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Dallas County Community Action Committee Inc. v. Shalala

U.S. District Court, District of Columbia

May 05, 1998


The opinion of the court was delivered by: Thomas F. Hogan, United States District Judge.

Plaintiff's motion for a preliminary injunction DENIED.

The opinion of the court was delivered by: Thomas F. Hogan


Pending before the Court is plaintiff's motion for a preliminary injunction. The Court held a hearing on this motion on May 1, 1998. After considering the submissions of both parties, and the arguments made at the hearing, the Court will deny plaintiff's motion.

I. Factual Background

A. Parties

Plaintiff is the Dallas County Community Action Committee (DCCAC), a non-profit that provides "a variety of services and benefits to poor people throughout Dallas County, Texas." (Complaint at P3). DCCAC has received funds from the state of Texas since 1981, and the state has allotted plaintiff funds from its federal block grant again this year.

Defendant is the Secretary of the Department of Health and Human Services ("HHS"). HHS provides some services and oversight, in connection with funds disbursed to the states under the Community Services Block Grant Act, 42 U.S.C. at 9901-9912 ("CSBG Act").

A. Statutory Framework

DCCAC receives funding from the State of Texas under the Community Services Block Grant Act. Congress enacted that statute in 1981, as part of the Reagan Administration's efforts to transfer greater decision-making in social programs to the states. See S.Rep. No. 484 at 4. The CSBG Act authorizes the Secretary of HHS to make grants to the states to ameliorate poverty in local communities. In 1998, HHS has budgeted $470 million in grants, with $23.6 million slated for Texas. HHS grants that money to states, such as Texas, which then fund local programs that pursue the statute's goals.

By accepting funds under the CSBG Act, states accept certain restrictions on their behavior. First, they certify that they will "ensure" that all recipients of funds will use those funds for eligible activities. 42 U.S.C. at 9904(c)(1) (Defining scope of eligible activities). The states agree to repay amounts that are not spent in accordance with the CSBG. 42 U.S.C. at 9904(g).

Second, the states agree not to terminate or reduce funding to an entity, except after notice and a hearing. 42 U.S.C. at 9904(c)(11). A State's decision to terminate or to reduce funding, even if made after notice and a hearing, is reviewable by the Secretary of HHS. 42 U.S.C. at 9905a(b).

Statutes and regulations also impose obligations and powers on the Secretary of HHS, in connection with grant recipients. If a State effects a termination or reduction of funding prior to complying with the requirements of at 9904(c)(11), the CSBG Act directs the Secretary to assume financial responsibility for the aggrieved entity and to directly fund that entity. 42 U.S.C. at 9905a(a). Under those circumstances, HHS must deduct the amount of direct funding from the recipient State's block grant. Id. In addition, the Secretary "may," under certain circumstances provide a "working capital advance payment" to a grantee who otherwise might not survive financially. 45 C.F.R. at 74.22(f).

B. Factual Background

The Texas Department of Housing and Community Affairs ("TDHCA") administers the CSBG program for the State of Texas. It does so by entering into contracts with grantee entities. DCCAC is an eligible entity under the CSBG Act, and by contract of January 20, 1998, TDHCA allotted $1,617,443 to DCCAC for FY 1998. There is no dispute that CSBG funding represents a substantial portion of DCCAC's operating budget.

According to the contract, DCCAC may request advance payment of its monthly allotment; this is the method of payment to which DCCAC was accustomed through 1997. However, the contract permits TDHCA to use a cost reimbursement method of payment if, among other reasons, it identifies any deficiency in cash controls or financial management systems.

In May of 1997, TDHCA conducted its yearly review of DCCAC programs. The government contends that TDHCA reported problems with DCCAC's financial practices, *fn1 some of which are, as yet, unresolved. On January 30, 1998, TDHCA placed DCCAC on a cost reimbursement basis. TDHCA also announced its intention to terminate funding, pending a hearing, for failure to comply with the terms of the CSBG contract. After two continuations, at plaintiff's request, TDHCA scheduled the hearing for May 1, 1998.

Notwithstanding its intention to terminate funding, TDHCA has funded DCCAC to this point. Some funds were paid on an advance payment basis, and later payments have been on a cost reimbursement basis. As of May 1, 1998, TDHCA has paid over $400,000 for the first three months of 1998, and DCCAC has submitted a request for payment for April expenses. TDHCA has disallowed certain charges for the first three months; these charges amount to less than $90,000, and perhaps to as little as $13,000.

