643 F.

2d 1261

Doris HOLBROOK, Plaintiff-Appellant,

v.
Henry C. PITT, Defendant and Third-Party Plaintiff,
v.
SECRETARY, UNITED STATES DEPARTMENT OF
HOUSING AND URBAN
DEVELOPMENT, Third- Party Defendant-Appellee.
No. 80-1006.

United States Court of Appeals,

Seventh Circuit.
Argued May 28, 1980.
Decided March 2, 1981.
Rehearing Denied July 2, 1981.

Lawrence G. Albrecht, James A. Grambling, Jr., Legal Action of

Wisconsin Inc., Milwaukee, Wis., for plaintiff-appellant.
William C. Calahan, Jr., Asst. U. S. Atty., Milwaukee, Wis., for thirdparty defendant-appellee.
Before BAUER, Circuit Judge, KILKENNY, Senior Circuit Judge,* and
CUDAHY, Circuit Judge.
CUDAHY, Circuit Judge.

This is an appeal by tenants of certain housing projects in Wisconsin who are

beneficiaries of housing assistance payments made by the United States
Department of Housing and Urban Development ("HUD") under its housing
assistance program for existing multifamily projects benefiting from HUDinsured or HUD-held mortgages. This program was established pursuant to
Section 8 of the United States Housing Act of 1937 (as amended by 201(a) of
the Housing and Community Development Act of 1974), 42 U.S.C. 1437f
(1976) ("Section 8"). Under this program, HUD executes contracts with project
owners to make rental payments on behalf of eligible low-income tenants (the

"Contracts"). Appellants contend they are entitled to these rent subsidies within
a reasonable time after the effective date of the Contracts between HUD and the
various project owners. The tenants also argue that the rent subsidies should be
made retroactive to the effective dates of the respective Contracts. Appellants
further claim that HUD's procedures for making rental assistance payments
violate the Due Process clause of the Fifth Amendment to the United States
Constitution.
2

The district court granted summary judgment in favor of the Secretary of HUD
(the "Secretary"), who was the third-party defendant, finding that the tenants
had no claim under the Contracts since no provisions of the Contracts were
breached. The district court also found that the tenants' interest in receiving
housing assistance payments was only a "subjective expectancy" which was not
entitled to due process protection. We hold that the Contracts were breached
and that the tenants can recover retroactive benefits as third-party beneficiaries;
we also find that tenants in existing HUD-insured projects assisted under
Section 8 are generally entitled to housing assistance benefits within a
reasonable time after the effective date of the applicable Section 8 Contract. We
further determine that appellants have a legitimate claim of entitlement to
housing assistance payments as of the effective dates of the Contracts. We
therefore reverse and remand.

The Case
3

This litigation began as a small claims action in Milwaukee County Court in

July 1977, to recover housing assistance payments allegedly due to plaintiff
Doris Holbrook from defendant Henry Pitt, the owner of Main Street Gardens,
the housing project in which Holbrook lived. Pitt subsequently filed a thirdparty complaint against the Secretary, alleging a breach of duty to inform Pitt of
his Section 8 Contract obligations. HUD removed the action to the United
States District Court for the Eastern District of Wisconsin.

After the district court granted Holbrook's motion to amend her complaint, the
original complaint was redesignated as Count I. In Count II, Holbrook then
asserted a class claim for declaratory judgment and damages on behalf of the
class of tenants in multifamily projects in Wisconsin who had been certified for
Section 8 assistance payments by the owners of their dwelling units. 1 Count II
was based on the theory that the members of the tenant class were third-party
beneficiaries of the Contracts executed between HUD and the owners of the
projects in question, and that the class was thereby entitled to Section 8 benefits
retroactive to the effective dates of the Contracts, payable within a reasonable
time after the dates of execution.

In Count III, the plaintiff class alleged that they were denied retroactive
assistance payments in violation of the Due Process clause of the Fifth
Amendment to the United States Constitution.2 The tenants argued that they
had a legitimate claim of entitlement to the receipt of Section 8 benefits as of
the date of Contract execution and that the provision of such benefits must
commence not later than thirty days after the execution date. To enforce these
rights, plaintiffs requested, inter alia, that HUD be ordered to provide a
meaningful opportunity for all class members to challenge HUD's procedures
regarding administration of the Contracts.

After extensive discovery, the parties, on a joint statement of uncontested facts,

filed cross motions for summary judgment. While these motions were pending,
Pitt certified Holbrook for the claimed retroactive housing assistance payments.
HUD then tendered full payment to Holbrook.

The district court found that, because of the payment to Holbrook, Count I had
become moot. As to Count II, the district court held that, even assuming that
plaintiffs were third-party beneficiaries, they were bound by the terms of the
Section 8 Contracts, which HUD had not breached. With respect to Count III,
the court found that plaintiffs possessed only an "inchoate property interest" in
the receipt of housing assistance payments, which was merely a "subjective
expectancy" not entitled to due process protection. HUD's motion for summary
judgment was therefore granted.3

Plaintiff Holbrook lived with her four minor children in Milwaukee, Wisconsin
in Main Street Gardens, a housing development owned by Henry Pitt. On June
10, 1976, HUD and Pitt executed a Section 8 Contract under which housing
assistance payments were to be paid to Pitt's eligible tenants, including
Holbrook. Under the Contract, HUD committed funds to make housing
assistance payments on behalf of eligible tenants as of June 1976. Funds were
not disbursed under the Contract, however, until Pitt certified to HUD the
names of the eligible tenants and the amount of subsidy to which each was
entitled.4

Despite prodding by Holbrook and HUD, a Section 8 application, and

eligibility and certification forms were not mailed by Pitt to residents of Main
Street Gardens until November 16, 1976. Holbrook and other eligible families
at Main Street Gardens were then certified and received Section 8 payments
beginning December 1976. But, at the time of certification, no retroactive
payments were made, as were authorized and for which funds had been set
aside.5

The Section 8 Program

10

The federal policy of providing decent, safe and sanitary housing for all
families, first articulated in the United States Housing Act of 1937, ch. 896, 50
Stat. 888 (codified in scattered sections of 42 U.S.C.), has inspired numerous
programs designed to increase the availability of housing for lower income
families.6 The Section 8 lower income housing assistance program, which was
enacted as part of the Housing and Community Development Act of 1974,
Pub.L. 93-383, 88 Stat. 633 (codified in scattered sections of 5, 12, 20, 31, 42,
49 U.S.C.), is one of the most ambitious of these efforts.7 This program was
enacted for the dual purposes "of aiding lower-income families in obtaining a
decent place to live and of promoting economically mixed housing." 42 U.S.C.
1437f(a) (1976). Section 8 was designed to achieve these goals by providing
rent subsidies to lower income families living in housing owned primarily by
private developers. All tenants whose incomes do not exceed 80 percent of the
median income for their area are eligible for Section 8 assistance.8

11

In implementing Section 8, HUD has created several distinct subprograms,

which are set forth in the regulations found at 24 C.F.R. 880 et seq. (1980).
Defined according to the characteristics of the housing to be subsidized, there
are separate subprograms governing Section 8 assistance payments for, inter
alia, newly constructed housing, 24 C.F.R. 880 (1980), substantially
rehabilitated housing, 24 C.F.R. 881 (1980), existing housing, 24 C.F.R.
882 (1980), and housing developed under public housing agency programs, 24
C.F.R. 883 (1980).

12

Appellants reside in projects with HUD-insured or HUD-held mortgages. Main

Street Gardens, for example, where Holbrook resides, received the benefit of
mortgage interest payments under Section 236 of the Housing and Urban
Development Act of 1968, 12 U.S.C. 1715z-1 (1976).9

13

The regulations applicable to the making of housing assistance payments on

behalf of tenants in projects subject to HUD-insured mortgages are found at 24
C.F.R. 886 (1980). These regulations, together with HUD's program
instruction handbook,10 establish the policies and procedures pursuant to which
HUD makes housing assistance payments for projects with HUD-insured
mortgages. The heart of this Section 8 subprogram is the Contract between
HUD and the owner, which governs the relationship between the contracting
parties and defines the rights and duties of the owner with respect to the
administration of the Section 8 subprogram.

