City of Kansas City, Mo. v. U.S. Dept. of Housing and Urban Development, s. 87-5354
| Decision Date | 18 November 1988 |
| Docket Number | 87-5408,Nos. 87-5354,s. 87-5354 |
| Citation | 861 F.2d 739 |
| Parties | , 57 USLW 2325 CITY OF KANSAS CITY, MISSOURI v. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, et al., Appellants. (Two Cases) |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeals from the United States District Court for the District of Columbia (Civil Action No. 86-03513).
Robert K. Rasmussen, Atty., Dept. of Justice, with whom John R. Bolton, Asst. Atty. Gen., Jay B. Stephens, U.S. Atty., Michael Jay Singer, Atty., Dept. of Justice, Gershon M. Ratner and John W. Herold, Associate General Counsels, and Carl A. Tibbetts, Atty., U.S. Dept. of Housing and Urban Development, Washington, D.C., were on the brief, for appellants.
Otto J. Hetzel, with whom Carl A.S. Coan, III, Washington, D.C., was on the brief, for appellee.
Before EDWARDS, BUCKLEY and SENTELLE, Circuit Judges.
Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.
Under the Community Development Block Grant ("CDBG") program, the Secretary of the Department of Housing and Urban Development ("the Secretary" or "HUD") makes grants to units of state and local government. The appellee, the City of Kansas City ("the City"), is a recipient of annual CDBG grants. After a dispute arose over the City's use of CDBG funds from 1978 to 1985, the Secretary, proceeding under section 104(d) of the Housing and Community Development Act of 1974 ("CDBG Act" or "the Act"), 42 U.S.C. Sec. 5304(d) (1982 & Supp. IV 1986), conditioned part of the City's 1987 grant on certain actions to be taken by the City. The City filed suit, arguing both that it was entitled to the funds unconditionally and that HUD had violated the CDBG Act by proceeding under section 104(d) of the Act, rather than under section 111, 42 U.S.C. Sec. 5311 (1982), which requires notice and an opportunity for a hearing. The district court granted summary judgment in favor of the City on the procedural claim, and the Secretary appealed. Because we find that the Secretary has adopted an interpretation of the CDBG Act that violates Congress' clear intent to provide cities with procedural protections, we affirm.
The CDBG Act distinguishes between two types of grantees: those entitled to receive grants every year ("entitlement cities") and grantees that receive funding only on a discretionary, case-by-case basis ("nonentitlement areas"). Kansas City is an entitlement city.
Once a grant to an entitlement city is approved, it is normally provided in the form of a letter of credit, which is increased annually by the amount of the grant. The grantee draws on the letter of credit as it makes obligations throughout the year, and funds not used in one year may be carried over to the next.
The Act contains two monitoring provisions. Section 104(d) requires the Secretary, on at least an annual basis, to make reviews and audits of a grantee's activities, and allows him to "make appropriate adjustments in the amount of the annual grants" in accordance with his findings. 42 U.S.C. Sec. 5304(d) (Supp. IV 1986). The second monitoring provision is found in section 111 of the Act, 42 U.S.C. Sec. 5311 (1982). Under that provision,
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.
Id. Sec. 5311(a) (emphasis added). 1 Thus, under section 111, a grantee must be given notice and opportunity for a hearing when charged with a failure to comply substantially with any provision of the CDBG program. The Secretary has promulgated regulations detailing the procedures to be followed when section 111 is to be invoked. See 24 C.F.R. Sec. 570.913 (1988). Actions taken under section 111 are directly reviewable in the courts of appeals. 42 U.S.C. Sec. 5311(c).
In 1975, Kansas City used CDBG monies to establish a fund (Fund 225) to improve streets, gutters and sidewalks in certain areas of the City. The City assessed property owners for the cost of sidewalks constructed in front of their homes, and these assessments went back into the Fund to be used for further improvements.
