2014-00162237-CU-BC

US Fund vs. Dept. of Housing and Community Development

Nature of Proceeding: Motion for Preliminary Injunction

Filed By: Phongpitag, Sonya

Plaintiff US Fund and Investment Consultants, Inc.’s (“US Fund”) motion for
preliminary injunction is granted.

Plaintiff’s request for judicial notice is granted.

In this derivative action, brought by US Fund, a limited partner, on behalf of Willow
Family Housing, LLC (“WFH”), Plaintiff seeks, among other things, to obtain specific
performance of contractual agreements between itself and the Department of Housing
and Community Development (“HCD”).

US Fund alleges that Central Valley Coalition for Affordable Housing, Inc. (“CVACH”),
is WFH’s managing general partner which provides low income housing. US Fund
alleges that WFH obtained a loan from HCD in 2006 through the Joe Serna Jr.
Farmworker Housing Grant Program which program required that housing units within
an apartment complex in Clovis (the “Project”) be made available to farm and
agricultural industry workers. US Fund asserts that HCD refuses to comply with its
obligations under the original loan documents or a December 2011 amendment by
insisting that the agreements require that a minimum of 37 farmworkers reside in the
project at all times. HCD has since recorded a notice of default.

“To obtain a preliminary injunction, a plaintiff ordinarily is required to present evidence
of the irreparable injury or interim harm that it will suffer if an injunction is not issued
pending an adjudication of the merits. Past California decisions further establish that,
as a general matter, the question whether a preliminary injunction should be granted
involves two interrelated factors: (1) the likelihood that the plaintiff will prevail on the
merits, and (2) the relative balance of harms that is likely to result from the granting or
denial of interim injunctive relief.” ( White v. Davis (2003) 30 Cal.4th 528, 554.) The
greater the showing on one factor, the lesser the showing must be on the other. (Butt
th
v. State of California (1992) 4 Cal.4 668, 678.) Likelihood of Success

US Fund argues that it is likely to succeed in this action given that HCD is proceeding
with a notice of default under the loan agreements based on its incorrect interpretation
that the agreement requires that 37 units of the development be occupied by
farmworker households. Here the Court finds that for purposes of the instant motion
only, that US Fund has shown that it is likely to succeed on its claims in this action.
Indeed, while HCD contends to the contrary, there is no specific provision in the loan
documents that requires that 37 units of the development actually be occupied at all
times by farmworker households.

HCD relies upon a statement in the Standard Agreement between itself and WFH
which reflects that HCD agreed to make a conditional commitment of Serna grant
funds to WFH to assist in developing or acquiring certain real property. (Rubin Decl.
Exh J. at p. 1.) The “Purpose” section of the Standard Agreement states that the funds
were made to assure that “certain residential units…shall be occupied” by eligible
households consistent with the Serna program. However, an examination of the
entirety of the documents and the parties’ conduct demonstrates, at least for purposes
of this motion only, that WFH was only required to make 37 units available for eligible
households, not that 37 units be occupied at all times by eligible households. In fact
the Standard Agreement provides that in “order to effect this conditional grant
commitment, [HCD] and [WFH] have agreed to enter into this Agreement, the
Regulatory Agreement, and other documents required by [HCD]…in accordance with
the terms and conditions herein and subject to the State laws and requirements
governing contracts.” (Id. at p. 3 ¶ 8.) Further, HCD and WFH “shall enter a
Regulatory Agreement which together with this Agreement and any additional
documents [HCD] may deem necessary or permit, shall control the use of Program
funds provided to [WFH].” (Id. at p. 3 ¶ 10(a).) Thus the Standard Agreement relied
upon by HCD makes clear that the parties would enter into a Regulatory Agreement
which together with the Standard Agreement would govern the use of the Program
funds. An examination of the Regulatory Agreement demonstrates the viability of
WFH’s position.

Indeed, Section 6A of the Regulatory Agreement states that “[f]or the full term of this
Regulatory Agreement, Borrower shall provide for eligible farmworker households
within the Development, the number, type and size of Assisted Units set forth in
Attachment B.” (Koach Decl. Exh E. p. 7 [emphasis added].) Attachment B to the
Regulatory Agreement set forth that 37 of the 77 units were to be Serna Assisted
Units. (Id. Exh. E, Attachment B p. 39.) “Assisted Units” are defined as “units subject
to this Regulatory Agreement which are, or are intended to be, occupied by
farmworker households.” (Id., Exh, E, p. 5 [emphasis added].) Considering the
documents as a whole, specifically the fact that the Standard Agreement indicates that
the parties would enter a Regulatory Agreement which would govern the use of the
loan funds and the Regulatory Agreement contains specific provisions with respect to
WFH’s obligations with respect to farmworker housing, as opposed to the general
statements regarding the purpose of the loan relationship contained in the Standard
Agreement, it appears that the parties contemplated that WFH make 37 units available
for farmworker households, not that the 37 units be occupied by such households.
Indeed, as WFH persuasively points out, it can only provide such housing, only the
farmworkers can take the housing.