14

Prior to execution of a Contract, the owner must submit information regarding

14

Prior to execution of a Contract, the owner must submit information regarding

the gross income, number of household members under age 18 and rent-toincome ratio for each resident household, present vacancies and any rental
increases currently being processed by HUD. At the time a Contract is
executed, HUD commits funds to that project. The dollar amount of HUD's
maximum commitment of funds is set at 75 percent of the current HUDapproved rents for the units expected to receive Section 8 subsidies. These units
include the units occupied by families whose gross incomes and rent payments
would appear to make them eligible for Section 8 assistance as well as the units
that were vacant when the owner applied for a Contract. This calculation of the
maximum contract commitment can include a proposed rent increase if HUD
anticipates its approval.

15

Pursuant to paragraph 1.9c of the model Contract,11 the owner is responsible

for determining and verifying the eligibility of families, processing necessary
application and verification forms, selecting families who will receive Section 8
assistance,12 and computing the amount of housing assistance payments to be
made on their behalf, a process denominated as "certification."13 Upon the
completion of certification of eligible families by the owner, HUD makes
housing assistance payments to owners on behalf of tenants in accordance with
the provisions of the Contract.14

16

HUD also maintains a project account "to assure that housing assistance
payments will be increased on a timely basis to cover (HUD-approved)
increases in Contract rents or decreases in Family Incomes." 24 C.F.R.
886.108(c) (1980). According to HUD's regulations, this project account is
established and maintained "out of amounts by which the maximum annual
Contract commitment per year exceeds amounts paid under the Contract for
any year." 24 C.F.R. 886.108(c)(1) (1980). It appears from the record,
however, that HUD actually deposits the entire amount of the maximum
contract commitment in a segregated account at the time the Contract is
executed.

17

Although HUD imposes no duty on owners to submit certifications at any

specified time,15 HUD regulations allow housing assistance payments to be
made as of the effective date of the Contract and funds are committed by HUD
to provide for payments from that date. 24 C.F.R. 886.108 (1980). HUD,
however, has refused to make housing assistance payments on behalf of tenants
for the period between the effective date of the Contract and the month in
which tenants are certified by the project owner, unless the owner provides for
proper certification (termed "retroactive certification") for the intervening
months.

18

After the effective date of a Contract, but before the initiation of housing
assistance payments, HUD provides no administrative process for determining
a tenant's eligibility to receive housing assistance payments. Nor does an
administrative procedure exist whereby an eligible (whether certified or
uncertified) family may, in appropriate circumstances, challenge either a
project owner's initial delay in certifying eligible tenants for payments or an
owner's unwillingness or refusal to certify tenants for payments retroactive to
the Contract date.

Discussion
1. Tenants' Third-Party Beneficiary Claim
19

In Count II, the tenant class asserted their rights as third-party beneficiaries of
the Contracts executed between HUD and the owners. The tenants sought
prompt implementation of the Contracts as well as the receipt of retroactive
benefits. The district court declined to rule on the third-party beneficiary issue
but found that, in any event, the Contracts had not been breached since HUD
had no contractual duty to pay benefits from the effective dates of the
Contracts. Holbrook v. Pitt, 479 F.Supp. 990, 994 (E.D.Wis.1979).

20

Plaintiffs' approach in this case seems to have made analysis of their claims for
retroactive benefits unnecessarily difficult. They argue that HUD has
improperly administered the Section 8 program by totally delegating
certification responsibilities to the owners. While this argument may have merit
in the context of a claim that HUD has failed to meet its Section 8 obligations,
it is only obliquely related to plaintiffs' claim that HUD has breached the
Contracts before us.

21

In her original action, Holbrook had named Pitt, the owner of her building, as
defendant. Pitt was dismissed from this action when he certified Holbrook for
retroactive benefits and those benefits were paid to Holbrook by HUD. The
other Wisconsin project owners who had executed Contracts with HUD were
not named as defendants, however, when plaintiff subsequently asserted her
class claim. Yet, since the Contracts place the obligation to certify tenants on
the owners, it is not HUD but the owners who have most clearly breached the
duty to properly certify the tenants. Despite this discrepancy, however, we have
concluded that tenants can recover retroactive benefits because HUD breached
its obligation to properly administer the Contracts by accepting non-retroactive
certifications from the owners.

22

Under settled principles of federal common law,16 a third party may have

22

enforceable rights under a contract if the contract was made for his direct
benefit. Crumady v. The Joachim Hendrik Fisser, 358 U.S. 423, 428, 79 S.Ct.
445, 448, 3 L.Ed.2d 413 (1959); Williams v. Fenix & Scisson, Inc., 608 F.2d
1205, 1208 (9th Cir. 1979); Owens v. Haas, 601 F.2d 1242, 1248-50 (2d Cir.),
cert. denied, 444 U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979); Roberts v.
Cameron-Brown Co., 556 F.2d 356, 362 (5th Cir. 1977); Olzman v. Lake Hills
Swim Club, Inc., 495 F.2d 1333, 1339 (2d Cir. 1974); Euresti v. Stenner, 458
F.2d 1115, 1118-19 (10th Cir. 1972); Inglewood v. Los Angeles, 451 F.2d 948,
955-56 (9th Cir. 1971); Bossier Parish School Board v. Lemon, 370 F.2d 847
(5th Cir.), cert. denied, 388 U.S. 911, 87 S.Ct. 2116, 18 L.Ed.2d 1350 (1967).
If the agreement was not intended to benefit the third party, however, he is
viewed as an "incidental" beneficiary, having no legally cognizable rights under
the contract.17 German Alliance Insurance Co. v. Home Water Supply Co., 226
U.S. 220, 33 S.Ct. 32, 57 L.Ed. 195 (1912); Williams v. Fenix & Scisson, Inc.,
608 F.2d at 1208; 4 A. Corbin, Corbin on Contracts, 776 at 18-19 (1951);
Restatement of Contracts, 133 at 151-52 (1932).

23

To determine whether plaintiffs have enforceable rights under the Contracts we

must analyze the purposes underlying their formation. Plaintiffs maintain that
HUD executed the Contracts in order to provide rental assistance to low income
families. HUD, however, claims that plaintiffs are only incidental beneficiaries
of the Contracts, since the primary purpose of the Section 8 program, and the
Contracts entered into pursuant thereto, was to benefit financially troubled
HUD-insured projects. We reject this argument, as it is contradicted by the
language of Section 8, relevant legislative history, HUD's implementing
regulations and interpretations and the terms of the Contracts.18 HUD's position
displays an astonishing lack of perspective about government social welfare
programs. If the tenants are not the primary beneficiaries of a program designed
to provide housing assistance payments to low income families, the legitimacy
of the multi-billion dollar Section 8 program is placed in grave doubt.

24

Congress did not establish the Section 8 housing assistance program merely to
limit claims on HUD's insurance fund that might be occasioned by assignments
or foreclosures of HUD-insured mortgages. Congress authorized Section 8
payments "(f)or the purpose of aiding lower-income families in obtaining a
decent place to live and of promoting economically mixed housing." 42 U.S.C.
1437f(a) (1976).

25

Section 8 is designed to provide rent subsidies to needy families. If Congress

had intended to design Section 8 primarily to assist financially troubled projects
(rather than low-income families), it would have provided that Contracts would
be awarded and funding structured in accordance with the financial condition of

the housing projects.19 Instead, it provided that Section 8 funds should be

allocated according to the financial needs of the tenants. The statute does not
establish a preference for projects that may soon be in default on HUD-insured
mortgages, but it does provide that 30 percent of the families assisted by
Section 8 funds must be "very low-income families," 42 U.S.C. 1437f(c)(7)
(1976), which are defined as "those families whose incomes do not exceed 50
per centum of the median income for the area." 42 U.S.C. 1437f(f)(2)
(1976).20
26

HUD has also recognized that the function of the Section 8 subprogram we are
considering is to assist low income families in securing decent, safe and
sanitary housing. Thus, HUD's introduction to the regulations that established
this subprogram provides:

27 purpose of this program is to assist families presently in occupancy in a HUDThe

insured or HUD-assisted project to more easily carry their rental burden.
28

42 Fed.Reg. 5602 (Jan. 28, 1977).

29

HUD's regulations further demonstrate that the Section 8 program is designed

primarily to benefit low-income families. Under the regulations, a Contract may
be executed only after a project owner establishes that a significant number of
existing or potential tenants are "eligible for and in need of Section 8
assistance." 24 C.F.R. 886.107(d) (1980). And, when a Contract is executed,
HUD calculates and budgets funds not on the basis of the financial needs of the
project's management but on the estimated rental assistance needs of eligible
tenants.

