United States Court of Appeals
For the First Circuit
No. 21-1043
AMTAX HOLDINGS 227, LLC and TAX CREDIT HOLDINGS III, LLC,
Plaintiffs, Appellants,
v.
TENANTS' DEVELOPMENT II CORP. and TENANTS' DEVELOPMENT CORP.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Leo T. Sorokin, U.S. District Judge]
Before
Kayatta, Selya, and Barron,
Circuit Judges.
Louis E. Dolan, Jr., with whom Stephen M. LaRose and Nixon
Peabody LLP were on brief, for appellants.
David A. Davenport, with whom BC Davenport, LLC was on brief,
for appellees.
October 13, 2021
SELYA, Circuit Judge. Federal courts are courts of
limited jurisdiction, and this appeal requires us to decide whether
the case at hand sufficiently implicates federal interests so as
to "aris[e] under federal law," 28 U.S.C. § 1331, and thus
galvanize a federal district court's subject-matter jurisdiction.
The court below answered this question in the negative, see
Tenants' Dev. Corp. v. AMTAX Holdings 227, LLC, No. 20-10902, 2020
WL 7646934, at *3-4 (D. Mass. Dec. 23, 2020), and — although our
reasoning differs somewhat — our answer is the same. Consequently,
we affirm the district court's dismissal of the action for want of
subject-matter jurisdiction.
I. BACKGROUND
We draw upon the well-pleaded facts adumbrated in the
complaint filed by AMTAX Holdings 227, LLC (AMTAX) and Tax Credit
Holdings III, LLC (TCH), plaintiffs below and appellants here. In
the process, we "read the allegations . . . liberally . . . and
tak[e] all inferences in favor of the plaintiff[s]." P.R. Tel.
Co. v. Telecomms. Regul. Bd. of P.R., 189 F.3d 1, 7 (1st Cir.
1999).
The controversy giving rise to this litigation stems
from a tug of war over the fate of a scattered-site affordable
housing development located in Boston's south end (the Project).
Defendant-appellee Tenants' Development Corporation (TDC) is a
not-for-profit corporation that promotes access to affordable
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housing. TDC owns seventy-nine percent of the stock in an
affiliated corporation, defendant-appellee Tenants' Development II
Corporation (TD II). As shortly will appear, both TDC and TD II
have ties to the Project.
The chronology of relevant events began on April 11,
2002, when TD II organized a limited partnership (the Partnership)
under Massachusetts law. TDC agreed to ground-lease the Project
to the Partnership for fifty years to allow the Partnership to
"redevelop, rehabilitate, renovate, develop, repair, improve,
maintain, operate, lease, dispose of, and otherwise deal with" the
Project in accordance with stated terms. TDC became a limited
partner in the Partnership and TD II became the managing general
partner — a role in which it had exclusive authority to "manage
the business and affairs of the Partnership."
The original partnership agreement proved to be a
temporary chrysalis for the joint endeavor. Some fourteen months
into the life of the Partnership, TDC and TD II executed an amended
limited partnership agreement (the Agreement), which was designed
to qualify the Project for federal low-income housing tax credits
(LIHTC). See 26 U.S.C. § 42.
At this point, some background is useful. Congress
created the LIHTC program in the Tax Reform Act of 1986. See Pub.
L. No. 99–514, § 252, 100 Stat 2085, 2189–208 (1986) (codified at
26 U.S.C. § 42). The program incentivizes private investors to
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finance affordable housing development in exchange for credit
against their federal income tax liability. See Mark P. Keightley,
Cong. Rsch. Serv., RS22389, An Introduction to the Low-Income
Housing Tax Credit 1, 6 (2021). Under it, the government allocates
tax credits annually to each state, and the state in turn allocates
credits to selected housing developers for use in connection with
qualified projects. See 8 Scott D. Schimick, Mertens Law of Fed.
Income Tax'n § 32B:10 (2021).
