results, it was too late for it to change management practices in order to prevent foreclosure. 106. On July 21, 1981, Little Earth submitted a proposed operating budget for the year 1981/1982, noting simply that it “should be based on large rent increases.” LEOUT also requested HUD’s help in securing additional funding to make up for flexible subsidy funding allocated to other projects but not to Little Earth. (Defendants’ Exhibit 53). 107. HUD did not formally act on the proposed budget or rent increase request. Goldman testified that by this time, based on results of the second management review, local HUD officials had decided to recommend that HUD foreclose the mortgage and address the project’s subsidy requirements after the Department acquired title through foreclosure. 108. On September 25, 1981, HUD’s Minneapolis Area Manager notified LE-OUT that because of the worsening physical and financial conditions at the project, because control of LEOUT had not been transferred to an organization acceptable to HUD, and because LEOUT had not hired a professional management firm, he planned to recommend to HUD’s Central Office in Washington, D.C. that the mortgage on the project be foreclosed. (Defendants’ Exhibit 57). By that time, the loan was nearly $900,000 in arrears and, since January 1980, less than six months worth of payments had been made on the loan. (Defendants’ Exhibit 101). 109. Attached to the September 25th letter were updated Management Review and Physical Condition Reports based on inspections conducted on June 9 and July 7, 1981. (Defendants’ Exhibits 58 and 59). Although these reports indicate improvements in some areas when compared to reports a year earlier, the overall general management practices and management operations were rated unsatisfactory. 110. Notwithstanding the fact that HUD’s Insured Project Servicing Handbook requires a written response to rent increase requests within thirty (30) days, the September 25th letter constituted HUD’s first written response to Little Earth’s pending rent increase requests for the 1979, 1980 and 1981 fiscal years. 111. HUD cited LEOUT’s management deficiencies as justification for HUD’s failure to take action on the rent increases and proposed annual budgets. In addition, Thomas Nagle and Donald Myers both testified without contradiction that LEOUT failed to timely submit annual independent financial audits. 112. Said audits were due within sixty days of the end of the project’s fiscal year. Although the audits were not timely submitted to HUD, the certified public accounting firm of Elmer Fox, Westheimer & Company had timely prepared audits for each of the fiscal years ending July 31, 1978, July 31, 1979, July 31, 1981 and July 31, 1982. (Plaintiffs’ Exhibits 283, 284,175 and 169). The audit for fiscal year ending July 31, 1980 was prepared some 18 days late. (Plaintiffs’ Exhibit 285). 113. During the entire time that Little Earth was under Goldman’s supervision, or in the loan portfolio of Nagle, HUD refused to grant rent increases to the project. 114. The refusal to grant or in any way act on the rent increase requests was during a period of high inflation. Withholding rent increases effectively reduced operating funds for the housing project. 115. Generally, HUD-subsidized Section 236 or 221(d)(3) housing projects within the State of Minnesota received regular rent increases. In fact, projects received increases on at least an annual basis. Only four projects, in addition to Little Earth, were denied rent increases at any time by HUD. All of these projects subsequently received rent increases. (Plaintiffs’ Exhibit 258). 116. In contrast to Little Earth, none of the four projects showed substantial objective indications of financial distress such as mortgage delinquencies exceeding six months of regularly scheduled payments. None were listed by HUD as being financially “troubled.” 117. In answers to interrogatories, HUD listed eight projects as having received overall “unsatisfactory” ratings on a Management Review Report (HUD form 9834) and/or a Report of Physical Condition (HUD form 9822). (Plaintiffs’ Exhibit 255, pp. 11 and 12). With the exception of the Little Earth project, none of these projects was among those to which HUD had denied requested rent increases. 118. The significance of these comparisons, however, is lessened by the fact that there is no evidence which, if any, of the projects had HUD-held mortgages; had been in default since 1975; had inadequately fulfilled Section 8 bookkeeping obligations; received adverse audit findings; or were managed by a non-profit corporation through its board of directors without on-site assistance of a professional management agent. 119. Plaintiffs have not presented sufficient evidence to show that the findings in HUD’s Occupancy and Management Reviews and the HUD Office of Inspector General Audit are unjustified, invalid or false. In fact, LEOUT’s independent auditor, Elmer Fox, and Westheimer & Company, made findings in their reports for the fiscal years ending in 1980, 1981, and 1982 that, in part, were consistent with findings of HUD’s own auditors. (Plaintiffs’ Exhibits 285, 175 and 169). These findings noted, inter alia, that the project lacked adequate cash controls, improperly used project funds for unreasonable or non-project purposes; participated in other grant funding without approval; and lacked subsidiary information on fixed assets. (Plaintiffs’ Exhibit 285, pp. 23-25). 120. The Area Manager made his foreclosure recommendation to Washington on September 30, 1981 (Defendants’ Exhibit 60), and the recommendation was subsequently accepted. On March 4, 1982, HUD notified LEOUT by letter that the mortgage debt had been accelerated and that the entire unpaid principal balance plus interest on the balance was then due. (Defendants’ Exhibit 65). On March 13, 1982, HUD began advertising the nonjudicial foreclosure sale of the Little Earth project. (Defendants’ Exhibit 66). The sale was scheduled to take place on May 3, 1982. (Id.) At that time, HUD’s records indicate LEOUT’s total accelerated debt was $5,256,776.64. (Defendants’ Exhibit 108). 121. From its inception, Little Earth was designed to be an Indian housing project, run by Indians and serving low-income Indian families. For official HUD purposes, however, Little Earth was always considered a standard Section 236 housing project and not specialized Indian housing. According to HUD, the term “Indian Housing” is a term of art, applying to housing developed and operated by the Indian Housing Authorities for the benefit of lower income Indians and native Alaskans. Thus, when HUD decided to foreclose, HUD did not consult with their own Indian Housing Program. 122. At no time did the HUD local office address the issue of how the denial of Section 8 rent increases exacerbated Little Earth’s financial default. 123. HUD made no formal analysis of the potential effect of the mortgage foreclosure on displacement of Little Earth’s Indian tenants. (Plaintiffs’ Exhibit 251, pg. 10). 124. HUD did not produce an Environmental Impact Statement or Environmental Assessment, finding no significant impact, under the National Environmental Policy Act, in connection with its decision to foreclose. 125. Numerous witnesses testified, and the Court finds, that the Little Earth housing project is an important cultural and housing resource for the American Indian population of Minneapolis. 126. Little Earth is made up primarily of families. Many of these are large and have related members who move in and out of the household. Moreover, many of these families have non-blood related extended families whose members also move in and out of the households. 127. Minneapolis contained one-quarter of all American Indians in the State of Minnesota counted by the 1980 census. Cens