The 9-0 decision was a victory for Franconia Associates, a Taylors Falls, MN-based housing firm, whose attorneys argued owners should have the right to reclaim lost income from the date they decided to prepay their government mortgage and were denied the opportunity to do so. It rejected the 1988 effective date of Congress' Emergency Low Income Housing Preservation Act, which made it more difficult for owners to opt out of the program.
Section 515 was designed to create rental housing in rural areas through private development and ownership.
A key incentive for owners was the option to prepay their 50-year government mortgages at some point and convert their units to market-rate housing. In 1988, however, Congress changed the rules, saying owners could prepay only under limited conditions.
Most owners were not aware of the change until they tried to prepay and instead found themselves locked into 50-year mortgages with minimal financial return, says Jeff Eckland, an attorney for Minneapolis-based Faegre & Benson who argued for the petitioners before the Supreme Court.
"Many of these owners are small 'mom & pop' operators who found themselves locked into 50-year mortgages with limited financial returns, despite the fact that they secured the right in their contracts to opt out at any time," Eckland maintains.
A lower court ruled that the breach of contract claims of "pre-1979" Section 515 owners was barred by the statute of limitations. But the US Supreme Court overturned this decision, ruling the statute of limitations did not start until the owners first decided to prepay their mortgages and learned from the government they could not.
The Supreme Court's decision is expected to affect not only Section 515 owners but also other industries that conduct business with the federal government and are affected by legislative, regulatory, and other changes involving contracts with government agencies.
Franconia Associates case is one of eight affordable housing cases that Eckland's firm has filed since 1996.
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