30

The Contract terms also demonstrate that the tenants are intended beneficiaries
of the Contracts. Paragraph 1.3(b)(1) provides, in part:

31 Government hereby agrees to make housing assistance payments on behalf of

The
Families for the Contract Units, to enable such Families to lease Decent, Safe, and
Sanitary housing pursuant to Section 8 of the Act.
32

Numerous other Contract provisions make it clear that the Contracts were
executed primarily for the tenants' benefit. Paragraph 1.7, for example, requires
the owners to "maintain and operate the Contract unit and related facilities so as
to provide Decent, Safe and Sanitary housing." See also paragraph 1.9(a)
(requiring affirmative action in owner's marketing of units and selection of
families); paragraph 1.9(b) (restricting owner's discretion regarding the
collection and refunding of utility and security deposits); paragraph 1.10

(restricting owner's right to evict tenants).

33

HUD, of course, perceives that the Section 8 program also serves to minimize
claims on its insurance fund. The creation of a separate Section 8 subprogram
exclusively for projects with HUD-insured mortgages is compelling evidence
of this perception. It is also apparent from the introduction to HUD's
Handbook, which reads:

34 Section 8 set-aside program for existing multifamily projects benefiting from

The
HUD-insured or HUD-held mortgages ... is designed to accomplish two goals: (1)
reduce the claims on HUD's insurance funds by stabilizing the finances of projects
intended for low and moderate income residents by avoiding project mortgage
assignments or, in projects with assigned mortgages, by preventing foreclosure and
(2) assure the continued availability of units in these existing multifamily projects to
the lower income families for whom they were intended by reducing to affordable
levels the rent obligation of assisted families.21
35

We do not decide whether it is proper for HUD, in allocating Section 8 funds,

to give priority to projects with serious financial problems.22 We believe,
however, that this preference does not contradict the fact that the Contracts
before us are intended primarily to benefit needy tenants. Plaintiffs have
enforceable rights since the Contracts were intended to provide them with rental
assistance. Subsidiary purposes, such as HUD's interest in minimizing claims
on its insurance funds, do not defeat plaintiffs' status as protected beneficiaries.
See King v. National Industries, Inc., 512 F.2d 29, 32 (6th Cir. 1975); Avco
Delta Corp. v. United States, 484 F.2d 692, 702 (7th Cir. 1973), cert. denied,
415 U.S. 931, 94 S.Ct. 1444, 39 L.Ed.2d 490 (1974); Beck v. Reynolds Metals
Co., 163 F.2d 870, 871 (7th Cir. 1947).23

36

Having concluded that plaintiffs have enforceable rights under the Contracts,
we must determine whether the Contracts have been breached. The district
court held that HUD did not violate any provision of the Contracts, since "it is
the owner who is given the responsibility to effect certifications of eligibility,
and there is no contract provision requiring HUD to make assistance payments
until the necessary certifications (including retroactive certifications) are
performed." Holbrook v. Pitt, 479 F.Supp. at 993.24 Because they are somewhat
distinct, we will consider first the question whether HUD breached the
Contracts because the tenants were not promptly certified, and second, the
question whether HUD breached the Contracts because the tenants were not
retroactively certified.

37

The district court refused to imply a Contract term that would require the

owners to certify tenants within a reasonable time after execution of the

Contract. We believe it is appropriate to imply such a term, since the purpose of
the Contracts to provide housing assistance to lower income families would
otherwise be frustrated. We agree with the district court, however, that HUD
did not breach the Contracts with respect to the timing of certification.
38

The district court relied on paragraph 1.9(c) (Eligibility, Selection and

Admission of Families), supra note 14, and on paragraph 1.11(a) (Reduction of
Number of Contract Units for Failure to Lease to Eligible Families), supra note
16, of the Contracts in deciding that there was no contractual duty to certify
tenants promptly. Paragraph 1.9(c), however, merely allocates the certification
function to the owner. It does not address the form which certifications are to
take, the date by which certifications are to be performed or the period of time
certifications are intended to cover. Although paragraph 1.9(c) is silent on the
question of time of performance, it is reasonably inferrable from the purpose of
the Contract that the owner is obligated to perform his certification
responsibilities within a reasonable time. 25

39

We are similarly unpersuaded that paragraph 1.11(a) is intended to be the sole

contract limitation on the timing of certification. Paragraph 1.11(a)'s penalty
provision would not be triggered until one year after the effective date of the
Contract. It is inconceivable, however, that the parties intended to allow a full
year for implementation (while housing assistance payments built up in project
accounts) of a shelter program designed to provide economic relief for poor
tenants. Paragraph 1.11(a) merely establishes one remedy which HUD may
resort to in the event that a project owner fails to keep Contract units leased or
available for leasing by eligible families. It does not purport to govern the date
by which owners must perform certification.

40

Since all the tenants in the class designated in Count II have been certified, it is
not necessary to determine what would be a reasonable time to perform
certification under the circumstances of this case. Cf. A. M. R. Enterprises, Inc.
v. United States Postal Savings Association, 567 F.2d 1277, 1281 (5th Cir.
1978). In any event, although we have implied a Contract term requiring
prompt certification, we believe that the owners, and not HUD, breached this
implied term, since HUD had no mechanism (in the Contracts before us) to
force the owners promptly to certify tenants.26

41

With respect to retroactive certification, the district court held that plaintiffs
could not recover retroactive benefits because HUD was not "required, by the
terms of the contract or otherwise, to pay retroactive benefits." Holbrook v. Pitt,
479 F.Supp. at 994. The court also refused to imply from the Contract that

retroactive certification was required, finding again that paragraph 1.9(c) set
"the terms and conditions of performance." Id. Yet we believe that paragraph
1.9(c) must be interpreted quite differently than the district court suggests.
Paragraph 1.9(c) provides only that the owner is "responsible for ...
computation of the amount of housing assistance payments on behalf of each
selected Family." It does not set forth the period for which housing assistance
payments are to be requested or paid. It certainly does not suggest that the
obligation to compute housing assistance payments includes the right to
arbitrarily deny to tenants benefits from the date of Contract execution. The
very use of the word "computation" connotes the application of a formula to
numbers, not the exercise of discretion either arbitrary or informed.
42

We believe it is necessary to interpret the language of paragraph 1.9(c) to mean

that retroactive certification is required. First, "computation" is a mathematical
process presumably involving, inter alia, the multiplication of the amount of
rental subsidy to which a particular tenant is entitled by the number of months
the subsidy is due; the Contract language in no way suggests that the number of
months is a matter of discretion. Rather, that number must be the number of
months the tenant has lived in the project since the Contract governing Section
8 payments was executed (and funds were set aside). Second, unless the
language is construed to require retroactive payment, the primary purpose of
the Contracts to provide housing assistance to low income families would be
frustrated. HUD has not offered any justification for its policy of accepting
certifications that do not provide for retroactive benefits covering all relevant
months, and we can perceive no circumstances that would justify such a
policy.27

43

HUD's calculation of the dollar amount of financial assistance it sets aside in a

project account is based on the estimated monthly rental assistance needs of
specific tenants beginning with the month in which the Contract is executed.
HUD, therefore, has committed funds to pay housing assistance payments from
the first day of the Contract period.28

