Evergreen Square v. Wisconsin Housing & Economic Development Authority, 776 F.3d 463

Background

Plaintiffs (owners of HUD Section 8–assisted multifamily housing in Wisconsin) sued WHEDA for breach of HUD-form Housing Assistance Payments (HAP) contracts, alleging WHEDA refused required annual rent increases and improperly demanded rent comparability studies.
Plaintiffs pleaded only state-law breach-of-contract claims but invoked federal-question jurisdiction under 28 U.S.C. § 1331, asserting resolution requires interpreting Section 8 and HUD guidance.
WHEDA filed a third-party complaint against HUD, alleging any alleged breach resulted from following HUD directives and statutory guidance.
The district court dismissed Plaintiffs’ amended complaint for lack of subject-matter jurisdiction (and dismissed WHEDA’s third-party complaint as dependent), issuing its order without full briefing on jurisdiction; all parties agreed on appeal the district court erred.
The Seventh Circuit evaluated whether the case falls within the narrow Grable/Gunn exception (state-law claim that necessarily raises a substantial, disputed federal issue appropriate for federal adjudication) and whether federal adjudication would disrupt the federal-state balance.
The Seventh Circuit reversed, holding federal-question jurisdiction exists because the breach claims necessarily and actually raise substantial issues of federal law (interpretation of 42 U.S.C. § 1437f and HUD regulations/notices) and federal resolution would not disrupt the federal-state balance; the court remanded for merits determination by the district court.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 1331 federal-question jurisdiction exists over state-law breach-of-contract claims tied to HAP contracts	Federal issues (Section 8, HUD rules/notices) are necessary to decide the contract disputes, so federal jurisdiction lies under Grable/Gunn	Federal jurisdiction is lacking because the claims are state-law contract disputes and the district court must police jurisdiction sua sponte	Held: § 1331 jurisdiction exists under the Grable/Gunn framework; the federal issues are necessarily raised, actually disputed, substantial, and do not disturb the federal-state balance
Whether the federal issue is "necessarily raised" and "actually disputed"	The parties disagree on how Section 8, HUD regs, and HUD’s Automatic Annual Adjustment Factors apply and who must produce rent comparability studies	WHEDA argued any breach was compelled by federal law or HUD guidance and raised jurisdictional concerns	Held: The federal-law interpretation is central to plaintiffs’ contract claims and is actually disputed by the parties
Whether the federal issue is "substantial" and warrants federal forum	Uniform interpretation of Section 8/HUD guidance affects nationwide Section 8 program implementation and potential fiscal exposure	WHEDA cautioned against extending federal jurisdiction beyond statutory bounds despite program importance	Held: The issue is substantial — federal interest in uniform interpretation of HUD-administered contracts supports federal adjudication
Whether the court should decide merits or remand after finding jurisdiction	Plaintiffs wanted merits to be decided after proper district-court proceedings	WHEDA asked appellate court to decide merits for judicial economy	Held: Court declined to decide merits on appeal and remanded for the district court to resolve the merits initially

Key Cases Cited

Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694 (1982) (parties cannot confer subject-matter jurisdiction by agreement)
Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567 (2004) (federal courts must inquire into their subject-matter jurisdiction sua sponte)
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (test for when state-law claims "arise under" federal law)
Gunn v. Minton, 133 S. Ct. 1059 (2013) (clarifies Grable’s four-part test for federal question jurisdiction over state-law claims)
Price v. Pierce, 823 F.2d 1114 (7th Cir. 1987) (Section 8 housing cases may warrant a federal rule and federal forum)
One & Ken Valley Housing Group v. Maine State Housing Auth., 716 F.3d 218 (1st Cir. 2013) (found federal jurisdiction over similar HAP contract claims)
Hartland Lakeside Joint No. 3 Sch. Dist. v. WEA Ins. Corp., 756 F.3d 1032 (7th Cir. 2014) (applies Grable test and denies jurisdiction where state-law issues remain central)
Bennett v. Southwest Airlines Co., 484 F.3d 907 (7th Cir. 2007) (no federal jurisdiction when federal law plays little role in state-law claim)
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994) (federal courts possess only the jurisdiction authorized by Constitution and statute)
City of Joliet v. New W., L.P., 562 F.3d 830 (7th Cir. 2009) (judicial-economy considerations do not alone create federal jurisdiction)