City of Kansas City, Mo. v. Department of Housing and Urban Development, 89-5385

• Decision Date: 18 January 1991
• Docket Number: No. 89-5385,89-5385
• Citation: 287 U.S. App. D.C. 365,923 F.2d 188
• Parties: , 59 USLW 2458 The CITY OF KANSAS CITY, MISSOURI, Appellant, v. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT, et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 188

923 F.2d 188

287 U.S.App.D.C. 365, 59 USLW 2458

The CITY OF KANSAS CITY, MISSOURI, Appellant, v. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT, et al.

No. 89-5385.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 12, 1990.

Decided Jan. 18, 1991.

Otto J. Hetzel, Washington, D.C., with whom Gaylord A. Virden was on the brief, for appellant.

Nathan Dodell, Asst. U.S. Atty., with whom Jay B. Stephens, U.S. Atty., John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., and Gershon M. Ratner, Washington, D.C., Associate Gen. Counsel for Dept. of Housing and Urban Development, were on the brief, for appellees.

Before EDWARDS, D.H. GINSBURG, and SENTELLE, Circuit Judges.

Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.

Concurring opinion filed by Circuit Judge D.H. GINSBURG.

HARRY T. EDWARDS, Circuit Judge:

The Urban Development Action Grant ("UDAG") program authorizes the Secretary of the Department of Housing and Urban Development ("HUD" or "the agency") to make grants to cities and urban counties experiencing "severe economic distress." 42 U.S.C. Sec. 5318(a) (1988). In 1983, appellant City of Kansas City, Missouri ("Kansas City" or "the city") and appellee HUD executed an agreement under which the city would receive a $613,000 grant to assist in financing low-interest home ownership loans. Subsequently, when a dispute arose over the city's compliance with the terms of the grant agreement, HUD terminated the arrangement prior to final approval and before any funds had been disbursed. Kansas City challenges the agency action on two grounds: first, the city claims that, before acting to terminate the grant agreement, the agency was required to give notice and a hearing under section 111 of the Housing and Community Development Act of 1974 ("HCDA" or "the Act"), 42 U.S.C. Sec. 5311 (1988); second, the city contends that, in any event, the agency's action in terminating the grant agreement was arbitrary and capricious.

On the first claim advanced by the city, we find section 111 to be unclear with respect to the process required when grant agreements are terminated prior to payment. Because of this ambiguity in the statute, and because the Act implicitly delegates interpretive authority to HUD, we are constrained to defer to the agency's interpretation of the Act as long as it is "based on a permissible construction of the statute," i.e., one that is "rational and consistent with the statute." NLRB v. United Food & Commercial Workers Union, 484 U.S. 112, 123, 108 S.Ct. 413, 421, 98 L.Ed.2d 429 (1987). On the record before us, however, we find that HUD has offered no reasoned interpretation of section 111 to which we can defer. Accordingly, we remand to the agency for initial consideration of the meaning of section 111 as it applies to the termination of Kansas City's UDAG agreement.

Even assuming, arguendo, that HUD had the authority under the Act to terminate the city's UDAG agreement without notice or hearing, we find merit in the city's claim that the action in this case was arbitrary and capricious. On the record before us, we can find no reasoned decision-making justifying HUD's termination of the UDAG grant to Kansas City. See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 48, 103 S.Ct. 2856, 2869, 77 L.Ed.2d 443 (1983) ("an agency must cogently explain why it has exercised its discretion in a given manner"). Accordingly, because the agency has failed to provide a coherent explanation for its decision to terminate the grant agreement, we grant the petition for review and remand to HUD for reconsideration of its decision.

I. BACKGROUND

A. Statutory and Regulatory Background

Title I of the HCDA establishes a number of grant programs to assist in the development of viable urban communities and in the provision of housing for persons of low and moderate incomes. See 42 U.S.C. Sec. 5301 (1988). In 1977, the UDAG program was added to Title I of the Act. See Pub.L. No. 95-128, Sec. 110(b), 91 Stat. 1125 (codified as amended at 42 U.S.C. Sec. 5318 (1988)). The UDAG program allows economically distressed cities and urban counties to apply and compete for grants intended to stimulate private economic development. See 42 U.S.C. Sec. 5318(a)-(d).

Extensive HUD regulations govern the UDAG application process. See 24 C.F.R. Part 570, Subpart G (1990). The agency reviews all UDAG applications in accordance with specified selection criteria, awarding preliminary approval to those applications receiving the highest scores. See 24 C.F.R. Sec. 570.459, 570.460 (1990). The terms and conditions of approval are finalized when HUD and the grant recipient execute a UDAG agreement. See 24 C.F.R. Sec. 570.461(a) (1990). Included in each UDAG agreement is a schedule for submission by the grant recipient of certain evidentiary materials, including evidence of "legally binding commitments" from all parties participating in the project. See 24 C.F.R. Sec. 570.461(b) (1990).

