AMTAX Holdings 227, LLC v. Tenants' Development II Corp.
15 F.4th 551
| 1st Cir. | 2021Background
- TD II formed a Massachusetts limited partnership in 2002 to operate a scattered-site affordable housing project; TDC (a nonprofit) was a limited partner and later held a recorded right-of-first-refusal (ROFR) tied to subsidies it provided.
- The partnership amended its agreement to qualify for Low-Income Housing Tax Credits (LIHTC) under 26 U.S.C. § 42; AMTAX (investor limited partner) obtained nearly all tax credits after making a capital contribution.
- The ROFR allowed TDC to buy the project at the lesser of a bona fide third‑party offer or a “debt-plus-taxes” price, reflecting the § 42(i)(7) safe‑harbor for tenant/nonprofit purchase rights at the end of the compliance period.
- As the compliance period ended, AMTAX initially exercised a forced‑sale option; later it attempted to rescind that election upon learning of TDC’s ROFR, while TD II (the general partner) proceeded with marketing and reported a $51M third‑party offer.
- TDC elected to purchase at the debt‑plus‑taxes price (~$17M); AMTAX recorded an objection, then sued TDC and TD II in federal court seeking a declaration that the ROFR is void because it allegedly violates § 42(i)(7), plus various state-law claims.
- The district court dismissed for lack of federal-question jurisdiction; on appeal the First Circuit affirmed, holding plaintiffs failed to carry their burden to show an embedded federal question under the Gunn/Grable framework.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint presents an embedded federal question sufficient for federal jurisdiction | AMTAX/TCH: resolving whether the ROFR complies with § 42(i)(7) is a necessary federal issue that must be decided by a federal court | TDC/TD II: § 42(i)(7) does not define all contractual terms; parties may negotiate ROFR mechanics; federal question is not necessarily raised or substantial | Court: No federal jurisdiction — plaintiffs failed to show a necessarily raised, substantial federal issue under Gunn/Grable; dismissal affirmed |
| Whether § 42(i)(7) voids noncompliant ROFRs (making the contract invalid independent of tax consequences) | AMTAX/TCH: noncompliant ROFRs contradict the federal scheme and therefore are void/unenforceable | TDC/TD II: § 42(i)(7) preserves tax‑credit allowance for qualifying ROFRs but does not itself void private agreements | Court: Skeptical of plaintiff’s theory; § 42 more plausibly affects tax treatment than contract validity, so the claimed statutory voiding is too thin to support federal jurisdiction |
| Whether plaintiffs’ breach-of-contract theory (that TD II breached duties by creating the ROFR) supplies a federal question | Plaintiffs (argued late): Partnership covenant to comply with § 42 might make breach claims necessarily implicate federal tax‑credit compliance | Defendants: Theory was not adequately presented below or developed on appeal | Court: Theory was inadequately developed/waived; cannot rescue federal jurisdiction |
Key Cases Cited
- Gunn v. Minton, 568 U.S. 251 (2013) (establishes four-part test for embedded federal-question jurisdiction)
- Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (2005) (paradigm of embedded federal question jurisdiction)
- R.I. Fishermen's All., Inc. v. R.I. Dep't of Env't Mgmt., 585 F.3d 42 (1st Cir. 2009) (describing embedded federal‑issue jurisdiction in First Circuit)
- Mun. of Mayagüez v. Corporación Para el Desarrollo del Oeste, Inc., 726 F.3d 8 (1st Cir. 2013) (discusses substantiality and federal interest factors)
- Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006) (federal‑interest/substantiality considerations for jurisdiction)
- Templeton Bd. of Sewer Comm'rs. v. Am. Tissue Mills of Mass., Inc., 352 F.3d 33 (1st Cir. 2003) (noting LIHTC compliance often delegated to state agencies)
- Zannino v. Zannino, 895 F.2d 1 (1st Cir. 1990) (undeveloped arguments deemed waived on appeal)