44

Although the owners may exercise limited discretion with regard to the
selection of those families that are to receive benefits,29 the owners' obligation
to "compute" the amount of housing assistance payments is entirely ministerial.
No reason has been suggested for allowing the owners to determine whether
tenants will or will not receive retroactive benefits.30 Therefore, by accepting
deficient computations from the owners, we believe HUD breached its
obligation to properly administer the Contracts, see 24 C.F.R. 886.120(a)
(1980), and its coordinate responsibility to third-party beneficiaries to fulfill the
purposes of the Contracts, i. e., to provide full assistance benefits to certified

families. Appellants can therefore recover retroactive benefits from HUD as

third-party beneficiaries of the Contracts.
2. Tenants' Due Process Claim
45

The class of tenants designated in Count III of the complaint includes only
those tenants "who were certified or who will be certified pursuant to the
contracts for housing assistance payments but who did not or will not receive
the benefit of housing assistance payments as of the effective date of the
contracts."31 The narrow question before us, therefore, is whether the due
process clause requires HUD to establish procedures to provide already
certified tenants with notice and opportunity to be heard concerning the
provision of retroactive benefits.32

46

The existence and scope of appellants' due process rights depend on the
resolution of three issues. First, there must be governmental action sufficient to
invoke the guarantees of the fifth amendment. This requirement has clearly
been met here. See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 95 S.Ct.
449, 42 L.Ed.2d 477 (1974); Joy v. Daniels, 479 F.2d 1236, 1238 (4th Cir.
1973). Second, the asserted interest must be shown to be a "liberty" or a
"property" interest to which there is a claim of entitlement under the due
process clause. Morrissey v. Brewer, 408 U.S. 471, 481-83, 92 S.Ct. 2593,
2600-01, 33 L.Ed.2d 484 (1972). Third, assuming an entitlement is established,
what process is due? Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47
L.Ed.2d 18 (1976). See generally Coppenbarger v. Federal Aviation
Administration, 558 F.2d 836, 839 (7th Cir. 1977).

47

In determining whether appellants have a constitutionally protected property

interest, we are guided by the well-known discussion in Board of Regents v.
Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972):

48 have a property interest in a benefit, a person clearly must have more than an
To
abstract need or desire for it. He must have more than a unilateral expectation of it.
He must, instead, have a legitimate claim of entitlement to it. It is a purpose of the
ancient institution of property to protect those claims upon which people rely in their
daily lives, reliance that must not be arbitrarily undermined. It is a purpose of the
constitutional right to a hearing to provide an opportunity for a person to vindicate
those claims.
49

Property interests, of course, are not created by the Constitution. Rather, they
are created and their dimensions are defined by existing rules or understandings
that stem from an independent source such as state law rules or understandings

that secure certain benefits and that support claims of entitlement to those
benefits.
50

It is clear in the present case that appellants have established a legitimate claim
of entitlement.33 The tenants' interest in retroactive benefits rises above a
subjective expectancy or a "unilateral expectation," Board of Regents v. Roth,
408 U.S. at 577, 92 S.Ct. at 2709, since, as concluded above, certified tenants
have legally enforceable rights as beneficiaries under the Contracts to receive
retroactive benefits.34

51

In similar circumstances, the United States Supreme Court held in Perry v.

Sindermann, 408 U.S. 593, 601-02, 92 S.Ct. 2694, 2699-2700, 33 L.Ed.2d 570
(1972), that a teacher at a state college would have a protectable interest in
continued employment if he could demonstrate that his tenure claim was based
upon an implied term in his employment contract. Here we have, in effect,
implied a Contract term requiring retroactive certification. Tenants therefore
have a legitimate claim of entitlement to such benefits.35

52

Courts have held in a variety of circumstances that certified tenants in Section 8

programs have protectable property interests under the due process clause. For
example, Ferguson v. Metropolitan Development & Housing Agency, 485
F.Supp. 517 (M.D.Tenn.1980) and Watkins v. Mobile Housing Board, No. 790067-P (S.D.Ala. May 14, 1979) (order on plaintiff's motion for preliminary
injunctive relief), both held that tenants have due process rights in connection
with the termination of their certificates of family participation in the Section 8
subprogram for existing housing.36 See also Brezina v. Dowdall, 472 F.Supp.
82 (N.D.Ill.1979). And, in Ressler v. Landrieu, No. A77-228C (D.Alas. March
6, 1980), the court extended due process protection to prospective applicants
for Section 8 payments who were not yet certified, but who met the Section 8
eligibility criteria, despite the fact that project owners exercise limited
discretion with respect to the selection of tenants to be certified. See note 12,
supra.

53

The district court's analysis in the present case is inapposite because it is based
on the assumption that appellants were claiming due process protection for
tenants who had not yet been certified.37 The class designated in Count III,
however, is limited to those tenants who have already been certified and,
probably in addition, those who will be certified in the future under existing
Contracts.38 But see note 31, supra. Thus, tenants are included in the class
denominated in Count III only after they have been certified. We therefore do
not express any opinion on the district court's holding that non-certified tenants
do not have a legitimate claim of entitlement under the due process clause. But

see Ressler v. Landrieu, No. A77-228C (D.Alas. March 6, 1980).

54

The district court relied on Judge Hufstedler's dissent in Geneva Towers

Tenants Organization v. Federated Mortgage Investors, 504 F.2d at 494-96, in
support of the proposition that neither Congress nor HUD has "manifested an
intention 'to create a governmental obligation' to tenants who have not been
certified as eligible to receive section 8 benefits." Holbrook v. Pitt, 479 F.Supp.
at 995.

55

The claim of entitlement rejected by Judge Hufstedler in Geneva Towers and

by this court in Harlib v. Lynn, 511 F.2d 51 (7th Cir. 1975), involved a rent
increase in a housing project subsidized under Section 221(d)(3), which created
an assistance program similar to the Section 8 program. In determining that
Section 221(d)(3) did not create an entitlement to a certain rent level, Judge
Hufstedler emphasized that Congress did not "gear rent levels to the budgets of
individual tenants" but, instead, authorized the Secretary to set rent levels based
upon several factors. She also noted that Section 221(d)(3) was not enacted as a
direct financial assistance program for tenants and that the program was
directed more "to benefiting the class of low and middle income housing
consumers than it (was) to benefiting any specific tenants." Geneva Towers,
504 F.2d at 497.

56

But this analysis, which also underlies Harlib, supports rather than contradicts
the existence of a legitimate claim of entitlement in the instant case. Here the
rent subsidies are fashioned to fit the budgets of individual tenants. Section 8
was designed to benefit specific tenants by providing them with monthly rental
subsidies meeting their particularized needs. Once a family is selected to
receive Section 8 assistance, the only factors that determine the level of
assistance the family is to receive are the monthly rental charge for the unit and
the family's financial circumstances. Thus, in contrast to the Section 221(d)(3)
program, award of Section 8 benefits is geared to the rental assistance needs of
particular tenants. 39

57

The existence of owner discretion in the certification process does not suggest a
different conclusion. Although the owner may have limited discretion with
regard to the initial selection of tenants who are to be subsidized under the
Contracts, see note 12, supra, the owner may properly exercise no discretion
with regard to retroactive certification, see pages 1274-76, supra. Indeed, it is
the apparent decision by HUD to give owners the unreviewable right to decide
whether a certified tenant will receive retroactive benefits that offends the
concepts of fairness and nonarbitrariness which are at the heart of the
constitutional requirement of due process of law.

3. What Process is Due?

58
59

Since appellants have a legitimate claim of entitlement to retroactive housing

assistance payments, we must remand to the district court to determine what
process may be due. Due process does not have a fixed content unrelated to
time, place and circumstances. Cafeteria & Restaurant Workers v. McElroy,
367 U.S. 886, 895, 81 S.Ct. 1743, 1748, 6 L.Ed.2d 1230 (1961). Instead, it is a
flexible concept that requires such procedural protections as the particular
situation demands. Greenholtz v. Inmates of Nebraska Penal & Correctional
Complex, 442 U.S. 1, 99 S.Ct. 2100, 60 L.Ed.2d 668 (1979); Morrissey v.
Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972). As the
Supreme Court has emphasized:

60 function of the legal process, as that concept is embodied in the Constitution,

The
and in the realm of factfinding, is to minimize the risk of erroneous decisions.
Because of the broad spectrum of concerns to which the term must apply, flexibility
is necessary to gear the process to the particular need; the quantum and quality of
the process due in a particular situation depend upon the need to serve the purpose of
minimizing the risk of error.
61

Greenholtz, 442 U.S. at 13, 99 S.Ct. at 2107 (citing Mathews v. Eldridge, 424
U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18 (1976)).