Final grant approval and actual disbursement of grant funds are conditioned on the submission and acceptance of these legally binding commitments. See 24 C.F.R. Sec. 570.460(c)(5) (1990). Both the HUD regulations and HUD grant agreements explicitly provide that failure to submit legally binding commitments or other evidentiary materials by the specified date is grounds for termination. See 24 C.F.R. Sec. 570.461(d) (1990); Grant Agreement, section 7.02(b), reprinted in Joint Appendix ("J.A.") II 13.

Neither the UDAG regulations nor the agreements themselves provide for any formal procedure prior to termination by HUD of UDAG agreements. However, section 111 of the Act, applicable by its terms to all Title I programs, entitles grant "recipient[s]" to notice and hearing before they are penalized for noncompliance. In relevant part, section 111 mandates If the Secretary finds after reasonable notice and opportunity for hearing that a recipient of assistance under this chapter has failed to comply substantially with any provision of this chapter, the Secretary, until he is satisfied that there is no longer any such failure to comply, shall--

(1) terminate payments to the recipient under this chapter, or

(2) reduce payments to the recipient under this chapter by an amount equal to the amount of such payments which were not expended in accordance with this chapter, or

(3) limit the availability of payments under this chapter to programs, projects, or activities not affected by such failure to comply.

42 U.S.C. Sec. 5311(a) (1988) (emphasis added). HUD has promulgated regulations detailing the procedures to be followed when section 111 is invoked. See 24 C.F.R. Sec. 570.913 (1990).

B. The Proceedings Below

In January 1983, Kansas City applied for a UDAG to assist in financing a housing development known as the Citadel Center Project. HUD preliminarily approved the grant application and, in September 1983, executed a UDAG agreement finalizing the terms and conditions under which Kansas City would receive a $613,000 grant. The project schedule established by the grant agreement required that Kansas City submit certain evidentiary materials by November 1, 1983. Grant Agreement, Exhibit F, reprinted in J.A. II 39.

In July 1984, when the city had not yet made its evidentiary submission, HUD issued a notice warning that the grant agreement would be terminated unless the required materials were submitted within 30 days of receipt of the notice. J.A. II 55. In response, Kansas City submitted some evidentiary materials in July and August 1984. J.A. II 56, 60. Subsequently, the final deadline for evidentiary submissions was extended to September 15, 1984, by amendment to the grant agreement. J.A. II 77.

When that deadline, too, had passed, HUD sent Kansas City a second notice warning of termination unless the city submitted the necessary evidentiary materials within 30 days of receipt of the notice. J.A. II 94 ("notice letter"). The notice was mailed by HUD on January 28, 1985, and received by Kansas City on February 1. See J.A. I 43. Kansas City made an evidentiary submission on March 4, 1985, a date which both parties now concede fell within the critical 30-day time period, ¹ and HUD received the submission on March 5, 1985. See J.A. II 97. Nevertheless, by letter dated March 19, 1985, HUD terminated the Kansas City UDAG agreement on the grounds that no evidentiary materials had been submitted in response to its notice of January 28. J.A. II 95. A series of communications between various HUD and Kansas City officials ensued, at the close of which the agency agreed to reconsider its decision. On October 31, 1985, HUD sent the city a final letter, "serv[ing] to reaffirm that the action of the Department to terminate the grant award was appropriate and no basis exists for its reinstatement." J.A. II 246.

In July 1986, Kansas City filed suit in federal district court. The city claimed, first, that HUD's failure to accord it a hearing prior to termination of its UDAG agreement violated section 111 of the Act and, second, that the agency action terminating its agreement was arbitrary and capricious under the Administrative Procedure Act ("APA"), see 5 U.S.C. Sec. 706 (1988). The District Court rejected both claims and awarded summary judgment to HUD. City of Kansas City v. HUD, Civ. Action No. 86-1954 (D.D.C. July 31, 1989), reprinted in J.A. I 351.

The District Court concluded that section 111 is inapplicable to cases in which HUD terminates a grant agreement before the grantee satisfies the conditions of its grant agreement and begins to receive payments. Accordingly, it denied Kansas City's motion for partial summary judgment on its statutory claim to notice and hearing. See Kansas City, slip op. at 12-13, reprinted in J.A. I 362-63. The District Court also ruled that the agency action was not arbitrary and capricious, resting its holding on a mistaken belief that the city did not respond in...