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HAMILTON SEC. GROUP v. DEPT. HOUSING & URBAN DEV.

July 17, 2000

HAMILTON SECURITIES GROUP INC., PLAINTIFF
V.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, OFFICE OF INSPECTOR GENERAL, DEFENDANT.



The opinion of the court was delivered by: Huvelle, District Judge.

MEMORANDUM OPINION

Plaintiff, Hamilton Securities ("Hamilton"), seeks materials from the 1996 audit of the Federal Housing Administration's mortgage loan sale program under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552. In particular, Hamilton asks this Court to order the Office of the Inspector General of the Department of Housing and Urban Development ("HUD OIG") to produce the records prepared and accumulated by auditors from the Rocky Mountain District Office of Audit and to award Hamilton its costs and reasonable attorney fees as provided by 5 U.S.C. § 552 (a)(4)(E). As explained more fully below, the Court concludes that it lacks subject matter jurisdiction, or in the alternative, that these materials are exempt from production under Exemption (b)(5) of FOIA. Therefore, defendant's motions to dismiss and for summary judgment will be granted.

FACTS

At issue are materials gathered as part of an OIG audit of HUD's loan sales program that was suspended when the OIG began a separate investigation of Hamilton Securities. Hamilton was HUD's financial adviser in the loan sales program. According to the Declaration of Joseph Haban, filed in support of defendant's motion, the HUD OIG's Rocky Mountain District Office of Audit began a routine audit of HUD's loan sales program in September 1995. In June 1996, two lawsuits were filed that related directly to the loan sales program. In the first, Ervin and Associates, Inc. v. Dunlap, U.S. Dep't of Housing and Urban Development, No. 96-1253 (D.D.C. filed June 5, 1996), plaintiff alleged that HUD and certain individuals "used Hamilton's control over HUD's note sales process to embark on a complex scheme to deliver huge blocks of discounted multi-family and single family HUD-owned notes to prominent Wall Street firms." Motion to Dismiss at 19. The second, United States ex rel v. Hamilton Securities Group, No. 96-1258 (D.D.C. filed June 6, 1996), is a qui tam investigation related to the loan sales program. In July 1996, the U.S. Attorney's Office for the District of Columbia requested the HUD OIG's assistance in investigating the qui tam complaint, and the OIG began an investigation into both the qui tam and the Ervin complaints. In November 1996, work on the audit was suspended pursuant to an order by the HUD OIG. In February 1997, materials relating to the audit were incorporated into the investigative file on HUD's note sale program.

By letter to Judith Heatherton, Counsel to the Inspector General, dated July 13, 1998, Hamilton requested "a copy of the Denver audit of Hamilton" from the HUD OIG. HUD's FOIA Officer, Darlene Hall, responded by letter dated July 20, 1998, that the OIG did not "possess or control `a copy of the Denver audit of Hamilton,'" but construed the letter to be a FOIA request for "a copy of the draft audit report of the Federal Housing Administration's loan sales program, . . . which was commenced but not completed by OIG's Rocky Mountain District Office of Audit." The HUD OIG refused to disclose the draft audit report, claiming that it was shielded from disclosure by 5 U.S.C. § 552 (b)(5) and (b)(7)(A). The letter further explained that, pursuant to the OIG's FOIA regulation, 24 C.F.R. § 2002.25, plaintiff could seek administrative review of the denial by the Inspector General ("IG") within 30 days of the date of the denial letter.

Hamilton appealed the decision by letter dated August 20, 1998, arguing that neither the deliberative process privilege under Exemption 5 nor the privilege protecting law enforcement records under 7(A) precluded disclosure of the requested documents. The IG denied Hamilton's appeal on four grounds. First, the appeal was untimely, having been filed one day late, on August 20, 1998, when the 30-day period for filing an administrative appeal ended on August 19, 1998. Second, the appeal did not challenge the law enforcement investigative privilege under Exemption 5 and therefore, the IG could treat the appeal as moot and other exemptions would not need to be considered. Third, the IG nonetheless addressed the merits of Hamilton's challenge and concluded that the draft audit was protected by the deliberative process privilege under Exemption 5 because it was pre-decisional and deliberative. And fourth, the IG concluded that the audit was protected by Exemption 7(A) because its disclosure "`could reasonably be expected to interfere' with pending law enforcement activity."