In addition to the extent that any ambiguity existed with respect to whether the loan documents required actual occupancy of the units as opposed to simply making a
specified number of units available for farmworker housing, for purpose of the instant
motion, the parties’ conduct and course of dealing supports WFH’s position, that it was
only required to make a specified number of units available. During the first five years
of the project WFH provided regular updates to HCD regarding rental activities,
including its efforts to market the units to farmworker households. (Koach Decl. ¶ 10.)
HCD conducted inspections and reviews to insure compliance with loan documents
and regularly gave WFH positive marks regarding the operation even without 37
farmworker households occupying the subject units. (Id.) Further, while WFH has
never reached the goal of having 37 units occupied by farmworkers, it has never
turned away a single qualified farmworker that sought housing. (Id. ¶ 9.) Without any
prior notice, HCD notified WFH that it would consider WFH in default under the loan
documents unless 37 units were actually occupied by farmworker households. (Id. ¶
11.) Brad Koach, the vice president of US Fund is responsible for the day to day
leasing for the project and began working with HCD in an attempt to resolve the
situation despite his belief that WFH was not in default. (Id. ¶¶ 12-13.) The parties
appeared to reach a resolution in December 2011, whereby the loan documents would
be amended such that HCD would give up the regulatory requirements for 34 of the 37
units so that only 3 units would be restricted to farmworker housing. (Id. ¶ 16.) The
agreement was set forth in a letter from HCD which also indicated that HCD would
begin drafting amendments to the loan documents. (Id. Exh. T.) Apparently the
amendments were never completed. In 2012, HCD, through Donald Rubin, its
manager for the compliance resolution program, indicated that HCD would not go
through with its prior commitment set forth in December 2011. (Id. ¶ 18.)

The Court rejects HCD’s contention that WFH admitted that the documents require 37
units to be occupied. HCD points to a letter sent by WFH’s general partner sent a
letter to its limited partner regarding the dispute between the parties stating that “we
are unable to house 37 farmer workers as required by the Joe Serna
Program.” (Rubin Decl. Exh. P.) However, this letter, does not in this Court’s view,
override the language of the documents discussed above or the parties five year
course of dealing pursuant to those documents also discussed above.

Finally, HCD’s reliance on California Code of Regulations § 7209 as support for its
argument that 37 units must be occupied at all times is unpersuasive. That regulation
simply provides a manner to calculate the number of “Assisted Units” under the Serna
Program. While the regulation provides that the units shall be restricted to being
occupied by eligible farmworker families, it does not in any way state that the units
must be actually occupied at all times. Indeed, the regulations cut against HCD’s
argument as they in fact make clear that where the farmworker population falls below
the minimum number required to occupy the development, “the recipient shall
implement an affirmative plan which will recruit other agricultural households as units
become available until the minimum number is once again in occupancy.” (CCR §
7209(a)(5).) Plaintiff’s evidence shows that reasonable attempts were made to offer
the units for occupancy to qualified families.

On balance, and for purposes of this motion only, the Court finds that US Fund is likely
to prevail on its claims, at least for breach of contract/specific performance of the loan
agreements alleging that HCD breached the agreements by recording a notice of
default despite the fact that it is not in default. Indeed, despite HCD’s contention that
the loan documents required 37 units to actually be occupied by farmworkers, the
Court finds that the documents instead require only that WFH provide 37 units for
farmworker housing and that WFH is not in default based on the fact that 37 units are
not actually occupied by farmworkers. The Court finds that US Fund’s interpretation of
the documents is supported by the parties’ course of conduct.

Given the above, the Court need not reach US Fund’s alternate argument that the
doctrine of contractual impossibility would void any requirement in the documents that
required 37 be occupied by farmworker families at all times.

Balance of Harms

The Court finds this factor tips in US Fund’s favor. Indeed, it does not appear that
HCD will suffer any harm if the injunction is granted and it does not contend otherwise,
instead arguing that US Fund failed to show WFH will be harmed if the injunction is not
granted. Here, if the injunction is not issued, WFH will be entitled to proceed with
foreclosure proceedings on the Project. The Project was initially funded by the
California Statewide Communities Development Authority (“CSCDA”). CSCDA’s deed
of trust is superior to HCD’s deed of trust and HCD’s attempt to foreclose on the
Project under its deed of trust could result in CSCDA declaring a default and initiate its
foreclosure proceedings of its own. (Koach Decl. ¶ 24; Exh. B.) This in turn could
eliminate HCD’s junior lien and the regulatory scheme for the Project implemented by
the loan documents. In addition, proceeding with foreclosure proceedings could
negatively impact WFH’s goal of providing low income housing which could result in
the loss of housing opportunities for farmworker families. HCD’s argument that WFH
could avoid harm if it accepted HCD’s settlement demands is not persuasive. Indeed,
if HCD’s argument were accepted, any party seeking an injunction could avoid any
harm if it simply acceded to the other’s demands. On balance, the Court finds that the
harm to WFH in not granting the injunction outweighs any harm that HCD may suffer if
the injunction is granted. Indeed, HCD can still litigate its claim that WFH is in default
under the loan agreements. If it is ultimately correct in its position it will simply have to
wait until the conclusion of the litigation to continue with foreclosure proceedings.

As a result, the motion for preliminary injunction is granted. Of course, this is not a
determination of the ultimate right to a permanent injunction; it is based on a showing
that it is desirable to maintain the status quo pending a determination of the merits.
(See Continental Baking Co. v. Katz (1968) 68 C.2d 512, 528.) Pursuant to CCP §
527, US Fund shall post an undertaking in the amount of $50,000.

Pursuant to CRC Rule 3.1312, US Fund’s counsel shall submit a formal order
consistent with the above which the Court will sign once the undertaking is posted.