Com. of Pa. Dept. of Public Welfare v. U.S. Dept. of Health and Human Services

• Decision Date: 04 December 1996
• Docket Number: No. 95-3699,95-3699
• Citation: 101 F.3d 939
• Parties: COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE, Appellant, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; United States of America.
• Court: U.S. Court of Appeals — Third Circuit

Page 939

101 F.3d 939

COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE, Appellant, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES United States of America.

No. 95-3699.

United States Court of Appeals Third Circuit.

Argued Sept. 30, 1996.

Decided Dec. 4, 1996.

John A. Kane, Chief Counsel, Jason W. Manne (argued) Assistant Counsel Office of Attorney General of Pennsylvania Department of Public Welfare, Pittsburgh, PA, for Appellant.

Frank W. Hunger, Assistant Attorney General, Frederick W. Thieman, United States Attorney, Barbara C. Biddle, Irene M. Solet (argued) Appellate Staff United States Department Of Justice, Civil Division, Washington, DC, for Appellees.

Before: ALITO and McKEE, Circuit Judges, and GREEN Senior District Judge. ^*

OPINION OF THE COURT

ALITO, Circuit Judge:

This case arises out of a debt of $800,885 that the Pennsylvania Department of Public Welfare ("Pennsylvania") owed the United States Department of Health and Human Services ("HHS"). HHS notified Pennsylvania of the debt in June 1991. Pennsylvania initially balked at having to pay, but eventually, in June 1993, paid the entire principal amount. The dispute that remains is over the interest on the debt. HHS charged Pennsylvania interest at the private consumer rate of 15.125%, which was significantly higher than the rate usually charged by federal agencies to states, the current value of funds rate of 8%. ¹ Pennsylvania refused to pay the allegedly exorbitant interest and brought this action, claiming primarily: (a) that HHS's use of the private consumer rate was not only arbitrary and capricious but inconsistent with the common law and (b) that HHS did not follow the proper procedures in enacting its interest rate regulation. The district court found Pennsylvania's substantive claims to be without merit and its procedural challenges to be time-barred. We affirm.

I.

Until January 1987, HHS had a policy of not charging states interest on disallowances under the Aid to Families with Dependent Children program ("AFDC"). On January 5, 1987, however, HHS repealed the existing regulation and put in place a new policy under which all of its debtors, including states and local governments, were to be charged a rate of interest based on the prevailing private consumer rates. HHS's action was in response to congressional enactment of the Debt Collection Act of 1982 ("DCA"), which aimed at increasing the efficiency of government efforts to collect debts owed to the United States. See S.Rep. No. 378, 97th Cong. 378, 2d Sess. (1982), reprinted in 1982 U.S.C.C.A.N. 3377. Although the DCA expressly excluded states and local governments from its ambit, ² see 31 U.S.C. § 3701 (1983), it did not limit HHS's ability to assess interest under the common law, see United States v. Texas, 507 U.S. 529, 530, 113 S.Ct. 1631, 1632, 123 L.Ed.2d 245 (1993). Accordingly, with certain exceptions not at issue here, HHS's regulations called for the imposition of interest on debts owed by states and local agencies in the same way as it was imposed on other debtors. See 52 Fed.Reg. 261 (1987) (codified at 45 C.F.R. § 30.13).

Under the HHS regulations at issue, interest on debts owed to HHS accrues from the date notice of the debt is mailed to the debtor, unless the debt is paid within 30 days of the notice. See 45 C.F.R. § 30.13(a). The regulations provide that the rate to be charged shall be the "rate of interest as fixed by the Secretary of the Treasury after taking into consideration private consumer rates of interest." ³ Id. The regulations do not provide for administrative review of the imposition of interest, but allow the Secretary to waive the interest if: (i) the debt or interest "resulted from the agency's error, action or inaction ... and [is] without fault on the part of the debtors" or (ii) collection "would defeat the overall objectives of a Departmental program." 45 C.F.R. § 30.13(h).

At issue is interest on a sum of $800,885 that was owed by Pennsylvania to HHS. HHS gave Pennsylvania notice of the debt in June 1991. Pennsylvania, however, chose not to reimburse the federal government within 30 days, which would have enabled it to avoid any and all interest payments. By the time Pennsylvania paid the principal amount in July 1993, $232,173.22 in interest charges had accumulated, and interest was continuing to accrue at 15.125% per annum.