62

To determine what process is appropriate, the countervailing interests of

appellants and HUD must be balanced. 40

63
(I)dentification
of the specific dictates of due process generally requires
consideration of three distinct factors: First, the private interest that will be affected
by the official action; second, the risk of an erroneous deprivation of such interest
through the procedures used, and the probable value, if any, of additional or
substitute procedural safeguards; and finally, the Government's interest, including
the function involved and the fiscal and administrative burdens that the additional or
substitute procedural requirement would entail.
64

Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18
(1976).41

65

The hardship upon tenants here consists in their being deprived, in their
necessitous circumstances, of housing assistance benefits for periods as long as
seven months. In this regard, the Supreme Court has recognized that "the
possible length of wrongful deprivation of ... benefits is an important factor in
assessing the impact of official action on the private interests." Mathews, 424

U.S. at 341, 96 S.Ct. at 905 (citing Fusari v. Steinberg, 419 U.S. 379, 389, 95
S.Ct. 533, 539, 42 L.Ed.2d 521 (1975)).
66

On the other hand, the fiscal and administrative burdens of elaborate procedural
requirements could become relatively onerous in comparison with the private
interests sought to be benefited. In this case, however, the burden of providing
procedural safeguards regarding the provision of retroactive payments to
already certified tenants would appear to be insubstantial. We note that HUD
has already provided notice, hearing and appeal procedures for applicants under
Section 8 subprograms that involve public housing authorities. See, e. g., 24
C.F.R. 881.603(b)(3) (1980) (substantially rehabilitated housing). See also
Ressler v. Landrieu, No. A77-228 (D.Alas. November 21, 1980) (requiring
HUD to establish tenant selection standards, waiting lists, and notice, hearing
and review procedures with regard to the selection of tenants to be certified
under the Section 8 subprogram for projects with HUD-insured mortgages).

67

It is a sine qua non that all tenants receive prompt notification of their right to
receive such payments retroactively. See Memphis Light, Gas & Water
Division v. Craft, 436 U.S. 1, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978). Due
process would also seem to require that the tenants receive a written statement
setting forth the reasons for any denial of retroactive benefits and the
opportunity to challenge the sufficiency of HUD's reasons. See Perry v.
Sindermann, 408 U.S. 593, 92 S.Ct. 2694, 33 L.Ed.2d 570 (1972); Mullane v.
Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94
L.Ed. 865 (1950); T. A. Moynahan Properties, Inc. v. Lancaster Village
Cooperative, Inc., 496 F.2d 1114, 1118 (7th Cir. 1974); Brezina v. Dowdall,
472 F.Supp. 82, 85 (N.D.Ill.1979). In addition, appellants must receive some
sort of hearing before retroactive benefits are finally denied, since the
"fundamental requirement of due process is the opportunity to be heard at a
meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S.
at 333, 96 S.Ct. at 901 (citing Armstrong v. Manzo, 380 U.S. 545, 552, 85 S.Ct.
1187, 1191, 14 L.Ed.2d 62 (1965)). See also Memphis Light, Gas & Water
Division v. Craft, 436 U.S. at 16, 98 S.Ct. at 1564. On remand, the district
court should determine the precise contours of the requirements of procedural
due process in the context of this case, giving whatever regard is appropriate to
the contract remedy we have provided to presently certified tenants.42

68

REVERSED and REMANDED for further proceedings in accordance with this

opinion.

The Honorable John F. Kilkenny, Senior Circuit Judge of the Ninth Circuit

The Honorable John F. Kilkenny, Senior Circuit Judge of the Ninth Circuit
Court of Appeals, is sitting by designation

The class certified in Count II includes all families in Wisconsin who resided in
certain dwelling units when Section 8 Contracts were executed between HUD
and the owners of these dwelling units and who were certified for housing
assistance payments pursuant to these Contracts, but who did not receive the
benefit of payments as of the effective dates of the Contracts

The class certified in Count III includes all families in Wisconsin who resided
or will reside in dwelling units when Section 8 Contracts were executed or will
be executed between HUD and the owner of these dwelling units and who were
certified or will be certified pursuant to these Contracts for housing assistance
payments, but who did not or will not receive the benefit of such payments as of
the effective dates of the Contracts

After the instant appeal was filed, plaintiffs orally moved (on the basis of Pitt's
certification of Holbrook and tender of full payment of claimed retroactive
payments) to dismiss defendant Pitt from the appeal, and this motion was
granted

At the time the Contract between HUD and Pitt was executed, Holbrook paid
$182.03 per month in rent; she also paid for electric service. Her total housing
costs allegedly consumed nearly 50 percent of her monthly income. Under the
Section 8 program she was entitled to subsidies from HUD that would limit her
housing costs to 25 percent of her monthly income

With respect to the Contracts executed between 1976 and 1979 between HUD
and the forty-nine multifamily project owners in Wisconsin, HUD made
housing assistance payments on behalf of 1,736 certified families, who are
members of the class certified in Count II. Of these, 336 families (19.3 percent)
waited longer than ninety days after the effective dates of their respective
Contracts to be certified and to receive initial housing assistance payments,
including Holbrook and twelve other families at Main Street Gardens. An
additional 188 families (10.8 percent) waited sixty days to receive payments
and 772 families (44.5 percent) waited less than thirty days. The record is
unclear concerning the delay in initial payments for the remaining 440 certified
families (25.4 percent)
Implementation of Contracts at the following projects illustrates the
inconsistent manner in which HUD initiated housing assistance payments on
behalf of certified families:
(a) At West View Apartments:

i. the effective date of the Contract was December 1, 1976;

ii. the initial claim for housing assistance payments was submitted by the
owner to HUD on November 23, 1976;
iii. HUD made housing assistance payments effective December 1976.
(b) At Watertown East I:
i. the effective date of the Contract was December 13, 1977;
ii. the initial claim for housing assistance payments was submitted by the
owners on June 9, 1978;
iii. HUD made housing assistance payments effective June 1978; no retroactive
payments to cover the period from December to June were made since none
were requested by the project owner.
(c) At Meadow Village:
i. the effective date of the Contract was October 21, 1977;
ii. the initial claim for housing assistance payments was submitted by the
owner on June 20, 1978;
iii. HUD made retroactive housing assistance payments to cover the period
from October to June since the tenants here were certified for retroactive
benefits by the project owner.
6

These programs include, inter alia, the Housing Act of 1949, ch. 338, 63 Stat.
413 (codified in scattered sections of 12, 42 U.S.C.), the Housing Act of 1961,
Pub.L. 87-70, 75 Stat. 149 (codified in scattered sections of 12, 42 U.S.C.), the
Housing and Urban Development Act of 1965, Pub.L. 89-117, 79 Stat. 451
(codified in scattered sections of 12, 15, 20, 38, 40, 42, 49 U.S.C.), the Housing
and Urban Development Act of 1968, Pub.L. 90-448, 82 Stat. 476, (codified in
scattered sections of 42 U.S.C.), and the Housing and Community Development
Act of 1974, Pub.L. 93-383, 88 Stat. 633 (codified in scattered sections of 5,
12, 20, 31, 40, 42, 49 U.S.C.)
Many of these programs were enacted because of the perceived failure of
existing legislation to provide decent housing for lower income families. The
Housing and Urban Development Act of 1968, for example, which set
ambitious goals for the preservation of existing housing as well as the creation
of additional housing through construction and rehabilitation, included the

congressional finding that the supply of housing was not increasing rapidly
enough to realize "the goal of a decent home and suitable living environment
for every American family." 42 U.S.C. 1441a (1976).
7

Congress has described the Section 8 program as "the Nation's major tool for
assisting the construction of lower income housing." S.Rep. No. 94-749, 94th
Cong., 2nd Sess. 3, reprinted in (1976) U.S.Code Cong. & Ad.News 1885,
1887. See also S.Rep.No. 93-693, 93rd Cong., 2nd Sess., reprinted in (1974)
U.S.Code Cong. & Ad.News 4273 et seq

Under the Section 8 program, the monthly rent an owner may charge is
generally limited to 110 percent of the fair market rental of the units. 42 U.S.C.
1437f(c)(1) (Supp. III 1979). Eligible families are required to pay not more
than 25 percent of their income for rent (or 15 percent in the case of certain
tenants). 42 U.S.C. 1437f(c)(3) (1976). The difference between the amount
payable by eligible families and the total rental amount due to the owner is the
amount subsidized by HUD in the form of housing assistance payments.
Owners do not receive an increase in rental income as the result of Section 8
Contracts. Rather, the rent payable by each certified tenant is apportioned
between the tenant and HUD based on both the tenant's income and family size
Pursuant to 202 of the Housing and Community Development Amendments
of 1979, 42 U.S.C. 1437f(c)(3) (Supp. III 1979) was amended to increase the
tenant's share of the rent to a maximum of 30 percent of income. However,
tenants currently in occupancy are exempt from this increase.

