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Feinerman v. Bernardi

June 12, 2008

LEON J. FEINERMAN, ET AL., PLAINTIFFS,
v.
ROY A. BERNARDI, ACTING SECRETARY OF DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, DEFENDANT.



The opinion of the court was delivered by: Reggie B. Walton United States District Judge

MEMORANDUM OPINION

Leon J. Feinerman, Earl L. Harris, and Constance Buxton, the plaintiffs in this civil lawsuit, seek "review of, and declaratory and injunctive relief from, the decision of [the Department of Housing and Urban Development ('HUD')] to debar the [p]laintiffs . . . pursuant to the Administrative Procedures Act, [5 U.S.C. §§ 551-59, 701-06, 1305, 3105, 3344, 4301, 5335, 5372, 7521 (2000) (the "APA")]." Complaint ¶ 1. Soon after filing their complaint, the plaintiffs filed a motion to preliminarily enjoin Roy A. Bernardi, the Acting Secretary of the Department of Housing and Urban Development and the sole defendant in this case in his official capacity, from effectuating HUD's debarment determination. Plaintiffs' Amended Application for Preliminary Injunction and Request for Expedited Ruling at 1.*fn1 The Court granted that motion in part and denied the motion in part at the conclusion of the hearing on the plaintiffs' motions held on May 27, 2008. This memorandum opinion supplements and, where applicable, amends the findings of fact and conclusions of law issued by the Court at that time.

I. Background

Except where otherwise noted,*fn2 the following facts are either undisputed or matters of public record. Pursuant to the United States Housing Act of 1937, 42 U.S.C. §§ 1437-1437bbb-9 (2000) (the "Housing Act"), HUD "may make annual contributions to public housing agencies to assist in achieving and maintaining the lower income character of their projects," provided that the "provisions for such annual contributions" are embodied "in a contract guaranteeing their payment," id. § 1437c(a). These "annual contribution contracts" "contain[] the terms and conditions under which [HUD] assists the [public housing agency] in providing decent, safe, and sanitary housing for low-income families." 24 C.F.R. § 968.105 (2007). "The [annual contribution contract] must be in a form prescribed by HUD, under which . . . the [public housing agency] agrees to develop, modernize, and operate the project in compliance with all provisions of the [annual contribution contract] and the [Housing] Act, and all HUD regulations and implementing requirements and procedures." Id.

The plaintiffs are present and former commissioners of the Harrisburg Housing Authority (the "HHA") in Harrisburg, Pennsylvania. Pls.' Mem. at 2.*fn3 Feinerman has been a member of the Board of Commissioners (the "Board") since 1983, and Harris and Buxton "were appointed to the HHA [b]oard in December [of] 1999." Id. at 3. "HHA board members are appointed by the Mayor of Harrisburg . . . for five[-]year terms unless they resign or are removed for cause," and meet once per month. Id. Commissioners are not compensated for their service on the Board. Id.

The HHA and HUD entered into an annual contribution contract on May 22, 1997.

Def.'s Opp'n at 2. Section 9 of that agreement provides in pertinent part that "[t]he [HHA] shall deposit and invest all funds and investment securities received by or held for the account of the HHA in connection with the development, operation[,] and improvement of the projects under an [annual contribution contract] with HUD in accordance with the terms of the General Depository Agreement(s)." Id., Ex. 1 (Consolidated Annual Contributions Contract) (the "ACC") § 9(A). That section further provides that "[t]he [HHA] shall maintain records that identify the source and application of funds in such a manner as to allow HUD to determine that all funds are and have been expended in accordance with each specific program regulation and requirement." ACC § 9(C).

"In 1998, . . . [the] HHA became involved in the planning for a low-income community credit union," which resulted in the creation of the Greater Harrisburg Community Credit Union (the "GHCCU"). Pl.'s Mem. at 3. Dorsey Howard, the HHA's executive director, informed the commissioners at a meeting in October of 1999 that "he had set aside $100,000 per year for five years to support the operation of [the] GHCCU" in a plan submitted for HUD's approval. Id. at 4. The members of the Board "understood that the expenditures for the credit union were detailed in that plan when it was approved by HUD[;]" however, the employee tasked with preparing the plan "neglected to include the expenditures for the credit union." Id. When the employee discovered his oversight, he decided that "operating funds could be used [nonetheless] to support the credit union" because "HUD regulations and annual plan guidance did not require detailed descriptions of uses of operating subsidies." Id. The employee informed Howard of his error, but neither he nor Howard informed the Board of this oversight. Id.

