Federal Housing Administration v. The Darlington, Inc.

PETITIONER: Federal Housing Administration
RESPONDENT: The Darlington, Inc.
LOCATION: Charleston, South Carolina

DOCKET NO.: 13
DECIDED BY: Warren Court (1958-1962)
LOWER COURT:

CITATION: 358 US 84 (1958)
ARGUED: Oct 13, 1958
DECIDED: Nov 24, 1958
GRANTED: Jan 21, 1957

ADVOCATES:
Alan S. Rosenthal - for the appellant
J. C. Long - for the appellee

Facts of the case

The Federal Housing Administration (FHA) was authorized under the Veterans’ Emergency Housing Act of 1946 to insure mortgages for projects that provide housing to war veterans. The Darlington, Inc., a corporation formed in 1949, obtained FHA mortgage insurance for a building in Charleston, South Carolina. Although The Darlington, Inc. submitted the required reports of its monthly rental rates for each of the units, the reports never mentioned the fact that an affiliate of the corporation was renting fully furnished rooms on a daily basis. The affiliate continued to rent these transient apartments after an amendment to the Act specifically excluded such units from eligibility for federal mortgage insurance. The FHA stopped insuring the mortgages because The Darlington, Inc. violated the terms of the Act. The Darlington, Inc. sued the FHA for a declaratory judgment and claimed to still be eligible as long as the building was used for “principally” residential purposes. The district court granted relief. On appeal, the Court remanded the case to a three-judge panel. The panel affirmed.

Question

Does the Veterans’ Emergency Housing Act of 1946 allow mortgage companies to rent to transients?

Media for Federal Housing Administration v. The Darlington, Inc.

Audio Transcription for Oral Argument - October 13, 1958 in Federal Housing Administration v. The Darlington, Inc.

Earl Warren:

Number 13, Federal Housing Administration, Appellant, versus The Darlington Incorporated.Before the argument in this case I make the announcement that the orders of the Court appear upon the list certified by the Chief Justice and filed with the clerk and will not be orally announced.

Now, Mr. Rosenthal, you may proceed in number 13.

Alan S. Rosenthal:

May it please the Court.

This case arises out of the Veterans' Emergency Housing Program, which was established in 1946.

In that year, Congress was apprised that a national emergency existed because of a critical housing shortage.

In this connection, it was called specifically to the congressional attention, almost 3 million returning World War II veterans and their families would be in need of residential housing by the end of 1946 and that the majority of them would not have the means to purchase homes, and therefore, would require so-called "rental housing".

In an endeavor to meet this acute problem in the statutory words to accelerate the production of houses with preference for World War II veterans and at sales prices or rentals within their means, Congress amended Section 608 of the National Housing Act to authorize the Federal Housing Administration to ensure mortgages covering multifamily housing projects in which a preference would be given to veterans.

The particularly attractive feature of Section 608 was its provision that the principle obligation of the insured mortgage could be as much as 90% of the reasonable replacement cost of the project.

This meant that if the project sponsor served as architect and builder of the project, they could construct it with little, if any, outlay of cash and thus, with little, if any, risk of loss, that the other 10% would be represented by architect fees and the builder's profit.

Now, judged by any objective standard, this program established under Section 608 was an immense success.

Well over 7,000 apartment houses were constructed containing over 450,000 rental units.

These projects were backed by Government insurance in an amount in excess of $3 billion.

With extremely due exceptions, these projects were successful in their operation, as is evidenced by the fact that the rate of default has run only between 1% and 1.5% of the total mortgages outstanding.

At the same time however, in some instances, project owners having applied for and obtained the advantage of Government mortgage insurance which enabled them to build this residential housing at little or no cost to themselves.

Started to engage, endeavored to increase the profitableness of their operations in a practice outside what we deem at any rate to be the scope of the legislative aid, namely the practice of renting units for transient occupancy.

One of these instances was that of the appellee in this case.

How general is that right?

Alan S. Rosenthal:

Your Honor, there are no specific statistics on it, insofar as the record and the congressional reports indicate that it could hardly be described as a widespread practice, but there were instances of it being done.

I don't think that there is any really -- really available figures on the -- the precise percentage of instances, but I think it is fair to characterize it as a -- as not a widespread practice, as a limited, relatively few of the 7000 plus units that were built.

Now, the issue in this case is the appellee's right to engage in this practice of transient rentals.

Now, on December 1949, the appellee was incorporated in the State of South Carolina for the purpose of obtaining Section 608 insurance of a mortgage covering a 12-storey apartment house to be constructed in Charleston.

Consistent with this purpose, it's charter which was prepared on a standard FHA form, specifically prohibited it from engaging in any business other than a construction and operation of a rental housing project so long as any of its property was subject to FHA insurance -- insured mortgage.

The appellee submitted an application to the FHA for a mortgage commitment on a -- this proposed project.

This application was disapproved by the local FHA officials, because the chief underwriter was dissatisfied with the location, which the apartment house was to have.

At the insistence of the appellee however, the rejection by the local officials was reversed by the FHA officials in Washington and the mortgage commitment was authorized not withstanding the local objection to the location at which the project was to be built.

Project was completed in July 1951 and in September 1951 as it was required to do under its charter and under the regulations, the appellee submitted and the Federal Housing Administration approved a proposed schedule of maximum monthly rentals.

And this schedule contained no indication that the appellee intended to furnish any of the partners.

One month later however, with the aid of a parent corporation which held all but three of the 1999 shares of common stock in a dollar form, the appellee engaged on a course of conduct concealed from the FHA which in the words of the Court below was a subterfuge.

First, without seeking FHA approval, the parent corporation furnished a number of appellees apartments and the tenants of those apartments were charged $15 to $20 a month in addition to the scheduled approved rentals.

This additional rental however was paid to the parent corporation so that it appeared that appellee was maintaining its schedule of rentals.