In 1978, HUD adopted a regulation that prohibited this type of assessment. 24 C.F.R. Sec. 570.200(c) (1988). The City asked that it be allowed to continue Fund 225, and in May 1978 HUD informed the City by letter that Joint Appendix 121 ("J.A."). The City subsequently transferred into the Fund unspent CDBG monies from the 1975, 1976 and 1977 grants.
In 1983, HUD's Regional Inspector General audited Kansas City's use of CDBG monies and concluded that the City's transfer of the earlier grants into Fund 225 had violated the 1978 regulation. HUD therefore ordered the City to reimburse property owners who were assessed for improvements financed by those grants. On March 5, 1986, on reconsideration at the City's request, HUD partially reversed itself and found that the transfers of pre-1978 CDBG grants were not subject to the 1978 regulation. However, HUD determined that assessments made after 1978 for the costs of improvements financed by the transfers constituted CDBG "program income" and were subject to the regulation. Therefore, HUD ordered the City to refund any further assessments made for improvements financed by that income. HUD did not object to any of the City's ongoing activities, nor has it done so since.
On December 23, 1986, fearing that HUD planned to withhold the City's 1987 CDBG entitlement, Kansas City filed an action in federal district court. The City sought declaratory and injunctive relief to compel HUD to distribute the City's full 1987 entitlement prior to the beginning of the City's fiscal year on March 1, 1987, and to require HUD to follow the procedures of section 111 before attempting to terminate or reduce the City's annual grant.
On April 27, 1987, when, contrary to its normal procedure, HUD still had not acted on the City's 1987 grant, the City moved for partial summary judgment. Four days later, on May 1, 1987, HUD proposed a Grant Agreement and Funding Approval, which it required the City to sign before it would release any of the $6.5 million in CDBG funds for 1987. The agreement contained two "special conditions" on $3.7 million of the grant. The Secretary conditioned $500,000 on the City's repayment of the allegedly improper assessments. HUD withheld the remaining $3.2 million until the City submitted revised "Grantee Performance Reports" (GPRs) listing certain loan repayments as CDBG program income. 2 In late May 1987, after an agreement was worked out allowing the City to sign the Grant Agreement and to submit revised GPRs without waiving its right to contest the special conditions and the proper characterization of the loan repayments, respectively, HUD released all of the City's 1987 grant except the $500,000.
On August 6, 1987, the district court granted partial summary judgment for the City and declared the special conditions invalid. 669 F.Supp. 525 (D.D.C.1987). The court found that the statutory framework made clear that section 111, and not section 104(d), applied to the dispute in this case. HUD's reading of the statute, the court found, would make section 111 a "nullity." Id. at 528. In fact, the court pointed out, "the Secretary does not seem adverse to making Section 111 a nullity--in the 13 years this statute has been in existence, the Secretary has never initiated Section 111 procedures against any grant recipient." Id. (emphasis in original).
After the court issued its opinion, HUD continued to refuse to release the $500,000 until the court ordered it to do so on October 2, 1987. HUD has appealed both the August 6 and October 2 orders.
The narrow question before this court is whether HUD must provide notice and an opportunity for a hearing when it proposes to condition, reduce or terminate an entitlement city's annual CDBG grant because of alleged past noncompliance that does not affect current or future performance. Since this case presents NLRB v. United Food & Commercial Workers Union, --- U.S. ----, 108 S.Ct. 413, 421, 98 L.Ed.2d 429 (1987) (quoting INS v. Cardoza-Fonseca, 480 U.S. 421, 446, 107 S.Ct. 1207, 1221, 94 L.Ed.2d 434 (1987)). If, on the other hand, "the statute is silent or ambiguous with respect to the specific issue," Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984), then the question for the court becomes whether the agency's construction of the statute is "permissible," id., that is, one that is "rational and consistent with the statute." United Food, 108 S.Ct. at 421; accord International Union, United Mine Workers v. Federal Mine Safety & Health Review Comm'n, 840 F.2d 77, 81 (D.C.Cir.1988). In the present case, the agency's construction of the statute cannot survive...
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