Pennsylvania sought administrative review of the interest assessment, but HHS's Departmental Appeals Board informed it that it lacked jurisdiction to review the interest assessment. The Board noted, however, that the form of administrative review available to Pennsylvania was a request to the Secretary for a waiver of interest, but Pennsylvania had not sought such a waiver.

Pennsylvania commenced this action in October 1994, alleging that HHS's imposition of interest on it was arbitrary and violative of the common law. Pennsylvania also attacked the procedures by which HHS promulgated its interest rate regulations as inadequate. In February 1995, HHS responded with a motion for partial dismissal and summary judgment, arguing that Pennsylvania's substantive challenges were meritless and that its procedural challenges were time-barred. The district court granted the motion, adopting as its own opinion the Report and Recommendation of Chief Magistrate Judge Mitchell. Pennsylvania appeals.

II.

A. Challenges to the Application of the Regulation

Pennsylvania makes three attacks on HHS's application of the interest rate regulation. It argues: (i) that charging it interest without making an individualized determination as to the appropriateness of the charge was violative of the common law; (ii) that charging it the private consumer rate as opposed to the current value of funds rate was arbitrary and violative of government-wide policies; and (iii) that the use of a rate certified by the Treasury for a different federal program contravened HHS's own regulations on how the applicable interest rate should be determined.

(i) Violation of the Common Law

Pennsylvania argues that HHS's interest rate regulation violates the common law because it fails to require a case-by-case determination of whether or not interest is appropriate and, if so, how much interest should be charged. We find no support for this argument in the law that Pennsylvania cites.

The parties do not dispute that the federal government is permitted to charge states interest on their debts. See United States v. Texas, 507 U.S. 529, 530, 113 S.Ct. 1631, 1632, 123 L.Ed.2d 245 (1993) (United States has a federal common law right to collect prejudgment interest on debts owed to it by the states). Instead, the dispute is over the process by which interest can be charged. Pennsylvania points to the Supreme Court's decision in Texas as support for its argument. Specifically, Pennsylvania points to language in Texas that says that "courts," in awarding prejudgment interest, are to "weigh competing federal and state interests." Id. at 536, 113 S.Ct. at 1635.

But Texas does not help Pennsylvania. In that case, where there was an "individual case" in front of a district court, the Supreme Court said that the court considering the question "should weigh the federal and state interests involved." Id. at 533, 113 S.Ct. at 1633. But the Court neither said, nor implied, anything about whether or not an agency could pre-specify the rate it was going to charge states that were delinquent on a particular class of debts.

Pennsylvania asserts that the general holding of Texas was that Congress, in enacting the DCA, intended to hold states to a more lenient standard than private debtors. However, the mere fact that Congress intended to exempt states from mandatorily having to pay at least the minimum rate specified by the DCA does not show that Congress either intended to exempt states from interest payments altogether, an argument rejected in Texas, see id. at 539, 113 S.Ct. at 1637, or that Congress intended to impose on federal agencies the costly task of an individualized consideration of the appropriateness of the rate to be applied in every case where a state is delinquent on its payments. Cf. id. at 537-38, 113 S.Ct. at 1636 ("[I]t does not at all follow that because Congress did not tighten the screws on the States, it therefore intended that the screws be entirely removed").

In sum, Pennsylvania has not given us a basis to read into the federal government's common law right to charge the states interest the costly and cumbersome obligation that a federal agency make an individualized determination as to the appropriate interest rate in every case where a state owes a debt. To impose such additional costs on federal agencies would undermine their right to charge interest by significantly increasing the cost of charging such interest.

In addition, the regulation in question allows the state to ask for a waiver of the interest charged. It states:

Waivers. The Secretary may waive collecting all or part of interest, administrative costs or late payment penalties, if--

(1) The debt or the charges resulted from the agency's error, action or inaction (other than normal processing delays) and without fault on the part of the debtors; or

(2) Collection in any manner authorized under this regulation would defeat the overall objectives of a Departmental program.

45 C.F.R. § 30.13(h).

Even assuming that there is an obligation on the part of a federal agency to allow room for discretionary determinations as to how much interest to charge, the waiver provision would appear to satisfy such a requirement. Under Section 30.13(h)(2), the Secretary has the ability to choose not to charge any or part of the interest due (especially if the state presents a compelling case). 45 C.F.R. § 30.13(h)(2). Pennsylvania, however, has explicitly stipulated that it does not meet the requirements for a waiver, (Pennsylvania Br. at 10) even though, to us, the class of ...