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Adam Leitman Bailey, P.C. Prevails as Second Circuit Upholds Title of Developer That Acquired Property Sold in H.U.D. Auction

Second Circuit Affirms Ruling Where Foreclosure Is Limited to Bidders to Governmental Entities, Local Housing Fund Development Corporations (HFDCs) and Lien Holders.

The U.S Court of Appeals for the Second Circuit upheld the right of a municipal/private development partnership to acquire a low-income apartment complex from the U.S. Department of Housing and Urban Development (HUD) where HUD had taken title in a foreclosure of its own mortgage on the property under the Multifamily Mortgage Foreclosure Act, 12 U.S.C. § 3701, et seq. (the MMFA). In a decision of first impression at the court of appeals level, Ku v. H.U.D., No. 12-2399-cv, 2013 WL 262034 (2d Cir. January 24, 2013), the Second Circuit rejected the appeal of Emanuel Ku, who had argued that he was improperly prevented from bidding by the terms of the HUD foreclosure auction, which limited bidders to governmental entities, local housing fund development corporations (HFDCs), and lien holders.

The case concerned the Burton Towers, a development for low-income, elderly tenants located Newburgh, New York. Because the physical conditions in the HUD-financed property had fallen below HUD’s standards, HUD initiated a foreclosure of the property under the MMFA. As part of the process, it solicited local governmental entities that might be interested in repairing and redeveloping the property, and the city of Newburgh similarly sought private development partners to undertake the redevelopment work. Prior to the foreclosure auction, HUD, the city of Newburgh and Burton Towers, LLC entered into contracts under which, if HUD acquired the property at the auction, HUD would convey the property to the city and the city would convey the property to Burton Towers, LLC to be repaired and operated under HUD-specified terms and conditions.

In setting up the auction, HUD restricted bidders to governmental entities, HFDCs and lien holders on the property. Mr. Ku, who had previously bid on HUD properties, initially sued to stop the auction, and when his temporary restraining order was denied, to vacate the auction and the subsequent conveyances of the property to HUD, to the city and to Burton Towers, LLC. Adam Leitman Bailey, P.C. represented Burton Towers, LLC in defending Mr. Ku’s claims that his exclusion from the auction violated his constitutional rights and the applicable statutes.

The Honorable Vincent L. Briccetti of the U.S. District Court for the Southern District of New York dismissed Mr. Ku’s claims, finding that HUD had sovereign immunity and that Mr. Ku neither had standing to sue nor grounds for an injunction reversing the sale against the City and Burton Towers, LLC.

In its appeal briefing, Adam Leitman Bailey, P.C. conclusively demonstrated that Mr. Ku had no valid claim to reverse the sale, and Mr. Ku’s attorney was forced to admit at oral argument that he could no longer pursue any claim against Burton Towers, LLC. The Second Circuit affirmed the District Court, finding that HUD was authorized to restrict bidders as it had.

Adam Leitman Bailey, Jeffrey Metz represented Burton Towers, LLC before the Second Circuit and Adam Leitman Bailey, John Desiderio, and Jackie Weinstein represented it in the District Court.

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