14 F.3d 615 (D.C. Cir. 1994), 92-5206, Kisser v. Cisneros

Docket Nº:92-5206.
Citation:14 F.3d 615
Party Name:Carroll KISSER v. Henry G. CISNEROS, Secretary of U.S. Department of Housing and Urban Development, et al., Appellants.
Case Date:January 25, 1994
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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Page 615

14 F.3d 615 (D.C. Cir. 1994)

Carroll KISSER

v.

Henry G. CISNEROS, Secretary of U.S. Department of Housing

and Urban Development, et al., Appellants.

No. 92-5206.

United States Court of Appeals, District of Columbia Circuit

January 25, 1994

Argued Oct. 25, 1993.

Rehearing Denied April 11, 1994.

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[304 U.S.App.D.C. 318] Appeal from the United States District Court for the District of Columbia (91cv2380).

Jeffrey T. Sprung, Asst. U.S. Atty., with whom J. Ramsey Johnson, U.S. Atty., John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., and John P. Kennedy, Associate Gen. Counsel, U.S. Dept. of Housing and Urban Development, Washington, DC, were on the brief, for appellants.

Steven D. Gordon, with whom Michael H. Ditton, Washington, DC, was on the brief, for appellee.

Before: SILBERMAN and RANDOLPH, Circuit Judges, COFFIN, [*] Senior Circuit Judge, United States Court of Appeals for the First Circuit.

Opinion for the Court filed by Senior Circuit Judge COFFIN.

COFFIN, Senior Circuit Judge:

This case concerns a decision of the Department of Housing and Urban Development (HUD) to debar Carroll Kisser, a former employee of DRG Funding Corporation (DRG), from participating in primary and lower tier covered transactions "throughout the executive branch of the Federal Government," see 24 C.F.R. Secs. 24.200, 24.110(a), for three years ending March 22, 1992. The district court reversed the decision of the Secretary's designee sustaining HUD's debarment decision. We reverse.

I. Factual Background

In January 1988, Carroll Kisser began working as DRG's executive vice president for administration. DRG then held the largest portfolio of multi-family properties coinsured by HUD and financed through the Government National Mortgage Assistance (GNMA), a part of HUD. DRG both made mortgage loans, coinsured by the Federal Housing Administration (FHA), and issued securities under GNMA's mortgage-backed securities (MBS) program.

Under the GNMA MBS program, DRG issued securities backed by "pools" of mortgages. Each month, DRG collected mortgage payments from property owners, and, in turn, "passed through" to security holders principal and interest payments on the mortgage in the pool in which they had invested, less servicing fees. If a property owner failed to make its monthly payment, DRG, as a HUD coinsured lender, was responsible for meeting the monthly payments to security holders using its own funds.

In June 1988, a GNMA program specialist became concerned that DRG had conducted foreclosure sales but had failed to pass through to security holders proceeds from these sales in the month following their receipt. In GNMA's view, this pass-through was required by the guaranty agreement entered into by DRG and GNMA, and by the MBS guide. Accordingly, GNMA requested the Federal National Mortgage Association MA to conduct a procedural review of DRG's administration of its MBS pools.

FNMA's review confirmed that DRG did not immediately pass through foreclosure sale proceeds to security holders, but instead used these funds to repay previously unrecovered advances. FNMA informed DRG that GNMA required a pass-through in the month following receipt. DRG contested this requirement, pointing to a cash flow model that had been provided to DRG's president by FHA in October 1987, which supported the company's position that the funds were

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[304 U.S.App.D.C. 319] not required to be passed through until after final disposition of their coinsurance claim by FHA. DRG officials indicated that they would not change their practice without written instruction from GNMA. 1

On July 1, 1988, GNMA defaulted DRG as an MBS issuer, based on DRG's alleged program violations. Four days later, Kisser joined other DRG officials in a meeting with representatives from GNMA and FHA to discuss the circumstances surrounding the default. At that meeting, GNMA stated that DRG was required to pass through all foreclosure sale proceeds to security holders on the fifteenth day of the month following receipt. DRG agreed to comply with this directive by July 15, and passed through foreclosure sale proceeds received from sales from March through June 1988. Based on these actions, GNMA withdrew its default of DRG.

On September 12, Donald DeFranceaux, DRG's president, wrote to HUD's under secretary, Carl Covitz, contending that DRG's pre-July 15 pass-through practices had been legally correct, and requesting that Covitz overrule GNMA's directive to DRG. Three days later, HUD's general counsel, J. Michael Dorsey, responded. He affirmed GNMA's position that pass-through was required of the principal portion of the foreclosure sale proceeds on the fifteenth of the month following their receipt. Dorsey further concluded that the net proceeds for the sale of each foreclosed property must be deposited in a principal and interest account, which accounts must be kept separately for each sale, and could not be commingled. In addition, Dorsey stated that the interest portion of the foreclosure sale proceeds could not be used to pay required payments on other pools, or to reimburse DRG for previous advances.

On or about September 15, GNMA demanded that DRG pass through the principal portion of the foreclosure sale proceeds from August sales. When DRG failed to do so, GNMA served the company with a second default letter.

In a letter dated September 29, 1988, an attorney for DRG informed Dorsey that DRG had received $8.5 million from September foreclosure sale proceeds, and that, from these proceeds, it had repaid itself $1.8 million for principal and interest that it had advanced previously to security holders from its corporate account. Kisser testified that DRG used the bulk of the September foreclosure sale proceeds to fund pass-throughs in other mortgage pools, rather than to compensate the corresponding pool's security holders. Price Waterhouse, an accounting firm retained by GNMA to audit GNMA's MBS pools after the September default, confirmed that it could not find the proceeds from DRG's August or September foreclosure sales in the appropriate accounts.

In March 1989, HUD suspended DRG, as well as Carroll Kisser and 15 other individuals connected with DRG, from all HUD programs and virtually all other transactions with the federal government, based on a pending criminal investigation of DRG, and its alleged violation of mortgage-backed securities program requirements. See 24 C.F.R. Secs. 24.400-24.420. On April 24, 1989, Kisser resigned his position with DRG, as did most, if not all, of the company's other officers. HUD later lifted the suspensions of most of the DRG officers who had resigned, but did not lift Kisser's suspension. Kisser's suspension subsequently was overturned by an Administrative Law Judge (ALJ), but reinstated on review by the HUD Secretary's designee.

On September 21, 1990, still lacking a disposition of the criminal investigation, HUD began a new proceeding against Kisser. In this action, HUD sought Kisser's indefinite debarment, based on DRG's misconduct while it was still a certified coinsurer, which could be imputed to him because he was an officer of DRG at the relevant time. See 24 C.F.R. Secs. 24.105(p) (defining "principal" to include "[o]fficer, director, owner, partner, key employee, or other person within a participant with primary management or supervisory responsibilities"); 24.325(b)(2) (allowing

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[304 U.S.App.D.C. 320] liability for HUD program participant's misconduct to be imputed to officers who "participated in, knew of, or had reason to know" of the participant's misconduct). 2

In August 1991, following a nine-day evidentiary hearing, an Administrative Judge held that Kisser should not be disbarred, finding that Kisser was a responsible program...

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