A rental property must remain affordable for thirty
years in order to qualify for a tax-credit allocation, see 26
U.S.C. §§ 42(g)(1), (h)(6)(A)-(D), although federal compliance
reporting is only mandated during the first fifteen years of the
commitment, see id. §§ 42(i)(1), (l)(1)-(2). For the duration of
the compliance period, property owners must submit annual
compliance reports to both the Internal Revenue Service (IRS) and
a state monitoring agency. The federal reporting requirement ends
after fifteen tax years, but state regulators may choose to
continue their monitoring regimes for longer periods. See Office
of Pol'y Dev. & Rsch., U.S. Dep't of Housing & Urban Dev., What
Happens to Low-Income Housing Tax Credit Properties at Year 15 and
Beyond? 37 (2012) [hereinafter Year 15 and Beyond].
Once an LIHTC project comes into service, the developer
may claim the allocated tax credits over a ten-year period. See
26 U.S.C. § 42(f)(1). By this time, though, the developer often
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will have sold the unrealized tax-credit allocation to an outside
investor. See Keightley, supra, at 1. Developers and investors
normally carry out such transactions through limited partnership
agreements. As the general partner, the developer holds "a
relatively small ownership percentage but maintains the authority
to build and run the [housing] project on a day-to-day basis."
Id. at 6. As a limited partner, the investor retains "a large
ownership percentage with an otherwise passive role." Id. At the
end of the compliance period, the investor's previously actualized
tax benefits are no longer subject to recapture, see 26 U.S.C.
§ 42(j)(1), and the time may be ripe for the investor to bid
farewell to the limited partnership.
Here, the Agreement reflects a somewhat typical LIHTC
transaction. When the tax credits were sold, TDC withdrew as a
limited partner, and the Partnership admitted AMTAX as an "investor
limited partner." AMTAX made a significant capital contribution
to the Partnership and received close to 100 percent of the tax-
credit allocation.1 TD II continued to oversee the Partnership's
day-to-day operations in its capacity as managing general partner,
but with added contractual obligations under the Agreement not to
"take any action . . . which would cause the recapture of any
1 At the same time, the Agreement was amended to admit Protech
2003-B as a "special limited partner." Protech 2003-B withdrew in
2011 and was replaced by TCH. For present purposes, we deem TCH's
interests congruent with those of AMTAX.
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Federal Housing Tax Credit" and "to avoid recapture of such credit
for failure to comply with the requirements of Section 42."
On the day that AMTAX was admitted as a limited partner,
the Partnership executed a separate contract with TDC. In
consideration of "subsidies and development assistance" provided
by TDC, through which the Partnership was "able to acquire and
rehabilitate" the Project "at a favorable total cost," the
Partnership granted TDC a right of first refusal in the event that
the Partnership later proposed to sell "all or substantially all
[of its] interest" in the Project to a bona fide third party. The
agreement that embodied the right of first refusal (the ROFR
Agreement) provided that the right, if exercised, would entitle
TDC to purchase the Project at the lesser of the third-party offer
price or "the sum of the principal amount of outstanding
indebtedness secured by the [Project] . . . and all federal, state
and local taxes attributable to such [a] sale" (the debt-plus-
taxes price). The ROFR Agreement was duly recorded in local
property records.
The debt-plus-taxes price corresponds to a statutory
provision enacted in 1989 to allow tenants to purchase buildings
at reduced cost at the end of the compliance period, see Pub. L.
No. 101-239, § 7108, 103 Stat. 2106, 2321 (1989) (codified at 26
U.S.C. § 42(i)(7)(A)) — a right that was subsequently expanded to
inure to the benefit of qualifying nonprofits, see Pub. L. No.
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101-508, § 11407(b), 104 Stat. 1388, 1388-474 (1990) (codified at
26 U.S.C. § 42(i)(7)(A)). That provision creates a safe harbor
within which qualifying organizations may negotiate "a right of
first refusal to purchase a LIHTC property at the end of the
compliance period." See Year 15 and Beyond, supra, at 31 n.20.