"In 2000, . . . [the] HHA began providing funding support for the credit union." Id. Thereafter, proposed expenditures for the credit union were presented to the Board only "when [the] GHCCU requested payments in advance of scheduled payments dates." Id. This arrangement lasted until September of 2004, when the HHA "learned that [the] GHCCU would continue to require funding support to maintain net worth requirements." Id. With the support of the HHA's executive director, general counsel, and "other members of senior management," id. at 5, the Board "approved the executive director's recommendation that an additional $495,000 be committed to [the] GHCCU, to be paid in several installments over the next several years," id. at 4.

Despite this infusion of capital, the GHCCU ceased operations in February of 2006 due to its "failure to meet net worth requirements." Id. at 5. Thereafter, HUD's Office of Inspector General conducted an audit of the HHA's involvement in the creation and maintenance of the GHCCU, which resulted in the plaintiffs "learn[ing] that HUD had not been notified of, and had not approved, [the] HHA's financial support of the credit union." Id. In response, the Board "committed to perform a management review and to adopt additional policies and internal controls." Id. "The Board also voted to create standing [g]overnance and [a]udit [c]ommittees and caused [the] HHA to enter into a payment plan so that all of the operating funds used to support the credit union are eventually replenished with non-federal funds." Id.

On July 30, 2007, HUD sent notices to each of the plaintiffs "proposing their debarments from future participation in transactions with the executive branch of the federal government for three years." Id. at 6. The basis for this proposed debarment was the failure of the plaintiffs, as members of the Board, to ensure that the HHA received approval from HUD before allocating funds received annually from HUD to the GHCCU. Id. The plaintiffs' individual debarment actions were subsequently consolidated. Id.

In support of their opposition to their potential debarment, the plaintiffs argued to HUD that "they had not participated in, had no knowledge of, and had no reason to know of, the lack of HUD authorization for [the] HHA's expenditures for the credit union." Id. "[T]he plaintiffs contended that the consolidated debarment actions should be dismissed," id. at 6-7, or that, at a minimum, the actions should be tried before an Administrative Law Judge, id. at 7.*fn4 For its part, HUD conceded that "there was a genuine factual dispute about whether the plaintiffs knew, or had reason to know, that [the] HHA's expenditures for the credit union were unauthorized," and therefore "request[ed] that the consolidated debarment action be referred to a hearing officer for fact-finding." Id.

According to the defendant, the Debarring Official's designee held a conference call with the parties on January 18, 2008. Def.'s Opp'n at 5. He denied HUD's motion for referral to a hearing officer at that time. Id. "On January 30, 2008, a hearing was held before . . . [the] designee," during which "[n]o evidence was presented." Pls.' Mem. at 7.

Two months later, the Debarring Official "issued a determination debarring [Feinerman] and [Buxton] for three years and . . . [Harris] for eighteen months." Id. The Debarring Official concluded that the entire Board willfully ignored the provisions of the ACC by failing to inquire whether the HHA's expenditures on behalf of the GHCCU had been approved by HUD in derogation of former 24 C.F.R. § 24.800(b) (2007), and that this transgression should be imputed to each of the individual commissioners pursuant to former 24 C.F.R. § 24.630(b). Id. at 7-8.*fn5

He also dismissed the Board's attempt to correct its prior oversights, concluding that the Board had not implemented any of its proposed new programs. Id. at 8.

The plaintiffs responded to the Debarring Official's ruling by filing a complaint in this Court on May 1, 2008. In their complaint, the plaintiffs seek declaratory and injunctive relief against HUD based on HUD's alleged violation of the APA, which provides in pertinent part that a "reviewing court shall[,] . . . [inter alia,] hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). The plaintiffs also filed a motion for a preliminary injunction along with their complaint, which the Court denied without prejudice in an order entered on May 6, 2008.*fn6 The plaintiffs renewed their motion on May 7, 2008.

In their renewed motion for a preliminary injunction, the plaintiffs argued that they were entitled to a preliminary injunction "stay[ing] . . . the[ir] debarments pending a final resolution of the merits of this action." Pls.' Mem. at 1-2. In support of their motion, they argued that they were likely to succeed on the merits of their APA claim because the Debarring Official relied upon the wrong legal standard and erroneous factual findings as the basis for his conclusions that the HHA should be debarred and that the debarment should be imputed to the individual members of the Board. Id. at 10-26. The plaintiffs further argued that they would suffer irreparable injury absent injunctive relief because (1) the debarments would ruin their "personal and professional reputations," would interfere with the private careers of Feinerman and Harris, and would effectively foreclose public service as an option for any of the three defendants, id. at 27, (2) the debarments deprived the plaintiffs of their constitutional right to freedom of association, id. at 28-29, and (3) any pecuniary losses suffered by the plaintiffs would be irreparable because they cannot recover damages from the defendant, id. at 29-30. Finally, the plaintiffs asserted that "[a]n order staying or enjoining the plaintiffs' debarments [would] not harm any legitimate interest of the ...


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