On June 16, 1999, Hamilton filed a Complaint for Declaratory and Injunctive Relief, requesting that this Court declare unlawful the HUD OIG's refusal to produce the requested records and order the HUD OIG to produce the records prepared and accumulated by the Denver auditors.

In response, the HUD OIG has filed both a motion to dismiss for lack of subject matter jurisdiction, based on Hamilton's failure to exhaust its administrative remedies by filing an untimely appeal with the IG and by requesting documents beyond those originally requested from the agency, and a motion for summary judgment based on the validity of withholding the documents under Exemptions 5 and 7(A). Hamilton opposes the motions to dismiss and for summary judgment and has requested leave to conduct discovery.

This Court upholds the HUD OIG's decision to withhold the draft audit materials on two grounds, either of which would be sufficient to defeat Hamilton's claim. First, Hamilton failed to exhaust its administrative appeals by filing an untimely appeal to the IG. Second, the draft audit report is protected from disclosure by the deliberative process privilege provided in Exemption 5 of the FOIA. Finally, this Court finds no bad faith or contradictory evidence in the record justifying defendant's request for discovery.

ANALYSIS

I. MOTION TO DISMISS

This Court has jurisdiction to enjoin agencies from improperly withholding records requested under the Freedom of Information Act, 5 U.S.C. § 552 (a)(4)(B), but a plaintiff must first exhaust all administrative remedies before seeking judicial relief. See Oglesby v. U.S. Dep't of the Army, 920 F.2d 57, 61-2 (D.C.Cir. 1990) (holding that courts have consistently required exhaustion of administrative remedies under FOIA). If a plaintiff fails to exhaust its administrative remedies, this Court lacks subject matter jurisdiction to adjudicate the claim. Here, the HUD OIG argues that the Court lacks subject matter jurisdiction over documents other than the Denver draft audit, since the original FOIA request was limited in scope to the audit only and did not include, as does the Complaint, a request for documents compiled or created in connection with the audit. The HUD OIG also argues that the Court lacks subject matter jurisdiction over plaintiff's entire claim because Hamilton filed its administrative appeal one day late.

A. Scope of Plaintiff's FOIA Request

The HUD OIG argues for dismissal of Hamilton's claim for documents other than the Denver draft audit, since the original FOIA request and administrative appeal only considered the Denver draft audit. Hamilton denies that it is seeking documents in this lawsuit that it did not include in its original FOIA request. Claiming that FOIA requests are to be construed broadly, Hamilton argues that the HUD OIG understood "the comprehensive nature" of the original FOIA request, since the denial letter referenced "documents compiled or created in connection with that audit."

Hamilton's initial request stated:

During our meeting last week, I again asked you whether or not you would produce a copy of the Denver audit of Hamilton, and you responded by asking that I put that request in writing. I am now doing so. Please provide me with a copy of the Denver audit. better from M. McManus to J. Hetherton.

In reply, HUD's FOIA Officer wrote that the OIG construed the FOIA request to:

be a request for a copy of the draft audit report of the Federal Housing Administration's loan sales program, . . . which was commenced but not completed by OIG's Rocky Mountain District Office of Audit. Documents compiled or created in connection with that audit have been incorporated into the law enforcement investigative files associated with an ongoing investigation that relates to FHA's loan sales program. Accordingly, the draft audit report, which pertains to only a part of the audit, is being withheld.

In response, Hamilton wrote "to appeal the denial of Hamilton's July 13, 1998 request for a copy of the draft report for the 1997 audit of the Federal Housing Authority's loan sales program." Although Hamilton challenged HUD's reasons for denying the FOIA request, it never challenged the scope of the request as construed by the HUD OIG.

In Dettmann v. U.S. Dept of Justice, 802 F.2d 1472, 1473 (D.C.Cir. 1986), the Circuit Court upheld the FBI's narrow construction of the appellant's original very broad FOIA request for "all documents" relating to her concern. Because the FBI notified the appellant in writing of its construction of her request and because she was represented by counsel who, based on his "express references to the FBI's procedures, knew full well what the FBI had done," the Court found that she had not exhausted her administrative remedies with respect to anything other than the narrowly construed request. Id. at ...


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