This safe harbor is attractive from an investor's coign of vantage
because the IRS ordinarily treats a below-market purchase option
as a conditional transfer of ownership to the option-holder, see
Rev. Rul. 55-540, 1955-2 C.B. 39, § 4.01(e), thus precluding an
owner whose interest is subject to such a right from claiming any
tax benefits associated with the asset. Section 42(i)(7) makes
this general rule inapplicable when a qualifying organization
holds the right of first refusal to purchase an LIHTC development.
The safe harbor creates an incentive for private investment at the
beginning of a project, allowing the investor to capture the tax
credits while making it easier for tenant groups and nonprofits
committed to "fostering low-income housing" to obtain ownership of
the property for the long term. See 26 U.S.C. §§ 42(i)(7), (h)(5).
The statute neither defines the term "right of 1st refusal" nor
dictates how the contractual mechanism must operate (other than
specifying who may hold and exercise such a right, when it may be
exercised, and the minimum price). See id. § 42(i)(7).
At some time during the next fourteen years, AMTAX came
under the control of Alden Torch Financial, LLC (Alden Torch).
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Alden Torch took over the management of AMTAX's interest in the
Partnership. The Project's compliance period was due to expire on
December 31, 2018. As that date approached, AMTAX (through Alden
Torch) entered into negotiations with TD II over the terms of its
potential exit from the Partnership. When there was no meeting of
the minds, Alden Torch notified TD II that AMTAX was exercising
its right under the Agreement to force the Project's sale at fair
market value. TD II promptly initiated a marketing process.
Ten months later, Alden Torch did an about-face,
claiming that AMTAX had just learned of the ROFR Agreement. Alden
Torch unilaterally declared that AMTAX now "rescind[ed] and
revoke[d]" its previous exercise of the forced-sale option. AMTAX
also denied that any rights under the ROFR Agreement had been
triggered. TD II rejected this attempted rescission, questioning
how AMTAX could be unaware of the ROFR Agreement (which was a
matter of public record). And it took the position that, under
the Agreement, AMTAX could not turn back the clock after having
set the forced-sale process in motion.
On February 10, 2020, TD II notified TDC that the
Partnership had received a bona fide third-party offer for the
Project. That offer was in the approximate amount of $51,000,000.
TDC responded by notifying TD II that it intended to purchase the
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Project for the debt-plus-taxes price (approximately
$17,000,000).2
In response, AMTAX sought leverage to strengthen its
bargaining position. It recorded (in the Suffolk County Registry
of Deeds) a notice reciting that "[AMTAX] ha[d] certain consent
rights relating to the sale of the [Project]" and that it had not
approved any sale. The recorded document caused the Project's
mortgagee to conclude that it could not transfer the mortgage until
the dispute between AMTAX and TD II was resolved.
With the parties at loggerheads, AMTAX (joined by TCH)
sued TDC and TD II in the United States District Court for the
District of Massachusetts.3 Their complaint sought a declaratory
judgment concerning the validity of the ROFR Agreement.
Specifically, the appellants sought a declaration that the ROFR
Agreement did not comply with section 42(i)(7); that the right of
first refusal "could not have been . . . validly exercised;" and
2 Some perspective on these numbers may be gained by arraying
them against the backdrop of AMTAX's initial investment and
subsequent tax benefits. For capital contributions of a little
more than $12,000,000, AMTAX received tax credits totaling over
$15,000,000, together with a string of year-by-year tax losses
over the life of the Project.
3 In actuality, TDC and TD II were the first to file in the
federal district court. Their suit, which named AMTAX and Alden
Torch (among others) as defendants, was premised on the alleged
existence of diversity jurisdiction. See 28 U.S.C. § 1332(a).
When the assertion of diversity jurisdiction proved insupportable,
the district court dismissed the suit for want of jurisdiction.