Plaintiff believed that the January 30 letter, which gave notice of an intent to terminate and which shifted payment methods to cost reimbursement, was effectively a termination of funding. Therefore, on February 18, 1998, DCCAC asked defendant's Office of Community Services (OCS) to either correct TDHCA's actions or to provide direct funding. On February 25, OCS informed DCCAC that its "tentative position" was to refuse direct funding. DCAC asked for reconsideration, and OCS undertook a more thorough review.

OCS issued its final decision on April 13, 1998. In that decision, OCS determined that TDHCA had not terminated or reduced funding, within the meaning of at 9905. OCS based its decision on the interpretive discretion accorded to states under the statute, on the grant contract between DCCAC and TDHCA, which provides for cash reimbursement as a method of payment, and on its interpretation of the terms definitions of "termination" and "reduction."

The OCS report found no termination or reduction. For this reason, defendant denied plaintiff's request for direct funding, pursuant to 42 U.S.C. at 9905a(a). Defendant also denied plaintiff's request for "working capital" on an advance basis, pursuant to 45 C.F.R. at 74.22(f).

II. Standard

Plaintiff now asks the Court to enter a preliminary injunction that requires defendant to provide direct funding. The standard for preliminary injunctions is dictated by Federal Rule of Civil Procedure 65(a). Under that Rule, the Court may grant preliminary injunctive relief if the moving party demonstrates (1) that it is likely to succeed on the merits of the claim, (2) that it will suffer irreparable harm if not granted injunctive relief, (3) that other parties will no suffer substantial harm, and (4) that the public interest is served by an injunction. Washington Metropolitan Area Transit Comm'n v. Holiday Tours, Inc., 182 U.S. App. D.C. 220, 559 F.2d 841, 842-43 (D.C. Cir. 1977). The standard is a balancing test; this means that the Court examines each requirement in light of the others to determine whether an injunction would be proper. Id. at 843.

III. Success on the Merits

The CSBG Act obligates HHS to provide direct funding if a State reduces or terminates funding to a previously-funded, eligible entity, without notice and a hearing. 42 U.S.C. at 9905a(a). It is undisputed that Texas has not yet afforded plaintiff notice and a hearing, and that plaintiff is a previously-funded, eligible entity. Furthermore, it is undisputed that TDHCA has taken some action against plaintiff, by changing the payment method to cost reimbursement, and by disallowing certain funding requests.

Plaintiff argues that placement on a cost reimbursement method of payment is illegal under the CSBG Act, and that it is equivalent to a reduction or termination in funding. Therefore, plaintiff argues that defendant is required to provide direct funding. Plaintiff also argues that, if the she is not required to provide direct funding, the Secretary is at least obligated to provide a working capital advance payment, to keep plaintiff's operation afloat.

On April 13, defendant issued the final agency decision that HHS would not provide direct funding. April 13 Decision, Defendant's Supplemental Exhibit I. Therefore, that decision is ripe for the Court's review, under the Administrative Procedure Act.

A. Standard of Review

Under the APA, the Court may set aside only final actions that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. 706 at (a)(2). This standard of review is narrow, and it does not permit the Court to substitute its own judgment for that of the agency. See Motor Vehicle Manufacturers Association v. State Farm Mutual Auto Insurance Co., 463 U.S. 29, 43, 77 L. Ed. 2d 443, 103 S. Ct. 2856 (1983). An agency makes an arbitrary and capricious decision only if it has relied on factors which Congress had not intended, failed to consider an important aspect of the problem, or offered an explanation that runs counter to evidence, or that is so implausible that it cannot be ascribed to difference in view or agency expertise. Id. See also, Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416 91971, 28 L. Ed. 2d 136, 91 S. Ct. 814). Therefore, the decision of an agency is generally accorded great deference. Chevron U.S.A., Inc. v. NDRC, 467 U.S. 837, 843-44, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984).

B. Review

There are two decisions that plaintiff asks the Court to review. First, plaintiff asks the Court to reverse defendant's decision not to provide direct funding. Second, plaintiff asks the Court to review defendant's decision not to provide a working capital advance payment.

1. Direct Funding

If TDHCA has terminated or reduced benefits to DCCAC without a hearing, then defendant is obligated to provide direct funding to DCCAC, and to deduct the amount of that funding from the Texas grant. 42 U.S.C. at 9905a(a). It is undisputed that TDHCA has not actually terminated funding; it has stated its intention to do so, and it has scheduled a hearing for that purpose, but it has not stopped paying; indeed, it has paid DCCAC over $400,000 in 1998 already.