12 U.S.C. 1715z-1(a) (1976) sets forth the purpose of the Section 236
program:
For the purpose of reducing rentals for lower income families, the Secretary is
authorized to make, and to contract to make, periodic interest reduction
payments on behalf of the owner of a rental housing project designed for
occupancy by lower income families, which shall be accomplished through
payments to mortgagees holding mortgages meeting the special requirements
specified in this section.
Tenants residing in Section 236 developments are required to pay, as rent, the
greater of either one-fourth of their monthly income, as defined, or a "basic
rental charge determined on the basis of operating the project with (the Section
236 mortgage interest subsidies)." 12 U.S.C. 1715z-1(f)(1) (1976).
For 20 percent of the units in projects assisted by Section 236 after August 22,
1974, HUD is authorized to make "additional assistance payments to the project
owner on behalf of tenants whose incomes are too low for them to afford the

basic rentals ... with 25 per centum of their income." 12 U.S.C. 1715z-1(f)(2)
(1976).
10

HUD, Section 8 Additional Assistance Program for Projects with HUD-Insured

or HUD-Held Mortgages (1976) ("Handbook")

11

It appears that the model Contract, which is included in the Handbook as an

appendix, was used as the actual Contract for every agreement, to which this
case has application, between HUD and the owners under the Section 8 HUDinsured mortgage subprogram

12

This responsibility would only arise if, at the time certification occurs, the
number of units occupied by eligible tenants is greater than the number of units
authorized to be assisted under the Contract

13

Paragraph 1.9(c) of the Contract, which contains the basic provision pertaining
to certification of eligible tenants, reads as follows:

9 Leasing of Units
c. Eligibility, Selection and Admission of Families.
(1) The Owner shall be responsible for determination of eligibility of
applicants, selection of families from among those determined to be eligible,
and computation of the amount of housing assistance payments on behalf of
each selected Family in accordance with schedules and criteria established by
the Government.

14

Contracts may be executed for an initial period of up to five years, renewable

for successive five year terms by agreement between the owner and HUD. The
total Contract term cannot exceed fifteen years. 24 C.F.R. 886.111 (1980)

15

Paragraph 1.11(a) of the Contract provides as follows:

11 Reduction of Number of Contract Units for Failure to lease to Eligible

Families
a. After First Year of Contract.
If at any time, beginning six months after the effective date of this Contract, the
Owner fails for a continuous period of six months to have at least 80 percent of
the Contract Units leased or available for leasing by Families, the Government
may on 30 days notice reduce the number of Contract Units to not less than the
number of units under lease or available for leasing by Families, plus 10

percent of such number if the number is 10 or more, rounded to the next higher
number.
This provision is an incentive to project owners to lease Contract units to
eligible lower income families. There is no other express requirement for
owners, detailed in the Contract, concerning either certification of eligible
families within any specific time period or retroactive certification to the
Contract date.
16

Federal common law applies to plaintiffs' third-party beneficiary claims since a

federal agency is a party to the action and since the outcome of this case will
directly affect substantial financial obligations of the United States. See United
States v. Standard Oil Co., 332 U.S. 301, 67 S.Ct. 1604, 91 L.Ed. 2067 (1947);
Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838
(1943). Miree v. DeKalb County, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557
(1977), does not suggest a contrary result. The Court in Miree held that state
and not federal common law applied to third-party beneficiary claims arising
out of a contract between the Federal Aviation Administration and DeKalb
County. Central to the Court's holding, however, was the fact that the United
States, although a party to the contract, was not named as a defendant in the
breach of contract claim. Therefore, in sharp contrast with the case before us,
only the rights of private litigants were at issue, and resolution of the dispute
would have had "no direct effect upon the United States or its Treasury." Id. at
29, 97 S.Ct. at 2493
We note, however, that our result as to the third-party beneficiary claim would
be the same if analyzed under Wisconsin law. See Mercado v. Mitchell, 83
Wis.2d 17, 264 N.W.2d 532 (1978); Schell v. Knickelbein, 77 Wis.2d 344, 252
N.W.2d 921 (1977); In re Bratt, 257 Wis. 447, 43 N.W.2d 817 (1950).

17

Consistent with the scheme set forth in the Restatement of Contracts 133
(1932), most court decisions have recognized three classes of third-party
beneficiaries donee, creditor and incidental with different rules governing the
rights of each class. It has been suggested, for example, that a contracting
party's "intent to benefit" a third party is relevant if the third party is viewed as
a donee beneficiary, but not if the third party is viewed as a creditor
beneficiary. Isbrandtsen Co. v. Local 1291, Int'l Longshoremen's Ass'n, 204
F.2d 495, 497 n.11 (3d Cir. 1953)
We decline to follow this approach, since it fails to focus on the central
interpretative question involved in third-party beneficiary problems: did the
contracting parties intend that the third party benefit from the contract? We
prefer the approach of the Restatement (Second) of Contracts 133 (Tent.

Draft No. 4, 1968), which divides beneficiaries into two classes intended and
incidental. Section 133 provides:
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a
promise is an intended beneficiary if recognition of a right to performance in
the beneficiary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to
pay money to the beneficiary; or
(b) the promisee manifests an intention to give the beneficiary the benefit of the
promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended
beneficiary.
We also decline to adopt the Restatement's position to the extent it may suggest
that only the intentions of the "promisee" (the party through whom the
beneficiary claims) and not the "promisor" (the party obligated to render
performance that benefits the third party) are relevant to a determination of the
third-party beneficiary's rights. Contracts are the product of shared intentions,
and a promisor should be bound only by those objectively manifested intentions
of the promisee to which the promisor has implicitly or explicitly assented. It is
improper to neglect the reasonable expectations of the promisor, since the
burden of the agreement to the promisor, and therefore the consideration he
will require, may vary according to the number of parties who have enforceable
rights under the contract. See generally Jones, Legal Protection of Third Party
Beneficiaries: On Opening Courthouse Doors, 46 Cinn.L.Rev. 313 (1977).
18

We believe the legislative history and purpose of the Section 8 program may
properly be used to interpret the parties' intentions. It is evident from the terms
of the Contract that HUD, in executing the Contract, is acting to fulfill the
objectives of the Section 8 program. The Contract itself is entitled "Section 8
Housing Assistance Payments Program" and Part I of the Contract expressly
states that the "contract is entered into pursuant to the United States Housing
Act of 1937." Cf. Inglewood v. Los Angeles, 451 F.2d 948, 955 (9th Cir. 1972);
Feir v. Carabetta Enterprises, Inc., 459 F.Supp. 841, 848 n.3 (D.Conn.1978)

19

It is instructive to compare Section 8 with Section 201 of the Housing and

Community Development Amendments of 1978, 12 U.S.C. 1715z-1a (Supp.
III 1979), which was designed to assist financially troubled multifamily
projects. Eligibility under Section 201 does turn on the likelihood that
assistance will "restore or maintain the financial soundness of the project," 12
U.S.C. 1715z-1a(d)(1) (Supp. I 1978), and the level of Section 201 assistance

is based on the project's financial circumstances, not the tenants' incomes and
rental assistance needs. 12 U.S.C. 1715z-1(f) (Supp. III 1979)
20

The only priority for acceptance of Contract applications set forth in the statute
is geared toward realizing the Section 8 program's second express purpose of
promoting economically integrated housing. Under 42 U.S.C. 1437f(c)(5)
(1976), the Secretary "may give preference to applications for assistance
involving not more than 20 per centum of the dwelling units in a project."