No appeal has been taken from that ruling, and we make no further
reference to this first-filed suit.
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that, therefore, the ROFR Agreement should be declared void. The
complaint also asserted a laundry list of state-law causes of
action, including claims of breach of contract and breach of
fiduciary duty against TD II; claims of tortious interference and
aiding and abetting a fiduciary-duty breach against TDC; and claims
of fraud and unfair trade practices against both TD II and TDC.
Federal jurisdiction was premised on the existence of an embedded
federal question. See R.I. Fishermen's All., Inc. v. R.I. Dep't
of Env't Mgmt., 585 F.3d 42, 48 (1st Cir. 2009) (describing
embedded federal jurisdiction as jurisdiction attaching to a suit
"in which the plaintiff pleads a state-law cause of action, but
that cause of action 'necessarily raise[s] a stated federal issue'"
(quoting Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg.,
545 U.S. 308, 314 (2005))). In particular, the appellants alleged
that the claims stated in their complaint (or, at least, their
declaratory judgment claim) required the district court to resolve
whether the ROFR Agreement violated 26 U.S.C. § 42(i)(7). The
precise scope of the statutory right would in their view determine
whether that contract should be declared void because it departed
from the federal scheme. Extending this reasoning, they said that
the same determination would show whether TD II "materially
breached" terms of the Agreement (such as the prohibition against
any action that could cause recapture of federal tax credits) when
it formed the contract with TDC.
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TDC and TD II moved to dismiss the appellants' suit for
want of federal subject-matter jurisdiction. The appellants
opposed the motion. The district court rejected the appellants'
jurisdictional theory and dismissed the suit. See Tenants' Dev.
Corp., 2020 WL 7646934, at *3-4.
In reaching this result, the court recognized the four-
part test for embedded federal jurisdiction articulated by the
Supreme Court, which requires the appellants to demonstrate that
"a federal issue is: (1) necessarily raised, (2) actually
disputed, (3) substantial, and (4) capable of resolution in federal
court without disrupting the federal-state balance approved by
Congress." Gunn v. Minton, 568 U.S. 251, 258 (2013). Three of
these four elements, the district court said, were missing in this
case: although the parties disagreed about the meaning of section
42(i)(7), the federal-law controversy was not necessarily raised,
substantial, or appropriate for federal intervention. See
Tenants' Dev. Corp., 2020 WL 7646934, at *3-4. This timely appeal
followed.
II. ANALYSIS
"We review the granting of a motion to dismiss for lack
of subject matter jurisdiction de novo" and may affirm the lower
court's judgment based on "any ground made manifest by the record."
Román-Cancel v. United States, 613 F.3d 37, 41 (1st Cir. 2010).
Given the appellants' theory of federal jurisdiction and this
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standard of review, we consider afresh whether the complaint falls
into the "'special and small category of cases' where a 'state-
law claim necessarily raise[s] a stated federal issue, actually
disputed and substantial, which a federal forum may entertain
without disturbing any congressionally approved balance of federal
and state judicial responsibilities.'" One & Ken Valley Hous.
Grp. v. Me. State Hous. Auth., 716 F.3d 218, 224 (1st Cir. 2013)
(alteration in original) (quoting Gunn, 568 U.S. at 258).
Two familiar principles guide our inquiry. First, "it
is irrefragable that the burden of establishing jurisdiction must
fall to the party who asserts it." Woo v. Spackman, 988 F.3d 47,
53 (1st Cir. 2021). It follows that the appellants must shoulder
that burden here. Second, any putative federal question must be
clearly stated on the face of the appellants' complaint, not
fashioned ex post. See R.I. Fishermen's All., 585 F.3d at 48
(describing well-pleaded complaint rule).