Plaintiff argues, however, that TDHCA's decision to switch to a cost reimbursement method of payment represents an effective termination and/or reduction of benefits. Defendant squarely addressed this issue in its decision, and it determined that there had been no termination or reduction.

TDHCA's switch to a cost reimbursement method of payment was not, in itself, improper, because the contract between plaintiff and TDHCA explicitly states that the state can switch to cost reimbursement if it "identifies any deficiency in the cash controls or financial management system used by [plaintiff]." See Defendant Exhibit 2 at @@ 5A, 5C. TDHCA identified several reasons for its decision to switch payment methods, and defendant found those reasons adequate.

Furthermore, the OCS determined that TDHCA's action was not a termination, which the agency defines as a permanent withdrawal of a grantee's ability to obligate funds. See Decision at Defendant Ex. I. See also Salt Lake Community Action Program v, Shalala, 304 U.S. App. D.C. 188, 11 F.3d 1084, 1089-90 (D.C. Cir. 1993) (HHS defines termination in similar manner on similar statute). OCS determined that TDHCA is still obligated to give plaintiff its allotted funds, provided that plaintiff can spend them properly. Therefore, defendant decided that there was no termination of funding, only a change in timing.

OCS also found that there was no reduction. The statute defines a reduction as a decrease in funding below the proportional share of overall CSBG funds received in the previous year. 42 U.S.C. at 9904(c)(11). OCS found that the shift to payment by cost reimbursement does not reduce the amount of funds that DCCAC is eligible to receive.

The OCS opinion determined that TDHCA's switch from advance payment to cost reimbursement payment was neither a termination nor a reduction under the CSBG Act. Because defendant did not find a termination or reduction, she is not obligated under at 9905a(a) to provide direct funding. Plaintiff presents no evidence to suggest that defendant's decision is arbitrary or capricious. Therefore, plaintiff does not have a likelihood of success on the merits of this claim.

2. Working Capital

Plaintiff also asked defendant to provide a "working capital advance payment." Under 45 C.F.R. at 74.22(f), if a "recipient" cannot qualify for advance payments and the "HHS awarding agency" determines that reimbursement is not feasible, because the recipient lacks sufficient working capital, then HHS "may" provide necessary cash on a working capital advance basis.

Defendant declined to provide this relief, because she believed that DCCAC was ineligible for such payments; HHS interpreted at 74.22 to apply onto to direct "recipients" of HHS funds. Since plaintiff receives funds from TDHCA, not from HHS directly, it would not qualify under defendant's interpretation.

HHS's interpretation of its own regulations is accorded great deference. See e.g., K-Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291-92, 100 L. Ed. 2d 313, 108 S. Ct. 1811 (1988). However, plaintiff has made a showing that this particular interpretation may be arbitrary or capricious, and that at 74.22 may apply to both indirect and direct recipients of HHS grants. Thus, plaintiff may be able to show that it was eligible for a working capital advance payment.

Even if plaintiff can show that it is eligible, however, the Court cannot overturn defendant's decision not to provide a working capital payment, because the regulation merely states that HHS "may" provide a cash payment. Thus, the regulation vests the Secretary with discretion, but does not create any obligation to act. Plaintiff has not presented any grounds on which the Court may find the Secretary's exercise of discretion arbitrary or capricious. Therefore, plaintiff has shown no likelihood of success on this claim.

IV. Conclusion

Plaintiff makes a showing that it will suffer substantial irreparable harm; indeed, it asserts that it will be forced to abandon its business without a quick shot of capital. While the pleadings and exhibits before the Court suggest that a substantial factor in plaintiff's plight may be its own financial mismanagement, *fn2 plaintiff may still meet the irreparable harm requirement for a preliminary injunction. At the same time, however, the State of Texas could lose substantial funds if the Court grants an injunction, because any direct funding from HHS is deducted from the state's CSBG grants.

Thus, if the balance of equities tips in plaintiff's favor at all, it does so only slightly. In light of the shaky equitable foundation for plaintiff's motion, and because plaintiff cannot demonstrate any likelihood of success on the merits, the Court must deny plaintiff's motion for a preliminary injunction.

May 5, 1998

Thomas F. Hogan, United States District Judge


For the reasons stated in the Court's Memorandum Opinion, it is hereby ORDERED that plaintiff's motion for a preliminary injunction is DENIED. May 5, 1998

Thomas F. Hogan, United States District Judge

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