21

Handbook, supra note 10 at 1. In similar fashion, a HUD-prepared model letter

sent to owners of HUD-insured projects provides:
This is to advise you that Section 8 project commitments are available for those
projects with HUD-insured or HUD-held mortgages ... which are likely to
benefit most substantially from Section 8 assistance. Commitments will be
made based upon HUD's approval of a project owner's request for participation
in the program.
The Section 8 program is designed to assist lower-income residents by bringing
their rents down to a level that they can afford, and to provide financial stability
to housing projects which serve the needs of lower-income families by
increasing the market for their units. Section 8 assistance can also help by
assuring that needed rent increases can be implemented without forcing out
those families needing such units. The Section 8 contract can cover up to 100
percent of the units and ties the subsidy to the project, not the individual
residents. The eligible families and individuals in these projects will pay
between 15 percent and 25 percent of income for rent. The difference between
the tenant's share and the HUD-approved rent for the unit occupied will
represent the amount of the assistance payment for that family or individual.
Handbook, supra note 10 at Appendix 3.

22

We note in this regard that the Senate Banking, Housing and Urban Affairs
Committee's Report on the Housing Authorization Act of 1976 disapproved of
HUD's efforts to direct Section 8 funds toward financially troubled FHAinsured projects:
The Committee recognized the merits of HUD's plan to help these projects, but
disagreed with HUD's use of Section 8 funds for this purpose because it
detracts from the basic intent of Congress that such funds be used to provide
additional housing units for low and moderate income families.
S.Rep.No.94-749, 94th Cong., 2nd Sess. 12, reprinted in (1976) U.S.Code
Cong. and Ad.News 1896 (emphasis supplied).

23

We believe that the status of appellants as third-party beneficiaries is not

defeated by the fact that they are not specifically named in the Contracts, since
they are identified at the time performance is due, i. e., when certification
occurs. See Owens v. Haas, 601 F.2d 1242, 1250 (2d Cir.), cert. denied, 444
U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979); Safer v. Perper, 569 F.2d 87,
92 (D.C.Cir.1977); Avco Delta Corp. v. United States, 484 F.2d 692, 702 (7th
Cir. 1973), cert. denied, 415 U.S. 931, 94 S.Ct. 1444, 39 L.Ed.2d 490 (1974);
United States v. California State Automobile Ass'n, 385 F.Supp. 669, 672
(E.D.Cal.1974), aff'd, 530 F.2d 850 (9th Cir. 1976); Bethune v. United States
Department of Housing and Urban Development, 376 F.Supp. 1074
(W.D.Mo.1972); 4 A. Corbin, supra, 781 at 70

24

We agree with the district court that the tenants, as third-party beneficiaries, are
bound by the terms and conditions of the Contracts. See Holbrook v. Pitt, 479
F.Supp. at 993. See also Trans-Bay Engineers and Builders, Inc. v. Hills, 551
F.2d 370, 378 (1976); Rotermund v. United States Steel Corp., 474 F.2d 1139,
1142 (8th Cir. 1973)

25

It is appropriate for courts to supply contract terms requiring performance

within a reasonable time where such terms are necessary to fulfill the purposes
of the contract. See Trailmobile Co. v. Whirls, 331 U.S. 40, 54-55, 67 S.Ct.
982, 989-990, 91 L.Ed. 1328 (1947); Boyd Construction Co. v. T. L. James &
Co., 477 F.2d 34, 35 (5th Cir. 1973); Seaboard Coast Line Railroad Co. v.
Long Island Rail Road Co., 447 F.Supp. 108, 114 (E.D.N.Y.), aff'd, 595 F.2d
96 (2d Cir. 1978)

26

Once owners did submit certifications, however, HUD was liable for the failure
to provide retroactive benefits to tenants, since the owner should no longer have
had any meaningful discretion with regard to the computation of the amount of
the payments to be made on behalf of the tenants. As discussed below, we
believe HUD improperly allowed owners to exclude retroactive benefits from
their computations

27

The district court apparently concluded that the tenants were bound by the
failure of their project owners to submit retroactive certifications to HUD. But
we think the binding effect of the owners' nonfeasance must be drastically
tempered by the economic realities of the transactions. The owners have no
economic stake in retroactive certification (except to the extent which the
record does not disclose that accumulated financial burdens might force tenants
sooner or later to default in rent payments). Indeed, the benefit of retroactive
certification is almost entirely to the tenants. Thus, there is no direct financial
incentive to owners to perform certifications in a way which will be
advantageous to tenants. We think the purpose of the Contracts to assist tenants,

who may be paying as much as 50 percent of their income for shelter expenses,
ought not to be frustrated by the owners' failure to perform financially profitless
acts. To accord weight, in this regard, to the owners' discretion is to convert the
statutory scheme into a game of chance
28

By segregating funds exclusively to pay rent subsidies on behalf of particular

tenants, HUD has created an identifiable res to which the tenants have a claim
in the nature of the equitable lien imposed in Bennett Construction Co. v. Allen
Gardens, Inc., 433 F.Supp. 825 (W.D.Mo.1977)
Bennett Construction involved the rights of a general contractor a third-party
beneficiary to enforce the terms of a construction loan agreement between
HUD as assignee of a mortgage and a mortgagor project owner in default. The
general contractor had completed construction and was owed certain
undisbursed loan proceeds. Bennett Construction is like the instant case in that
the mortgagor through whom the general contractor claimed was assertedly not
entitled to performance in two respects: (1) it had not gone to final closing of
the construction loan and (2) it was in default. These defects are analogous to
the failure of the project owners in the instant case to certify tenants
retroactively. Bennett Construction is, however, unlike the instant case in that
the general contractor there was a creditor third-party beneficiary, and failure to
impress the undisbursed loan proceeds with an equitable lien would have
resulted in the unjust enrichment of HUD. "Unjust enrichment" is only at issue
here to the extent that HUD might be said to be "enriched" by the opportunity
to retain set-aside funds and to the extent that it is "unjust" to deny retroactive
benefits to tenants who may have reasonably relied on receiving them.
In any case, Bennett Construction and the instant case are similar in that (1)
there is an identifiable res (in Bennett Construction the undisbursed loan
proceeds and here the set-aside funds) and (2) HUD in both cases is the
"guiding spirit" and the dominant force. In Bennett Construction, the mortgagor
owner was the "creature of HUD", 433 F.Supp. at 835. Here the project owners
have (or should have) no meaningful discretion regarding the decision to pay
retroactive benefits. Based on these similarities we think there are persuasive
reasons for regarding the funds set aside by HUD as impressed with a lien
dictated by the policy of the Section 8 program in favor of the tenants from the
execution dates of the Contracts. It is unjust to deny tenants the funds set aside
specifically for their benefit solely because of the capricious decisions of their
project owners not to make their certifications retroactive.

29

See note 12, supra

30

Indeed, the question of retroactive certification often becomes important only if

the owner breaches his obligation to promptly certify tenants. As the record in
this case demonstrates, it is often possible for owners to certify tenants by the
effective dates of their Contracts. See note 5, supra. In such cases, an owner
would have the opportunity to choose whether tenants are to receive retroactive
benefits only if he failed to promptly certify the tenants in the first instance. It
is unreasonable to assume that the parties intended for the owner to have such a
choice when the choice exists only because of the owner's initial breach of his
contractual obligation of prompt certification
31

The class designated in Count III would appear to include Wisconsin tenants
who will be certified in the future under existing Contracts. In their brief on
appeal, however, appellants assert that "all class members claiming
entitlements to housing assistance payments as of the effective dates of the
respective Section 8 Contracts have already been certified and received benefits
under the contracts." Appellant's brief at 30 (emphasis supplied)
On remand, the district court should determine whether due process protection
should be extended to tenants certified in the future or whether appellants have
waived such a claim.