Refined to bare essence, this is a dispute over a
contract, the ROFR Agreement. As we already have explained, the
ROFR Agreement sets out a right of first refusal at a purchase
price equal to the lesser of a bona fide third-party offer price
or the debt-plus-taxes price. TDC holds this right of first
refusal and chose to exercise it after AMTAX exercised its forced-
sale option, marketing of the Project began, and TDC asserts that
a bona fide third-party offer had been secured. Having had second
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thoughts once they realized that TDC would seek to exercise its
option to purchase the Project at the debt-plus-taxes price, the
appellants now prefer to retain their ownership interest — but
they may do so only if TDC cannot exercise its right of first
refusal.
To that end, the appellants asked the district court to
declare the ROFR Agreement "void, void ab initio, and[] otherwise
ineffective," contending that it does not comport with the right
of first refusal contemplated by 26 U.S.C. § 42(i)(7). The
appellants posit that the statute defines the right as being
triggered only when the property owner receives a bona fide
purchase offer that it is willing to accept. By contrast, TDC and
TD II assert that "[s]ection 42 does not purport to specify all of
the possible terms and conditions of th[e] 'right of 1st refusal,'"
leaving private parties to "freely negotiate" how the contractual
mechanism will operate in any given instance subject to the
statute's explicit restrictions on when the right may be exercised
and to the debt-plus-taxes minimum price.
This dispute over the proper construction of section
42(i)(7) is the hook upon which the appellants hang their argument
for federal jurisdiction. The need to test the validity of the
parties' conflicting constructions is necessarily raised, the
appellants say, by their prayer for declaratory relief seeking to
void the ROFR Agreement because it is out of sync with section
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42(i)(7). The potential of noncompliance, they submit, presents
a "threshold" federal question, which — until resolved — precludes
any court from properly interpreting the ROFR Agreement.
We do not gainsay that the parties disagree about the
meaning and reach of section 42(i)(7). To support embedded federal
jurisdiction, though, it is not enough that a federal issue is
"actually disputed." See Gunn, 568 U.S. at 258. The federal issue
must also be "necessarily raised," "substantial," and "capable of
resolution in federal court without disrupting the federal-state
balance approved by Congress." Id.
We are doubtful that this case, as presented by the
appellants, necessarily raises a federal issue. Section 42(i)(7)
provides only that "no Federal income tax credit shall fail to be
allowable" when a qualifying right of first refusal is in effect.
Nothing in the statute either suggests or implies that it voids
noncompliant right of first refusal agreements. The notion that
section 42(i)(7) independently voids noncompliant agreements
rather than simply making a party or a project ineligible for
certain tax benefits borders on the specious and seems too thin a
reed to support federal jurisdiction. See Abraugh v. Y H Corp.,
546 U.S. 500, 513 n.10 (2006) ("A claim invoking federal-question
jurisdiction under 28 U.S.C. § 1331 . . . may be dismissed for
want of subject-matter jurisdiction if it is not colorable, i.e.,
if it is 'immaterial and made solely for the purpose of obtaining
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jurisdiction' or is 'wholly insubstantial and frivolous.'"
(quoting Bell v. Hood, 327 U.S. 678, 682-83 (1946))). To the
extent that the appellants' bid for federal jurisdiction rests on
this theory — and the preponderance of their briefing suggests
that it rests exclusively there — the proposed federal issue also
lacks substantiality.
Substantiality demands that an embedded federal question
be "important to the federal system," not just to the parties.
Mun. of Mayagüez v. Corporación Para el Desarrollo del Oeste, Inc.,
726 F.3d 8, 14 (1st Cir. 2013). There are multiple possible ways
in which to satisfy this test, such as when a state-law claim
"directly challenges the propriety of an action taken by 'a federal
department, agency, or service,'" id. (quoting Empire Healthchoice
Assurance, Inc. v. McVeigh, 547 U.S. 677, 700 (2006)), or will
otherwise yield "a new interpretation of [federal law] which will
govern a large number of cases," id. The common thread that runs
through all such suits is that they entail some appreciable measure
of risk to the federal sovereign. See id.
The federal question posed by the appellants involves no
such jeopardy. Their complaint does not challenge — nor even
implicate — concrete federal activity (such as an attempt by the
IRS to recapture the Partnership's tax credits). And it is
questionable whether the outcome of the litigation will have
ramifications for other cases.
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For aught that appears, right of first refusal
agreements are sui generis. There is no standardized language for
such agreements, nor is there any indication that developers and
investors customarily use a one-size-fits-all prototype. In their
briefing, the appellants have not furnished any basis for
concluding that a large number of LIHTC transactions would be
affected by the federal-law issue here. And the federal government
already "delegates" LIHTC-related compliance matters "to state
agencies as a matter of course," Templeton Bd. of Sewer Comm'rs.
v. Am. Tissue Mills of Mass., Inc., 352 F.3d 33, 41 (1st Cir.
2003), and it is not clear how a state court could destabilize the
program by ruling on the meaning of section 42(i)(7). The short
of it is that the theory advanced by the appellants in their
briefing does not suggest broad significance to the federal
government or other parties and, thus, lacks substantiality.
To be sure, the appellants' complaint also suggests that
interpretation of section 42(i)(7) might be necessitated by claims
for breach of provisions of the Agreement requiring TD II not to
endanger tax benefits and to comply with section 42(i)(7). But
the appellants never fleshed out that theory either in the district
court or in their briefs to this court. In their opening brief in
this court, the appellants adverted to this theory in a single
sentence but made no effort to develop it. Instead, they hewed to
the more general contention that the ROFR Agreement was "in
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violation of Section 42 of the Internal Revenue Code, and thus is
void and unenforceable." (emphasis in original). Nor did their
reply brief make any effort to fill this void. Indeed, it was not
until oral argument that the appellants explained — and again
without substantial elaboration — that one of the causes of action
underpinning the declaratory judgment count was a breach of
contract claim based on the "express provision in the Partnership
Agreement that obligates the general partner to comply with
statutory requirements." Critical elements of this line of
reasoning, such as how the recapture process works and whether the
tax credits the Project received might be imperiled, also remained
unexplored.
It may or may not be that this breach of contract theory
would necessarily implicate the proper interpretation of section
42(i)(7) and would present a substantial issue of relevance to
other cases. But that question is not properly before us, and we
need not answer it. It is the party claiming federal jurisdiction
that bears the burden of making such arguments face up and
squarely, and it is a "settled appellate rule that issues adverted
to in a perfunctory manner, unaccompanied by some effort at
developed argumentation, are deemed waived." United States v.
Zannino, 895 F.2d 1, 17 (1st Cir. 1990); see United States v.
Merritt, 945 F.3d 578, 585 n.3 (1st Cir. 2019) ("Arguments not
advanced before the district court or in a party's briefs and then
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raised for the first time at oral argument are 'doubly waived.'"
(quoting United States v. Leoner-Aguirre, 939 F.3d 310, 319 (1st
Cir. 2019))); Teamsters Union, Loc. No. 59 v. Superline Transp.
Co., 953 F.2d 17, 21 (1st Cir. 1992) ("If any principle is settled
in this circuit, it is that, absent the most extraordinary
circumstances, legal theories not raised squarely in the lower
court cannot be broached for the first time on appeal."). The
appellants' undeveloped breach of contract theory is waived and,
as such, cannot rescue their bid for federal jurisdiction.
To say more would be supererogatory.4 We hold that the
district court did not err in concluding that the complaint in
this case failed to trigger embedded federal question
jurisdiction.
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the district court's dismissal of the action for want of federal
subject-matter jurisdiction is
Affirmed.
Our reasoning makes it unnecessary for us to delve into the
4
extent (if at all) to which the appellants' complaint implicates
the congressionally approved balance of federal and state judicial
responsibilities. At first blush, though, any such implication
appears to be minimal.
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