32

In their amended complaint, appellants also requested declaratory and

injunctive relief under the due process clause ordering the Secretary to amend
the Contracts to require certification of tenants and initiation of benefits within
thirty days. This relief was denied by the district court
On appeal, appellants no longer seek this relief because of HUD's
representation that it does not intend to execute any additional Contracts in
Wisconsin. We therefore express no opinion on the merits of these claims.
We also note that our decision to provide appellants with due process protection
regarding the decision to award retroactive benefits is largely superfluous, since
we have decided that tenants have enforceable rights to retroactive benefits as
beneficiaries under the Contracts. It would certainly be inappropriate for us to
engage in unnecessary constitutional adjudication. See Ruslan Shipping Corp.
v. Coscol Petroleum Corp., 635 F.2d 648 at 650 (7th Cir. 1980).
We reach the due process claims, however, since appellants may want to
invoke their due process rights if HUD does not promptly tender the full
amount of retroactive benefits. Even if HUD does tender these benefits to
existing tenants, tenants certified in the future under existing Contracts may be
entitled to due process protection, since their rights as beneficiaries will not
have been reduced to judgment at the time they are certified. But see note 31,
supra.

33

In response to the need for insuring that government programs are not
administered in an arbitrary or irrational fashion, courts have extended due
process protections to a wide variety of governmentally conferred benefits. See,
e. g., Greenholtz v. Inmates of Nebraska Penal & Correctional Complex, 442
U.S. 1, 99 S.Ct. 2100, 60 L.Ed.2d 668 (1979) (parole application); Willner v.
Committee on Character & Fitness, 373 U.S. 96, 83 S.Ct. 1175, 10 L.Ed.2d 224
(1967) (application for bar admission); Wright v. Califano, 587 F.2d 345, 354
(7th Cir. 1978) (social security benefits); Freitag v. Carter, 489 F.2d 1377 (7th
Cir. 1973) (chauffeur's license application); Holmes v. New York City Housing
Authority, 398 F.2d 262 (2d Cir. 1968) (public housing application)
As court decisions have extended the notion of protected rights under the due
process clause beyond traditional concepts of "liberty" and "property,"
however, it is often difficult to discern the boundaries of due process
protection. Compare Geneva Towers Tenants Organization v. Federated
Mortgage Investors, 504 F.2d 483 (9th Cir. 1974), with Geneva Towers, 504
F.2d at 494 (Hufstedler, J., dissenting) and Harlib v. Lynn, 511 F.2d 51 (7th
Cir. 1975).

34

Indeed, HUD does not dispute that certified tenants have a legitimate claim of
entitlement. Its brief on appeal states:
In this case, a property interest did not arise until the owners certified plaintiffs
as being eligible to participate in the Section 8 program. Prior to certification
plaintiffs had merely an inchoate property interest. Only after certification by
the owner did a property interest become choate. Therefore, plaintiffs'
subjective expectancy is not constitutionally protected by the due process
clause.
Thus, at most HUD challenges only the scope or magnitude of entitlement of
certified tenants (i. e., whether the entitlement extends to retroactive benefits).

35

At a minimum, the nature of the appellants' entitlement claim must be deemed

to be that of applicants for retroactive benefits. Applicants who have met the
objective eligibility criteria of a wide variety of governmental programs have
been held to be entitled to protection under the due process clause. See, e. g.,
Greenholtz v. Inmates of Nebraska Penal & Correctional Complex, 442 U.S. 1,
99 S.Ct. 2100, 60 L.Ed.2d 668 (1979) (parole applicant); Willner v. Committee
on Character & Fitness, 373 U.S. 96, 83 S.Ct. 1175, 10 L.Ed.2d 224 (1967) (bar
applicant); Griffeth v. Detrich, 603 F.2d 118 (9th Cir. 1979), cert. denied, 445
U.S. 970, 100 S.Ct. 1348, 64 L.Ed.2d 247 (1980) (general assistance
applicants); Larry v. Lawler, 605 F.2d 954 (7th Cir. 1978) (federal employment
applicant); Carey v. Quern, 588 F.2d 230 (7th Cir. 1978) (general assistance

applicants); Wright v. Califano, 587 F.2d 345, 354 (7th Cir. 1978) (social
security applicants); White v. Roughton, 530 F.2d 750 (7th Cir. 1976) (general
assistance applicants); Freitag v. Carter, 489 F.2d 1377 (7th Cir. 1973)
(chauffeur's license applicants); Like v. Carter, 448 F.2d 798 (8th Cir. 1971),
cert. denied, 405 U.S. 1045, 92 S.Ct. 1309, 31 L.Ed.2d 588 (1972) (AFDC
applicants); Holmes v. New York City Housing Authority, 398 F.2d 262 (2d
Cir. 1968) (public housing applicants); Meyer v. Niles Township, 477 F.Supp.
357, 361-62 (N.D.Ill.1979) (general assistance applicants); Davis v. United
States, 415 F.Supp. 1086 (D.Kan.1976) (worker's compensation applicant);
Alexander v. Silverman, 356 F.Supp. 1179 (E.D.Wis.1973) (general relief
applicant); Neddo v. Housing Authority of Milwaukee, 335 F.Supp. 1397
(E.D.Wis.1971) (public housing applicant); Custom v. Trainor, 74 F.R.D. 409
(N.D.Ill.1977) (general assistance applicants)
36

Although Ferguson and Watkins involved termination of certificates of family

participation in a Section 8 subprogram, a similar analysis applies to the denial
of housing assistance payments in the first instance. In Wright v. Califano, 587
F.2d 345, 354 (7th Cir. 1978), this court concluded that "denials (of benefits)
do not necessarily deserve less due process than terminations."

37

The district court stated:

HUD argues that a property interest in Section 8 benefits does not arise until the
owner certifies a family as eligible to receive such benefits. Prior to
certification, HUD contends that the plaintiffs have an inchoate property
interest, which is merely a subjective expectancy not entitled to any due process
protection. I agree.
Holbrook v. Pitt, 479 F.Supp. at 994.

38

Future tenants obviously have a legitimate claim of entitlement only with

respect to benefits for the months during which they rented units

39

Judge Hufstedler determined that a governmentally conferred benefit constitutes

a constitutionally cognizable claim of entitlement if the initial receipt or the
termination of the benefit is conditioned on the "existence of a controvertible
and controverted fact." Geneva Towers, 504 F.2d at 495. This requirement
"serves the practical side of due process, since a hearing and notice would be
'pointless' if there were no such facts to resolve." Uneeda Davis v. Ball
Memorial Hospital Association, 640 F.2d 30, at 41 (7th Cir. 1980)
In the present case, it is clear that appellants have an entitlement claim under
Judge Hufstedler's definition. Since they are certified, their eligibility to receive
Section 8 benefits has been established, and their owners have selected them

specifically as the tenants who are to receive payments under the Contracts.
Also, by the terms of the Contracts, HUD has already committed sufficient
funds to provide assistance payments to the tenants from the effective dates of
the Contracts. The tenants' receipt of retroactive benefits is therefore
conditioned solely upon the owners' certification of the tenants for retroactive
benefits (and we have held, in effect, that this retroactive certification cannot
properly be withheld). The single factual determination that may be required,
therefore, is whether, during the period for which the retroactive benefits
would be paid, the tenants' incomes exceeded the maximum income limits set
forth in the statute, 42 U.S.C. 1437f(c)(4), 1437f(f)(1) (1976), and in the
regulations, 24 C.F.R. 886.102, 886.109, and 886.117 (1980).
40

See, e. g., Goss v. Lopez, 419 U.S. 565, 579, 95 S.Ct. 729, 738, 42 L.Ed.2d 725
(1975); Carey v. Quern, 588 F.2d 230, 232 (7th Cir. 1978); Winston v. United
States Postal Service, 585 F.2d 198, 209 (7th Cir. 1978); Klein v. Mathews,
430 F.Supp. 1005, 1008 (D.N.J.1977)

41

Accord, Ingraham v. Wright, 430 U.S. 651, 97 S.Ct. 1401, 51 L.Ed.2d 711
(1977); Winston v. United States Postal Service, 585 F.2d 198, 200 (7th Cir.
1978)

42

On remand, the district court may also decide to fashion due process protection
for tenants who will be certified in the future. See note 31, supra